The Hindu Business Line : ‘Sub-prime write-downs may rise to $285 b’

Write-downs from sub-prime-tied securities will probably rise to $285 billion, or $20 billion more than S&P’s forecast of $265 billion, two months ago, the global rating agency Standard & Poor’s said on Friday.

However, the agency said write-downs by the world’s financial institutions on debt linked to sub-prime mortgages might end soon.

“The valuation write-downs of sub-prime asset-backed securities (ABS) — primarily collateralised debt obligations (CDOs) of ABS but also sub-prime residential mortgage-backed securities (RMBS) — could reach $285 billion for the global financial sector,” said the report.

The report, however, noted that the global financial sector appears to have already disclosed the majority of valuation write-downs of sub-prime ABS.

“Significant write-downs have dominated the 2007 results of the investment banks that were the leading arrangers and dealers of CDOs of ABS. However, these institutions may benefit from future recoveries in market prices if the performance of sub-prime borrowers stabilises and risk premiums for uncertainties dissipate,” said the report.

Deterioration in Q1

“There may be some additional marks-to-market, as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses,” said Standard & Poor’s credit analyst, Ms Tanya Azarchs, lead author of that report.

The present market forces are placing further downward pressure on valuations. Margin calls and “events of default” clauses in CDOs are beginning to force liquidations at distressed prices. Disclosure to date appears to be uneven across the financial sector, including among regional and emerging market financial institutions.

Any near-term positive impact of reducing sub-prime risk in the financial system by increased disclosure and write-downs will, however, be offset by worsening problems in the broader US real estate market and in other segments of the credit markets, said the report.

“A major repricing of credit risk is taking place across the debt markets, with credit spreads having further widened in most segments since the beginning of 2008, after opening up in the second half of 2007. If the wider spreads hold to the end of the first quarter or half of this year, financial institutions will suffer further market value write-downs of a broad range of exposures, including leveraged loans,” the report said.

More Stories on : Mortgage | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page