Babson Capital Management is currently marketing its fourth CLO-related transaction since the beginning of the year, adding to the 50 plus CDOs it currently oversees. But some investors are wondering where the commitments are coming from, given the CLO sector's relatively limited investor base.

While Babson could not comment on planned issuance or its current investor base, Thomas Finke, president and head of Babson's bank loan team, noted that the firm has seen an increase in general interest in the loan asset class, given that it is trading at attractive yields. "In the CLO space, we have a market where deals can get done, but it is obviously difficult. We were fortunate to be one of those to do a deal in the first quarter." Finke declined to comment on the deal Babson is currently shopping.

The $437 million Babson CLO 2008-1 began marketing in the U.S. last week, with underwriter Merrill Lynch. Seventy-six percent of the transaction is at the triple-A level, and the rest is evenly distributed among the other ratings ranging from double-A to double-B, according to JPMorgan Securities research. The collateral will have a maximum of 5% invested in second liens and a 15% cap on covenant-lites, JPMorgan said, noting that there is a three-year non-call and reinvestment period according to International Financial Review data.

Earlier this month, Babson Capital Management announced that it had closed the $680 million Vinacasa CLO. The deal is a restructuring of Beecher Loan Fund, a market-value CLO previously managed by Hartford Investment Management. Citigroup arranged the transaction.

In February, Babson, along with arranger Morgan Stanley, priced the $550 million Babson Loan Opportunity Fund. The deal is composed primarily of U.S.- dollar-denominated senior secured loans. Up to 30% of the portfolio can be invested in covenant-lite loans and 5% can be invested in second liens.

Also in February, the firm announced that it had assumed the management of Osprey CDO 2006-1 from Brightwater Capital Management, an alternative investment manager owned by German lender West LB. The portfolio consists of both high yield bank loans and mezzanine tranches issued by other CLO funds. A number of high ranking officials at Brightwater left the management team, which prompted the sale, sources said.

One CDO manager suggested that Babson has a large investor who has been buying up a significant portion of the paper it has been issuing. Another market participant agreed that large investors are coming back into the market, citing the good buying opportunities at the top of the capital structure, particularly the single-A to triple-A tranches.

While many traditional buyers are either still abstaining from re-entering the market or just making their way back, many firms are seeking funding overseas. One CDO market participant said he knew of at least three different portfolio managers who have gone to the Middle East in recent weeks to garner investor support.

However, other market participants said that looking for funding overseas is nothing new. Although there has been some focus on the Middle East, portfolio managers have also been busy looking for buyers in non-Japan Asia and Europe.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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