The CDO market is witnessing a significant pick-up in trading of non-PIKable (payment-in-kind) distressed mezzanine paper. Hedge funds (or hedge fund-like units within insurance and reinsurance companies) across the globe are driving this recent increase in buying of distressed mezzanine paper and a handful of these shops are setting up distressed CDO funds that are increasing the trading volume in this illiquid market.

An example of a typical offering in the CDO secondary market is a 1999 triple-B arb cashflow high-yield CDO (75% HY bonds/25% senior secured loans) seen at an 87 dollar price to yield 15%, which is similar to a first-loss piece yield on a new issue transaction. Granted, a position of this kind has seen a couple notches of downgrades.

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