Fitch: Issuer Diversity Beneficial to CLO Market

CHICAGO--()--Diversity among CLO managers is beneficial to the overall CLO market by ensuring market longevity given uncertainties such as those posed by regulation and providing investors with investment differentiation.

Fitch has noted that the active CLO manager population is highly diversified amongst various types of firms, including affiliates of private equity firms, hedge funds, large financial institutions, insurance companies and smaller, independent firms. This dispersion promotes a healthy balance should one segment fall out of favor with investors or be forced out for other reasons.

For instance, new regulations for capital retention may impact managers differently. Rules stemming from the Dodd-Frank legislation in the U.S. and the Capital Requirements Directive in Europe may require CLO managers to retain a 5% vertical or horizontal interest in all CLOs they sponsor. If some firms, such as smaller, independent managers, find the rules prohibitive, CLO issuance is not likely to be significantly affected given the increased capacity and appetite to grow CLO business shown by other manager segments. Private equity firms and hedge funds have been increasing CLO market share since late 2010 during the era of what is commonly referred to as CLO 2.0. Global alternative firms accounted for 75% of total CLO issuance by deal count in 2013 versus 28% for independents, 9% for traditional multiline asset managers, 8% for insurance companies and 8% for banks.

Issuer diversity also gives investors a wide range of investing styles or mandates to choose from. For example, investors more comfortable with an active trading style may migrate towards managers affiliated with large private equity firms or hedge funds. Investors looking for a more hands-on approach from senior management may side with smaller independent managers. Since smaller organizations may have a stronger ownership culture among staff, the senior management of these companies may be more aware of daily events regarding their CLOs.

Given the increase in managers of all kinds, a comprehensive assessment of a CLO manager is critical. Before rating CLO securities Fitch reviews managers for strength of credit analysis, deal-sourcing and portfolio selection practices, loan and CLO administration capacity, loan trading and management of distressed situations. People, strategy, infrastructure and systems are important to ensure long-term CLO performance.

The full report 'U.S. CLO Management Landscape' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--U.S. CLO Management Landscape - Feb. 24, 2014

Applicable Criteria and Related Research:

U.S. CLO Management Landscape (Examining Strengths and Challenges Unique to Specific Ownership Types)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731744

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Contacts

Fitch Ratings
Russ Thomas, +1 312-368-3189
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Russ Thomas, +1 312-368-3189
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com