Conti Downgraded by S&P

The long-term counterparty credit rating and the senior unsecured debt rating of ContiFinancial Corp. have been lowered to BB from BB-plus by Standard & Poor's and removed from CreditWatch.S&P said the action followed Conti's announcement of a writedown in its excess-spread receivable. "The downgrade reflects an increasingly difficult operating environment in which a flood of mortgage refinancings have negatively impacted the value of ContiFinancial's and most other subprime mortgage securitizers' excess-spread assets," S&P said. The rating agency said ContiFinancial "remains a benchmark for the industry. Management's skill in maximizing cash out of its securitizations while minimizing associated cash expenses have contributed to a near neutral operating cashflow -- an achievement in an industry characterized by an inability to cover cash expenses out of operations." Noting the "substantial risk" involved in the industry's reliance on securitization and gain-on-sale accounting, S&P said "no management is capable of effectively controlling these risks without compromising the basic economics of the business model." The risk is now large enough that subprime mortgage lenders that follow the model "represent, on a stand-alone basis, a credit risk that is no longer consistent" with a BB-plus rating, S&P said. S&P's website address is http://www.ratings.standardpoor.com.