CDO Default Events Accelerate With New `Wave,' JPMorgan Says

Discussion in 'Wall St. News' started by THE-BEAKER, Aug 20, 2008.

  1. Aug. 19 (Bloomberg) -- Collateralized debt obligations experienced so-called events of defaults at a faster pace in early August, with a commercial-mortgage CDO joining the list, according to JPMorgan Chase & Co.

    Seven mortgage-linked CDOs experienced default events, indicating even the senior-most classes may not be repaid in full, up from 14 for June and July, JPMorgan said in a report yesterday. Monthly additions to the $229 billion of defaults since mid-2007 peaked with 47 in February, the report said.

    ``Unwind fears,'' including concern that CDOs will dump their holdings, have pushed asset prices lower, the report said. Typical yields on AAA rated slices of collateralized loan obligations over the London interbank offered rate are at a record 2.25 percentage points, up 1.30 percentage point this year, the report said. Default events, which may lead to liquidations, can be triggered by downgrades on the collateral.

    ``We have been expecting the next wave of EODs to come with further downgrade activities on the horizon,'' the analysts in New York led by Chris Flanagan wrote.

    CDOs repackage assets such as mortgage bonds, loans and derivatives into new securities with varying risks. CLOs repackage buyout loans and other high-yield corporate debt.

    Currently, 19 structured-finance CDOs totaling $18.7 billion, are being liquidated, and 48 totaling $50.8 billion, have completed liquidations, the report said. Estimated recoveries for ``super-senior'' classes average 8 percent for CDOs of low-rated bonds, 33 percent for CDOs of originally high- rated bonds and 4 percent for CDOs of CDOs, the report said.

    The $500 million Capmark G-Star VI CDO from 2006 was the first CDO composed of commercial-mortgage securities to experience a default event since November, the report said.