Fitch Publishes 2002 U.S. CDO Transition Study & 2003 First-Half Recap.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 26, 2003

Fitch Ratings today released its annual update and analysis of Fitch's U.S. collateralized debt obligation (CDO) rating transitions over the eight-year period, beginning Jan. 1, 1995 and ending Dec. 31, 2002.

In 2002, CDO downgrades ran well above historical levels and were prevalent across every rating category. Approximately 8.7%, 11.3% and 22.6% of 'AAA', 'AA' and 'A' rated CDO tranches, respectively, were downgraded over the course of the year. Downgrades at the speculative grade level were even more severe, ranging from 31.1% to 34.4%.

'Downgrades in 2002 were at least double 2001 levels and generally exceeded average annual downgrades for the period 1995 - 2001 by a margin of at least three times,' said John Schiavetta, Managing Director, Credit Products, Fitch Ratings. Fitch calculated a CDO downgrade to upgrade ratio of 14.3 to 1 for the year.

The deterioration in CDOs in 2002 is not surprising given that the U.S. corporate debt markets experienced the worst credit conditions in a decade and perhaps longer. Defaults ballooned to new heights and credit quality deteriorated across the rating spectrum. 'With corporate debt making up the bulk of CDO collateral, it is not surprising that stress in a number of CDO structures, in particular those heavily exposed to high yield bonds, mirrored and often exceeded volatility in the corporate sector,' said Stephanie Mah, Director, Credit Market Research, Fitch Ratings. CDO downgrades were notably concentrated in arbitrage cash flow collateralized bond obligations, with a third of the sector's rated tranches downgraded in 2002.

The record level of corporate credit deterioration in 2002 and subsequent CDO downgrades resulted in greater volatility in the long term average transition rates for CDOs. 'Transition rates are dynamic and are certain to stabilize as credit conditions improve and the CDO product becomes more seasoned,' said Mariarosa Verde, Managing Director, Credit Market Research, Fitch Ratings.

Through the first half of this year, Fitch downgraded 152 tranches and upgraded 12 tranches. This compares with 186 tranches downgraded and 13 tranches upgraded for the full year 2002. The majority of downgrades this year were concentrated in the same sectors as in 2002, with arbitrage cash flow collateralized bond obligations (ACF CBOs) making up the bulk of downgrades (approximately 55%). The number of affirmations through the first half of 2003 totaled 225 tranches.

Fitch expects the second half of 2003 to continue to produce above average downgrades, although at a more moderate pace than that recorded over the eighteen months ending June 2003. 'Following the unprecedented decline in corporate credit quality over the past several years, many CDO structures have been weakened and are vulnerable to any additional collateral losses or credit erosion,' said Schiavetta.

The complete 'Fitch 2002 U.S. CDO Transition Study and First Half 2003 Recap' is available on the Fitch Ratings web site at 'www.fitchratings.com' in both the 'Credit Market Research' and 'CDO' sections. A copy can also be obtained by contacting the Ratings Desk at 800-893-4824.