CDOs of asset-backed securities prove their worth, says Moody's

Collateralised debt obligations (CDOs) of asset-backed securities (ABS) and other repackaged securities,have suffered minimal credit deterioration in response to the general macroeconomic decline, according to credit rating agency Moody's.

Speaking at an asset securitisation conference in Arizona, Moody's analysts said no liabilities issued by re-packaged CDOs have ever been downgraded. But issuance could be limited by the availability of suitable assets.

"We've seen volatility and numerous downgrades in CDOs generally, but we have not yet seen a single downgrade in CDOs of ABS," said Moody's senior analyst, Gary Witt.

He said one reason that repackaged CDOs have held their ratings integrity longer is attributable to the deterioration needing to first take place from the underlying asset - such as a mortgage loan - then up to the ABS level and then again up to the CDO level. The CDO of ABS market is only about two years old.

Responding to calls for increased transparency in the CDOmarket, Moody's launched a CDO Navigator service – a series of indexes and deal summary reports that will enable collateral managers and investors to benchmark their holdings against the markets.

"It is our hope that the freer flow of information will help to boost liquidity in this market," said Witt. "To date, the process of monitoring and comparing CDO structures was cumbersome nearly to the point of being impossible. We are hoping that this will begin to change.”

The use of repackaged CDOs is growing rapidly, and they now represent a quarter of the CDO market. Moody's rated 62 deals last year, up from just 33 in 2000. Included among these were collateralised bond obligations (CBO) of mixed structured assets, CBOs backed by real-estate-related assets and CBOs of CBOs.

But continued issuance could be hampered by a limited supply of assets. "These markets focus on the more speculative mezzanine tranches in the Baa1-Baa3 range. Since many deals rely on fairy high levels ofdiversification as well, they need to invest in many different ABS types. Unfortunately, for many ABS asset types, the supply of appropriate collateral is limited," said Witt.