Moody's downgrades Lehman CSOs following court ruling

Moody's has downgraded $4 billion in face value of CSO tranches issued by Lehman Brothers following the recent New York court ruling on the Dante series of CDOs. All the deals in question were secured by one of two funds linked to Lehman Brothers, the Lehman Brothers ABS Enhanced Libor Fund and the Milestone Offshore Funds Daily Dollar Portfolio.

The New York court ruled that the standard techniques for subordinating swap termination payments in a bankruptcy are unenforceable under US law. Moody’s says that the ruling increases the risk that the swaps are terminated with Lehman Brothers receiving a termination payment. The agency says that this could lead to the notes being completely wiped out. Moody’s downgraded the tranches, which are mostly from full capital structure synthetic CDOs and CLOs, by up to eight notches.