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COLLAPSE OF $488M BOND POOL

By
Roddy Boyd
Published Dec. 7, 2007, 10:00 a.m. ET

The collapse of an asset-backed bond pool yesterday is the most stark reminder yet of the growing cost of the subprime meltdown.

Adams Square I, a $488-million collateralized debt obligation – essentially a bond made up of slices of other bonds – saw the value of its underlying collateral drop so sharply that even the most highly rated classes were unable to return more than 25 cents on the dollar to its investors.

While billions of dollars of CDO tranches have been downgraded since the summer, investors in the higher-rated pieces have usually seen their losses contained to between 10 cents and 30 cents on the dollar.

The cost of writing down the value of Wall Street’s soured CDO investments is about $66 billion so far. Late Wednesday, Standard & Poor’s took the unusual move of downgrading all of the CDO’s classes – even its triple-A pieces – to D, its lowest rating.

Launched in January, the Credit Suisse-managed deal was a combination of subprime asset-backed securities and derivatives known as swaps, according to its prospectus.

S&P estimated that about $165 million worth of Adams Square notes would not be repaid as a result of the rapid downgrade, which triggered defaults.

According to Barclays Capital, the damage is likely to be widespread among investors.

In a report released yesterday, Barclays analysts argued that in event of a liquidation, the senior-most CDO classes may recoup between 30 percent and 65 percent of their investment. The second highest classes, the so-called mezzanine pieces, would see recovery of only 20 percent to 30 percent.