Potential CDO downgrades climb to $1.4 bln - Fitch
NEW YORK, July 23 (Reuters) - Fitch Ratings on Monday said it may lower ratings on 26 parts of 12 collateralized debt obligations (CDOs) due to eroding quality of subprime mortgage bonds held in the securities.
The potential cuts affect $603 million in debt, bringing the total for subprime-related CDOs on watch for downgrade to about $1.4 billion, Fitch said in a statement.
Investors have been expecting downgrades on CDOs will follow cuts to the underlying mortgage bonds that have been mounting at a rapid pace this month. Mortgage bonds were increasingly favored for yield in CDOs until last year as the slumping U.S. housing market revealed unsound underwriting practices and excessive credit.
CDOs are created by taking portions of debt securities and packaging them into new bonds that are split into several classes by degree of risk.
Two CDO classes placed on watch for downgrade -- Northlake CDO I, Ltd.'s class II notes and Pacific Coast CDO, Ltd.'s class A notes -- are rated "A" and "AA," respectively. The rest are lower-investment grade bonds rated "BBB" and below.
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