More Default Events Reported on CDOs

The number of collateralized debt obligations linked to U.S. home loans that experienced events of default last month quadrupled from July, to 16, as ratings were cut on more securities, according to Morgan Stanley.

More than $236 billion of CDOs have breached a default trigger, bringing the count to 229 debt offerings, a New York team of Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report published Monday.

More than half the CDOs tied to subprime mortgages created from 2005 through 2007 faced events of default, the analysts wrote. "After slowing down for the last two months, the pace of CDOs hitting events of default accelerated in August."

Nine of the securities faced default triggers in June.

CDO defaults and liquidations are accelerating as more homeowners fail to make mortgage payments and ratings agencies downgrade the bonds that package the home loans. Standard & Poor's Corp. said Aug. 29 that its downgrades on CDOs linked to subprime mortgages are approaching $400 billion.

The Morgan Stanley analysts wrote that overall sales of CDOs so far this year have dropped 76.2% from the same period last year, to $89.5 billion. Last month $12.1 billion of CDOs were issued.

Events of default occur when a CDO's collateral is downgraded enough to suggest that the most senior classes will not get repaid. Investors can then liquidate holdings or redirect payments from certain classes to others, under varying voting rules.

CDOs tied to home loan bonds and related derivatives have been the largest source of more than $500 billion of writedowns and credit losses reported this year by the world's largest banking and brokerage firms.

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