In this era of ultra-tight spreads, a first lien loan with a 650 basis point over Libor coupon is like a diamond in the rough. This is why Delphi Corp.'s $1 billion term loan - which not only priced at Libor plus 650 basis points, but it was also sold at an original issue discount of 99.5 - broke to trade in the 103 context and traded up after the company filed for bankruptcy, as loan investors were expected to net a full recovery.

Delphi's loan may be beneficial for investors in more ways than one, however, as the deal is maintaining the weighted average spread test for some CLO managers. The spread test has been a challenge for some fund managers, especially for those with older vintage CLOs. According to Standard & Poor's, 45% of 2001 vintage CLOs and 40% of 2000 vintages are failing their spread requirements.

The CLOs that invested in the Delphi loan saw between a one and four basis point gain in their portfolios' spread, according to S&P. The spreads of 2000 vintage CLOs saw on average the greatest boost after buying the Delphi paper, with an average increase of 2.9 basis points.

"While the increases may not seem dramatic, for CLO managers struggling to maintain weighted average portfolio spreads above the minimum covenanted value, they were significant," S&P said in a report. "In many cases, if the minimum [spread] test is failing and the manager is having difficulty sourcing new loans with spreads that will maintain or improve the the portfolio, even a minor increase has the power to determine whether reinvestment of principal proceeds can continue."

Meanwhile, given the expectation of a full recovery for loan holders, S&P said it does not expect to initiate any negative rating actions on any CLOs with exposure to Delphi's term loan as a result of the bankruptcy. The recovery prospects for Delphi's bondholders are not as good, but there are only few cashflow collateralized debt obligations and only two CLOs that have exposure to the bonds, S&P said.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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