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Fitch rates collateralised debt obligation (CDO) asset managers by asset type, on a scale of 1 to 5, with 1 being the highest rating. These ratings are based on a standardised scorecard methodology that includes factors in several rating categories: staffing, procedure and controls, portfolio management, CDO administration, and technology.
The downgrade was mainly prompted by the adverse impact the credit crisis has had on SGAM AI's business franchise (particularly on its assets under management) and the turnover at senior management level (particularly the departure of the firmÆs CEO last year and the appointment of a new one). It also takes into account Fitch's expectation of increased corporate and staffing instability due to the repositioning and restructuring of SGAM AI through its planned merger with Lyxor Asset Management. SGAM AI, founded in 2003, is a wholly owned but independent subsidiary of Societe Generale Asset Management.
Fitch has CDO asset manager ratings for 23 asset management companies, and this is its first downgrade so far this year. Its highest rating goes to Collineo Asset Management and Solent Capital, both with a rating of CAM3. The rest of the ratings are between CAM1- to CAM2+.
A CAM2 reflects an asset management companyÆs significant CDO history, including experience managing the asset class, as well as demonstrated facility with CDO portfolio management and a strong organisational commitment to the CDO portfolio management business. It also means the company's executive management team is experienced, tenured, and leading a solid business strategy, resulting in a firmly established market position. The organisation is deemed stable with respect to ownership, management, operational infrastructure, and business strategy. Whether the rating is CAM2, or with a plus or minus depends on specific details of developments that may affect the business or portfolio management.
While SGAM AI was established in 2003, the structured product business line was created in 1997. The firm has developed a core competence in investment grade synthetic CDO management since 2004. Its strong growth since inception was driven by financial engineering and product innovation. The business franchise has been adversely impacted by the credit crisis, however, with its AUM halved in 2008 mainly as a result of market value declines and redemptions on enhanced cash funds.
As of September 2008, SGAM AI had Ç30.8 billion in assets under management that was mostly invested in structured products (Ç21.1 billion) and the rest in hedge funds, private equity and real estate.
Fabienne Crayssac, Paris-based global head of structured asset management at SGAM AI, notes that structured products and hedge funds have been severely affected by the credit crisis and that has weakened the positions of fund management companies specialised in alternative investments.
ôThis has been the case with SGAM AIÆs credit activity, especially due to the disappearance of enhanced cash funds,ö says Crayssac. ôHowever, our CDO activity has suffered relatively less, our CDOs being closed vehicles. As the current market turmoil has not yet made it possible for us to create new CDOs, we are concentrating on managing our existing CDOs in the best interests of our investors and offering solutions for existing distressed portfolios.ö
SGAM AIÆs senior management team was largely renewed in 2008, with Olivier Lecler and Crayssac joining as SGAM AIÆs CEO and head of structured products respectively, both with over 10 yearsÆ tenure with Societe Generale Group. Lecler, formerly head of finance and operations and then deputy to the deputy general manager for operations at SGAM, was appointed CEO of SGAM AI after Philippe BrosseÆs departure in June 2008.
The structured asset management division represents 35% of SGAM AIÆs total staff, the size and organisation of which remained largely stable in 2008. The CDO portfolio management team consists of six professionals. The independent fundamental credit research team is a central, shared resource at SGAM, staffed by 12 professionals with an average of five yearsÆ tenure and nine yearsÆ experience.
A key challenge of the team is to cover the whole credit spectrum in a meaningful way for all its internal clients. The credit structuring team of 22, which provides legal and quantitative solutions, represents, in FitchÆs opinion, a highly skilled group, albeit one that is under-utilised in the current environment. The CDO team also benefits from shared resources in the areas of operations and IT (27 staff within SGAM AI) and the risk management team, which has been strengthened to 12 employees, at SGAM.
Corporate and staffing issues in relation to SGAM AIÆs merger with Lyxor, meanwhile, are being addressed.
ôThe study into bringing together the hedge funds, structured and index management of SGAM AI and Lyxor is currently under process,ö says Crayssac. ôThe risk of staffing instability remains present, like in all organisational changes in every business.ö
Despite uncertainties over the exact scope and the effects of the consolidation with Lyxor, Fitch views the steps taken by management to restructure the franchise positively.
Fitch does not expect the CDO platform's core staff and processes to be materially affected on a day-to-day basis.
The rating continues to reflect SGAM AI's extensive alternative credit management experience with a core competence in investment grade corporate synthetic CDO management. The rating also reflects the company's expertise in financial engineering, which, combined with its recognised fundamental credit research capabilities, supports advanced risk management and trading practices.
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