PHOENIX, Ariz. - CDO investors, privately, confessed to growing discomfort with the credit side of the business at last week's ABS West, hosted by the Information Management Network. As a result, collateral managers and bankers alike were not waving around solicitation materials for new deals, but instead were placing their ears to the ground, hoping find the next bid.

Real estate-related vehicles, by far, received the most attention, with commercial real estate in particular singled out most often. Bonds based on real assets seem doubly attractive in an adverse market.

While it's no secret real estate has been an asset holding its own, investors did not seem to tempted by more esoteric structures such as hedge fund CDOs, which have received more attention from the press than the buyside.

According to William May, of Moody's Investors Service, just one such vehicle was rated by the firm in all of last year, a deal from Mann-Glenwood. The rating agency was approached by a several hopefuls, all which were turned down for a variety of reasons. Most notable appears to be the nature of the beast of hedge funds themselves.

"Hedge fund managers aren't used to dealing with rating agencies, nor accessing the public capital market...they're not used to having to opening up about what they're going to do with investors' money," said May. "That's one thing we've run into. It can be a bit like pulling teeth to get information."

And unless the high yield market makes a dramatic comeback, don't look for a return of high yield CDOs, said others.

"It may well be that we need to completely rethink the rules in which they operate," said William Fischer of Financial Security Assurance, pointing to the leverage high yield bonds structures are forced to bear.

However, Bear Stearns appeared to jump that hurdle thanks to a little ingenuity, as the bank was one of the few to close a high yield deal last year. The trick, according to Bear's Jean Fleischhacker, was straying from the plain vanilla package, creating something with a twist, as she put it. "It wasn't a highly leveraged transaction," said Fleischhacker, explaining that the high yield CDO contained just three debt tranches, and that equity participation was doled out to triple-B note holders.

Yet not all high yield is dead. The loan market is still ticking on, panelists noted.

Last year Moody's rated 29 high yield loans, down from 32 in 2001, said May. By comparison, only 7 high yield bonds were rated. "The whole market isn't that grim," May said.

"High yield bonds are very a very difficult asset class and it's important to distinguish between the two," said Darius Grant of Salomon Smith Barney.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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