The sudden withdrawal of liquidity, coupled with a possible sustained slowdown in new collateralized debt obligation (CDO) issuance, likely means further impairment among CDO asset managers well into next year, says Derivative Fitch in a new report.

“While the potential liquidity risk of some manager platforms appears contained in the short-term, the continuing global liquidity crises warrants close monitoring to determine if future manager impairment is possible, be it material staff reductions, cutbacks on critical resources like data and technology, financial stress or, in a worst case, outright failure of the manager,” the firm says.

Derivative Fitch believes it possible that manager impairment rates may reach 20% for all CDO asset managers across all collateral types, and as much as 40% for managers focused on ABS collateral should the CDO market downturn persist.

“One consequence of manager impairments would be consolidation of collateral assets with unimpaired managers,” says senior director Vincent Matsui. “Manager tenure is not necessarily an indicator of future manager success or failure, as the impairments to date have involved seasoned managers. That said, newer entrants will be under pressure should the new issue CDO market take time to return.”

Many CDO asset managers often diversified their fee revenues with high-leverage vehicles such as ABCP conduits and SIVs prior to the market downturn, but downsizing or closure of such operations may further compound a manager’s loss of income and reputation, it said. “Even if the CDO market were to recover completely, specialist managers with poor or mediocre absolute performance may be completely shut out of new mandates as investors opt for managers with strong prior performance and good long-term business prospects,” says managing director Shaun Baddeley.