Fitch to rate CDO performance

In a move that will be noticed by a number of diversifying private equity firms, international rating agency Fitch has launched the first global ratings program for assessing the capabilities of collateralised debt obligation (CDO) asset managers.

According to Fitch, the program has been designed to meet three primary objectives. Firstly, it will provide investors with clear measures of CDO asset manager capabilities. It is also meant create a league table based on individual managers’ performances, and to provide for more frequent monitoring of CDO asset management organisations.

Fitch will issue CDO asset manager ratings for each type of asset under management including high yield bonds, bank loans and emerging market credits. A four step rating system will be used.

According to Fitch, the recent growth in global CDO, which has averaged nearly $140bn annually over the last three years, has led to an increased number of organisations involved in CDO asset management.

This increase coupled with the varying performance records of these organisations, the continuing evolution of CDO technology, and the increased leeway given to asset managers in making investment decisions means there is a need for greater scrutiny of CDO asset managers, said the group.

It is certainly the norm to put assets through rigorous internal credit approval processes including an appraisal of likely performance during any economic downturn. In the past the managers of such assets were unlikely to come under a similar level of scrutiny.

Among the institutions to recently have taken an interest in CDO funds are private equity firms who see an opportunity to capitalise on their understanding of the buyout market by investing in leveraged bond and loan products.

One such firm is Duke Street Capital, whose debt fund management division has invested more than E500m in 35 transactions from its first CDO fund, a E750m vehicle.

Duchess 1, which was launched in March, is currently the largest fund of its kind in Europe. It focuses on senior mezzanine loans within the leveraged finance market.

David Wilmot, a director at Duke Street Capital Debt Management, welcomed Fitch’s development. Investors want to know that managers have the skill and expertise to manage assets in both good and bad times, he said.

The ratings program will address this need for more transparent and quantifiable measures of asset manager capabilities, said Mitchell Lench, senior director and head of European CDOs, “We realise that what investors really want to know is the capabilities of an asset manager – what they bring to the table.”

Fitch also claims that the performance of CDOs is directly impacted by the actions of the asset manager.

Wilmot agrees. “I am a firm believer that management is an important differentiating factor in any business venture. It is particularly important in CDOs where asset managers should be actively managing their portfolio rather than letting it run its own course.”

“And so putting into place assessment structures can be a positive development to help investors form an objective means of a manager’s capabilities,” he said.