Managers move to liquidate distressed CDOs

NEW YORK (Reuters) - Managers plan to liquidate $2.85 billion of collateralized debt obligations backed by distressed securities next week, market sources said on Monday.

CDOs are repackaged asset-backed securities that typically include a variety of debt and are sold to investors in slices with different yields, depending on the risks.

A $581 million CDO list containing asset-backed securities secured by auto loans, credit cards, student loans and aircraft are slated for sale early on April 14, followed by a $323 million CDO sale backed by commercial mortgage-backed securities that afternoon, market sources said.

A $368 million CDO liquidation backed by collateralized mortgage obligations is slated for April 15, while a $545 million CDO sale backed by home equity ABS is scheduled for April 16, market sources said.

Liquidations to be held April 17 and 18 feature a $562 million CDO list of home equity ABS and a $471 million CDOs supported by both home equity ABS and corporate bonds, market sources said.

Defaults on CDOs jumped after credit-rating downgrades reduced projected levels of protection for bondholders.

Another $104.4 billion of CDOs experienced ratings downgrades last week due to negative loan performance trends, bringing year-to-date downgrades of CDOs to $356.7 billion, according to Deutsche Bank Securities.

Banks are taking the biggest losses on CDOs and other structured finance vehicles, as rising defaults on U.S. home mortgages and falling house prices undermine their value.

The latest liquidations are a sign that investors known as "super senior" holders of the securities may be forcing liquidations of CDOs that may leave out junior investors, who are farther back in line to claim those assets.