Fitch sees rising credit concerns over US bank CDOs
May 2nd, 2008 | by admin |NEW YORK, May 2 (Reuters) - The risk of a U.S. recessionand failing home equity and residential construction loans maybe putting a greater squeeze on banks that financedrestructured debt, Fitch said on Friday.
Delinquencies and defaults are creeping higher on smallerconstruction loans, which were repackaged into trust preferredsecurities, known as TruPS, that are tied to collateralizeddebt obligations, Fitch said.
TruPS, which combine benefits of both debt and equity, arepreferred stock issued by bank holding companies through aspecial purpose vehicle.
Fitch has been notified of the deferral of 11 banks and thedefault of one bank since September. Those 12 banks financed$644.5 million in aggregate TruPS and subordinated debt through46 Fitch-rated CDOs.
“Further bank deferral and default activity is likely givencurrent economic conditions,” said Nathan Flanders, a seniordirector at Fitch.
U.S. banks and thrifts set aside record amounts of moneylast year in anticipation of higher loan losses, according toU.S. regulators. In February, the Office of Thrift Supervisionsaid thrifts, which are largely mortgage lenders, suffered arecord $5.24 billion loss in the fourth quarter.
Due to expected collateral deterioration of underlying bankTruPS CDOs, Fitch is revising both its rating and assetperformance outlook on U.S. bank TruPS CDOs to negative fromstable, suggesting another rating cut is more likely over thenext two years. (Reporting by Walden Siew; Editing by Tom Hals)
