Oak Hill Launches CBO/CLO Sequel

At a time when some market participants are waving red flags and calling attention to the potential problems of a weak high yield sector, Oak Hill Advisors Inc., a private investment firm, is launching a $1.6 billion fund.

The same week that a handful of issuers were toying with mammoth new offerings of junk bonds (see story on page 1), Oak Hill, an investment arm of Texas financier Robert Bass's company, launched a sequel to its $1.75 billion Oak Hill Securities Fund L.P., which was formed in August 1996. The two will have similar investment strategies, said Glenn August, president of the New York-based firm.

Fully 60% of the $1.6 billion will be devoted to high yield, while 25% will be earmarked for bank loans and the balance will go to special situations.

Oak Hill Advisors is certainly not alone in investing in high yield securities when the bond market is under-performing, said Gus Harris, managing director of the CLO group at Moody's Investors Service.

"For every investor who says it's not a good time to buy, there is at least one other saying it is," he said.

Harris noted that as long as the market value of the invested assets exceeds a certain threshold, there will be no pressure for the collateral manager to sell assets. If the market value falls below such a level, then the manager typically has 10 days to "correct" the situation by selling some of the investments, among other options.

While many players are refraining from undertaking new ventures before year end, one reason why Oak Hill Advisors may have chosen to launch a new CBO/CLO fund at this time was to take advantage of the lower prices resulting from "hung" deals. According to Tanya Azarchs, an analyst at Standard & Poor's, there is an increase in the number of deals that did not sell as expected during the course of the year.

If they are not bought, arranging banks would be obliged to either hold them or discount them heavily, thereby taking a potential loss.