Although the current syndicated loan and high-yield debt markets are booming, they remain largely unavailable for “turnaround” situations and lower middle-market borrowers seeking to raise funds, according to the Financial Restructuring Quarterly Update report Morgan Joseph TriArtisan issued on Monday.

“No question that some borrowers are feeling left behind in the current market,” said James Decker, managing director and head of Morgan Joseph’s financial restructuring group.

The report, which covered the fourth quarter of 2010, also noted the appearance of “new” credit funds focused on direct lending. Regardless of their genesis, many of these funds were originally raised with all equity, but were still able to generate handsome returns by picking off dislocated secondary paper in 2009.

As the secondary market quickly recovered, however, most funds have since transferred their strategies to direct lending, building books with debt returns they hope to leverage and create equity returns for investors, the report said.

Among other topics, the report noted concerns over replacing legacy CLOs – with roughly $234 billion expected to roll out of their investment windows over the next 24 months – has started to abate.

While in 2010 banks and hedge funds stepped up to begin filling the hole left by legacy CLO funds, this year retail, or “prime funds,” appear poised to take a material share. The report said most experts expect between $10 and $15 billion of new CLO formation in 2011, with most continuing to be repackaging of existing CLOs. ”  

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