CLO Strategies Continue to Percolate

If anyone had any doubts about whether the Collateralized Loan Obligation market was nearing full boil, these doubts should have been erased by the cascade of new developments over the past several days in this recovering asset class.

Yesterday’s announcement by Ares Asset Management of their purchase of a US$2.5 Billion portfolio, composed of 6 CLO issues and a separate loan fund from Nomura Holdings, Inc., capped yet another week of signficant announcements for CLO’s.

Although there are continuing concerns about the supply of new product, there are few that can refute the steady recovery of the broadly syndicated loan market which has traditionally provided most of the collateral for these structured programs.  The recent flurry in bank financing to back a surging  M&A market only reinforces the growing momentum in the loan market which should create a strong supply of collateral for new CLO programs.  On the investor side, more and more portfolio managers are being called on to produce better returns, as their clients begin to push for performance.  CLO’s and the strong performance of many of these structures over the past several years, despite the economic turn-down, are turning into an increasingly attractive option.

These trends are generating a wave of activity within the CLO market as managers look for consolidation opportunities such as the Nomura purchase by Ares and the recent completion of the combination of CIFC and Deerfield CapitalCarlyle has also let it be known that they remain on the hunt for new acquisition opportunities and Wells Fargo’s sale of  its US$500mm Foothill CLO I is apparently imminent. 

Other strategies involve the build out of new commercial financing platforms with the intent to issue new CLO’s as their portfolios grow.  Churchill Financial’s announcement of their organization of a business development company (“BDC”) aimed at building a CLO platform is just the latest example of a BDC strategy being utilized in the CLO market.

We would expect that for much of the remainder of 2011, we will find key CLO market participants continuing to retool and reload their businesses to take advantage of expected growth in demand for new CLO product.

About markferraris
Managing Principal Orchard Street Partners LLC

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