July 23, 1997

Confidential
------------

Mr. James Reis
Pilgrim America Investments, Inc.
40 North Central Avenue
Suite 1200
Phoenix, Arizona  85004-4424


Dear Mr. Reis:


                  This letter agreement will confirm the  understanding  between
Pilgrim America  Investments,  Inc. (the  "Manager") and Merrill Lynch,  Pierce,
Fenner & Smith  Incorporated  ("MLPFSI")  pursuant to which (a) MLPFSI or one or
more of its  affiliates  (collectively,  "Merrill  Lynch")  agrees  to act on an
exclusive  basis as sole placement  agent, on the terms and conditions set forth
herein,  in connection with the structuring and placement of a private  offering
(the  "Offering") of senior secured notes or revolving loans ("Senior Notes" and
together  with the  Subordinated  Notes (as defined  below) issued in connection
with ML CLO Series 1997 - Pilgrim  America-1,  the  "Notes") and (b) the Manager
agrees to serve as collateral manager for the Issuer (as defined below) pursuant
to a  collateral  management  agreement in  substantially  the form of Exhibit B
hereto (the "Collateral Management Agreement").  The Notes will be issued by one
or more special purpose vehicles  (individually and collectively,  the "Issuer")
pursuant  to an  Indenture  substantially  in the form of  Exhibit  C hereto  as
revised to reflect the requirements of the trustee, any rating agency rating any
of the  Senior  Notes and as  otherwise  revised by mutual  agreement  among the
Manager  and  Merrill  Lynch  prior to the  closing  date of the  Offering  (the
"Indenture")  in as many as four classes  consisting  of up to three  classes of
Senior Notes and one class of subordinated notes ("Subordinated Notes") and will
be collateralized primarily by a portfolio of bank loans and high yield bonds to
be acquired by the Manager or an affiliate of the Manager (the  "Collateral") on
behalf of the Issuer.


                  1. Roles of Merrill  Lynch and Manager.  Merrill  Lynch hereby
agrees (i) to act as sole  advisor to the Manager  and the Issuer in  connection
with  structuring the Offering of the Notes,  (ii) to act as placement agent for
the Notes and to use all reasonable efforts to consummate the Offering and (iii)
to purchase (for  retention or resale at Merrill  Lynch's sole  discretion)  any
Subordinated Notes not placed pursuant to clause (ii) hereof. The Manager hereby
agrees  to  act as  collateral  manager  for  the  Issuer  with  respect  to the
Collateral.  The Manager agrees that it has not retained and will not retain any
other person,  firm,  corporation or other entity (any and all of which shall be
referred  to herein as a  "person")  to assist the  Manager  or the Issuer  with
respect  to the  underwriting,  placement  or sale of the  Notes  and will  not,
directly  or  indirectly,  offer any of the Notes  for sale to, or  solicit  any
offers to buy from,  or otherwise  contact,  approach or negotiate  with respect
thereto with any person other than Merrill Lynch. Notwithstanding the foregoing,
nothing herein shall prevent the Manager 
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from retaining Tri-River Capital Group ("Tri-River"),  at the Manager's expense,
as a  financial  adviser to the  Manager  in  connection  with the  transactions
contemplated in this letter agreement.

                  Merrill  Lynch's  obligations  under clauses (ii) and (iii) of
the first  sentence of this Section 1 shall be conditioned on and subject to (i)
no material adverse changes in market conditions from those existing on the date
hereof,  (ii) unless  otherwise  agreed between the Manager and Merrill Lynch, a
structure  for the Notes  consistent  with the  requirements  of the  applicable
rating agencies and prior Merrill Lynch CBO and CLO transactions,  and (iii) the
timely  satisfaction by the Manager of all of its obligations  under this letter
agreement.

                  The Manager  hereby  agrees that for a period of 6 months from
the issue date of the Notes  (such  issue  date,  the  "Closing  Date") or until
Merrill Lynch has resold all of the  Subordinated  Notes  purchased by it on the
Closing  Date,  whichever  shall be earlier,  the Manager  will not  commence or
participate in any CBO or CLO.

