In what is predicted to be the start of a string of European collateralized debt obligation (CDO) launches, Intermediate Capital Group (ICG) has kicked off a EURO350 million high yield CDO, dubbed the EuroCredit II.

The fund, to be placed by Morgan Stanley Dean Witter, is the successor to the EuroCredit CDO, Europe's first, which was launched by ICG in August 1999. That EURO400 million fund is now fully invested, as is ICG's Mezzanine 2000 fund, which closed at EURO465 million earlier this month.

The EuroCredit II portfolio, which priced last week and closes the first week of October, will have an investment strategy very similar to that of its predecessor, said Andrew Phillips, director of ICG's fund management division, Intermediate Capital Managers. It will consist of roughly 50% high yield bonds, 30% senior debt, and 20% mezzanine financing. However, the amounts are not fixed and can be modified according to market conditions.

The mix of assets also offers investors who want buy high yield bonds the diversity that has been so hard to obtain in Europe's telecom/media-heavy market - a sector that, incidentally, has not performed particularly well in the last year.

"The underperformance [of European high yield] over the last 12 months is really due to the performance of TMT," Phillips said. "Therefore we will have beaten the index precisely because of the fact that we have a relatively low exposure to those sectors."

The appeal of CDOs in Europe is certainly something the market is beginning to bank on. Phillips said that he believes that there are six more due to launch this year. And market analysts seem to agree that more European CDOs are on the way.

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