Bear Stearns Asset Management is planning to hold on to a high cash position in a collateralized debt obligation it manages, Grayston CLO 2001-1, rather than invest in high-priced senior secured debt, according to Elizabeth Russotto, a senior director at Fitch Ratings who has spoken with the collateral managers. The CLO was sold in early 2001 and consists mainly of loans with a high-yield component. But, investors are hard pressed to find value in the market and the collateral manager has decided to maintain the cash position and reinvest opportunistically, she says.
"They want to wait and invest in alternative high-yield investments over the course of 2004, which will provide better value than the currently overpriced loans," notes Tim Baylor, an associate director at Fitch. The deal currently has $32.5 million in principal cash, which is approximately 8% of the total collateral balance, excluding defaults and equity. While Grayston is still in the reinvestment period, this sizable position affects the weighted average coupon, weighted average spread and interest coverage levels. Justin Driscoll, manager of the leveraged loan group at BSAM, did not return calls.
One manager says all investors in senior secured debt are facing reinvestment hurdles. "The challenge is looking for product, especially when you have fixed liabilities," he notes. The most likely effect of holding on to a high cash position is returns on equity classes are likely to be lower, and that instead of the 20% returns of the past, first-loss holders are more likely to see returns in the 12-15% range. "That's still reasonable though," he states.