The CDO took us to the brink of financial devastation, it wasn’t the structure that did the damage, but the toxic mortgages that formed the underlying collateral. Exponents of the business claim that the structuring process is fundamentally sound and the benefits to the financial system have been exposed over the years.
In late 2007 through to early 2009 there was an anticipation of a large wave of bankruptcies in corporate America and we have certainly seen some bankruptcies but not as many as expected. Loan defaults were down to a rate of 5.7% at the end of the first quarter of 2010 compared to a high of 11% in November 2009 and Citigroup is forecasting a default rate of 3-4% for 2010. Loan prices have rebounded and according to data released by Morgan Stanley prices for the most senior tranches of CLOs have risen from the lows of 69 cents on the dollar in April 2009 to 90.5 cents on the dollar recently.
The market for CLO transactions backed by US high yield loans is starting to come back and we saw the first CLO transaction brought to the market in over a year at the end of March. The COA Tempus CLO deal was a US$525m offering arranged by Citigroup and managed by FS COA Management LLC with almost a quarter of the collateral consisting of health care loans.
The Cayman Islands has always been the domicile of choice for US market CLO transactions, and COA Tempus CLO Ltd., like many before it is a special purpose vehicle incorporated under the laws of the Cayman Islands. At Summit Management, we welcome back the CLO market and anticipate more activity in private equity, mergers and acquisitions as a result. We remain optimistic that there will be a further 10 to 12 deals in the next twelve months.
You can direct any questions concerning this article to Summit Management Limited, PO Box 32311, Grand Cayman, KY1-1209, Cayman Islands, Tel: +1 345 945 7676 or email: email@example.com.