New Signs of Life for Collateralized Loans

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'Stress Scenarios'

By April 2009, amid the worst financial crisis since the Great Depression, the slices of CLOs with BBB ratings plummeted to 6 cents on the dollar, while the safest portions fell to 69 cents, Morgan Stanley data show.

As the U.S. has lent, spent or guaranteed $11.6 trillion to rescue the financial system and pull the economy out of recession, prices on the S&P/LSTA loan index rose to 86.31 cents on the dollar from the record low in December 2008 of 59.2 cents.

Banks need to make "an extraordinary commitment" to help rebuild the economy, President Barack Obama said yesterday, after the government bailed them out of a crisis "largely of their own making."

Even as bond issuance soared this year as borrowers took advantage of record-low interest rates and investor demand for higher-yielding assets, sales of leveraged loans to high-yield, high-risk companies has declined 45 percent from the same period in 2008.

Junk Bond Sales

Companies have sold $152 billion of junk bonds in the U.S. in 2009 compared with $64 billion for all of 2008, Bloomberg data show. JPMorgan and Bank of America led banks arranging $147.7 billion of leveraged loans this year.

Issuance this quarter has exceeded the prior three quarters, and since November at least a dozen companies, including Ronald Perelman's Revlon Inc. and Booz Allen Hamilton Inc., have asked lenders to change the terms of debt agreements to allow bond sales, extend loan maturities or pay dividends to private-equity firm owners, Bloomberg data show.

That's boosting confidence the number of high-yield companies defaulting globally will decline to 3.9 percent by November 2010 from 12.7 percent last month, Moody's Investors Service said Dec. 7.

The value of CLOs with the BBB portions has climbed to 55 cents on the dollar, Morgan Stanley data shows.

"This solid performance in a majority of CLOs should increase investor confidence, raising the probability that newly issued CLOs will be received favorably by the market," said Matthew Natcharian, the head of Babson Capital Management LP's structured credit team that has bought the securities this year. The Springfield, Massachusetts-based firm manages $112.5 billion of assets.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Kristen Haunss in New York at khaunss@bloomberg.net

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