Add to balance / Manage account | User: | Log out |
Prospect News home > News index > List of issuers R > Headlines for Ratings > News item |
Senior subordinated note losses at 84% as CLOs must dump defaulted securities, S&P says
By Sara Rosenberg
New York, Nov. 25 - High-yield senior subordinated note loss levels have soared to 84% from 63% three years ago, according to Standard & Poor's.
One reason for the loss increase is the need for collateralized loan obligations to sell defaulted securities immediately since they have a lack of flexibility when it comes to owning these notes.
"As banks' appetite for loans has disappeared as a result of mergers and management attempts to improve return on assets, the slack has been taken up by specialized investment pools, like collateralized loan obligations (CLO's) and other vehicles," said Steven Bavaria, director of Standard & Poor's, in a news release.
"Unlike banks, these investors usually don't have the time or resources to work out distressed debt, or the legal flexibility to keep defaulted securities in their portfolios.
"When there's a default, they often have no choice but to sell the notes into the distressed debt market, and take whatever the market offers, which may differ markedly from the ultimate recovery for those who hold the paper until it is worked out or emerges from bankruptcy. Vulture investors, who specialize in buying distressed debt, can take advantage of this potential arbitrage opportunity."
With the rate of defaults at 10%, and the loss on a defaulted deal at 84%, the investor's overall credit cost is 8.4%, whereas three years ago, defaults were at 4% and average losses on defaulted deals were at 63%, for a credit loss of 2.5% on the overall portfolio, Bavaria added.
© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere.
For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.