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CLO Manager Consolidation: Is The Timing Right?
Wednesday, August 31 2011 | 08:14 AM
NEWOAK CAPITAL LLC
|After 4 years of anticipation by investors, we are finally seeing CLO manager consolidation occurring in a meaningful but yet modest way.
The CLO market had gone from being driven by equity-investors/managers seeking leverage in early years, to an asset management/structuring fee play by the mid 2000’s. This led to a proliferation of smaller managers hanging on for the market re-opening for new issuance post-2007. Because of the pending Dodd-Frank’s risk-retention rules requiring issuers to keep 5% of equity and debt, smaller CLO managers without an outright equity capital or sponsorship are more willing to sell out.
The timing of these consolidations may appear unwise in light of the volatile markets, lower expected growth and uncertainties about European bank capital issues. However, since the funding spread of the existing CLOs are fixed, wider loan spreads for reinvestment will lead to higher equity cash flows and returns. Depending on the combined price of management fees and purchased equity cash flows, the strategy of acquiring smaller CLO managers could make sense today for larger managers.
Longer term, CLO manager consolidation is a negative factor for the corporate loan issuers as it reduces their investor base and their pricing power. Higher spreads due to a weaker economy is already expected, so the only good news for corporate issuers is that Libor will stay low for quite a while and keep their overall funding costs low.
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