OREANDA-NEWS. Fitch Ratings says that the annualised growth rate in the number of collateralised loan obligation (CLO) managers active post-crisis (CLO2.0) has been slower than pre-crisis (CLO1.0).

The annualised growth rate in the number of active CLO2.0 managers at 23% is slower than the like-for-like growth rate seen in CLO1.0 managers at 34%. We counted 31 active European CLO2.0 managers as of end-December 2015. At its peak we estimate that a total of 64 managers of CLO1.0s were active in Europe pre-crisis.

While the universe of active managers has been growing more slowly in European CLO2.0 than it did in CLO1.0, the starting base was higher as a number of managers that had been active pre-crisis promptly re-entered the market once issuance had resumed. We believe the combination of more measured growth in the number of active managers and the presence of managers with experience of managing CLOs over a longer history (including through the financial crisis) should be viewed as a positive by investors.

CLO1.0 managers were primarily part of broader asset management organisations or specialist loan asset managers. There has been a pronounced shift to private equity sponsored CLO managers in CLO2.0, dominating managers by type at 37% of managers. This reflects both the relative asset class specialism required in CLO management and strategic acquisitions by private equity firms designed to leverage their investment platforms and diversify revenue sources.

We estimate that a CLO manager needs three to four CLOs under management to be viable long term, without other revenue sources. The break-even point is sensitive above all to staff costs and the ability of the CLO structure to generate subordinated and senior fees. Without structural protections such as strong manager replacement provisions, Fitch will be challenged to rate CLOs managed by new managers that are unable to demonstrate reasonable financial stability.

Achieving financial stability is not the only challenge facing CLO managers. We also see some evidence of aggressive practices by seed investors in the CLOs of new managers and broader challenges relating to collateral supply, funding retention stakes and complying with applicable regulation.

The availability of resources also differentiates CLO managers. We estimate the average workload is around 20 loan issuers per analyst as of end-December 2015 across the European CLO managers we have reviewed, although actual numbers may vary from 10 up to 50 where coverage also includes bond issuers.

The report, Slower Growth in Number of European CLO2.0 Managers - New Managers Face Barriers to Entry, is available at www.fitchratings.com.