Research & Commentary

CDO Market Overview and Commentary       (PDF, 72.97 KB)
March 31, 2008, Jeff  T.  Prince 

Any lingering hopes that the credit crisis would resolve quickly were laid to rest in the first quarter of 2008. Banks further
restricted lending activities, disposed of assets (when possible) and issued new equity as they sought to shore up teetering capital ratios. It is difficult to say whether these actions were caused by, or the cause of, plunging equity and credit markets. In the end, the precise order of events may not matter: with existing levels of leverage, the markets were not stable and everyone fled.

Leveraged Finance Market Overview and Commentary       (PDF, 63.15 KB)
March 31, 2008, Thomas  McDonnell 

The first quarter of 2008 looked nothing like 1Q07, or any other preceding quarter in the history of the leveraged loan market. Total volume was at its lowest level in nearly five years, as volume decreased 40% from the previous quarter and 75% from the same three months the previous year. Moving forward, the market should expect levels to remain depressed, due in part to the volume, albeit diminishing, of hung deals in the pipeline. At the end of the first quarter, the forward pipeline was $120B, down 25% from the end of 4Q07. If the potential collapse of the Clear Channel LBO comes to pass, the forward pipeline will be reduced by an additional 12.5 percentage points.

Fixed Income Overview and Commentary       (PDF, 59.33 KB)
March 31, 2008, David  L.  Nagle 

Desperate times demand desperate measures. And so it was in the first quarter of 2008 when the Federal Reserve
engineered the forced marriage of Bear Stearns to JPMorgan, introduced numerous historic market-liquidity enhancing
facilities, and lowered rates with unprecedented dispatch. Credit market convulsions which began last summer
crescendoed in a new – and hopefully final – peak during the first quarter. The potential of a Bear Stearns insolvency
brought investors to a standstill, regulators to action and lawmakers to full, bi-partisan alert.

Babson Capital Real Estate Market Overview and Commentary       (PDF, 89.04 KB)
September 30, 2007, Michael  Gately 

Given the unsettled economic environment, transaction activity dropped significantly in the third quarter of 2007. Financing is more difficult and more costly, forcing highly leveraged buyers out of the market. Underwriting standards are being tightened, and fewer deals are coming to market as many owners decide to wait until pricing stabilizes. Data from Real Capital Analytics (RCA) shows a record $332 billion in transactions through the first three quarters of 2007, but a sharp falloff in volume in September, with similar declines expected in October. Earlier in the year, portfolio deals and REIT privatizations drove sales volume to record heights - a trend not likely to recur in the near term.

A Retrospective on Five Essential Truths       (PDF, 70.59 KB)
April 14, 2006
Over the years, the Babson Staff Letter has provided readers with a window into the expertise and core values of our investment staff, offering common sense and straight-forward perspectives available in few other places. The Babson Staff Letter has been a tangible expression of the practical philosophy and "do-your-homework" approach to investing that this firm has long practiced. As capital markets and investment management progressed, from investing in stocks for dividends to investing for growth, and from investing for individuals to investing to address the complex needs of institutions, Babson Capital has changed. So too has the Babson Staff Letter.

Fixed Income Hedge Funds and Leverage – Looking Behind The Curtain       (PDF, 64.3 KB)
March 03, 2006
In the last edition of the Staff Letter, we reprinted a letter originally published in 2002 - The Long and Short of Hedge Funds - that explored equity-based hedge funds and the marketplace dynamics that have fueled the increased popularity of the hedge fund vehicle. In this edition, we build on the hedge fund theme by reprinting a Staff Letter that explores the other side of the hedge fund market spectrum. In the 2003 Staff letter Fixed Income Hedge Funds and Leverage - Looking Behind the Curtain, author David E. Canuel deconstructs fixed income hedge funds with particular emphasis on two important, and often misunderstood, considerations for hedge fund investors - leverage and risk.

Avoiding Investment Short Cuts and Bias Traps       (PDF, 68.85 KB)
November 05, 2005
"The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people full of doubts." — Bertrand Russell. Just why people make mistakes when choosing between courses of action has been the life work of Harvard Business School Professor Max Bazerman. Relevant to Staff Letter readers, he even includes a chapter on errors investors are prone to make. In this Staff Letter we examine a few of the theories Dr. Bazerman highlights.

The New York Stock Exchange – Part II       (PDF, 102.56 KB)
August 12, 2005, Benjamin  F.  Sylvester 
On the occasion of the New York Stock Exchange's decision to merge with Archipelago, an electronic-trading market rival, we decided to look at the NYSE itself to see how its changes reflect the evolution of the U.S. capital markets. In part 1 of this Staff Letter (June 10), we looked at the NYSE's early roots and development up through the Crash and Great Depression. Here we continue the tale up to the present day.

Co-Investing: A Strategy For Sharing Real Estate Risk and Returns       (PDF, 63.8 KB)
July 08, 2005, Jeffrey  J.  Williams 
In the last ten years another kind of real estate transaction called co-investment, where real estate mortgages are shared privately among two or more portfolio lenders, such as insurance companies and pension funds, has accounted for as much as $35 billion in transaction value. Although this level is small relative to the nearly $650 billion in commercial mortgage-backed securities (CMBS) issued over the same time, it is still meaningful and is having a steadily increasing influence on the real estate lending marketplace. This Staff Letter focuses on the unique characteristics of co-investing: who participates in these deals, what these investors end up owning and where, and how co-investment transactions are structured.

The New York Stock Exchange: Evolution Through Revolution — Part One       (PDF, 70.52 KB)
June 10, 2005, Benjamin  F.  Sylvester 
The venerable New York Stock Exchange (NYSE) and its celebrated trading floors are in for some significant change. For starters, this quintessential symbol of capitalism will soon likely merge with a former rival electronic-trading market and in the process become publicly traded like the very stocks swapped through the Exchange's storied open-outcry auctions.

Portable Alpha — Taking Returns With You       (PDF, 75.58 KB)
April 29, 2005, Edward  Y.  Kung 
Portable Alpha — it sounds like the latest competitor for Apple Computer's iPod digital music player or Research in Motion's BlackBerry handheld communications device. But far from being another gizmo for today's executive road warrior to carry around, portable alpha is an emerging strategy for institutional (and other sophisticated and generally tax-exempt) investors to capture additional return.

Opportunities in the Leveraged Loan Market       (PDF, 332.8 KB)
May 12, 2008

Broad economic events and specific technical conditions have combined to create a period of unprecedented opportunity in the leveraged loan market. Beginning in early-to mid-2007 with the ripple effects of deterioration in residential mortgage quality, and spiraling into the forced liquidation of numerous loan investment vehicles in 2008, the capital markets have reached a meaningful and fundamental disconnect between the performance and relative risk associated with bank loans as an asset class. As with any such event, this confluence of circumstances offers tremendous risk-reward prospects for investors in this space.

CDO Manager of the Year       (PDF, 243.38 KB)
April 01, 2005
Read Risk Magazine's article on Babson Capital - Winner of their award "CDO Manager of the Year".

Bank Loan Report - Babson's Upbeat About 2005 Euro Market       (PDF, 68.35 KB)
January 31, 2005
The loan team at Babson Capital Management LLC has seen some major changes over the past year - changes that vice chairman, head of corporate securities, Roger Crandall, believes will further boost the firm's growing loan business in both the US and abroad.

Portable Alpha - Philosophy, Process & Performance       (PDF, 94.19 KB)
, Edward  Y.  Kung 

Active investment managers provide two types of return: the return generated from market exposure or "beta" and the return that comes from selection skill or "alpha. Active "beta" returns typically come from market timing. That is, increasing market exposure in up-markets and decreasing it in down-markets. Passive beta returns come from index fund exposure. "Alpha" comes from security selection within an asset class.