Just when you thought that it could not get any worse for those lucky people who stuck money into CDOs, yesterday the S&P made a series of announcements that only serves to add another nail in the coffin for their money.

The S&P has changed the assumptions about how much cash will be recovered by investors in those infamous sub prime bonds when individuals default on their loans. This in turn affects the CDOs that are based upon them (in this case those that have at least 40% in sub prime mortgage backed bonds). The recovery rates for the various tranches were announced as follows:

A or Lower                 Zero
AA                             5%
AAA (Junior)               35%
AAA (Super Senior)     60%

This, as the S&P so rightly point out, will lead to even more downgrades as lower recovery rates typically requires a bigger cushion against potential losses in order to achieve the same rating.

In their announcement the S&P said "...The changes to our recovery-upon-default assumptions may have a negative impact on the ratings assigned to the affected CDOs because a reduction in the expected recoveries typivally necessitates more subordination to sustain the ratings on the tranches.."

Shame they didn't get it right in the first place really, eh.