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Pension Fund Interest Boosts Babson CDO Growth

14 Jan 2005

Babson Capital Management plans to capitalize on pension fund interest in structured products by rolling out up to three collateralized debt obligations (CDO) in the first quarter and up to six this year, according to Money Management Letter, an LMW sister publication.

Bill Glavin
Babson Capital Management plans to capitalize on pension fund interest in structured products by rolling out up to three collateralized debt obligations (CDO) in the first quarter and up to six this year, according to Money Management Letter, an LMW sister publication. Bill Glavin, who was promoted to president from chief operating officer this month, said the firm is seeing investor interest in European and U.S. loan products, in addition to mortgage-backed securities, as a protection against rising interest rates.

Of the three products to be launched during the first quarter, one will be a European collateralized loan obligation (CLO), another will be a U.S. CLO and the third will use mortgage-backed securities. Institutional investors have recently bought into these structures at the equity level, where there is increased risk but higher returns than the senior tranches. "This is a marketplace [where] for a long time, the equity participants were insurance and mortgage banks," Glavin said. Now pension funds have more awareness of the vehicles and since structured products operate like a cross between equity and fixed-income, they are appealing, he added. "What you see is less volatility and returns from pure equity investments, but greater returns than you would get in a fixed-income investment," he said. Returns are generally in the low-to-mid teens. Glavin said it is too soon to discuss which banks will be underwriting the transactions.

In June and October last year, Babson raised two CLOs that were increased due to demand. The first was increased from $375 million to $450 million and the second from $300 million to $450 million. Morgan Stanley led both deals with pricing on the second CLO carrying a weighted average spread of LIBOR plus 48.3 on the liabilities. Thomas Finke, managing director, leads the leveraged loan team in Charlotte with $6.8 billion in assets under management.

Babson also bought European leveraged loan manager Duke Street Capital Debt Management last year and has since renamed it Babson Capital Europe. The firm manages approximately ¤2 billion in high-yield debt with ¤1.7 billion in leveraged loans. Ian Hazelton, ceo, and David Wilmot, managing director, have responsibility for loan origination and credit quality.Roger Crandall, vice chairman of Babson, is chair of the credit committee.

According to Standard & Poor's, Babson Capital Europe's approach differs from many other European leveraged loan managers. Duchess I CDO and Duchess II CDO are among the two largest transactions of their type launched in Europe. Portfolios are also split between assets denominated in British pounds and euros, with currency exposures hedged at portfolio level. Additionally, the team uses the secondary market opportunities to stay as fully invested as possible.

14 Jan 2005