Moody's Investors' Service recently announced that it has downgraded two collaterialized debt obligations (CDOs) - coming as no shock to the industry - seeing as collateralized loan obligations (CLOs) and collaterialized bond obligations (CBOs) are typically victims of ratings downgrades, sources say.

Three tranches within Alliance Collaterialized Holdings Series 1997-1 and the "mezzanine tranche" of Putnam CBO I Limited received downgrades, prompted by a reduction in the credit quality.

"We downgraded quite a number over the past year or so, probably a bit more than year, initially because of the emerging-market crisis and then because there was an uptake in defaults and downgrades in the U.S.," said Jeremy Gluck, a managing director at Moody's. "It's something we've seen a fair bit of."

Gluck does anticipate however, that the rate at which CDOs are downgraded may slow down in the future.

"The key event was the emerging-market crisis and that had an impact on quite a few CBOs," Gluck said. "Now it's a concern that's receding and it seems that the pace and deterioration has slowed."

The reasoning behind the downgrades of CDOs varies from case-to-case, Gluck explained, with the majority of them due to the emerging-market crisis as well as domestic issues. He also noted that what occurs from the start of the deal has an impact on its future as well.

"Some transactions are structured with a fair bit of fat in them and others are not," Gluck noted. "They're right at the edge, where if anything goes wrong in the portfolio, there's likely to be a downgrade. Those that were structured with a bit of room for error typically have not been downgraded, so it's probably what happens with the initial transaction."

Gluck also pointed out that although there have been some downgrades in these transactions, the rate at which they've been downgraded is really no more rapid and probably less rapid than what is seen for corporate instruments.

"The ratings are no less stable than corporate bonds," he said.

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