Katonah Capital, the loan asset management subsidiary of Kohlberg & Co., has proposed that Sankaty Advisors, Blackstone Debt Advisors and INVESCO Senior Secured Management act as the replacement managers for a group of Katonah funds, potentially locking up more than $2 billion in assets that have been in play for the last month.
There was wheeling and dealing over which shop will get each fund, said a rival buyside source. He said the deals are in varying stages of reinvestment and also carry different consent requirements. As first reported on Loan Market Week's Web site last week, if approved by the required investors in the deals, Bain Capital affiliate Sankaty will take control of Katonah II, Katonah III and Katonah IV. Blackstone's loan group is being proposed for Katonah I and Katonah VI and INVESCO for Katonah V.
For Katonah I, the consent of the fund and MBIA as insurer is required to approve the replacement portfolio manager. A buyside source said this is straightforward since the deal was completed in the early years of the CDO market. In contrast, Katonah VI requires approval by a majority of the holders of Class A Notes and the equity investors and is the most complex.
Katonah II was described as a no-brainer as this fund does not require consent. The approval by a majority of the equity investors in Katonah III, IV and V is required to approve the respective replacement portfolio managers, according to a Katonah statement. The consent period takes 15 business days. Significant overlap between the investors in the Katonah deals and those managed by the three loan shops was a major factor in the decision, sources indicated.
Katonah was forced to find replacements following the departure of Joyce DeLucca to form Kingsland Capital, which triggered the key man provision in most of the funds. She left ahead of the firm being sold to Allied Capital, taking a significant portion of the staff with her (LMW, 2/7). The sale to Allied, valued at up to $40 million, was nixed shortly after. DeLucca did not return calls.
If the required approvals are obtained, Katonah Capital intends to enter into sub-advisory agreements with the three firms. There were some rumblings last week that Kohlberg was skirting the collateral management agreements by delegating collateral management responsibilities to the replacements. "This is not a replacement, this is de facto assignment," said one source familiar with the matter. If this is an assignment, then it will require a different provision, he added. But a Katonah spokesman said the process has been vetted by the issuer and advisors, a statement supported by officials and spokesman for the three managers. A rival manager said Katonah is getting good value from the process. "They have managed to recover from a bad situation and put together a good auction," he said.
Kingsland Lawyers File For Summary Judgment
Lawyers for Kingsland Capital have filed a motion for summary judgment in the case against Katonah Capital and Kohlberg & Co. The statement argues that the case "is merely (and sadly) a vindictive effort by a large investment management firm to punish a departing-at-will fund manager."
Katonah and Kohlberg filed in February following the collapse of the sale of Katonah to Allied Capital and its subsidiary Callidus Capital Management. The lawsuit seeks injunctive relief and to recover compensatory and punitive damages arising from breaches of contract and fiduciary duties and torturous interference with Katonah's business relations by DeLucca (LMW, 2/21).
Joyce DeLucca's affidavit states that she did not solicit employees or investors of Katonah before resigning and has not used any confidential information or trade secrets. "Plaintiff's allegations about 'cabals' and 'schemes' are sheer fantasy," according to the court documents. "The reality is that Kohlberg tried to sell me and my team to a buyer we did not welcome and keep all or most of the proceeds of the sale. Not being chattel, and not being subject to non-competition agreements or other contractual restrictions, I declined to let myself be sold under these circumstances," the affidavit adds.
The case used by Proskauer Rose, attorneys for DeLucca, to support dismissal is Lazard Debt Recovery v. Weinstock, where the court found fund managers who had no non-competition or non-solicitation agreement did not breach their fiduciary duty by resigning to compete. According to the motion, the Lazard court also noted that under New York law, an employee has a right to plan and prepare a new competing business as long as no wrongful means are used and has no duty to notify the employer of these plans. A spokesman for Katonah could not provide comment by press time.
