Two swallows do not make a summer, although they can cause much excitement among the birdwatchers who hunt for such sights.

Loan market watchers in Europe are frantically pulling out their binoculars after last week saw the first appearance in months of two of the structured funds whose appetite for leveraged loans helped fuel the private equity buy-out boom before the credit crisis.

Both deals are from experienced managers – Avoca and Harbourmaster, both based in Dublin – and have not been designed purely to shift a pool of unwanted leveraged loans off the books of over-extended banks.

The question is whether they are the products of a short window of opportunity or harbingers of sunnier times.

The market for collateralised loan obligations – investment funds that buy pools of leveraged loans and fund these with slices of debt that have different risk profiles – has been hard hit in the credit crunch.

But while other kinds of collateralised debt obligation saw issuance volumes fall off drastically in the second half of last year and next to no new deals this year, CLOs have seen a continuing trickle of deals.

Total CDO volumes were $23.3bn this year to the end of April, according to Morgan Stanley, down from $207bn in the same period last year. CLOs account for the vast majority of these deals.

However, many of these have not been true so-called arbitrage CLOs composed of recently acquired assets as are the Avoca and Harbourmaster CLOs, which are worth a combined €704m. An arbitrage deal is one that aims to make profits by earning more on the loans it buys than it pays out in funding costs to the CLO note holders.

Most of those CLOs that have appeared have been so-called balance-sheet deals, which historically were done to reduce banks’ regulatory capital requirements, but more recently have been more likely to be used to access funding from central banks.

Lehman Brothers, for example, structured a $2.8bn US deal to use for central bank funding and recently completed a €1.1bn European deal, which is also expected to be used for funding, though the bank would not comment.

“We note a growing share of balance sheet CLO transactions in the new issuance,” says Vishwanath Tirupattur at Morgan Stanley.

But Avoca and Harbourmaster are not entirely alone. In the US, Blackstone Group, which in March merged some operations with GSO Capital Partners, has closed three deals in the past month worth a combined $1.3bn, which the US manager insists are also true arbitrage deals.

The question hanging over these recent CLOs is their high cost. The €300m Avoca deal, which priced on Friday, will pay 125 basis points over six-month Euribor for its triple A rated notes, although because the notes were sold at a discount of roughly 1.6 per cent, they will yield about 150bp.

Such a yield is in line with where similar bonds are trading after some recent improvement in the sector, but it remains a radically higher cost than was available before the credit crunch when similar bonds yielded less than 25bp.

When it costs so much to fund a CLO, economies have to be found elsewhere, such as in discounts on the cost of the loans themselves.

However, since a low of less than 86 per cent of face value, or par, in Europe in February, average loan prices in Europe have since rallied to back above 90 per cent. The US market shows a similar picture.

Some observers are asking whether a limited window of opportunity to get the economics right for new CLOs has passed.

However, Clayton Perry, head of CLOs at Credit Suisse, which structured and sold the Avoca deal, says such deals can find other ways to make the economics work.

Avoca’s deal is certainly taking advantage of discounts in loan markets, but it has also been structured – like some other deals in recent months – with a much larger equity tranche than historically was normal and with none of the middle-ranking, or mezzanine, debt that is typically rated at lower than single A.

“It makes sense to do deals with lower leverage to ensure better stability as we enter a more uncertain time,” Mr Perry says.

“At the same time, paying current rates to mezzanine investors doesn’t increase returns for the equity enough to justify the increase in return volatility.”

Mr Perry believes that deals can be done in this environment if managers and their banks can find equity investors who are happy with the lower return economics.

However, there are other limits on new deals, such as the volatility in both loan and CLO markets, which is dissuading banks from taking on the risk of owning pools of loans before a CLO is sold.

Also there is still a very limited supply of new debt from new buy-out deals, which CLOs need to maintain the diversity of their holdings.

More CLOs are in the pipeline in both the US and Europe, from managers such as Carlyle’s debt investment arm or Prudential’s CLO unit in Europe and from Babson in the US, according to people with knowledge of the situations.

But these are all leading blue-chip names in the CLO management world. For the rest of the herd who were making hay while the sun shone in 2006 and 2007, the chances of doing new deals are likely to remain thin for some time.