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S&P Says End in Sight for Writedowns on Subprime Debt (Update5)
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March 13 (Bloomberg) -- Standard & Poor's said the end is in sight for writedowns by the world's financial institutions on debt linked to subprime mortgages.
Writedowns from subprime-tied securities will probably rise to $285 billion, or $20 billion more than S&P forecast two months ago, the New York-based ratings company said today in a report. More than $150 billion of writedowns have been reported by banks, brokers and insurers, the firm said. S&P raised its estimate as it assumes deeper losses on collateralized debt obligations.
``The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns'' on subprime debt, S&P credit analyst Scott Bugie said in a statement. Losses on other debt such as leveraged loans are still likely to increase, the report said.
Writedowns from subprime-tied securities will probably rise to $285 billion, or $20 billion more than S&P forecast two months ago, the New York-based ratings company said today in a report. More than $150 billion of writedowns have been reported by banks, brokers and insurers, the firm said. S&P raised its estimate as it assumes deeper losses on collateralized debt obligations.
``The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns'' on subprime debt, S&P credit analyst Scott Bugie said in a statement. Losses on other debt such as leveraged loans are still likely to increase, the report said.
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S&P said that it now expects larger losses from ``high- grade'' CDOs used to repackage asset-backed securities with AAA, AA or A ratings into new debt. Holdings of highly rated bonds backed by Alt-A mortgages, which are a step below subprime loans in terms of expected defaults, pose a risk to those CDOs, according to a report this week from Barclays Capital analysts. The high-grade CDOs also own top classes from other CDOs.
Citigroup and Merrill Lynch are already valuing the ``super- senior,'' or safest, classes of these CDOs at 52 percent and 68 percent discounts, S&P said, compared with 30 percent at the broader range of banks that own them.
As much as $75 billion of writedowns from subprime-tied CDOs will be offset by gains of the same amount because they'll stem from so-called credit-default swaps, S&P said. The swaps cover losses if securities aren't repaid as expected, in return for regular insurance-like premiums. Even so, the losses will damage financial firms' earnings, capital, and reputations, S&P said.
S&P said an end to subprime writedowns and increased disclosure probably won't be enough to staunch financial companies' losses.
Citigroup and Merrill Lynch are already valuing the ``super- senior,'' or safest, classes of these CDOs at 52 percent and 68 percent discounts, S&P said, compared with 30 percent at the broader range of banks that own them.
As much as $75 billion of writedowns from subprime-tied CDOs will be offset by gains of the same amount because they'll stem from so-called credit-default swaps, S&P said. The swaps cover losses if securities aren't repaid as expected, in return for regular insurance-like premiums. Even so, the losses will damage financial firms' earnings, capital, and reputations, S&P said.
S&P said an end to subprime writedowns and increased disclosure probably won't be enough to staunch financial companies' losses.
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