Collateralized loan obligation spread tightening has been so dramatic, particularly in subordinate tranches, that an increasing number of CLO managers are seeking to lower weighted average spread requirements within their portfolios, according to Standard & Poor's. For example, "BB" and "BB" rated institutional loan spreads have tightened from more than 400 basis points over Libor in April 2003 to less than 200 basis points over Libor in July. And while the crunch has generally left enough space for the deals to squeeze past interest ratio coverage tests - a significant number of the deals are failing their weighted-average spread tests, according to the rating agency.

Of the 2001 vintage CLOs, 45% are failing their weighted-average spread requirements, and 40% of the 2000 vintage is failing, while the more recent 2002, 2003 and 2004 vintages are failing at rates of 15.8%, 11.3% and 7.40%, respectively.

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