Deerfield Capital Management is in the preliminary stages of planning a fully funded CLO backed by distressed loans, slated for late this year, market sources said. The firm is currently in discussions to hire a handful of distressed debt pros to form a portfolio management team.

The first visible distressed debt deal, FleetBoston's $1 billion ARK CLO I, was brought to market by CIBC World Markets in January of this year. Unlike Deerfield's expected deal, Fleet had outsourced the workout function on its portfolio of distressed loans to a collateral manager, in this case Patriarch Partners.

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