Fitch Ratings yesterday downgraded $10 billion and affirmed $435.9 million of rated notes across 16 CDOs backed primarily by trust preferred securities (TruPS), senior and subordinated debt issued by REITs, homebuilders and financial institutions that specialize in mortgage lending.


Of the $3.8 billion of previously triple-A rated securities, 8% were affirmed as a direct result of financial guaranty insurance policies, 69.1% were downgraded but are still in investment grade categories, and 23% were downgraded to below investment grade.

For the rest of the securities, the current rating actions resulted in downgrades averaged between two and three categories.


These rating actions resolve the Rating Watch Negative status issued in July and December 2008, wherein 150 tranches from 16 deals were placed on Rating Watch Negative as a result of observed credit deterioration. Yesterday’s rating actions were the direct result of continued asset quality deterioration and incorporate Fitch’s updated criteria for rating structured finance CDOs published on Dec. 16. With these rating actions, Fitch assigns a Stable Rating Outlook to tranches rated in the single-B category or better. The Stable Outlook reflects Fitch’s forward-looking opinion about the prospects of a tranche’s performance over a one to two-year period.


The rating agency’s rating actions reflect continued deterioration in the credit quality and liquidity profiles of issuers underlying REIT TruPS CDOs. In certain cases, underlying issuers have experienced payment or technical default, a distressed debt exchange or default of an underlying operating subsidiary.

Beyond defaults and distressed debt exchanges, credit quality of the underlying issuers has declined as evidenced by multiple notch rating downgrades and the assignment of Rating Watch Negative or Negative Rating Outlooks. 

The average is 28.6% of the assets in the 16 CDOs reviewed have had negative rating migration, with around 15.6% experiencing one-to-two notch downgrades and 13% experiencing more than two-notch downgrades.

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