                  2. Manager's Commitment.  In order to achieve a transaction of
approximately $400 million,  it will be necessary to issue  approximately  $33.5
million aggregate principal amount of Subordinated Notes (such amount, the "Base
Subordinated Note Amount").  Accordingly,  the Manager hereby agrees to purchase
or cause an affiliate to purchase at least $5 million aggregate principal amount
of Subordinated Notes (such amount, the "Manager Subordinated Note Amount") at a
price of par on the Closing Date,  such amount to be subject to change from time
to time as mutually agreed in writing between Merrill Lynch and the Manager.

                  3.  Compensation.  In  payment  for  services  being  rendered
hereunder,  the Manager  agrees that Merrill  Lynch shall be paid the  following
fees from the  proceeds  of the  Offering of the Notes  (however,  such fees are
separate and distinct from, and do not preclude the receipt of, origination fees
which may be payable to investors in the Senior  Notes):  (i) a structuring  fee
equal to 1.0% of the aggregate par amount of the Notes and (ii)  placement  fees
determined in the manner described in Exhibit A hereto; provided,  however, that
the placement fees described in clause (ii) shall not be payable with respect to
the Subordinated Notes purchased by the Manager or an affiliate pursuant to this
letter agreement. Such fees shall be payable in same day funds at the offices of
Merrill Lynch,  Merrill Lynch World  Headquarters,  North Tower, World Financial
Center, New York, New York 10281-1317 out of the proceeds of the Offering on the
Closing Date.

                  The Manager  agrees that the  Collateral  Management  Fee that
will  be  payable  pursuant  to the  Collateral  Management  Agreement  and  the
Indenture will consist of (capitalized terms not defined in this paragraph shall
have the definitions ascribed to them in the Collateral Management Agreement and
the Indenture) (a) a "Base Collateral Management Fee" payable in arrears on each
Distribution Date pursuant to Section 8 of the Collateral  Management  Agreement
and Section 11.1 of the Indenture,  in an amount (as certified by the Manager to
the  Trustee)  equal to 0.35%  per annum of the sum of the  Aggregate  Principal
Amount   outstanding  on  the  first  day  of  the  Due  Period  preceding  such
Distribution  Date, (b) a  "Subordinated  Collateral  Management Fee" payable in
arrears  on each  Distribution  Date  pursuant  to  Section 8 of the  Collateral
Management  Agreement  and  Section  11.1 of the  Indenture,  in an  amount  (as
certified by the Manager to the Trustee)  equal to 0.15% per annum of the sum of
the Aggregate  Principal  Amount  outstanding on the first day of the Due Period
preceding such Distribution  Date, and (c) a "Contingent  Collateral  Management
Fee" payable in arrears on each  Distribution  Date pursuant to Section 8 of the
Collateral  Management  Agreement  and Section 11.1 of the  Indenture,  equal to
0.25% per annum of the Aggregate  Principal Amount  outstanding on the first day
of the Due  Period  preceding  such  Distribution  Date and as  provided  in the
Indenture; provided, however, that the Contingent Collateral Management Fee will
be payable on each  Distribution Date only to the extent that (after taking into
account  any  distributions  to be  made  to  the  Subordinated  Notes  on  such
Distribution  Date) the  holders  of the  Subordinated  Notes have  received  an
internal rate of return of 10% per annum on the amount of the initial  principal
amount of the  Subordinated  Notes for the period from the Closing  Date to such
Distribution
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Date, to the extent of funds  available for such purpose in accordance  with the
priorities of payment described under Section 11.1 of the Indenture.

