Collateralized debt obligations backed by structured finance assets are experiencing the most negative rating actions among U.S. cash flow vehicles, according to Standard & Poor's. The rating agency expects the sector to continue to underperform other asset classes such as deals backed by corporate credit including bank loans and unsecured bonds.
Ratings on 18 ABS CDOs have been lowered in the first three quarters of the year--making up half of all negative rating actions on cash flow CDOs--and another 15 are on CreditWatch negative, according to Jimmy Kobylinski of the CDO surveillance group at S&P. The negative trend is expected to continue throughout the rest of the year and beyond, he said, as exposure of 2001- and 2002-vintage deals to assets such as manufactured housing continues to ripple through. He spoke at S&P's Hot Topics in Structured Finance Surveillance and Servicer Evaluations briefing last week in New York.
To be sure, rating volatility in ABS CDOs has not been as severe as it was in corporate-credit backed deals during the sector's downturn. Since 1997, the average rating movement of senior tranches in high-yield CDOs is down more than two notches, while like ABS CDO classes are on average down less than 1/3 of a notch, according to S&P figures.