Tuesday, December 23, 2008
A BlackRock HY fund may be headed for Default
By Pierre Paulden Dec. 23 (Bloomberg) -- A BlackRock Inc. fund that invests in high-yield, high-risk loans may be headed for an event of default after debt prices tumbled, according to Moody’s Investors Service. Moody’s cut ratings on portions of BlackRock Senior Income Series III collateralized loan obligation, citing “deterioration in the market value of the underlying collateral pool.” The transaction “may experience an event of default,” that would force New York-based BlackRock to sell loans to repay the notes, Moody’s said in a statement today. Loan prices have dropped 29 cents on the dollar this year to 65.8 cents, according to Standard & Poor’s LCD, as banks and asset managers have been forced to sell holdings because of clauses in borrowing agreements that require them to raise money when prices drop below a set level. BlackRock asked investors, including the Oregon state pension fund, to commit more equity in October to a separate $3 billion fund after loan prices dropped. The BlackRock Senior Income Series III fund is a market value collateralized loan obligation that was raised in September 2006, according to Moody’s. A CLO is a type of collateralized debt obligation, an instrument that packages pools of debt and splits it into pieces with various ratings. These ratings are derived from the prices of the underlying loans. Moody’s graded $257.2 million of notes in September 2006, including a $217.1 million portion rated AAA. There is an unrated $52 million tranche that is repaid after other noteholders. Loan Values In September 2006, the Missouri State Employees Retirement System bought half of the so-called equity tranche of the BlackRock Senior Income Series 2006 CLO, Jim Mullen, the fixed- income director of the Missouri fund, told Bloomberg in 2007 Brian Beades, a spokesman for BlackRock, declined to comment today. Chris Rackers, manager of investment policy and communication for the Missouri pension plan, didn’t immediately provide a response. Mullen told Bloomberg in 2007 that the investment would pay off because Missouri had entered the market early. The investment didn’t require board approval and instead he relied on the fund’s 12-year relationship with BlackRock, he said. Mullen didn’t return a call for comment today. So-called leveraged loan prices were above face value in 2006 until problems with subprime mortgage securities caused investors to flee from all but the safest securities, triggering writedowns and losses globally in excess of $1 trillion. Moody’s downgraded $9.9 million of notes of the BlackRock fund one level to Ca, the second-lowest junk rating, according to the statement. The New York-based ratings company also downgraded $21.7 million of notes to one notch to C. The AAA portion is now graded B1, four levels below investment-grade, Moody’s said. PNC Financial Services Group Inc., the Pittsburgh-based bank that owns more than a third of BlackRock, arranged the majority of the safest part of the CLO, according to Bloomberg data. A PNC spokesman, Fred Solomon, said the bank has “minimal exposure.” The CLO paid down some of the top-rated bonds as loan prices fell, a process known as deleveraging, he said.