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The massive drop-off in collateralized loan obligations has been a big part of the pain debt markets continue to endure. A panel at DealFlow Media Inc.'s Distressed Debt Conference 2008 discussed whether CLOs can make a comeback in the second half of 2008.
John McCormick, Tricadia Capital takes the view that "certainly the CLO market isn't dead; we think it will come back, but it's taken a long hiatus. I think the next issue will be in the 2009 time frame." Karen Gottwald of Hilco Financial agreed that it will be awhile before the market recovers. "The overhang is astounding, credit continues to be OK in general, but the problem is with secondary loan market prices, which have dropped precipitously." "Any company that needs a loan, you have to add three more weeks for syndication, and with some industries it's a 'don't even go there' situation," she continued. "Credit is starting to show its cracks," said McCormick. "The trouble we should be seeing now has been staved off by covenant-lite loans. Our view is that it won't persist; [defaults will come] if not tomorrow, then the day after." Steven Kuppenheimer of FSI Capital cautioned that "it's a tricky time to be a CLO investor. If you have money to buy, sellers will tell you almost anything you want to hear [to make the sale]." "There's a lot of capital out there, waiting to come into the market," he continued. "My own opinion is that it's way too early for the strategy of [buying distressed CLOs]. It's a good time to look at distressed loans, but too early to look at distressed CLOs." Gottwald added that "Moody's came out [recently] and said that things aren't so bad in the CLO market, and they expect to see a return in the second half." McCormick commented that problems with the ratings agencies are a big issue for the CLO market. "Investors do not trust the ratings agencies," he said. "The rating agencies are something we're very concerned about; I don't think the ratings agencies have been under this much doubt ever." "In other distressed times when there was a problem with Wall Street or a particular industry, they could take the pain and change quickly," he continued. "But ratings agencies are quasi-regulatory; they will take a while to change." - George White Categories Deal Video
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