Nov. 8 (Bloomberg) -- More than $350 billion of collateralized debt obligations comprising asset-backed securities may become ``distressed'' because of credit rating downgrades, Morgan Stanley said in a report today.

``The pace of ABS CDO downgrades will pick up significantly over the next few weeks,'' wrote analysts led by Vishwanath Tirupattur in New York. ``Given the degree of market dislocations and the potential size of the market, there is clearly an opportunity for attentive investors.''

Moody's Investors Service, Standard & Poor's and Fitch Ratings have downgraded 856 portions of debt based on asset- backed securities this year because of rising defaults on subprime mortgages. Losses on U.S. home loans may reach $250 billion in the next five years, analysts at Lehman Brothers Holdings Inc. wrote on Monday.

Bonds are considered distressed when investors demand yields at least 10 percentage points above similar-maturity Treasuries. Morgan Stanley said many of the CDOs of asset-backed securities sold in recent years are trading on an interest-only basis, signaling investors expect to receive little of their original principal back.

To contact the reporter on this story: Neil Unmack in London at nunmack@bloomberg.net

Last Updated: November 8, 2007 10:28 EST