With increased demand and issuance of collateralized loan obligations (CLO), new entrants to the market are taking advantage of favorable conditions to enter a space historically dominated by large institutional firms, according to a new Fitch Ratings report.
The CLO market has experienced a 65% growth in issuers, with 47 new managers entering during 2013 and 2014 (through October). As expected, the profile of newer entrants, in terms of size, is quite different than the 'frontier' CLO 2.0 issuers of 2010 and 2011.
Investors are typically focused on operational and reputational risk. Therefore, there should be emphasis on governance, risk management, investment processes and discipline, operational risk and sustainability. Investors should be demanding in terms of reporting and client servicing, which could be a challenge for less experienced managers with less resources.
Fitch's CLO rating process includes an operational risk assessment and a review of the CLO manager's investment processes. A team of analysts specializing in asset manager reviews, structured credit/CLO analysis and leveraged finance brings a cross-disciplinary perspective to the manager assessment, an important input into the CLO rating process.
Due to differences among CLO asset management organizations in terms of size, operating strategy and assets under management, among other organizational characteristics, a review of a manager requires careful consideration of the context in which it operates.
The full report 'CLO Market Expands Requiring More Investor Scrutiny' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: CLO Market Expands Requiring More Investor Scrutiny (Increase of New Entrants Highlights Investors' Need to Focus on Unique Risks)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=829410
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