At the onset of the credit crisis, market participants expected a wave of consolidation in the CLO market. The wave turned out to be little more than a ripple, with less than 5% of the CLO market making management changes during the last year and a half, according to analysts at Citigroup Global Markets.
That, however, now appears to be changing, with several managers recently acquiring portfolios, and a number of others looking for buyers, sources said.
"Despite all the hope and hype that new issue CLOs were just around the corner, the arbitrage is simply not there. It's not even close," said a New York-based CLO manager. Because of that, "consolidation will be the order of the day for many months to come."
Just last week, Stanfield Capital Partners placed essentially all of its CLOs on the block. With those portfolios holding assets of around $4.6 billion, that transaction would represent the largest acquisition of its kind recently.
Meanwhile, ING Investment Management last month assumed management of three Avenue Capital Management CLOs, with $1.72 billion in assets under management. The CLOs will be managed by ING's Scottsdale, Ariz.-based senior loan group, which is led by Jeff Bakalar and Dan Norman.
Also in January, GSO Capital Partners bought all nine of Callidus Capital Management's CLOs, comprising $3.2 billion of assets. And in November, Babson Capital Management acquired a Jefferies unit that managed five CLOs, with roughly $1.7 billion in assets under management.
"The loan market will see more consolidation among [CLO] managers occur," one CLO manager said. "I'm aware of another larger transaction where a CLO manager is looking to put their unit out on the market."
A bank analyst said that he heard that Nomura is trying to acquire a Mizuho's Mountain Capital Advisors' unit, which manages four CLOs. Calls to Nomura were not returned. A Mizuho spokesman said Mizuho doesn't comment on market speculation. Mountain Capital manages approximately $2.3 billion, according to its Web site.
Other recent CLO sales include Avoca's acquisition of KBC Financial Products' CLO unit, which managed approximately Ã¢Â‚Â¬350 million ($472 million), and IKB Capital's transfer of the Bacchus 2006-1 CLO to Halcyon Bacchus Management.
The wave that was supposed to happen at the start of the credit crisis didn't happen because, "most managers were too busy trying to put out the fires," said Tom McDonnell, a managing director at Babson. "Managers are now looking at their business models and asking themselves whether they will be able to issuer future CLOs or other fee-generating products going forward. That's a question managers really have to face. If you're not likely to do deals in the future you would have to think of the business as a melting ice cube - that cash flows are going to eventually end as the CLOs reach the end of their reinvestment period and begin to wind down. Managers will be looking at their business model and asking themselves: What's the best time for me to go ahead and go to market to maximize my value?" McDonnell added that Babson has "been approached a number of times about potential transactions," and that the firm "continues to evaluate them as they come up."
McDonnell's perspective was echoed by a Citigroup analyst who wrote a report published late last month. "With fewer CLO deals now failing their performance tests, managers are seeing better prospects for their subordinated fee streams. As many firms re-evaluate their commitment to leveraged loans and CLO management because the primary market has yet to return, the prospect for better prices may finally lure managers into selling up."
Some consolidation activity could also reflect that equity investors within a CLO - those investors who have invested in debt that is not rated - do not like the way the CLO is being managed, sources said.
"If you're an equity investor, and some key triggers have been breached, and you're not happy with how the vehicles are being managed, those investors could get proactive and try to find a more stable manager with more resources," the CLO manager said.
However, not everyone is convinced consolidation in the CLO market will pick up. "I think there's just a lot of [managers] just hanging on to see if they can make it," said a New York-based banker.
Even though CLOs don't dominate like they used to just a couple of years ago, they still represent 46% of the institutional loan market, according to Standard & Poor's Leveraged Commentary and Data.
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