Highland Capital Management is working on an array of loan-focused funds that it hopes to launch at the beginning of 2010.
One of these is a credit opportunity fund that will invest mostly in senior secured loans, secondary loans and possibly distressed loans. That fund will be managed by Highland cofounder Mark Okada and partner Paul Kauffman.
Highland, which manages approximately $25 billion in senior secured loans, high yield bonds, structured products, mezzanine debt and equities, is also looking at opportunities for new CLOs.
Representatives from Highland met with several banks in New York this week to discuss possible financing options for new CLOs, sources familiar with the situation said. Nothing has been finalized, according to these sources, but if these CLOs are launched, they will have lower leverage and be much simpler than CLOs during the buyout boom.
The new CLOs may even be structured with just two tranches: one tranche of all triple-A debt and one equity tranche (a nomenclature for unrated debt). These structures differ from the multi-tranche CLOs that helped balloon the loans market to more than half a trillion dollars. Those CLOs had everything from mezzanine to triple-C tranches. The mix in these new CLOs could be 70% triple-A and 30% equity, sources say.
Highland has had success with a CLO it launched in November 2008. That fund, which was the first of its kind, sources said at the time, focused on secondary positions of other CLOs. The returns for that fund have since increased by 130%, sources say.
While it may not be as buoyant as it was in 2006, the leveraged loan market has floated back up, which has made it possible for firms such as Highland to have conversations about new funds.
As of Nov. 30, the Standard & Poor's/Loan Syndications and Trading Association Leveraged Loan Index had returned 42% year-to-date. At the same point last year, the index was at -26.49%. The strong returns have been helped by rising secondary prices. The average bid on the index last week was in the upper eighties. The average bid this time last year was in the low sixties. Spreads, meanwhile, have come down to Libor plus 663.4 basis points from Libor plus 2304 basis points. The average triple-C loan bid has returned to the upper 70s, a level that was last seen prior to the Lehman Brothers bankruptcy filing, according to the index. Single-B prices have increased by 57% year-to-date. These have particularly helped CLOs that hold a lot of downgraded loans.
Another encouraging sign is the fact that the number of CLOs violating their OC tests has dropped well below 45% from the peak reached in June, which was around 57%, according to S&P Leveraged Commentary and Data.
Pension funds have become a stronger presence in the loan market and have approached banks to discuss ways to invest in CLOs and loan-focused funds. These two types of funds are playing a more important role in the loan market, buying up paper at attractive yields, sources say.