CDOs

The reputations of the rating agencies mirrored the fate of the securitization market last year: As the credit conditions went south, so did their standing in the industry.

After a tumultuous summer in mortgages triggered a whirlwind of CDO downgrades, this past year will not be seen in a positive light for U.S. ABS CDOs.

Monolines appear to be the primary target in the securitization market's game of mortgage loss speculation. Sources said that revisions to rating agency criteria for guarantors and the negative outlooks that resulted were the ugliest points in 2007 for these bond insurers.

As the CDO market ushers in 2008, many industry players are hoping that the gloomy conditions that plagued 2007 will remain in the past. But with recession fears looming over the structured credit markets, and rating agencies tweaking their methodologies, new issuance will continue to move slowly, at least for the first half of the year, market participants said.

With no crystal ball to guide them, market players are finding it harder to predict how 2007's unprecedented liquidity crunch might affect future European CDO performance.

Michael Kanef has moved internally within Moody's Investors Service. Kanef, who was formerly group managing director in ABS, is now the chief regulatory and compliance officer at Moody's. He replaces Jeanne Dering who is retiring. There is no word yet on Kanef's replacement as the rating agency's ABS group is going through a transition period.

Choosy and cautious investors put the brakes on the ABS production market last week by tightening their purse strings. Without their money on the table, sell-side sources doubted that anything would be done at all before year end.

At a forum hosted by the American Securitization Forum last Wednesday in New York, ABS participants willingly shared the blame for current market problems, and admitted that a lot of the old ways of doing business, including relying so heavily on REMIC laws, will not work.

As the bulk of loans underlying the ABX.06-1 index approach their reset, market participants now say the performance of these mortgages could start 2008 off on a better footing than previously expected. They cited the better quality of the underlying loans and the timing of the resets as the factors contributing to the better outlook.

MBIA's shares traded higher last week on the announcement of Warburg Pincus' infusion of up to $1 billion of additional capital into the monoline insurer. MBIA sought the new capital to maintain its triple-A rating and to cushion loss expectations on its RMBS portfolio.

Michael Strange left the financial institution securitization group at Barclays Capital to take up a position at Goldman Sachs, according to sources familiar with the matter. A Goldman rep declined to comment. At press time, it was unclear when Strange, who helped build Barclays' presence in Russian existing assets, would start his new job. Whether Strange will switch to a different area at Goldman or ramp up its business in Russian securitization was another open question. At least publicly, Goldman hasn't been a player in the space of Russian securitization, though sources said the bank had a sizable Moscow office, making a significant dent in other areas of the Russian finance market. At Barclays, Strange was involved in arranging such transactions as mortgage deals for Gazprombank with euro and ruble tranches and a dollar RMBS for Vneshortgbank .

The increasing number of government investigations into subprime lending, and continued losses on these loans have prompted a substantial amount of litigation.

As a result of declining issuance in the real estate and structured finance markets, Thacher Proffitt & Wood has joined the ranks of a number of other law firms, banks and asset management firms that have laid off staff in these departments.

Fieldstone Mortgage filed for Chapter 11 last week, shortly after announcing that it would stop accepting loan applications and funding mortgage loans. According to court documents, the company has liabilities of more than $100 million, with creditors including Morgan Stanley and Bear Stearns, who are seeking $38.5 million and $15.3 million, respectively. Fieldstone's parent company, Fieldstone Investment was acquired by C-Bass in July.

ABS market professionals are still dealing with a sluggish issuance calendar, and with four weeks remaining in 2007, they do not expect to unwrap the gift of recovery anytime soon. Between Nov. 19 and press time Nov. 28, around $9.7 billion of deals came to market.

Calyon is arranging its first CDO backed by commodity trigger swaps - or a collateralized commodities obligation (CCO) - set to close by the end of the month. The transaction, Amadeus 2007-1, references 10 commodities, including base metals, precious metals and energy assets, through a static portfolio of 150 Asian long and short commodity trigger swaps. But the new CCO is launching into what has been a relatively inactive sector, raising the question: Will these exotic' products be seen as an investment alternative for CDO investors in search of diversity?

While A-Rod was unanimously expected to re-sign with the Yankees, panelists at IMN's Real Estate Mezzanine Loan Forum in New York last week were not as certain about the future of the CRE CDO market. A group of panelists made up of CRE CDO managers and a CDO lawyer collectively agreed that value in the commercial real estate market has not yet bottomed out. They also agreed that CDO write-downs were not over for the major banks.

November remittance data ushered in more bad news this month, but the results were surprisingly milder than October.

There may be three weeks remaining in the asset backed securities production year, but traders and analyst say any serious action will remain under wraps until 2008.

Price dislocation in the CDO market has not only halted new issuance but has made the value of existing CDO securities almost impossible to assess. In an effort to address these valuation issues, Moody's Investors Service's Wall Street Analytics (WSA) recently launched Credit Values DCV (Discounted Cash Value), a product the rating agency hopes will enhance the transparency of CDOs by providing investors with valuation information about their securities.