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The incredibly shrinking spreads on new issue loans that have haunted investors like a B-grade movie for the better part of the last year are finally fattening up, thanks to horror stories playing out in other markets. Jitters in the equity markets over accounting scandals, a slackening of demand from retail funds and institutional buyers and three straight weeks of bond outflows have caused secondary pricing in the loan market to soften. Spreads over LIBOR are starting to follow suit and are getting bigger. "You've seen in the last 10 days the market has changed," said Art Zimmer, senior v.p. and portfolio manager at OppenheimerFunds. "Refinancings at lower spreads and new deals getting flexed down are not going to continue. People are putting their foot down." Zimmer cited a slackening demand from retail funds and institutional buyers as the reason behind the sea change.

The exceptionally low primary market volume this week resulted from a combination of summer doldrums, post July 4 hangover and the ongoing market dislocation as the equity meltdown continues. Examples of cancelled deals are growing, such as Merck's decision this week not to proceed with the planned bond sale for Medco on the back of the postponement of the IPO. With risk appetite minimal at best and non-existent for any company that is under an accounting cloud, primary market conditions are not conducive to placing the kind of deals that always took more legwork even at the best of times. Exemplary borrowers such as Wal-Mart however, are having little trouble with market access with WMT able to price $1 billion of 5-years at +50 this week. Total investment grade issuance for the week was just under $4 billion, making it one of the slowest weeks of the year.

The market for cash flow collateralized debt obligations will be hit hard by the WorldCom accounting debacle, market players say. One CDO collateral manager notes that cash flow CDOs have much more exposure to WorldCom than they do to Enron, the previous corporate fiasco, which had a minimal effect on the cash flow CDO market. The manager predicts that investment-grade CDOs with exposure to WorldCom will be severely downgraded, making the CDO corporate market more volatile as a whole. He reasons that with so many corporate CDOs backed by WorldCom debt, downgrades in the collateral will put added pressure on the CDO notes, contributing to a worsening in investor confidence in the CDO market.

High-yield hung in relatively well through Thursday of last week considering the carnage on the equity side.New issuance included a $305 million Goldman Sachs-led deal for Oregon Steel Mills. Though Qwest Communications' bonds took a beating, traders and salespeople believe at least 30% remains in high-grade accounts.

J.P. Morgan held a bank meeting last Wednesday for existing lenders and some prospective new lenders to shop a lower-priced refinancing for Domino's. The pizza delivery company is looking to take advantage of a recent upgrade by Moody's Investors Service, which was prompted by improved performance, and more favorable market conditions, said a banker familiar with the deal. The $474 million bank facility was upgraded from B1 to Ba3, while $256 million of 103/ 8% senior sub notes jumped to B2 from B3. Company officials and a spokesman for J.P Morgan declined to comment.

The banks holding XO Communications' bank debt are not yet ready to take up Carl Icahn on his offer to buy $331 million of the senior secured paper at 40, as lenders hold out hope that they can continue to fend him off and realize a better recovery with their own plan. "People think the company has a higher value," said one dealer, noting that selling to Icahn caps out the recovery value at 40. But not everyone is so sure, and there was some speculation that, if one bank cracks, there would be a rush to unload rather than be left holding the paper.

Bank debt of Level 3 Communications jumped some 10 points to the 68-70 level after the announcement that the company would raise $500 million in new capital from Longleaf Partners Funds, Berkshire Hathaway and Legg Mason. Before July 4, investors could have bought the paper in the high 50s, one dealer said, noting that more than $20 million had changed hands after the announcement early last week. Investors perceived the move as a sign of positive support for the beleaguered telecom industry.

Mizuho Corporate Bank has lost its second-in-command on its securitization desk. Ian Gray, director of structured debt and structured finance, has left the firm to travel, according to a firm insider. Gray reported to Tim Saunders, head of securitization, who was on holiday at press time and could not be reached for comment. In May, Thierry Sebton, Tarek Safi and Enrique Marin all left Mizuho to join Royal Bank of Scotland's securitization team (BW, 5/5).

Casella Waste Systems' new $300 million credit facility has been assigned a B1 rating by Moody's Investors Service, taking into account the benefits and limitations of the credit's security package. The security includes first-priority perfected liens on all of the assets of Casella and its subsidiaries, except those on motor vehicle titles are not perfected. The lenders, however, will have the option to take security in the company's real estate and landfills. The new credit does not have subsidiary guarantees because Casella and its subsidiaries are the collective borrower. The company's proposed $175 million in senior subordinated notes have been rated B3, reflecting the contractually subordinated nature of the obligations

Alex Braun, director of funding and asset management on the fixed-income side, and Paul Caldwell, a senior asset-backed and high-yield bond portfolio manager, have left Abbey National's wholesale bank. The departures are the result of a restructuring in the wholesale bank, a spokeswoman says. Braun's responsibilities have been divided, with funding now being part of the Treasury division and asset management coming under a newly established division--asset management and risk transfer. It could not be determined whether Caldwell will be replaced. Braun and Caldwell could not be reached for comment.

WorldCom's bank and bond levels narrowed to the 20-22 level after Qwest Communications International announced that it was the center of a criminal probe. Dealers still maintain that the company's bank debt has not yet changed hands since it plummeted last month, although rumors of trades still continue to circulate around the market. "It's a train wreck if anyone were to trade it down there," one dealer said.

Aurora Foods has obtained an extra $37.6 million loan from its J.P. Morgan-led bank group, made covenant changes to its existing credit agreement and received $25 million from its sponsors as the St. Louis company looks to reduce more than $1.2 billion in debt. "In the short term, debt increases," said William McManaman, cfo. "But to de-lever, we need to gain liquidity to keep suppliers and vendors current and to run the business the way it should be." Merrill Lynch is advising on potential de-leveraging options, which include an asset sale, an equity offering and the conversion of debt to equity.