In many ways connected to our earlier piece on "Investigating the GIC," Moody's downgraded various LCDO tranches underwritten by Lehman Brothers. As their name suggests, these CDOs are backed by loan credit default swaps (LCDS). With the underlying being by nature synthetic, funded issuance can be invested in "Eligible Investments," such as a GIC.
For these deals, proceeds of funded issuance was invested (either substantially or completely) in the Lehman Brothers ABS Enhanced LIBOR Fund, which according to Moody's, consists of -- or invested in -- a portfolio of highly-rated asset-backed securities. Moody's remarks confirm the suspicions we describe in our earlier piece on GICs: that the proceeds of liquidation may not be sufficient to repay in full the principal amount of the funded note tranches.
Those notes were downgraded by 3 to 6 rating subcategories across the board. We're admittedly surprised by the mildness of these downgrades, but they remain on watch for further downgrade, so stay tuned.