                  4. No Unauthorized  Use of Advice from Merrill Lynch.  Subject
to Section 9, (i) no advice  rendered by Merrill  Lynch in  connection  with the
services  performed by Merrill Lynch  pursuant to this letter  agreement will be
quoted, nor will any such advice or the name of Merrill Lynch be referred to, in
any report, document, release or other written communication (including, without
limitation,   any  offering  document  relating  to  the  Senior  Notes  or  the
Subordinated  Notes) and (ii) no advice  rendered by Merrill Lynch in connection
with the services  performed by Merrill Lynch pursuant to this letter  agreement
will  be  quoted,  nor  will  any  such  advice  be  referred  to  in  any  oral
communication;   in  either  case  (i)  or  (ii)  whether  prepared,  issued  or
transmitted by the Manager, the Issuer (to the extent acting at the direction of
the Manager), or any person or corporation  controlling,  controlled by or under
common  control  with the  Manager or the  Issuer  (to the extent  acting at the
direction  of the  Manager),  or  any  director,  officer,  employee,  agent  or
representative of any of the foregoing, to any unaffiliated third party, without
Merrill  Lynch's  prior  written  authorization.  The Manager shall not make any
public  announcement  concerning  the issuance of the Notes,  the Manager's role
hereunder  or  any  other  aspects  of the  transactions  contemplated  by  this
agreement  and the  Indenture  except:  (i) as  required  by  federal  and state
securities  laws or (ii) with the consent of Merrill  Lynch  provided  that such
announcement does not violate federal and state securities laws.

                  5.   Termination   Generally.   This  letter  agreement  shall
terminate  twelve  months  after the date of signing by the  Manager and Merrill
Lynch,  unless (i) the Manager and Merrill  Lynch  mutually  agree in writing to
extend or shorten  its term,  (ii) in the absence of any mutual  agreement,  the
Manager elects to terminate this agreement by notifying Merrill Lynch in writing
and Merrill  Lynch  consents to such  termination,  which  consent  shall not be
unreasonably  withheld;  or (iii) in the  absence of any mutual  agreement,  the
Merrill  Lynch elects to terminate  this  agreement by notifying  the Manager in
writing and the Manager consents to such termination, which consent shall not be
unreasonably  withheld;  provided,  however, that Sections 3, 4, 5 and 9 of this
letter  agreement  will survive any  termination  of this agreement and provided
further  that any early  termination  pursuant  to  subsection  (ii) above shall
constitute  a  breach  by the  Manager  for  purposes  of the  provisions  under
"Termination  Not  Upon  Closing  of  the  Transaction"   below  and  any  early
termination  pursuant to  subsection  (iii) above shall  constitute  a breach by
Merrill Lynch for purposes of the provisions under "Termination Not Upon Closing
of the  Transaction"  below.  If the Offering is not executed during the term of
this letter  agreement and the Manager or an affiliate enters into a transaction
similar  to that  described  above  (regardless  of the  number  of  classes  of
securities issued) with a firm other than Merrill Lynch within six months of the
termination  of this  letter  agreement,  the  structuring  and  placement  fees
heretofore agreed  (calculated based on the corresponding  classes of securities
issued) shall be promptly paid by the Manager to Merrill Lynch.

                  Termination Upon Closing of the Transaction.  If the Notes are
issued on the Closing Date, any positive Gross Carry  remaining after payment of
the  Origination Fee (each as defined below) shall be ratably shared between the
Manager and Merrill Lynch based upon the Share Ratio (as defined  below) and any
negative  Gross Carry shall be treated as an additional  expense of the Offering
to be paid from the proceeds of the Offering.

                  "Share  Ratio"  shall mean the ratio  obtained by dividing (x)
the Manager  Subordinated  Note Amount by (y) the Base Subordinated Note Amount.
The Share Ratio  shall  initially  be 5/33.5  (thus,  14.9% with  respect to the
Manager  and 85.1%  with  respect to  Merrill  Lynch).  Such ratio is subject to
change from time to time as mutually agreed in writing between Merrill Lynch and
the Manager and, if the Notes are issued,  shall be automatically deemed changed
to equal the ratio of the  aggregate  principal  amount  of  Subordinated  Notes
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actually  purchased  by  the  Manager  or an  affiliate  of the  Manager  to the
aggregate principal amount of Subordinated Notes actually issued.

