European CLO Asset Managers
'Survival of the Fittest: The Return', a report by Fitch Ratings
This report is a continuation of the previous report, European CLO Asset Managers – Survival of the Fittest, dated 31 January 2007, updating and expanding the agency’s analysis of the European CLO management industry.
Changes in the European structured credit and leveraged loan market since January 2007 have created an unprecedented and challenging environment for CLO managers. The long awaited manager shake out has just begun.
According to Fitch Ratings’ European leveraged finance group, defaults have yet to materialise in meaningful volumes in Europe. However, in future, while under-performance may not trigger defaults given the early life of most transactions and substantial covenant headroom, debt levels are nonetheless unlikely to prove sustainable on the basis of standalone performance. Fitch expects value to erode for all creditors (including senior secured creditors) along the way towards distant though eventual defaults in 2009 and beyond. Clearly, the timing of defaults will depend critically on economic conditions, which are likely to vary among countries.
Greater divergence in CLO performance by manager is expected in future months and years while the forthcoming performance triage is expected to reveal differences between those managers which selected well balanced, defensive portfolios and those that “bought the market” under pressure to issue new deals.
Managing a CLO in a turbulent market does not necessitate a fundamental change in investment strategy; rather, active portfolio management creates value through secondary trading and heightened surveillance.
The characteristics and rapid changes observed in the European CLO manager
industry reflect the attractiveness of an overheated market up to Q307. Out of
over 60 European CLO managers:
- 60% of managers entered the market in 06‐07, 50% of which were US managers;
- 50% have only one‐two CLOs under management, 80% issued opportunistically at the peak of the market.
- The issue of the financial viability/vulnerability of the CLO manager becomes central in a deteriorating/closed market:
- Two‐three CLOs of average size under management result in a European CLO
manager platform breaking even in benign market circumstances;
- Four CLOs or more creates a sustainable, scalable business;
- Subordinated fees typically contribute to two thirds of CLO manager
compensation; if subordinated fee income was reduced by 25% the breakeven point would move up to four CLOs under management.
· Key market success factors include critical mass, strong sponsor backing, (demonstrated) ability to manage through the cycle, and adequacy of corporate
strategy or product range.
Download full report (PDF, 475K)
Changes in the European structured credit and leveraged loan market since January 2007 have created an unprecedented and challenging environment for CLO managers. The long awaited manager shake out has just begun.
According to Fitch Ratings’ European leveraged finance group, defaults have yet to materialise in meaningful volumes in Europe. However, in future, while under-performance may not trigger defaults given the early life of most transactions and substantial covenant headroom, debt levels are nonetheless unlikely to prove sustainable on the basis of standalone performance. Fitch expects value to erode for all creditors (including senior secured creditors) along the way towards distant though eventual defaults in 2009 and beyond. Clearly, the timing of defaults will depend critically on economic conditions, which are likely to vary among countries.
Greater divergence in CLO performance by manager is expected in future months and years while the forthcoming performance triage is expected to reveal differences between those managers which selected well balanced, defensive portfolios and those that “bought the market” under pressure to issue new deals.
Managing a CLO in a turbulent market does not necessitate a fundamental change in investment strategy; rather, active portfolio management creates value through secondary trading and heightened surveillance.
The characteristics and rapid changes observed in the European CLO manager
industry reflect the attractiveness of an overheated market up to Q307. Out of
over 60 European CLO managers:
- 60% of managers entered the market in 06‐07, 50% of which were US managers;
- 50% have only one‐two CLOs under management, 80% issued opportunistically at the peak of the market.
- The issue of the financial viability/vulnerability of the CLO manager becomes central in a deteriorating/closed market:
- Two‐three CLOs of average size under management result in a European CLO
manager platform breaking even in benign market circumstances;
- Four CLOs or more creates a sustainable, scalable business;
- Subordinated fees typically contribute to two thirds of CLO manager
compensation; if subordinated fee income was reduced by 25% the breakeven point would move up to four CLOs under management.
· Key market success factors include critical mass, strong sponsor backing, (demonstrated) ability to manage through the cycle, and adequacy of corporate
strategy or product range.
Download full report (PDF, 475K)
