Corporate & Securities Law

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind.

Morgan Stanley is selling $87 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody's Investors Service, according to marketing documents obtained by Bloomberg News.  The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group and managed by Greywolf Capital Management, an investment firm based in Purchase, NY.

Two years after the credit markets began to seize up, costing the world's biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so-called structured finance securities and turning them into new debt investments with top credit ratings.  While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks. 

A lot of banks and insurers "cannot buy anything but AAA," said a principal at R&R Consulting.  "You're manufacturing AAA out of non AAA, therefore allowing those people who have AAA written on their forehead to buy."

Investors beware.

Source:  Bloomberg.com