Delphi's bankruptcy filing should not have a negative impact on United States collateralized debt obligations that have exposure to the struggling auto parts supplier, according to Fitch Ratings. The ratings agency said that 19 U.S. cash flow CDOs that it has rated have at least some exposure to the debt of Delphi. But every one of the CDOs has a maximum of 1% exposure to Delphi in their portfolios. As a result, it would be very difficult for negative ratings on such a small part of the CDO to ruin the ratings of the whole.
At the onset of the Delphi bankruptcy filing, there was some concern that many CDOs with exposure to Delphi would be in danger of downgrades. But Kevin Kendra, analyst at Fitch, explained that most of the U.S. cash flow CDOs only have exposure to Delphi's senior secured bank lines, which carry a recovery rating of R1. "They had an incredibly high chance of recovery in case of a default," he said. Additionally, a lot of the cash deals were part of a managed CDO structure. "They were being carefully watched by asset managers and once they saw the way the market was going and a Delphi bankruptcy was possible, they pulled away most of their exposures to them," Kendra said.
Fitch is far less enthusiastic about the prospects of synthetic CDOs. In Fitch's index of global static synthetic CDOs with 35% or greater exposure, Delphi is the third most prevalent junk name. These CDOs also have high exposure to Delphi's senior unsecured debt, which has the lowest recovery rating of R6 attached to it.
Only four U.S. CDOs with Delphi exposure have been negatively affected. EPOCH 2000-1, EPOCH 2001-1, EPOCH 2001-2 and STOCKHORN CDO LTD were placed on CreditWatch negative on October 13. Calls to Swiss Re Capital, which structured the STOCKHORN CDO, and the Morgan Stanley entities that underwrote for the series of EPOCH CDOs, were not returned by press time.