The market for cash flow collateralized debt obligations will be hit hard by the WorldCom accounting debacle, market players say. One CDO collateral manager notes that cash flow CDOs have much more exposure to WorldCom than they do to Enron, the previous corporate fiasco, which had a minimal effect on the cash flow CDO market. The manager predicts that investment-grade CDOs with exposure to WorldCom will be severely downgraded, making the CDO corporate market more volatile as a whole. He reasons that with so many corporate CDOs backed by WorldCom debt, downgrades in the collateral will put added pressure on the CDO notes, contributing to a worsening in investor confidence in the CDO market.
Steven Anderberg, analyst at Standard & Poor's, says that 84, or 17%, of the approximately 500 cash flow deals rated by his firm have exposure to WorldCom. By contrast, 16 cash flow deals were impacted by Enron, or 3.5% of the 450 cash flow structures rated at the time by S&P. He noted that telecom bonds are widely used to back CDOs. The CDO collateral manager adds that the CDO market used a lot of the WorldCom paper because WorldCom was not only a telecom company, but also a service provider, which gave the market the perception that its debt was safe.
Gus Harris, managing director at Moody's Investors Service, says all of the 27 investment-grade cash flow deals rated by his agency are being impacted by WorldCom. Harris points to WorldCom's $30 billion outstanding as one reason why the cash flow structures are likely to be affected.