Collateralized debt obligation market players are pointing to the J.H. Whitney Market Value Fund as perhaps the first market value CDO transaction to ever be downgraded. This prompted one dealer CDO analyst to point out that in such cases the CDO collateral manager is supposed to sell the assets to pay out the note holders. The deal, first rated in 1999, has been downgraded three times by Moody's Investors Service this year. Mike Deflorio, the portfolio manager at J.H Whitney & Co., did not return several calls seeking comments. Gus Harris, head of Moody's CDO group, declined to comment. Standard & Poor's and Fitch Ratings did not rate the transaction.
Market value CDOs are less vulnerable to downgrades because managers can actively trade of bad positions. But based on Moody's' reports, the J.H. Whitney transaction was "violating the class D overcollateralization test" in February, March and June. Jim Leahy and Rudolph Bunja, the Moody's analysts who are responsible for the downgrades, write that "the violation has not been cured" and that "the collateral manager is currently exploring possible solutions for this situation." Bunja was on vacation last Thursday and unavailable to comment. Leahy stressed that the manager has sold some of the assets, but not enough to pay the noteholders, calling the situation faced by this CDO manager, "a death spiral." Leahy declined to elaborate on this remark, but he did admit that Moody's remains concerned.