Barclays Capital is in the market warehousing European collateral for a Euro$350 million collateralized debt obligation--originally slated for Euro$450 million but downsized, according to dealers, because pricing on attractive bonds has tightened in Europe. Faith Bartlett, portfolio manager at Barclays, did not return calls by press time. The deal is reportedly structured to comprise a majority of leveraged loan assets, but as with most European cash flow arbitrage structures, the deal also has bonds in the collateral mix as loan assets are scarce. "The bonds are pricing too tight now so they reduced the deal," said a market player, who said Credit Suisse First Boston is now shopping a new structure for the firm. CSFB officials did not return calls by press time.
A European CLO structurer said many industrial names are now trading above par, making it difficult for CLO managers to fill out the bond component on most deals, which could negatively affect the execution of European based CDOs in the pipeline. In Europe, bond pricing is even more crucial to European deals than U.S. deals, because there is not enough available loan collateral to do entirely loan-based transactions. Others in the market said bond pricing has put a virtual stop to deal flow for European CDOs that are dependent solely on bond assets. "It's very hard for a European bond-based CDO to get off the ground right now," said Zach Summerscale, CDO portfolio manager at London-based Duke Street Capital.
A high-yield analyst at Lehman Brothers explained that two recent new issues, including a bond issue backing the leveraged buyout of Sanitec, a Finish bathroom fixture company, have priced much tighter than LBO deals have historically. The analyst said that last year the deal would have priced with a 500-600 basis point spread compared to the 350 basis point spread the deal received. "Issuance is substanially down and the pipeline is essentially empty. Competition for new supply is fierce," he said.
On a positive note, a mostly European-based deal was completed for Pacific Investment Management Company. Deutsche Bank issued notes two weeks ago to fund PIMCO's $300 million collateralized loan obligation. One dealer speculated that sourcing collateral can be easier for those managers with critical mass. "People looking for smaller tickets have a really tough time getting deals done." Calls to Thurston Powell, structurer at PIMCO, were not returned by press time.