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Structured is dead. Long live Structured!

Carlyle, Deutsche Bank Seek to Raise $500 Million CLO (Update1)

By Pierre Paulden

April 21 (Bloomberg) -- Carlyle Group, the world's second largest private-equity firm, is raising a $500 million collateralized loan obligation to buy high-risk, high-yield debt being sold by banks at discounted prices, according to people with knowledge of the plan.
The CLO is being arranged by Deutsche Bank AG, said the people, who declined to be identified because the terms aren't public. The fund follows a similar $450 million CLO that Carlyle and JPMorgan Chase & Co. closed this month.

Carlyle, the Washington-based buyout firm run by David Rubenstein, joins Blackstone Group LP and Apollo Management LP in purchasing loans from banks that have struggled to offload the debt after losses on securities tied to subprime mortgages caused investors to shun all except the safest of government bonds. Private-equity firms are emerging as buyers at a time when financial institutions from Goldman Sachs Group Inc. to Citigroup Inc. are willing to sell the loans for as little as 63 cents on the dollar.

``Private-equity firms have the capacity and interest in buying these loans,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York.

Michele Allison, a Deutsche Bank spokeswoman in New York, and Ellen Gonda, a Carlyle spokeswoman, declined to comment. CLOs, a form of collateralized debt obligation, package loans and channel the income to investors in portions, or tranches, of varying risk and ratings.
Backlog Reduced

Banks have cut their backlog of so-called leveraged loans to $95 billion from $245 billion in July by offering discounts, according to New York-based Standard & Poor's. New York-based Citigroup sold $8 billion of loans to buyout firms in the past quarter, the bank's Chief Financial Officer Gary Crittenden told investors April 18. Frankfurt-based Deutsche Bank sold $5 billion to private-equity firms, according to analysts at Lehman Brothers Holdings Inc.

Prices for average actively traded loans have risen almost 5 cents to 91.16 cents on the dollar in the past two months, according to Standard & Poor's. Even so, the percentage of loans trading below 80 cents on the dollar is at 14 percent, up from less than 1 percent in November, according to Lehman analysts.

High-yield, or leveraged, loans are rated below Baa3 by Moody's Investors Service and less than BBB- at S&P.

Collapsed Fund

In addition to the CLOs, Carlyle raised a $1.35 billion fund to buy loans and bonds of troubled companies. Carlyle is stepping up to take advantage of low prices even though it was forced to close a $22 billion fund run by its Carlyle Capital Corp. unit that invested in mortgages. The fund collapsed as lenders seized its assets after it couldn't meet margin calls.

Deutsche Bank is marketing the $500 million Carlyle High Yield Partners 2008-1, the people said.
The CLO will consist of $383 million of bonds with the highest ratings and $52.5 million of low-rated bonds, the people said. Carlyle will hold the $64.5 million so-called equity portion, which receives income once interest payments on the bonds have been made.

JPMorgan arranged Carlyle Credit Partners Financing last month, according to a prospectus. The CLO consists of $332 million of bonds with the highest credit ratings that will pay interest of 0.85 percent more than the three-month London interbank offer rate.

`Attractive Prices'

The JPMorgan CLO, ``enables us to buy senior secured bank loans at attractive prices,'' Michael Zupon, head of Carlyle's U.S. leveraged finance team said today in a statement announcing the close of the $450 million fund. Carlyle manages $10.3 billion in leveraged finance assets globally.
The bonds were sold at 97.13 cents on the dollar according to the prospectus. JPMorgan sold shares in the $58 million riskiest portion at 66.6 cents on the dollar. Brian Marchiony, JPMorgan spokesman, declined to comment.

The CLOs by Carlyle are helping drive up issuance after sales ground almost to a halt. Firms sold $16.7 billion of CDOs in the first quarter, including $13.4 billion of CLOs, compared with $165 billion in the same period a year earlier.

``The CLO market never died, it's been dormant,'' New York- based Morgan Stanley analyst Vishwanath Tirupattur said in telephone interview. Only managers with ``significant experience and access to capital,'' can raise a CLO, he said.