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As Commercial Real Estate Weakens, Moody's Considers Action on Related CDOs

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The credit rating agency Moody’s Investors Service put a total of $6.2bn of commercial real estate linked CDOs up for possible downgrade today, citing growing concerns over the ability of the underlying assets to continually perform. The credit rating agency recently found that although commercial real estate (CRE) prices are rising, widespread defaults in the market are weighing down recovery. And while the secondary market deals with a rise in commercial mortgage-backed securities delinquencies, the CDO reviews indicate CRE will continue to drag for the immediate future. Credit default obligations (CDOs) are structured finance products with returns linked to the fixed income of the assets. They are marked-to-market, and so a weak commercial real estate (CRE) sector drives down the rate and amount at which the securities pay out. Moody’s is taking the action as part of its ongoing surveillance of these CRE CDO transactions, in a move that comes as no surprise—even an actual downgrade would likely be another non-shocker. However, a recent ruling by a bankruptcy judge in the New York, over the payout structures of a Lehman Brothers CDO is also adding to market volatility. Another major concern, additionally, lies in basic supply-and-demand principles. Holders of CDO paper who may wish to wind down holdings based on today's announcement may only be adding more product into an already strained and abundant marketplace. However, as one market player tells HousingWire, wait-and-see investors may be coming off the sidelines after the successful liquidation of earlier CDOs, for example, the MJX Asset Management $1bn CDO auction at the end of last year on behalf of the trustees of the Declaration Managment Kent Funding platform. In the information released today, the Goldman Sachs Abacus CDO portfolio will likely receive the most scrutiny. Moody’s placed 42 of its CRE CDO classes up for possible downgrade, affecting more than $1.3bn in structured securities. Moody’s also reports that the Crystal River CDO contained $193.3m of defaulted assets, roughly 48.4% of the portfolio. The last time Moody’s reviewed the transactions none of the assets had defaulted. Crystal River Capital is a mortgage real estate investment trust (REIT) managed by Brookfield Asset Management. Moody’s placed 11 classes of CDOs with GS Mortgage Securities Corp. on review for downgrade, roughly $700m in securities. According to the Stanford School of Law, investors filed a lawsuit in early 2009 against GS for misleading statements. The Moody’s review will focus on potential losses from defaulted collateral and other indicators. Write to Jon Prior.

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