DANA POINT, California (Reuters) - The worst of severe rating cuts of collateralized debt obligations tainted by U.S. subprime mortgages is probably over and 2008 should begin a "healing process," a senior director at Fitch Ratings said.
By Walden Siew
DANA POINT, California (Reuters) - The worst of severe rating cuts of collateralized debt obligations tainted by U.S. subprime mortgages is probably over and 2008 should begin a "healing process," a senior director at Fitch Ratings said.
Deteriorating value of U.S. subprime mortgage debt has resulted in $67 billion of rating cuts of CDOs by Fitch, including top-tier "AAA"-rated debt that now has been lowered on average to "BB"-rated debt known as junk bonds.
Asked if Fitch expects further CDO downgrades ahead, Richard Hrvatin, a managing director at Derivative Fitch in New York, said the worst cuts were behind.
!ADVERTISEMENT!"I never say never, but I think the answer is the rating action that we've taken is meant to be adding stability to the ratings," Hrvatin said on Sunday, during the Opal Financial Group CDO Summit. "I think the answer to that question is no."
Fitch last month completed a global review of CDOs tied to deteriorating subprime mortgage debt resulting in total downgrades of $67 billion, including affirmations of $10.7 billion of structured finance CDOs across 158 deals.
The three main rating companies, including also Standard & Poor's and Moody's Investors Service, began a campaign this summer to lower top-rated debt tied to declining mortgages closer in line with their real value and rating level.
"We're taking a very strong view here, in fact even a gamble that we're taking some severe actions," Hrvatin said. "I'm not sure if that's going to shut us out of the market, or if people are going to say we agree with your levels... but we believe it's the right approach to take."
Hrvatin declined to comment about rating cuts of underlying residential mortgage-backed securities, which he said will depend on U.S. home prices and the American consumer. Further losses experienced by those mortgage securities would however "naturally trickle down" to CDOs, he said.
On CDO rating cuts, "we've tried to take the point of view that we don't want to be doing this every three months," he said. "We think that we've taken enough severe action that the ratings that are there now are going to hold up."
The average investor believes that risk models are broken, said Louis Lucido, managing director of Los Angeles-based Trust Company of the West.
The market needs to "generate ratings that make sense," Lucido said. "Seeing triple-A rated securities that get downgraded in one fell swoop from triple-A to triple-C is something that's happening."
"I would hope that everyone here is not hesitant to ask tough questions," he said.
Karla Chung, a Deutsche Bank vice president and CDO product manager, said a future trend is rising technical defaults for CDOs, which rating companies also have acknowledged.
Last year most of her time was spent closing CDO deals, she said. This year the focus has changed to monitoring existing deals for potential losses and event of default notices.
(Editing by Tomasz Janowski)
