August 12, 1999

Business and Finance - Europe

Collateralized Debt-Obligation Fund
May Lift Europe Junk-Bond Market


LONDON -- In what could give a boost to Europe's young and growing junk-bond market, Morgan Stanley Dean Witter & Co. and a British finance firm are launching a 400-million-euro ($428.4 million) high-yield collateralized debt obligation fund, Europe's first.

While highly developed as a major source of funding for noninvestment-grade companies in the U.S., the so-called junk-bond market is still in infancy in Europe. For instance, since 1997, new-issue volume in the U.S. has totaled $330.9 billion, compared with $35.4 billion in Europe, according to Morgan Stanley.

Collateralized debt obligation, or CDO, funds could be a catalyst for further growth in Europe's high-yield market, which has been used to finance risky new ventures, especially in the telecommunications and cable industries. And because they are closed-end, the funds could also add stability to the market by preventing investors from cutting and running during periods of high volatility, such as that which followed Russia's default last August.

"This is a positive development in the maturation of the European high-yield market; it will bring new investors into that market and help it to grow," said Edward Ocampo, a managing director at Morgan Stanley, which is arranging the new fund and has brought in major European institutions as investors.

Mr. Ocampo said his firm estimates that more than $70 billion is invested in CDO and similar funds, of which $25 billion was supplied in the first half of this year. Bankers estimate that about 15% to 20% of all recent U.S. high-yield bonds were financed by CDOs.

The new fund, which is called EuroCredit CDO I, will be managed by the London-based Intermediate Capital Group PLC. ICG will purchase the assets that will serve as the collateral for the fund.

CDOs are essentially special-purpose vehicles designed to invest in a diversified portfolio of subinvestment grade assets. The investments in CDOs are financed through the sale of different classes of securities, which supply the capital for the funds' investment in the junk bonds.

Unlike most high-yield funds, which invest in junk securities issued by noninvestment-grade companies, a CDO fund is split into various segments, or tranches, representing different categories of riskiness. In that way, the fund will appeal to investors with different appetites for risk and different investment objectives.

For instance, EuroCredit CDO I will invest in a variety of noninvestment-grade European assets, which will consist of junk bonds and different categories of loans. The portfolio will be financed by the sale of five classes of bonds, which will range from high-grade Triple-A and Double-A to noninvestment grade Single-B to unrated.

The bonds issued by the fund will be listed on the Luxembourg Stock Exchange; and because the fund is considered a private placement, the securities are available to so-called qualified U.S. institutional investors. All the bonds have been sold, which means that any new investor must purchase them from a current holder.

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