Downgrade likely on sub-prime debt

Moody’s Investors Service said Wednesday that it might cut ratings on $5 billion of collateralized debt obligations, a day after lowering the ratings on sub-prime mortgage bonds that make up the securities.

The move, although viewed by many analysts as overdue, could deepen concerns about investor losses on securities backed by sub-prime loans made to people with dicey credit.

CDOs are packages of bonds put together by Wall Street firms. The packages are then sliced up, allowing investors to decide on a particular interest return and an assumed risk level. Such investment vehicles have become popular in the last few years with pension funds and other big investors.

A Moody’s downgrade would affect 184 pieces of 91 CDOs, representing about 3.6% of rated CDOs containing asset-backed securities, the ratings firm said.

The Moody’s announcement included a rare decision to place eight CDO tranches, or slices, rated AAA -- the highest rating -- on watch. Fifteen of the securities involved are rated Aa, 37 are in the A range and 124 are rated Baa1 or lower, Moody’s said.

A downgrade of the highest-rated securities could shake confidence in CDOs, analysts said.

The AAAs “are supposed to be bulletproof,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. and co-author of a recent study that said ratings firms understate the risks of sub-prime bonds.