Banc Of America Securities and high-profile fixed-income arbitrage hedge fund Ellington Capital Management are embroiled in an unusual debate over the equity stake of the Beacon Hill CBO II and III collateralized bond obligations. The crux of the debate centers on Ellington's refusal to sell the equity--the volatile unrated cash-flows within a CBO--when presented with a bid for it last November, according to individuals familiar with the situation. That refusal is seen as unusual because Ellington was brought on last autumn to dissolve the Beacon Hill hedge fund portfolios, which include equity tranche stakes in the CBOs. The CBOs are separate entities from Beacon Hill Asset Management (BHAM).
Ellington principals Larry Penn and Michael Vranos confirmed the bid, made by B of A, saying "we got a bid and it simply was not in the best interests of the fund to sell at such a low price. It wasn't enough and it's our duty to say that." Penn and Vranos declined to provide a dollar value that they are seeking for the equity. CBO market players say B of A is arguing that Ellington's refusal to sell is more a function of its desire to gain the right to manage the CBOs. "We would recommend that the equity be sold should an appropriately priced bid come and have put this in a letter to the board," said Vranos, careful to point out that he isn't trying to obstruct the last component of BHAM liquidation.
Whoever owns the equity tranches has voting control over the management of the existing CBOs.
Pat Augustine, head of MBS trading, sales and research at Banc of America Securities, confirmed the dispute, and acknowledged that his firm owns equity and notes in the two deals, but declined further comment. Market participants say that B of A, the underwriter of the two deals as well as a CBO note-holder, says that the legal troubles of the original collateral manager, BHAM, warrant its removal from the deals. To this end, B of A filed an amended complaint in Federal court, a copy of which was obtained by BondWeek, seeking the ouster of BHAM.
Last autumn, B of A interviewed 14 separate bond hedge fund managers, including veteran CBO managers such as The Clinton Group, MKP Capital and Western Asset Management Company, seeking a potential replacement, assuming that Beacon Hill would eventually be removed from management. People close to the situation say that MKP was tabbed, pending the vote of the majority of the equity and note-holders. This vote has been postponed given Beacon Hill's refusal to cede control of its management duties. Pat McMahan, a principal at MKP, confirmed that his firm was among the presenters, but declined to comment, citing the continuing legal battle.
Penn and Vranos reason that Ellington, which doesn't own any BH CBO II or III equity in its internal portfolios, would make a fine candidate to manage the CBOs. "Our track record and experience compares favorably to anyone who we believe presented," says Vranos. Queried as to why his firm was not among the many presenters, Penn and Vranos argue that "we were told at the last second, sent everything they asked for, and were then told that we had sent stuff to the wrong B of A guy." Asked how this could occur, Penn says only that "B of A seems to have viewed this as a plum, to be awarded to someone whose interests are maybe close to theirs." He declined to elaborate further.
They also expressed concerns that any manager selected for the CBOs, in the event of the ouster of, "not be solely focused on the note-holder," continuing that they were not certain the equity was a major concern for B of A given its large ownership position in the notes.