Fund selling adds to leveraged loan woes

The beleaguered secondary market for U.S. leveraged loans is facing added pressure from funds that are being forced to unwind positions due to mounting credit losses...

On Tuesday, a $430 million portfolio of loans was offered in the secondary market after the hedge fund seller was forced to unwind its total return swaps (TRS) program. And on Thursday, a $265 million portfolio was out for auction by a fund unwinding its TRS program, several market sources said.

TRS lines are used by hedge funds and "market value" collateralized loan obligations (CLOs) to borrow from banks to buy debt instruments, such as leveraged loans, in the open market. Unlike cash flow CLOs, market value CLOs are obliged to mark the price of their underlying loans to market at the end of each day.

As the market for loans declines and losses mount, investors using TRS lines face repayments akin to margin calls.

Typically, such funds are levered between four and five times, but more recently funds have been known to lever themselves up by 10 times using such lines of credit.