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Survival tactics
CDO manager consolidation gathers pace
The recent integration of Omicron Investment Management with Aurelius Capital highlights the difficulties that smaller CDO managers are facing in the current environment. But it is also the first instance of what analysts expect to become a trend over the next few months – the consolidation of CDO management businesses.
"The move represents the next step in a consolidation trend in the CDO management industry – we've already seen managers being replaced on individual transactions [see SCI issues 69 and 75], but now we're seeing whole businesses being consolidated. The number of such cases is likely to increase over the next few months as more and more managers recognise that, in order to survive and be profitable in the CDO industry, a firm needs critical mass," explains Fitch analyst Manuel Arrive.
Considerable uncertainties about the consolidation of Aurelius and Omicron's businesses nonetheless remain: while some of Omicron's staff and technology will be retained, what legal form the combined businesses will now take is still unclear. Omicron's founding partners, Marcus Klug and Manfred Exenberger, have left the firm and been replaced by Aurelius' co-founders Hans-Michael Schania and Michael Dirnegger.
Calyon acquired Omicron in January 2006, two months after it was established. Whether Klug and Exenberger left of their own accord hasn't been disclosed, but it is thought that a combination of financial losses and difficulties in the current market environment frustrated the pair.
Anecdotal evidence suggests that, while any losses experienced by Omicron are likely to be small, raising assets in the current environment was proving to be difficult for it. Indeed, Fitch's January CDO Asset Manager Report on the firm explains that Omicron is still in a growth phase and is yet to reach profitability, but aims to create shareholder value for Calyon in 2008.
Fitch placed Omicron's CAM2 rating on watch negative on the news of its integration with Aurelius, reflecting the firm's corporate instability and concern over its long-term viability in continuing adverse market conditions. But the rating agency stressed that it views positively Calyon's re-affirmation of its "commitment to Omicron through a re-capitalisation of the company and its intention to bring additional resources from Aurelius in order to increase the manager's critical mass and financial performance – a key success factor in the current structured credit market".
In addition, in Fitch's opinion, Klug and Exenberger – although central to the business – were no longer actively involved in Omicron's day-to-day operations. The agency says that it takes comfort from management's intention to retain Omicron's core team of senior investment professionals.
The firm has €1.96bn-equivalent in assets under management as at 14 January, comprising the US$495m Stanton CDO I, the €1bn Carnuntum High Grade I CDO and the €615m Omicron ABS Income Fund. The consolidated Omicron/Aurelius entity is expected to continue managing Carnuntum and the Income Fund, but Stanton has a key-man clause with respect to Klug and so its future is uncertain at this time.
This key-man clause was triggered – along with those of another two CDOs where the manager was replaced by Cambridge Place Investment Management – when Klug left UNIQA Alternative Investments to establish Omicron. The transition period for the manager to be replaced took six months.
With this in mind, investors will likely want the Stanton issue to be clarified as soon as possible. "The most important thing for an investor is stable performance and so the risk of portfolio deterioration during a transition period is problematic. It takes time to replace a manager and is quite a painful process because it requires various votes to be conducted both for termination and replacement of the manager," explains Arrive.
He says that key-man clauses are rare in newer CDOs because they aren't necessary in the current environment, where there is an abundance of structured credit professionals and larger management platforms. "Key-man clauses were included in CDO documentation in earlier deals because at that time CDO managers were more reliant on the expertise of a few individuals. As the CDO market matured, organisations became more process-driven than people-driven."
07/05/2008
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