July 11 (Bloomberg) -- Moody's Investors Service may cut $5 billion of collateralized debt obligations after lowering the ratings of subprime mortgage bonds that make up the securities.

A downgrade would affect 184 pieces of 91 CDOs, representing about 3.6 percent of rated CDOs containing asset-backed securities, Moody's said in a statement today. Moody's yesterday sliced ratings on $5.2 billion of subprime bonds that back CDOs, which are also sliced into pieces to allow investors to choose how much risk they bear for the returns they receive.

Moody's and Standard & Poor's, after coming under criticism for failing to downgrade subprime mortgage bonds, yesterday began taking action. Moody's lowered ratings on 399 bonds and Standard & Poor's said it may reduce ratings on 612, valued at about $12 billion.

``It is anticipated that the current rating reviews will be resolved over the upcoming weeks as more information becomes available and Moody's completes its analysis,'' Moody's analysts, led by senior credit officer John Park, said in a statement. ``We expect to engage collateral managers in a dialogue to understand better what plans, if any, will be executed for their respective transactions.''

S&P, Moody's and Fitch Ratings were slammed by investors because their ratings on bonds backed by mortgages to people with poor or limited credit don't reflect the fastest default rate in 10 years. Some bonds backed by subprime mortgages are down by more than 50 cents on the dollar this year while their credit ratings haven't changed.

AAA Ratings

Moody's and S&P have already made the most ratings changes ever in the subprime market, the companies said. Pension funds and insurance companies may be among investors required to sell their CDOs, which package mortgage bonds into new securities, if they are downgraded.

The Moody's announcement included a rare decision to place eight CDO tranches rated AAA, the highest rating, on watch. Fifteen were rated Aa, 37 were in the A range and 124 were rated Baa1 or lower, Moody's said. Top-rated securities make up about three-quarters of a CDO.

The AAAs ``are supposed to be bulletproof,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said ratings companies understate the risks of subprime mortgage bonds. ``That's a rating they only give to six corporations in the whole U.S. and they give it to 75 percent of CDOs. This really blows the whole concept of an AAA.''

Aircraft Leases

The AAA CDO tranches have pools containing 20 percent to 30 percent concentrations of ABS that had recently been downgraded compared with an average exposure of less than 7 percent, said Noel Kirnon, Moody's head of global derivative ratings, in a telephone interview. Moody's does not project whether the CDO pools will show future losses in principal, Kirnon said.

``As a CDO analyst, I'd have to say I don't know,'' Kirnon said. ``We look at the ratings to give us a sense of what the expected losses or defaults are going to be in those portfolios. Based on the current ratings, there is some likelihood that some will take losses, but not now.''

Kirnon said Moody's had downgraded AAA CDOs previously. Those CDOs were backed by securities based on aircraft leases, manufactured housing loans and franchise payments.

S&P said it is also reviewing its ratings of CDOs that contain subprime mortgages. Investors in CDOs alone stand to lose as much as $250 billion, according to Institutional Risk Analytics in Hawthorne, California, which writes computer programs for auditors to detect portfolio risk.

Fitch is reviewing information on June foreclosures before acting, spokesman James Jockle said in an e-mailed statement. Fitch has taken ratings actions on 200 bonds representing $2.3 billion of debt outstanding, he said.

Moody's said today that 360 U.S. CDO transactions composed of 1,792 pieces contain some residential mortgage-backed securities recently downgraded or placed on review for possible downgrade by the ratings company.

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net.

Last Updated: July 11, 2007 17:34 EDT