Outlook of Leveraged Finance - from Creditsights

--historic recovery does not apply to the current market environment. Recovery in 1990-1992 and 2000-2002 was 31%, 8% lower than the historic normal. Now more corps use secured debt laden bonds. So recovery will be lower. --The lack of Debt-in-possesion will impaire recovery prospect. eg LyondelBasell --creditsights one year forward default probability forecast stands at 11.7%, next to 1991 since 1970s --the lower debt price will be a reflection of higher cost of capital and the market environment --there will be divergence between loan and bond recovery prospects because the need for refinance will drive sme high yield corporate issuers to defaults. - fundamentals hurt, weak balance sheets maim but liquidity kills. --roughly $175 bil of S&P rated leverage finance debt (loand & debt) will come due for refinancing in 2009. A good portion is unfunded revovling line of credit. --the fact that 20% of loans are considered convenant-lite does not change the relative value seniority of loan asset classes. It still enjoyed the proection of secured creditors as per the bankruptcy code. --as of Jan 2009, Leveraged Loan S&P/LSTA was trading at ~64, 16% (lib 1.12), 3.3 MD while HY index was trading at ~63, 18%, 4 MD. But from risk-reward perspective, investing in leveraged loan is more attractive and loans have been impacted by a large degree by market technicals. --the risk is still market technical - redemptions