08/20/2010

Vanquish Dealt Setback in Management Fight

Opposition from other investors has stymied efforts by Vanquish Capital to remove New York Life as manager of two collateralized loan obligations.

Working via a hedge fund called VCG Special Opportunities Master Fund that invests primarily in collateralized debt obligations, the Delray Beach, Fla., firm owns a majority of the junior-most notes from the issues: Flatiron CLO, 2003-1 and 2004-1. With those securities come the rights to boot New York Life as manager without cause.

But there's a catch, as senior investors have to sign off on the appointment of a new manager. And that's something they so far have proven unwilling to do.

Vanquish had set out in late May to remove New York Life, with the intent of transferring the management assignments to Commercial Industrial Finance Corp. of New York. The campaign lasted until Aug. 11, when most of the senior noteholders in the 2004 transaction voted against the request.

The 2003 deal never made it to a vote. "We're evaluating what our next steps will be," Vanquish chief investment officer Don Uderitz said.

Vanquish decided to take action against New York Life after the 2004 CLO missed a quarterly equity payment in late 2009. Uderitz said CIFC has never had a deal fall below minimum over-collateralization levels, the point at which equity installments are cut off.

It is estimated that more than half of CLOs missed equity payments in 2009.

Another source said CIFC has indeed developed a reputation as an equity-friendly manager by keeping payments flowing to its deals' bottom tranches. But "New York Life did not do such a bad job either and, in fact, looking at the portfolios now, their portfolios look safer."

The 2004 transaction and presumably the 2003 deal have passed their reinvestment periods, meaning their managers have almost no capacity for discretionary loan trades. The issue for Vanquish is how New York Life handles existing loans that have run into trouble. "We're doing this for the benefit of our investors, and we have a fiduciary responsibility to do that," Uderitz said.

Another possible motivation for Vanquish is that CIFC apparently agreed to share an undisclosed amount of management fees with the firm had the transfer gone through. Each of the Flatiron deals, initially totaling $350 million, produces management fees equal to about 50 bp of its current value each year.

Yet another wrinkle: One source said that before Vanquish talked to CIFC, it approached several asset managers to see if they would be interested in replacing New York Life. But those shops apparently balked at a condition that they felt might dent their reputations. That is, they would have to buy a small portion of Vanquish's equity in the Flatiron issues and vote for the change, in what would amount to a hostile management takeover. Apparently, CIFC was comfortable with the move.

Vanquish accumulated the Flatiron notes on the secondary market in 2007 and 2008. Like other hedge fund managers, it targeted deals with "removal-without-cause" provisions. Those conditions were common among CLOs created by institutional investors, as the firms thought at the time that the language would help them avoid on-balance-sheet treatment for the issues' underlying assets.

New York Life manages six CLOs, including five under the Flatiron banner. It took over the other deal, Silverado CLO, 2006-2, from Wells Fargo in November 2007.

CIFC is led by founder Peter Gleysteen, who earlier helped launch J.P. Morgan's loan-syndication business. The firm issued seven CDOs with a combined face value of $3.3 billion in 2006 and 2007, according to Asset-Backed Alert's ABS Database.

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