ABN, UBS May Face Downgrades on Financial CPDOs, Moody's Says

ABN Amro Holding NV and UBS AG may face credit rating downgrades on a total 492.5 million euros ($717 million) of constant proportion debt obligations, bonds based on credit-default swaps, Moody's Investors Service said.

CPDOs are designed to combine returns of as much as 2 percentage points more than money-market rates with the top debt rankings by speculating on credit quality. The eight CPDOs under review reference credit-default swaps based on the debt of financial institutions, whose credit quality has deteriorated because of losses on subprime mortgages.

Credit-default swaps on banks and insurers have jumped to about 55 basis points from about 10 basis points since the start of July, according to the benchmark iTraxx index of senior debt from 25 financial companies. The cost, or spread, on credit- default swaps rises as perceptions of creditworthiness worsen.

The review ``is in response to the continuing spread widening and spread volatility on the financial names underlying these CPDOs negatively impacting their net asset values,'' Moody's said in a statement today.

Moody's is reviewing ratings on four CPDOs called Financial Basket Tyger notes sold by Zurich-based UBS through its Elm BV unit, of which two are rated Aa3 and the rest Aaa. The New York- based ratings firm also may cut a Aa2 rated CPDO sold through UBS in London, called Financial CPDO Credit Default Swap.

ABN Amro had two Aaa rated CPDOs issued under its SURF program placed under review. The notes were issued through ABN's Castle II Ltd. and Chess III Ltd. vehicles.

CPDOs are based on indexes of credit-default swaps. The contracts pay the buyer face value if the borrower can't meet payments on its debt in return for the defaulted notes or cash equivalent.
predictpennystockmarket.com