While the high-yield bond market was roiled in more depressing default statistics last week, Salomon Smith Barney surprised several market participants with the tight execution of Highland Loan Funding V, a $503 million arbitrage cashflow CLO for Highland Partners.

Some of Highland's past deals have seen ratings volatility, market sources said. The triple-A tranche priced at 43 basis points over three-month Libor with an eight-year average life (A/L); all tranches priced at par. The single-A priced at 68 basis points over three-month Libor with a nine-and-a-half year A/L. Highland V is backed by 90% leveraged senior secured loans and 10% unsecured leveraged loans, said market sources.

Another CLO coming up shortly is Franklin Templeton's $400 million arbitrage cashflow deal talked at 43 basis points over Libor on the triple-A's. Salomon is also expected to price Conseco Capital Management's $302.5 million Asension High Grade CDO next week. The triple-A notes are talked at 40-45 basis points over Libor, although one investor heard 43 basis points area.

Standard & Poor's said last week that 101 rated or formerly rated companies defaulted in the first half, totaling $57.9 billion in debt. This figure becomes meaningful when compared with all of 2000, when there were just 117 defaults for $42.3 billion.

The telecommunications industry, one of the most widely held sectors by CBOs, has been hit the hardest by this latest spate of bankruptcies, which accounted for 20.8% of all business failures, S&P added in a report.

Despite the sanguine backdrop, high-yield cashflow CBOs continue to roll out of the pipeline, and investors keep buying them.

Also fresh out the gate, Dryden CBO, a $300 million high-yield CBO for Prudential Investments, is being shown to investors by underwriter Merrill Lynch. Merrill is now working on the equity and double-B note buyers, before launching the senior debt classes, which is expected by month-end.

Also in the cashflow high-yield CBO arena for the first time is XL Capital, providing a wrap for Pareto Partners's Flagstone. The triple-A tranche is rated by all three agencies. Since Moody's does not rate XL, the tranche is triple-A on a stand alone basis. XL Capital owns 30% of Pareto, Mellon Financial has a 30% share, and 40% is owned by the employees.

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