J.P. Morgan is said to be considering the sale of Octagon Credit Investors, its leveraged loan asset management arm with over $1.75 billion of assets under management. Bankers said the reasons are twofold. FIN 46, a Financial Accounting Standards Board (FASB) measure that calls for the consolidation of special purpose vehicles on the balance sheet of the firm or bank taking on most of the vehicle's risk, is unnerving J.P. Morgan as it tries to interpret the effect it could have on its balance sheet.
Additionally, the bank has for some time made it clear it is looking at ways to reduce its private equity commitments. "FIN 46 has made the sale of Octagon an option," said one banker with knowledge of the situation. James Ferguson, who founded Octagon in 1994, was out of the office and could not be reached. Other officials at Octagon declined comment. Octagon is owned by senior management and J.P. Morgan Partners. A J.P. Morgan spokesman declined comment.
A portfolio manager explained that Octagon's latest collateralized loan obligation, Octagon VI, is being marketed by Bear Stearns with a disclosure statement that notes that the firm may or may not evaluate strategic options. The manager said it is not a foregone conclusion that J.P. Morgan will own them going forward, while another said, "the disclosure language is not boilerplate."
FIN 46 establishes that variable interest entities, once called special-purpose entities, should be moved onto the balance sheet of the company or bank that bears a majority of the risk. Ownership of CDO equity could consolidate the CDO debt on J.P. Morgan's balance sheet, the manager said. As of last week, FASB decided to defer the application of FIN 46 for venture capital and private equity firms that are currently using investment company accounting. This is until American Institute of Certified Public Accountants language can be finalized and approved later this year or early next year.
Even with this latest twist that could change the interpretation, the loan manager said a sale is still an option. "If you examine recent research reports from J.P. Morgan, they want to reduce private equity commitments," the manager said. J.P. Morgan has reportedly said it is continuing to take steps to manage risk with the private equity portfolio, including reducing total capital commitments and limiting exposure to specific sectors.