Bear Stearns Asset Management (BSAM) has indicated to Fitch Ratings that it will not invest in overpriced loans for its Grayston CLO 2001-1 vehicle, despite the vehicle being cash rich. The CLO was issued in April 2001 and is mainly loans with a high-yield component. But managers are hard pressed to find value in the market and BSAM has decided to maintain the cash position and reinvest opportunistically, according to Elizabeth Russotto, a senior director at Fitch.
"We spoke to BSAM during the review and 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," noted Tim Baylor, associate director at Fitch. Russotto added that [Fitch] expects BSAM "to reinvest their cash well, however, there is some pressure on the transaction's interest coverage tests."
The deal 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.
Unlike BSAM, "Not all loan managers have the flexibility within their documents or expertise to invest in a diverse range of investment vehicles," Russotto said. "Nevertheless, loan managers are looking for alternative high-yield investments. As a result there has been an increase in institutional investors in the middle market loan universe looking for better relative value," she explained.
One loan manager said all shops are facing problems with reinvestment. "The challenge is looking for product, especially when you have fixed liabilities," he noted. The most likely effect is that the IRR on the equity class is likely to be lower, he added, noting that instead of the 20% returns of the past, it is more likely to be in the 12-15% range. "That's still reasonable though," he stated.