S&P: Losses Jump for High-Yield Sub Notes

Loss levels on high-yield senior subordinated notes have jumped to 84% from an already high 63% three years ago, according to data from Standard & Poor's.The rating agency says it believes the rise is tied to an increasing use of specialized investment pools, such as collateralized loan obligations, as a result of banks' decreased appetite for loans. "Unlike banks, these investors usually don't have the time or resources to work out distressed debt, or the legal flexibility to keep defaulted securities in their portfolios," S&P director Steve Bavaria explained. "When there's a default, they often have no choice but to sell the notes into the distressed debt market, and take whatever the market offers, which may differ markedly from the ultimate recovery for those who hold the paper until it is worked out or emerges from bankruptcy. Vulture investors, who specialize in buying distressed debt, can take advantage of this potential arbitrage opportunity." Mr. Bavaria said he believes that this results in "a geometric increase in portfolio credit losses for fixed-income investors." S&P can be found online at http://www.standardandpoors.com.