Wednesday, February 4, 2009

Cash Loans Are Bid Up By CLOs Returning From JPM HY Conference

As the JP Morgan High Yield Conference wraps up today (at yet another boondoggle in the Loews hotel in South Beach), and CLO managers get back to their respective cubicles and start having to come up with investment ideas to justify the $500 mini bar bills, the cash loan market has been getting significantly bid up. Names that have gotten the strongest bid interest are the CLO eligible names which trade above 80 cents on the dollar. The 80 cent price is a cut off, as any CLO purchases below the threshold must be held at that price until the loan trades up to a certain price for a certain number of days (usually 90 cents for 10-20 days). Also holding a cash loan at a below-80 price can potentially trigger an overcollateralization test which all CLOs dread.

Some loans buoyed by presumed CLO interest include HCA's Term Loan B which had traded up from an 80s low in January to 84.5, as well as Georgia Pac's Term Loan B, which traded up from the 70s range in December, thru the 80s in January and is now at 87. Other loans which may catch a CLO bid include TXU loans trading at 80 and West Corp which has risen from 75 to 81 overnight on good Q4 results. Nonetheless, any rally will likely be confined to higher-quality, liquid loans.

As dealer inventory is still very thin, any bid has the effect of dramatically rising liquid names. But since the liquid universe of daily traded names has dramatically dropped and is currently about 60 names, the possibility to generate attractive returns on pure technicals is definitely available to bored loan traders.
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