CDOs May Bring Subprime-Like Bust for LBOs, Junk Debt (Caroline Salas and Darrell Hassler)

  Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.

  By Caroline Salas and Darrell Hassler

  March 13 (Bloomberg) -- Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.

  Sales of CDOs, which package loans, bonds and derivatives into new securities, rose by almost half to $918 billion last year, according to data compiled by JPMorgan Chase & Co. Demand for investments to use in CDOs has helped push risk premiums lower for everything from home loans to high-yield, high-risk bonds, forcing managers to borrow ever more money to maintain returns and stand out from the competition.

  ``There will ultimately be a shakeout,'' said Oliver Wriedt, a partner at New York-based GoldenTree Asset Management LP, which oversees about $8 billion and manages CDOs and was founded in 2000. ``Many'' new managers ``lack the pedigree, or at a minimum the track record. Many have not managed'' in a downturn, he said.

  Managers of CDOs backed by speculative-grade loans are borrowing as much as 13 times the amount they raise in equity from investors, up from nine to 10 times as recently as late 2005, according to Wriedt. Forty-one percent of the 142 CDOs backed by corporate loans and rated by Moody's Investors Service last year were set up by first-time issuers.

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