The middle market CLO sector has seen a rash of rating agency upgrades this year. And while credit quality is expected to remain strong despite new managers and collateral choices, the rosy performance can be attributed largely to structural development. The sector only in the last several years has begun to diverge from traditional sequential-pay structures and static portfolios, and continued innovation is expected.

"The biggest story was the development in middle market CLO structures leading to redeemed notes," said Fitch Ratings analyst Christine Choo last week. Within the 21 middle market CLOs the rating agency reviewed between May 18, 2005 and July 31 of this year, Fitch upgraded 14 tranches (three of which were upgraded twice) and affirmed 55; 23 tranches that were paid in full. The rating agency has yet to downgrade any middle market CLO, the first of which it rated in 2000.

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