Last night Standard & Poors announced that it was lowering its ratings on a CDO called Adams Square I. The CDO, which was managed by Credit Suisse and has been in liquidation since November, will apparently have insufficient assets to fully-cover its super senior swap and there will be nothing left over for distributions to holders of the other classes of notes. S&P has downgraded it's rates to a 'D' on the senior swaps and every other class of notes.
This should make it a little harder for those who have been insisting that the Citadel discount—the 74% discount Citadel got when it bought a portfolio of asset backed securities from E*Trade—did not provide an indicator of prices in the market. That argument largely hinged on the idea that the securities involved were too heterogeneous of an asset class for a package price to indicate anything reliable about prices individual securities. But now we have an example of even highly rated paper—triple As, in the case of the best rated Adams Square notes—that looks like it will pay nothing. At least when it comes to Adams Square, the paper seems far less heterogeneous than the ratings would have implied. Now it's all wallpaper.
Of course, it's always dangerous to make any blanket statement about a market as heterogenous as CDOs. But with the market trading as lightly as it is, it is not re-assuring to hear those who claim to be marking their CDO portfolios to the market brushing off every actual market price as irrelevant. One thing that looks clear from the Adams Square wipe-out is that the idea that the Citadel discount created a floor is probably far too optimistic.
"This is a fairly big leap from even the most dire CDO news we’ve heard in the past couple months, where losses of the 10-30 per cent order were the most bearish estimates for AAA tranches," FT Alphaville notes.
Or, as Calculated Risk puts it even more simply: "From triple AAA to nothing. That is a deep cut."

Mortgage CDO Liquidates at Below 25 Cents on Dollar [Bloomberg]
CDO wipeout: AAA noteholders get nothing [FT Alphaville]
CDO Liquidates for "Less than 25% of par value" [Calculated Risk]