The nature of CLO exposure to troubled U.S. auto parts supplier Delphi Corp. shows how much those deals are, and have been, thirsty for loans that will offer higher-than-average spreads, according to Standard & Poor's.

Delphi's Oct. 8 bankruptcy filing is largely not expected to immediately affect U.S. cashflow CDOs with exposure to Delphi, in fact, Delphi loans are largely trading above par. But interestingly, S&P analysts found that some 75% of cashflow CDOs in the U.S. holding Delphi securities were CLOs. And in those CLOs, almost half of the securities constituting Delphi exposure were term loans purchased during the week of June 20 - when, as a result, the majority of those CLOs enjoyed a one-to-four basis point jump in their portfolio weighted average spreads.

Lured by the relatively wide spreads, CLO managers snapped up the proceeds of a $2.8 billion refinancing package announced by Delphi on June 15, consisting of a $1.8 billion secured revolving credit facility and a $1 billion six-year term loan. The new first-lien term loan, maturing June 2011, came with a 650 basis point spread and sold at $0.99 on the dollar at issuance.

A number of CLOs also picked up the loan during secondary trading during July and August, when it traded at about 102.87 and 102.75 cents on the dollar, respectively, according to S&P.

At a time when CLOs are widely missing their weighted average spread targets, even a small boost can make the difference between being able to reinvest principal proceeds or being forced to simply sit on stagnant loan portfolios. Fifty-nine CLOs, constituting about 20% of the market, bought the loans, exposure to which amounted to a total of $103.5 million, or 10% of Delphi's $1 billion term loan.

As of Oct. 20, that term loan was current and trading at $1.03 on the dollar. Exposure to Delphi within investment-grade and high-yield CBOs was concentrated in the company's later vintage debt.

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

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