You wondered what would happen when a CDO was forced to liquidate? Now
you know:
The ratings on the most senior class of Carina CDO Ltd. were lowered to BB,
two levels below investment grade, from AAA, while another AAA class was slashed
18 steps to CCC-minus. The chance of material losses to note holders is high,
New York-based S&P said.
Carina is a CDO which was born in September 2006. When it failed an over-collateralization
ratio test, the senior debt holders triggered
their option to liquidate. S&P said the proceeds would be sold at "what
will most assuredly be depressed prices".
You can be sure that the vultures are circling Carina already: this is the
kind of event that distressed-debt investors live for. What’s interesting is
that S&P said that the AAA debt would only have been cut by two notches
had the CDO not decided to liquidate: they clearly reckon that the structure
is still reasonably sound. But if that was really the case, one would imagine
that the senior debt holders would simply have tried to sell their CDO tranches
in the secondary market, rather than liquidating the entire vehicle.