                  If the Notes are issued,  Merrill Lynch shall be reimbursed on
the  Closing  Date  from  the  proceeds  of  the  Offering  for  all  reasonable
out-of-pocket expenses,  including but not limited to the fees and disbursements
of Merrill Lynch's counsel, the fees of the applicable rating agencies, the fees
of the trustee,  including trustee's counsel,  and fees for accounting and other
professional  services that may be incurred in connection  with the  preparation
and placement of the Offering (the "Merrill Lynch Reimbursement Amount"). If the
Notes are not issued,  the Merrill Lynch  Reimbursement  Amount shall not exceed
$1,000,000 in the aggregate.

                  If the Notes are issued,  the Manager  shall be  reimbursed on
the Closing Date from the  proceeds of the  Offering  the Manager  Reimbursement
Amount (as defined below); provided,  however, that in addition to the Manager's
Note  purchase  obligations  under  Section 2, the  Manager  shall  purchase  an
aggregate  principal  amount of Subordinated  Notes equal to or greater than the
Manager Reimbursement Amount at a price of par of the Closing Date. In addition,
if the Notes are  issued  Merrill  Lynch  agrees  to pay to the  Manager  on the
Closing Date an amount equal to the  Origination  Fee (as defined below) out of,
and only up to, the positive amount of the Gross Carry, if any.

                  "Manager  Reimbursement  Amount" shall mean an amount equal to
all of the  Manager's  reasonable  out-of-pocket  expenses,  including  but  not
limited to the fees and disbursements of its counsel, in an amount not to exceed
(a) $50,000 if the Notes are issued and (b) $15,000 if no Notes are issued.

                  "Gross Carry"  (which may be a negative  number) means (a) the
amount of interest accrued on the Collateral for the period from the acquisition
of such  Collateral in  anticipation of the Offering to the Closing Date or date
on which such Collateral is liquidated  following a determination that the Notes
will not be issued (the "Accumulation Period"), plus (b) any gain on the sale of
any  Collateral  prior  to the  Closing  Date or  from  the  liquidation  of the
Collateral, or any hedging gains or profits,  following a determination that the
Closing  Date  will not  occur  (in each  case net of  expenses  of such sale or
liquidation  and any related  hedging  costs or losses,  but not  including  the
Origination  Fee,  if any,),  minus  (c) any loss on the sale of any  Collateral
prior to the Closing Date or from the liquidation of the Collateral  following a
determination that the Closing Date will not occur (in each case net of expenses
of such sale or  liquidation  and any related  hedging costs or losses,  but not
including  the  Origination  Fee,  if any,)  minus (d) an amount  (the  "Finance
Charge")  equal to interest  accrued on the  average  daily  amount  advanced to
purchase  the  Collateral  held  by the  Issuer  or  Merrill  Lynch  during  the
Accumulation  Period  at a rate of  three-month  LIBOR  plus 100  basis  points.
Merrill  Lynch shall be paid or shall be  entitled to retain the Finance  Charge
whether or not the Closing Date occurs.

                  Termination Not Upon Closing of the  Transaction.  If no Notes
are issued, the Manager and Merrill Lynch agree to ratably share in any negative
Net Carry (as defined  below),  or in any  positive  Net Carry  remaining  after
payment of the Origination Fee as described  below,  based in each case upon the
Share Ratio,  except upon a breach of this letter  agreement  by either  Merrill
Lynch or the Manager as provided below.

                  "Net Carry"  (which may be a negative  number) means (i) Gross
Carry minus (ii) the Merrill Lynch Reimbursement  Amount minus (iii) the Manager
Reimbursement Amount.

                  If this letter agreement terminates prior to the Closing Date,
the  Collateral  shall be sold or liquidated by Merrill Lynch at the  respective
Market Prices (as defined below) for each item of Collateral; provided, however,
the Manager  shall have a right of first  refusal to purchase all or any portion
of the  Collateral
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at the  respective  Market  Prices of such  Collateral.  The  Manager  must give
Merrill  Lynch  notice that it wishes to exercise  such right  within 5 business
days of the termination of this letter agreement.

