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Capital Markets

CLOs chafe at inability to find bargains: Restrictions limit purchases to par

The European secondary loan market was bracing itself for a painful year-end in December as balance-sheet-driven forced selling started to bite.

RBS put a €620 million portfolio of loans up for sale at the beginning of the month (although this was later reduced to €440 million when some of the assets were revealed to be subject to a lock-up). The effect of such a bid list on a market still licking its wounds after the Icelandic bank collapse was inevitable – average bids hit new lows of early 60s.

"The Icelandic banks financed €2 billion through total return swaps [TRS] and the secondary market fell 20 points in a month after their collapse – €2 billion TRS positions were dropped on the market in a week," grumbles a CLO manager. "Even assuming this is the right level, it is hugely technical." Hopes that the market is approaching the end of the technical cycle but the beginning of the fundamental cycle could be premature if more forced selling emerges in the dying weeks of 2008.

"There is a meaningful amount
of pain still to come. The
primary market cannot
recover until the secondary market is back trading
at 90 – and that is not
going to happen
any time soon"

The situation is increasingly frustrating for CLO managers as the confines of most vehicles prohibit them from buying loans below 85.

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