A Citigroup Inc. unit and at least two other firms have purchased contracts to manage $4.5 billion of collateralized loan obligations this month as prices of the debt fell by 6.1 percent.
Citi Capital Advisors this week acquired the right to oversee $2 billion of CLOs from DiMaio Ahmad Capital LLC. Private-equity firm Carlyle Group and Ares Management LLC are amongst companies that have bought contracts to manage $54 billion of such funds since 2010, according to Barclays Plc data.
CLO managers are buying smaller rivals to expand as issuance of the securities is low. There have been $7 billion of funds backed by widely syndicated loans arranged this year, compared with $91.1 billion in 2007, according to Bloomberg and Morgan Stanley data. CLOs may be subject to rules proposed by the Dodd-Frank Act that could effectively shut down the market for the debt and lead to more consolidation.
“You had large managers that weren’t issuing CLOs that wanted to grow and were willing to deploy capital to take over other managers and increase their scale,” Matt Natcharian, head of the structured credit team at Babson Capital Management LLC, said in a telephone interview.
Citi Capital Advisors said it had acquired four CLOs worth $2 billion from investment manager DiMaio Ahmad, also known as DA Capital, according to an Aug. 16 news release. Last week Carlyle purchased a $500 million fund from Wells Fargo & Co.’s Foothill Group Inc. unit and Ares Management bought Indicus Advisors, which oversees more than $2 billion in assets in CLOs and other credit funds in both the U.S. and Europe. Apollo Global Management LLC and Resource Capital Corp. have also made acquisitions this year.
With these purchases, the largest managers continue to get bigger. There were $297.1 billion of U.S. CLOs as of Dec. 31, according to Moody’s Investors Service. The top 10 managers held $94 billion of those assets, according to a January report from the ratings company. In 2007 at its peak there were 136 CLO managers and that number has shrunk to 111 as of a July 14 report from Citigroup.
CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.
New risk-retention rules proposed by the Dodd-Frank Act would force lenders to hold at least a 5 percent stake in debt they package or sell. If CLOs are subjected to this proposal the market for the securities might shut down, according to the Loan Syndications and Trading Association.
Ending ‘CLO Formation’
Speaking before the House Subcommittee on Capital Markets in April, Bram Smith, the executive director of the New York-based LSTA, said the rules could “basically end CLO formation entirely.” The trade association contends that most CLOs are independent investors and should be exempted from the provision.
“I think that for a long time managers were unwilling to consider selling their firms because they believed that they would be successful raising money during the crisis or after the crisis,” Christopher Allen, senior managing director and co-founder of New York-based Apidos Capital Management LLC, said in a telephone interview.
Apidos, a unit of Resource, is “routinely evaluating situations in the market,” Allen said. He declined to comment on any specific transactions.
In order to raise a fund in 2010, most managers were required to provide the riskiest portion of debt, also known as the equity slice, themselves, Allen said. A smaller manager not associated with a larger firm was probably not able to do that and wouldn’t have been able to raise a fund.
“Faced with this situation, a lot of managers realized it was in their economic self interest to sell,” he said.
The new-issue CLO market has largely stayed closed to those not among the largest managers, limiting the prospects for future growth for other firms.
“If you don’t have committed equity, you are not going to be a CLO issuer, it’s that simple,” Brad Rogoff, head of U.S. credit strategy at Barclays Capital, the investment banking unit of Barclays, in New York, said in a telephone interview.
Banks issued more than $3.4 billion of CLOs backed by widely syndicated loans in the U.S. last year, according to data compiled by Bloomberg. That is more than double the $1.22 billion issued in 2009, according to Morgan Stanley data.
JPMorgan Chase & Co. said it maintains its estimate of $10 billion to $15 billion of CLO issuance this year, according to an Aug. 12 report. “Given the current volatility it’s increasingly unlikely the higher end of our forecast will be reached,” analysts wrote.
Leveraged loan prices have been falling after Standard & Poor’s downgraded the U.S. and the Federal Reserve said it is prepared to use a range of policy tools to support the economy
The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell to 88.2 cents on the dollar on Aug. 11, which was the lowest since July 13, 2010. The measure was at 88.69 cents yesterday.
The price of the slices of debt that make up CLOs have also fallen, with BBB rated-debt hitting 68 cents Aug. 11 from a high this year of 81 cents in February, according to Morgan Stanley data. AAA rated-debt dropped to 93 cents Aug. 11 from 96 cents in May and June, the highest level since December 2007, according to the data.
“When the market was closed, you had some smaller managers worried about their ability to grow their business and support a full staff,” Babson’s Natcharian said. As credit has deteriorated further “the prospects for future growth began to fall.”