                  "Market  Price"  shall  mean the firm bid  price  obtained  by
Merrill Lynch from a buyer or buyers in the market for each item of Collateral.

                  Upon the occurrence of a sale or liquidation of the Collateral
pursuant to the second preceding paragraph,  the Manager shall be entitled to be
paid the  Origination Fee out of, and only up to, the positive amount of the Net
Carry, if any.

                  "Origination  Fee"  shall  mean an amount  equal to 0.385% per
annum on the average daily principal amount of the Collateral held by the Issuer
or Merrill Lynch during the Accumulation Period.

                  Upon a termination of this letter agreement due to a breach by
the  Manager of any of its  obligations  or  agreements  hereunder,  the Manager
hereby agrees that Merrill Lynch shall not be responsible for, and shall be held
harmless from any losses (including any unreimbursed Merrill Lynch Reimbursement
Amount or Manager Reimbursement Amount) relating to, such termination.  Upon the
occurrence  of  such  a  breach,  the  Manager  shall  not  be  entitled  to the
Origination  Fee regardless of any gains resulting from a sale or liquidation of
the Collateral pursuant to the fourth preceding paragraph.

                  Upon a termination of this letter agreement due to a breach by
Merrill Lynch of any of its obligations or agreements  hereunder,  Merrill Lynch
hereby agrees that the Manager shall not be  responsible  for, and shall be held
harmless from any losses (including any unreimbursed Merrill Lynch Reimbursement
Amount or Manager Reimbursement Amount) relating to, such termination.  Upon the
occurrence of such a breach,  the Manager  shall be entitled to the  Origination
Fee regardless of gains or losses  resulting from the sale or liquidation of the
Collateral pursuant to the fifth preceding paragraph.

                  6.  Notices.  Each notice or request by the Manager  hereunder
will be  evidenced  by a writing  signed by  authorized  representatives  of the
Manager. All communications hereunder shall be in writing and shall be mailed or
delivered (i) to the Manager at the address set forth above, and (ii) to Merrill
Lynch,  at its  offices at Merrill  Lynch World  Headquarters,  North Tower -7th
Floor, World Financial Center, New York, New York 10281-1307,  Attention:  Frank
Ronan, Managing Director.
                  7. Benefits of this Agreement.  This letter agreement shall be
binding on and inure to the  benefit of Merrill  Lynch,  the  Manager  and their
respective  successors and assigns.  No person other than such parties specified
in the preceding  sentence shall have any rights with respect to the enforcement
of any of the rights or obligations hereunder.

                  No party to this  letter  agreement  shall  assign this letter
agreement to any other  person or entity  without the prior  written  consent of
each party hereto.

                  8. Manager Representation. The Manager represents that neither
it nor any of its affiliates is a party to or is bound by any agreement (written
or  unwritten)  with any person  other than  Merrill  Lynch (i)  relating in any
manner to the  structuring,  offer,  issuance,  sale,  purchase or management of
collateralized loan obligations or similar instruments,  (ii) the terms of which
would in any manner limit the Manager's ability to execute,  deliver and perform
the Manager's obligations under this letter agreement, the Collateral Management
Agreement,  the terms of any  indenture  relating  to the  Offering or any other
documents  or  instruments  contemplated  in  connection  with the  transactions
described  herein  or (iii)  the terms of which  would in any  manner  limit the
Manager's  ability to  provide  information  to the  Issuer or Merrill  Lynch in
connection  with  the
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structuring  and  execution  of such  transactions,  the  composition  or  other
characteristics  of  the  Collateral  or  any  other  aspect  of  the  Manager's
involvement in such transactions.

