Although more often a factor in funded high-yield CDO downgrades, a rock-bottom recovery rate recently hit a synthetic balance-sheet deal.

Last week York Funding 1998-1 was further downgraded by Moody's Investors Service, due in large part to recovery rates proving well below assumptions. Moody's would not specify the severity of the loss, although sources indicated that a certain defaulted credit came back at one cent on the dollar.

"If it's a total wipeout, it's not alone," said Brian Gordon of Fitch, who is not familiar with York Funding, but is compiling a CDO default study. Gordon's study looks specifically at CDO collateral performance, as opposed to using the collateral market (like the high-yield market) as a proxy, as has traditionally been done, he says.

Gordon estimates that 10% of all defaulted CDO collateral comes back at five cents on the dollar or below.

York Funding is one of several synthetic deals downgraded this year, although most of the activity has been associated with high quality credits that have either defaulted or have been downgraded to below investment grade. For example, JPMorgan's Bistro transactions, which were also further downgraded last week, have had problems largely tied to California utilities exposure. Other deals have had exposure to companies afflicted with asbestos litigation.

York Funding was issued by Credit Suisse Financial Products, which has since merged with Credit Suisse First Boston to become Credit Suisse First Boston International, a U.K. bank.

The deal has been downgraded by Moody's on four separate occasions, two occurring this year. In late February, Moody's downgraded the Class III, Class IV and Class V notes, then placed those notes plus the Class II's on review in May.

The Class I notes were originally downgraded by Moody's to A1' from Aa3' in December 1998, when CSFB's rating was downgraded because of exposure to the Russian liquidity crisis. The deal is in part linked to CSFB's corporate credit.

Standard & Poor's has ratings on the top three classes only, and has hit the deal twice, most recently in December 2000, bringing the Class I notes (initially rated AA' by S&P) to BBB+.' S&P declined comment.

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