Nov. 13 (Bloomberg) -- Standard & Poor's cut its ratings on more than $20 billion of U.S. collateralized debt obligations that made bets on companies including now-bankrupt Lehman Brothers Holdings Inc. and Washington Mutual Inc.

S&P lowered its ratings on 565 pieces of the CDOs, which sold credit-default swaps protecting against defaults on groups of companies that included Lehman and WaMu, as well as Fannie Mae and Freddie Mac, the mortgage finance companies that were seized by the government in September, according to a statement today from the ratings company.

Investors have been anticipating downgrades, with some taking losses of more than 90 percent because they bet heavily on financial companies that have either failed or have shouldered the biggest losses from the worst financial crisis since the Great Depression. S&P said it may make further cuts because it hasn't yet taken into account the failure of three Icelandic banks, which were seized by the government's financial regulator.

Fitch Ratings, which last month cut its rankings on 422 classes of CDOs and warned that more may come, said in a report today that the high concentrations of financial companies in the deals are a ``key driver of risk.''

The financial company defaults ``exceeded expectations and could yet prove to be part of a new peak default pattern,'' Fitch analysts Jeremy Carter, Philip McDuell and Jan Bockelmann in London wrote in the report today.

Iceland Banks

S&P said it may still cut pieces of 170 CDOs as it assesses the effect from the failure of Iceland's Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf. Sellers of protection on the three banks must pay as much as 98.75 cents on the dollar to those buying protection after dealer auctions this month that determined a value on their bonds.

Susquehanna Bancshares Inc., a Lititz, Pennsylvania-based lender, last month lowered the value of $20 million in so-called synthetic CDO notes it bought by almost 88 percent because the securities made guarantees on the failed financial firms. KBC Groep NV, Belgium's biggest financial-services firm, which had 377.4 billion euros ($482 billion) in assets as of June 30, wrote down 1.6 billion euros after downgrades on company- and asset- backed debt.

CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk, typically providing higher returns than other investments of the same rating. Credit-default swaps are derivatives based on bonds and loans and used to protect against or speculate on defaults. Should a borrower fail to meet debt agreements, the contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: November 13, 2008 17:15 EST