Clinton Group is seeking to amend the indentures on two collateralized debt obligations it manages. It wants to redirect a portion of the millions of dollars of fees it receives to holders of the vehicles' first-loss positions, according to individuals familiar with the move. The hedge fund has asked the rating agencies whether the changes would, in and of themselves, affect the ratings on the transactions; Clinton Group expects to receive consent from the rating agencies to make the change in the coming weeks, and it could then have the trustee of the transactions send the manager fees directly to the equity holders.
Clinton Group has informed the rating agencies that it wants to change the indenture to allow the trustee to direct the fees to equity holders for taxation reasons. It could not be determined who holds the equity positions in Bleecker Structured Asset Funding and Varick Structured Asset Fund, although they have seen their returns shut off by poor performance so the move would certainly be a boon to them. In general, collateral managers typically retain up to a third of the equity position. And, it's for this reason that some outside professionals say the move by Clinton Group is noteworthy. "The thing that's shady is that the voting rights are with the equity; if you're a senior or mezz holder, you're not happy because the equity people are getting an extra benefit," says one outsider.
Another market pro notes that, in general, amending the deal documentation to redirect the management fee could make it less attractive for an outside manager to take over the deals in the future if they are performing poorly, similar to the way below-market servicing fees in the asset-backed market are frowned upon. And, both Bleecker and Varick are on watch for downgrade by Moody's Investors Service.
Patrick O'Meara, a managing director, did not respond through a spokesman by press time.
The hedge fund is making the move "to maintain good relations with equity holders," explains Stephen Anderberg, a director in surveillance at Standard & Poor's, which is considering whether the proposal will affect the deals' ratings and will likely confirm the ratings on these deals. He says managers have, in the past, changed covenants to pay off senior holders to stay in their good graces and notes "it's interesting when it happens." Rudy Bunja, a surveillance official at Moody's, declined to comment on what action the rating agency might take on the private transactions.