                  9.  Confidentiality.   In  connection  with  the  transactions
contemplated  by this letter  agreement,  Merrill  Lynch  expects to furnish the
Manager with certain oral and written  confidential or proprietary  material and
information,  including without  limitation  information  regarding the specific
proposed structure of the transaction, including investment criteria and hedging
arrangements.  All material and  information  furnished by Merrill  Lynch to the
Manager,   whether  oral  or  written,  shall  be  considered  confidential  and
proprietary  unless  Merrill  Lynch  otherwise  specifies  in writing  (all such
confidential  or proprietary  material and  information is referred to herein as
the  "Confidential  Information").  The  Manager  agrees  that it will  keep the
Confidential  Information strictly confidential.  Notwithstanding the foregoing,
the Manager may disclose Confidential Information to Tri-River to the extent the
Manager deems appropriate;  provided,  however,  that the Manager agrees to take
all reasonable  steps necessary to ensure that Tri-River keeps the  Confidential
Information  strictly  confidential.  The  Manager  agrees  that it will use the
Confidential  Information  solely  for the  purposes  described  in this  letter
agreement. The term "Confidential  Information" does not include any information
(i) that is or becomes publicly  available other than as a result of a breach of
this Section 9 by the Manager or (ii) that was known by the Manager prior to its
disclosure by Merrill  Lynch.  This Section 9 shall not be construed to prohibit
disclosure by the Manager of the Confidential Information or any portion thereof
pursuant  to any  subpoena  or similar  legal  process of any court or  tribunal
provided  that the Manager shall first give Merrill Lynch notice of the proposed
disclosure  and  seek  to  obtain  confidential  treatment  of the  Confidential
Information  or portion  thereof  from such court or  tribunal.  Moreover,  this
Section 9 shall not be  construed to prohibit  disclosure  by the Manager of the
Confidential   Information  or  any  portion  thereof  as  required  by  federal
securities laws;  provided,  however,  that the Manager shall first give Merrill
Lynch notice of the proposed  disclosure and certify to Merrill Lynch in writing
that such  disclosure  is required  pursuant to federal  securities  laws.  Upon
request of Merrill  Lynch,  the Manager  shall return or cause to be returned to
Merrill Lynch the Confidential Information,  without retaining any copy thereof.
It is understood and agreed that money damages would not be a sufficient  remedy
for a breach  of this  Section  9 and that in  addition  to all  other  remedies
available  at law or in equity,  Merrill  Lynch shall be  entitled to  equitable
relief,  including injunction and specific performance,  without proof of actual
damages.

                  Merrill  Lynch  agrees  that  all  material  and   information
furnished by the Manager to Merrill Lynch, whether oral or written, with respect
to the Collateral shall be considered  confidential  and proprietary  unless the
Manager  otherwise  specifies in writing,  and that its review and inspection of
such  material or  information  shall be  undertaken  solely for the purposes of
evaluating the transactions  contemplated herein. The rights and limitations set
forth with respect to the disclosure of Confidential  Information by the Manager
in the last five sentences of the preceding  paragraph  shall also apply mutatis
mutandis to the disclosure by Merrill Lynch of  information  with respect to the
Collateral.  Notwithstanding  the  foregoing,  nothing  herein shall prevent the
disclosure by Merrill  Lynch of  information  with respect to the  Collateral in
order to assert,  as Merrill Lynch deems necessary or appropriate,  any defenses
available to them under federal or state law.

                  10. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE  WITH, THE LAWS OF THE STATE OF NEW YORK  APPLICABLE
TO CONTRACTS EXECUTED IN AND TO BE PERFORMED IN THAT STATE.

                  11. Due  Authorization.  Each party represents that it is duly
authorized to execute this letter agreement.
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                  12. Counterparts.  This letter agreement my be executed in one
or more counterparts each of which shall be deemed an original.

                  13.  Headings.  The section  headings in this letter agreement
have been inserted as a matter of convenience of reference and are not a part of
this letter agreement.
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                  If the above correctly sets forth the understanding  among the
Manager and Merrill  Lynch,  please so indicate by signing and  returning to the
undersigned one of the enclosed duplicates of this letter agreement.

                                            Very truly yours,
         
                                              MERRILL LYNCH, PIERCE, FENNER
                                              & SMITH INCORPORATED
                                              By:___________________________
                                                  Name:
                                                  Title:

Confirmed and agreed to as of the date first above written:

PILGRIM AMERICA INVESTMENTS, INC.


By:_______________________________
     Name:
     Title: