Are there limits on the type of investments Babson Capital Europe makes?
Yes. When a CDO fund issues its notes they are usually a combination of rated and unrated notes. The capital structure of the fund and the mix of the notes to be issued are reviewed by the rating agencies. The agencies then rate the various tranches of notes in the capital structure. The agencies continue to monitor the fund throughout its life in order to monitor the ratings of the notes. The agencies impose a variety of restrictions on the fund which are usually called covenants. The covenants are evaluated and monitored by the fund manager and independently monitored and reported to investors by the fund’s Trustee. The covenant levels usually relate to collateral mix, diversity scores, spread tests and recovery tests. They oblige the manager to invest in a portfolio diversified by industry and country and to avoid large concentrations. E.g. Duchess I must maintain a minimum of 75% of the fund invested in senior secured loans. Therefore this prevents Duchess I from investing heavily
