Thursday, December 06, 2007

From AAA to Worthless in Less than a Year

by Bill McBride on 12/06/2007 11:19:00 PM

Note: If you are looking for a discussion of the Mortgage Freeze plan, see Tanta's The Plan: My Initial Reaction

First, here is a great graphical explanation of a CDO from Felix Salmon at Portfolio.com: What's a C.D.O.?

Now back to the Adams Square Funding liquidation. Thanks to jck for sending me the prospectus for the deal. Here are the notes:

U.S.$48,000,000 CLASS A SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$51,000,000 CLASS B-1 SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$10,000,000 CLASS B-2 SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$15,250,000 CLASS C FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$16,000,000 CLASS D FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$5,000,000 CLASS E FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$20,000,000 SUBORDINATED NOTES DUE DECEMBER 2051

Adams Square Funding I, Ltd. (the “Issuer”) will issue the Notes referenced above on or about December 15, 2006 ...
And here were the initial ratings:
It is a condition of the issuance of the Notes on the Closing Date that (a) the Class A Notes be rated “Aaa” by Moody’s Investors Service, Inc. (“Moody’s”) and “AAA” by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”), respectively, (b) the Class B-1 Notes be rated at least “Aa2” and “AA” by Moody’s and S&P, respectively, (c) the Class B-2 Notes be rated at least “Aa3” and “AA-” by Moody’s and S&P, respectively, (d) the Class C Notes be rated at least “A2” and “A” by Moody’s and S&P, respectively, (e) the Class D Notes be rated at least “Baa2” and “BBB” by Moody’s and S&P, respectively, and (f) the Class E Notes be rated at least “Ba1” and “BB+” by Moody’s and S&P, respectively. The Subordinated Notes will not be rated.
All of the above notes are worthless, including the AAA rated (by S&P) Class A notes.

Even the $342 million in Super Senior notes were impaired. As S&P noted yesterday: "proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes."

From AAA to worthless in less than a year.

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