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Collaterized Loan Obligations |
HenryTo
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 Posted: Sun Nov 05, 2006 12:26 am Post subject: Collaterized Loan Obligations |
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This is where all the buyout money is coming from:
http://www.businessweek.com/magazine/content/06_43/b4006088.htm?chan=top+news_top+news+index_investing
An axiom: Given that this is being mentioned in BusinessWeek, that means we are nowhere near the top yet. And given that these are all floating rate instruments (tied to LIBOR or prime), the collaterized loan and the leveraged loan markets should continue to do well next year as the Fed starts cutting interest rates. |
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HenryTo
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rffrydr
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HenryTo
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| Posted: Mon Jun 25, 2007 10:46 pm Post subject: |
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An update from the WSJ. CLOs most probably the next to go after CDOs:
http://online.wsj.com/article/SB118282461107748034.html?mod=googlenews_wsj
| Quote: | The market for mortgage-backed securities -- which are similar to CLOs but are backed by home mortgages rather than corporate loans -- is providing CLO investors with a case study in how quickly values can tumble. Troubles in the housing market have driven down the value of securities backed by risky "subprime" mortgages. Last week, two Bear Stearns Cos. hedge funds with substantial holdings of illiquid securities backed by subprime-mortgage bonds had to scramble to stave off collapse after their assets lost much of their value. Bear pledged up to $3.2 billion to bail out one of the funds.
In late April, a Bank of England report noted parallels between the markets for subprime mortgages and for poorly rated corporate credit, heightening concern about the CLO market. CLOs are a form of collateralized debt obligation, or CDO. Besides corporate loans, CDOs often hold mortgage bonds and junk bonds.
Over the next few months, the market for non-investment-grade corporate debt will be tested by the sale of roughly $200 billion of new loans and billions more in bonds. In several loan and bond sales in recent weeks, including one to fund the buyout of Thomson Corp.'s Thomson Learning unit, investors have demanded higher interest rates or more protections to compensate for the risk.
The companies behind many of these loans aren't the only ones loaded with debt. Many investors who put money into CLOs use borrowed money to magnify their returns. And the financial professionals who create CLOs use borrowed money when getting them started.
"CLOs are the equivalent of the savings and loans in this cycle," says Kenneth Buckfire of Miller, Buckfire & Co., a restructuring advisory firm. Savings-and-loan institutions gobbled up a mountain of junk bonds issued to fund the 1980s buyout boom. A spike in corporate defaults during the recession of the early 1990s, coupled with a sharp downturn in real-estate markets, caused many S&Ls to fail. |
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rffrydr
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rffrydr
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| Posted: Mon Nov 06, 2006 7:50 am Post subject: |
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Now you see it. Now you don't:
http://www.ft.com/cms/s/873249b6-6ce3-11db-9a4d-0000779e2340.html
Investment banks and hedge funds are being forced to rapidly adjust their trading strategies amid a wave of reported “panic selling” in the US and European credit derivatives market last week.
This heavy selling has driven the cost of insuring debt against default in the market for credit default swaps to record low levels – signalling either that investors are extraordinarily optimistic about the outlook for corporate debt, or that prices are so distorted that they are no longer being paid for the risks they are taking on.
http://www.ft.com/cms/s/93c88c4e-6ae0-11db-83d9-0000779e2340.html
CDS market 10X the cash value of underlying corporate bonds.
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Prospero
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Joined: 01 Mar 2006
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| Posted: Sun Nov 05, 2006 11:43 am Post subject: |
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Henry, I have a vague idea about how a CLO is structured (the law of large numbers means that aggregates of different grade bonds can be packaged into appropriate tranches). But I am not too familiar with how they work in practice. Could you explain your comment 'This is where all the buyout money is coming from'?
Thanks |
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