Bloomberg is reporting that Standard and Poor’s has lowered its assumptions for how much money investors will recover after defaults of mortgage related collaterized debt obligations. Many view this as a sign that S&P may be preparing to add to the record number of downgrades already present.
Mortgage-linked CDOs have been the biggest source of more than $320 billion of asset writedowns and credit losses since the beginning of last year. These writedowns have come primarily from classes once rated AAA or Aaa.
According to Brian James, a partner at Link Global Solutions, “further rating-agency action will cause banks who hold hte majority of AAA bonds to re-evaluate their strategy. So far they have been more comfortable writing down their positions in hopes of better recoveries.”
A statement released this week from S&P announced that the most senior bonds from CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing.
One possible outgrowth of these reductions could be an increase in a secondary market where holders are forced to entertain the bid side of the market.
According to S&P, their structured-finance ratings only reflect the odds that investors will receive timely interest payments and the return of their principal by the debt’s maturity date.