Credit deterioration for U.S. CDOs was almost wholly contained to U.S. dollar-denominated resecuritizations in 2007, according to a recent study by Moodys Investors Service. Moody's downgraded a total of 1,331 tranches of U.S. dollar-denominated resecuritizations in 2007, which accounted for 92% of the 1,448 downgrade actions for all CDOs during the year.
Not surprising, downgrades were primarily concentrated in the 2006 and 2007 vintages, making up 87% of the 1,448 total downgrades.
And the outlook for rating volatility in 2008 is not much brighter, Moodys said. The rating agency currently has almost 2,000 tranches of U.S. dollar-denominated resecuritization CDOs under review for a downgrade.
When examining the other CDO sectors, downgrade rates for 2007 were fairly comparable to 2006. There were exceptions for market value CDOs, where the downgrade rate increased from 0% in 2006 to 7.5% in 2007, and the investment-grade arbitrage cash flow CBO sector, where the downgrade rate dropped from 10% in 2006 to 0% in 2007.
