S&P Warns Investors To Scrutinize Loans

Standard & Poor's is telling investors in collateralized loan obligations that they should more carefully scrutinize the collateral being purchased by managers in light of the proliferation of loans that are senior secured in name only.

  • 28 May 2004
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Standard & Poor's is telling investors in collateralized loan obligations that they should more carefully scrutinize the collateral being purchased by managers in light of the proliferation of loans that are senior secured in name only. It is also suggesting that specific buckets be included in new transactions going forward that recognize second-lien loans if the manager is intent on purchasing these assets.

"There is a lack of clarity in the marketplace as to how second-lien loans and other new collateral should be treated in vintage transactions that do not specifically contemplate their inclusion," said CDO analyst David Tesher. "Some of the older indentures and current indentures don't narrowly define senior secured to exclude senior secured second-lien loans," he added. Vintage CLOs need to reflect their potential for post-default recovery appropriately as not all second-lien loans are created equal, he said.

Hedge funds were at the forefront in buying second lien loans, but Tesher believes some vintage CLO managers have been buying the collateral and some new transactions plan on purchasing the collateral. He explained that vintage loan deals have experienced significant prepayments, causing several transactions to bump up against their weighted average spread tests. This has created a thirst for yield, enabling second-lien loans and other assets outside some managers' investment disciplines to look more attractive.

For new CLO issuance, specific reference to second liens in transaction documents can ensure they are afforded the appropriate security and recovery examinations, he explained. Furthermore those managers intent on purchasing such collateral will likely include explicit buckets to highlight their inclusion and appropriate categorization. "We want to make sure the loan manager is being upfront with their intentions," Tesher said.

  • 28 May 2004

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 BNP Paribas 10,542 20 17.55
2 Bank of America Merrill Lynch (BAML) 6,103 21 10.16
3 Citi 5,130 13 8.54
4 JP Morgan 4,681 6 7.79
5 Morgan Stanley 4,137 11 6.89

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 79,222.71 230 11.49%
2 Bank of America Merrill Lynch 65,088.22 185 9.44%
3 Wells Fargo Securities 55,825.35 161 8.10%
4 JPMorgan 52,873.25 155 7.67%
5 Credit Suisse 44,197.08 113 6.41%