The Morgan Stanley-led emerging market CDO issued by Alliance Holdings (97% EM/3% HY bonds) may be working its way back to its original rating of A2 as a result of a de-levering portfolio. The deal was upgraded last Monday to Baa1' from Baa2'. However, the Baa2' rating was assigned on Oct. 22, 1998 along with eleven other EM CDOs downgraded due to the ramifications of the Russian debt crisis. Meanwhile, pros say CDOs that have reached the end of the reinvestment periods and are keeping excess spread in the transaction are often worth examining in for investment should the opportunity arise in the secondary market.

Alliance has paid down $29 million of the tranche's initial face amount, which was $120 million when it was first issued in Jan. 1997. Moody's said that the de-levering of the deal since the end of the re-investment period in 2000 is boosting the creditworthiness of the transactions' tranche and the par value has been restored to $127 million. Now that excess spread generated from the underlying assets is not going towards buying new collateral and is staying in the deal, the investors are benefiting, explained an official, adding that, "It's a strong Baa1 and we're watching it for future upgrades."

Rating sources added that one concern with a de-levering pool is that theremaining assets may become overly concentrated and that since the reinvestment period is over the manager is generally not able to work through problems via trading.

Meanwhile, last week Moody's Investors Service put another Morgan Stanley-underwritten EM CDO on watch for upgrade, Oasis CBO Ltd., managed by MSAM/Miller Anderson. The Oasis second priority senior notes, rated Baa3' (original rating), are on watch for an upgrade. This deal has a pool of about 23% HY bonds and 77% EM (some of which is tier II).

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