De-leveraging credit risk

The CDO market has been jolted by the recent downgrades of Ford and General Motors, and with credit spreads widening, the economics of transactions currently being pushed through will start to look very different. John Ferry reports

For the first few months of this year, when credit spreads were locked at historically tight levels, it seemed the only way for collateralised debt obligation (CDO) investors to make the sort of money they were making just a few years ago was to take additional leverage. In the search for additional yield, investors have pumped money into CDO-squared transactions, while dealers have even looked at CDO-cubed to squeeze more juice out of the underlying portfolios.

However, the downgrade of General