High-risk securities used in leveraged buyouts have taken on more risk over the last few years, causing bond investors to worry that they will start to exhibit the same weakness as the subprime mortgage market.
Sales of collatorallized debt obligations, or CDOs, grew by nearly 50 percent in 2006 to $918 billion, according to Bloomberg News, fueled by the increased level of speculative loans in comparison with equity in the instruments. In addition, many of the CDO issuers are new to the market.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
“There will ultimately be a shakeout,” said Oliver Wriedt of New York-based GoldenTree Asset Management LP, which manage CDOs, adding that many new managers have not managed in a downturn.
CDOs are financing loans that often do not use the standard level of investor protections, much like loans to individuals with poor credit histories have been made in the subprime mortgage market. In fact, many subprime loans have been turned around and used in CDOs.
The lenders “lower their standards and say, ‘Well, we can put them into CDOs’,” said Martin Fridson, CEO of research firm FridsonVision LLC. “Like that’s somehow burying that it’s toxic waste.”
