Posted on 11/04/2008 9:29:39 AM PST by BGHater
The unwinding of the investment vehicles that drove the credit boom is roiling the once-staid corporate leveraged loan market, and the pain may not be over yet.
For years the US loan market was a clubby world dominated by banks, insurance companies and a few mutual funds.
In the early part of the decade steady returns, low defaults and high recovery in bankruptcy attracted new buyers that used leverage to boost returns.
Now these vehicles are unravelling in a wave of selling that is causing and feeding on volatility in the asset class.
We expect market volatility around loans to continue to cause these structures to delever and add further pressure to the market, analysts at Barclays Capital said in a recent research report.
Among the investment vehicles that bought loans were collateralised loan obligations (CLOs) and total return swaps (TRSs).
Barclays estimates that the two bought 80 per cent of new US loans issued from 2003 to 2007.
CLOs are a type of securitisation where loans are pooled and income paid out via tranches of varying credit risk.
Similar to a margin call, some CLOs, called market value CLOs, contain triggers that force managers to sell assets or post additional collateral should the price of the underlying loans fall beneath a certain level.
So-called cash CLOs, the majority of the group, have triggers based on default rates and credit quality.
TRS programmes are derivatives where parties swap payments based on a set rate and payments based on asset, in this case, the loan.
In October, more than $3bn in loans were put on the auction block as market value CLOs and TRS programmes unwound, according to Standard & Poors Leveraged Commentary & Data, which tracks the loan market.
(Excerpt) Read more at ft.com ...
Citi has nearly one TRILLION dollars in off balance sheet vehicles.
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