In the next few months, possibly this quarter, the first collateralized bond obligation in more than a decade to be backed entirely by distressed debt will hit the market, analysts and traders said. There have been several similar proposals for such deals to hit rating agency desks in recent months, and there is a good chance at least one will be approved by analysts before year-end.

Strangely enough, a wholly distressed-debt deal marks a return to the CBO market's distant past, as the last fully distressed-debt deal was issued in 1988 by Mellon Bank. It is still unknown who will issue the 2000 edition of the deal, but analysts predicted it would likely be a money manager focused on distressed debt or, like Mellon, a bank saddled with a raft of underperforming loans.

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