Trouble at Calyon's structured finance subsidiary Omicron Investment Management could serve as a harbinger for the further woes awaiting CDO managers.

The unprecedented deterioration of the structured credit markets has made it more challenging for Omicron and smaller European CDO boutiques to raise assets and execute a growth strategy.

Calyon has brought in Vienna-based manager Aurelius Capital to help restructure and recapitalize the firm, according to market reports.

"We think this is a trend set to continue as the current environment is for fewer new deals and for those that do print to go to experienced managers," Royal Bank of Scotland analysts said. "Therefore, small managers may not reach the critical mass required to make the operation economical."

In December, Fitch Ratings analysts reaffirmed Omicron's CAM2' rating, the second highest out of five possible ratings for a firm that manages CDOs.

The agency said it believed Omicron was well positioned to ensure its long-term business and financial viability, primarily as a result of its limited and indirect exposure to the U.S. subprime market. The rating agency also considered Omicron's affiliation with Calyon. According to Omicron's own business plan, the firm should be profitable this year.

But the departure of the firm's two founders and senior executives, Markus Klug and Manfred Exenberger, prompted Fitch to place the firm's CAM2' rating on negative watch this month. Fitch noted the "considerable uncertainty over the new management's ability to successfully restructure the company."

The key trigger for Omicron's troubles, according to market reports, has not been related to the performance of the 2 billion ($3.15 billion) of assets under management. Instead, it is the relatively small size and newness of the manager. Omicron was only established in 2005.

Omicron's fate is indicative of what is happening in the general market. The future appetite for CDOs will be limited, Fitch said, adding that the market will probably be seeing more consolidations among CDO managers.

The most vulnerable to be taken over are the most recently set up boutique CDO shops that have relatively few assets under management, little name recognition, limited access to funding and a lack of resources to manage assets in a market downturn, according to Fitch.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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