RAIT Fails to Shed Light on Debt Deals

The higher tranches get paid before others. RAIT typically keeps the riskier lower tranches, which include BB notes and BBB notes.

The worries about some of these CDO deals are that they are just a mix of a lot of risky debt. As skeptics say: It's similar to putting horse dung and other garbage into a grinder to make some sausage.

Technically, a BBB tranche is considered investment grade. But that doesn't mean there isn't a lot of questionable debt underlying that tranche.

Ratings service Fitch placed $118 million of BBB Taberna notes on "ratings watch negative" on Thursday, along with $109 million of BB and BB+ notes.

"Fitch's rating actions reflect the rapid deterioration in the credit quality of a number of residential mortgage REITs, finance companies specializing in residential mortgage lending and homebuilders underlying these CDOs," the ratings service said.

The downgrades related to older Taberna CDO deals. But RAIT's earnings release says that the company also closed two new CDO securitizations in 2007, Taberna 8 and Taberna 9. "Neither of these securitizations has encountered any permanent impairment during 2007," the company said. "Our investment in these securitizations includes $78 million of BB notes and $112.5 million of equity as of June 30, 2007."

Notice the word "includes." What else might the company be holding? Skeptics say RAIT could very well be holding more of these tranches from two deals if it was unsuccessful in selling down the paper in the CDOs, which bears claim has been the case. One market source says Taberna still hasn't fully sold the two deals.

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