Citigroup, Highland Capital Battle over Control of a Collateralized Loan Obligation

By Bisbey, Allison | American Banker, April 18, 2012 | Go to article overview

Citigroup, Highland Capital Battle over Control of a Collateralized Loan Obligation


Bisbey, Allison, American Banker


Byline: Allison Bisbey

Some of the biggest players in collateralized loan obligations are embroiled in a contract dispute.

Highland Capital Management is trying to block Citigroup (NYSE:C), Babson Capital Management and Bank of New York Mellon (BK) from removing it as the portfolio manager of a CLO.

Citigroup, which underwrote Liberty CLO for Highland in 2005, approached Highland in May 2011 about liquidating the vehicle, according to a complaint Highland filed in a state court in Dallas County, Texas, on April 5.

When Highland refused, Citigroup sought to remove Highland as portfolio manager and replace it with Babson, according to the complaint.

Highland said Citi has ulterior motives: it claims that Citi bought up shares in the controlling class of securities issued by Liberty CLO at a steep discount, setting it up to profit handsomely if the assets used as collateral for the deal are sold.

aIf the CLO is wound down as Citi desires, Citi will be paid the face value of the debt, resulting in a windfall to Citi,a Highland said in the complaint.

The asset manager said it refused Citigroupas request to liquidate the CLO because it determined that proceeds from the sale of the collateral would be insufficient to redeem all of the outstanding notes and to pay fees, expenses and obligations. Failure to do that would have violated the terms of the management agreement and hurt the interests of the other certificate holders, it says.

Highland has more than management fees at stake; the firm said it will suffer aimmediate and irreparable harma to its business as a result of Citias and Babsonas conduct because its areputation as a successful portfolio manager will be unjustly impugned.a

Citigroup spokeswoman Danielle Romero-Apsilos said the claims lack merit. A spokesman for Babson said the firm could not comment on pending litigation. A spokesman for Bank of New York Mellon, which is named as a defendant in its capacity as the trustee of Liberty CLO, also declined to comment.

Highland, which was formed in 1993 by James Dondero and Mark Okada, is one of the largest CLO managers, with $20 billion of assets under management. It has structured and monitored 32 CLOs and collateralized debt obligations totaling $29 billion. Liberty CLO, which was arranged in 2005, issued securities with a face value of $872 million, according to a report published by Moodyas Investors Service that year. In the normal course of events, a CLO issues debt that is used to fund the purchase of noninvestment grade loans and other kinds of collateral, and the interest and amortization on these loans is distributed to CLO security holders.

aA cash-flow CLO doesnat typically end its life by having its assets sold at market value to pay down security holders at less than par,a said Frank Iacono, a partner at Riverside Risk Advisers, a New York firm that analyzes derivatives and structured products transactions.

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Citigroup, Highland Capital Battle over Control of a Collateralized Loan Obligation
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