Middle market commercial finance company Churchill Financial Holdings last week announced plans to acquire CDO manager Centre Pacific LLC - a move that will create another player in the rapidly growing middle market loan CLO space.

The number of middle market CLO managers has tripled in the past five years, according to Moody's Investors Service. At the same time, U.S. issuance in the space has grown from less than $1.5 billion in 2001 to 24 transactions totaling more than $14.5 billion year-to-date. Twelve of those transactions came in the third quarter, according to the rating agency. "This year there was substantial growth, and I think there is more of that to come," said David Burger, an analyst at Moody's. Positive performance and relatively generous risk premiums in the middle market sector have drawn a number of the new managers.

"I think it is part of a continuing evolution in the market," said Ken Kencel, Churchill's chief executive. "Ten years ago it was dominated by banks, and now it is dominated by CLOs and loan funds." The New York-based Churchill was formed by Churchill Capital and Bear Stearns Merchant Banking in February with an initial $500 million in committed capital; prior to its formation, Kencel was head of leveraged finance for Royal Bank of Canada. As of March, the company has originated 20 transactions with a hold of roughly $200 million.

As Churchill's new asset management platform, Centre will be known as Churchill Pacific Asset Management. Centre's Los Angeles-based management team, led by Heather Creeden, initially worked together at Transamerica Investment Services. Centre, which has about $3.5 billion in assets under management, has been seeking a buyer for about a year.

Changing times

As a middle market loan originator, Churchill will join the group of CLO managers that originate at least a portion of the loans that make up their deals. Such was the make-up of the first wave of small-to-medium business loan CLO managers, who primarily issued static deals to the market as a source of matched term financing. The newest wave of CLO managers using middle market collateral, however, may either be carving out buckets for the higher yielding bonds (senior secured and second lien loans are paying roughly 450 and 650 basis points over Libor, respectively) within their traditional structures or are simply delving in entirely from other asset classes.

Some have questioned the increase in new players to the market, which involves primarily unrated collateral. "One of the things that I believe firmly, is that if you are going to do a middle market CLO, it helps considerably if you can generate your own proprietary deal flow," Kencel said, adding that although the company will not rely solely on its own originations to ramp deals, access to proprietary deal flow will allow the company to "generate very attractive middle-market deals" for its investors.

Although, rating agency professionals say the performance outlook for the sector remains rosy - that is, barring any economic downturn.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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