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Ratings Cut Could Mean More HF Losses

Date: Tuesday, July 10, 2007
Author: Hedge Fund Daily

Facing criticism that their grading classifications on subprime mortgage-backed bonds are no longer accurate, Standards & Poor’s reportedly may downgrade the ratings on $12 billion worth of the offerings – a move that could mean deeper losses for hedge funds. S&P said in a statement that the ratings on 2.1% of the $65.3 billion in bonds that S&P rates are now listed on CreditWatch with “negative implications,” and if the ratings are cut, a number of investors will have to sell the bonds, which could sink prices again. “S&P’s actions are going to force a lot more people to come to Jesus,” Christopher Whalen of Risk Analytics told Bloomberg News. “When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and re-evaluate everything.” He added: “This could be the trigger we’ve been waiting for.” According to BN, nearly two-thirds of the bonds indices that track subprime debt no longer meet the criteria that earned them their S&P ratings in the first place. S&P also is said to be developing a new rating system for existing and new mortgage bonds to better reflect the likelihood of defaults and losses. The company also told BN that it will change its practice and seek greater protection for investors that hold bonds in classes ranked directly above any downgraded security. BN says most of the bonds S&P rated were BBB+, BBB, or BBB- with a smattering of AA.