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.

Not including warehousing, Deerfield has $1.4 billion of CLO issues outstanding or under management through three prior synthetic deals, including a MINCS/Sequils CLO via Chase Securities last year. Deerfield plans to have $5 billion under management by the end of 2001.

Meanwhile, Deerfield is prepping its first fully funded CLO, via JPMorgan, which the firm hopes to close this quarter. This new deal officially kicks off marketing equity next week, with a close slated for September, although timing could be stepped-up depending on how quickly the equity is sold-off.

Deerfield and its affiliates will take up to 40% of the deal's equity.

The upcoming CLO will be issued on an unwrapped basis. It has very preliminary price talk of 45 basis points over Libor, although the modelling assumptions on the triple-A tranche is 50 basis points over Libor, buyside sources said.

The deal, yet to be named, is backed by a pool of 90% senior secured leveraged loans, 10% bonds (up to 5% ABS), no emerging markets, and there is a 15% limit on a bucket for synthetic securities. The rating factor is 2300, and the Moody's Investors Service diversity score is 45.

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