Investors move to block Cohen & Co. from amending four CDOs into fee machines

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Investors are trying to stop Cohen & Company from amending the terms of four collateralized debt obligations backed (CDOs) backed by bank trust preferred securities, according to several of the CDOs’ note holders and documents obtained by Debtwire. Cohen’s effort to increase its ability to substitute credits in and out of the deals in question constitutes an “illegal fee-grab,” one of the investors said.

Officials at Cohen did not return calls and a spokesman at the boutique bank and asset manager specializing in ABS declined to comment, citing a quiet period connected to its merger with Alesco. All four CDOs are early vintage Alesco deals and were issued as static pools that are not actively managed and shouldn’t change.

A trust preferred security (TruPS) is a bank debt instrument that is treated by regulators as tier 1 capital because repayment can be deferred for several years. TruPS are also issued by real estate investment trusts and insurance companies.

Through proposed amendments to the four deals – Alesco Preferred Funding I, II, II and IV – Cohen is asking for the power to replace various TruPS from issuers rated BBB- or higher with other TruPS credits. The new amendments also provide for advisory fees, including a portion of the difference in par values of the exchanged TruPS credits if the newly acquired credit is cheaper than the old one, to be paid to the exchanging issuers’ third-party advisors, which in many instances is subsidiary Cohen & Company Securities, according to each 34-page proposal document. Third-party advisory fees would be capped at 2% of the exchanged securities’ original face value, according to the proposal.

Earlier this year when corporate loan prices plummeted, many actively managed collateralized loan obligations (CLOs) executed somewhat similar manoeuvres. The deals needed to amend restrictions on trading loans below particular price thresholds in order to allow managers to to take advantage of cheaper secondary levels. the

Called a deep-discount amendment, the move expanded the deep-discount bucket and the amount of collateral deal managers could purchase below the threshold, generally 50 or 65 cents on the dollar. The fad has largely passed as loan prices are back near par.

Investors are calling Cohen’s proposed amendments illegal because in the proposal – dated 25 September by trustee Bank of New York Mellon – Cohen says that unless it hears differently from the ratings agencies, trustees, investors or other parties involved with the CDOs within 15 days, it will execute the amendment. That method is called negative consent.

“We definitely wouldn’t be happy with that,” said an investor in one of the deals who was never made aware of the proposal. “You can’t just say, ‘oh, it got lost in the mail,’ you have to [allow investors to] give affirmative consent.”

The same investor also objected to the idea of essentially changing a static CDO into managed deals. “In our view everything should be at arm’s length,” he added. “I would find it hard to believe we’d [want] them doing it that way.”

Meanwhile, officials at Hildene Capital Management, which has positions in all four CDOs, posted a letter to the Irish Stock Exchange opposing the amendments, describing them as an attempt to collect more fees. Hildene also claims that Cohen has already illegally substituted TruPS credits into the deal, grounds for Cohen’s removal as collateral manager. In the letter, Hildene officials point to a past instance in which Cohen “exchanged” into one of the deals TruPS from Colonial BancGroup, which was closed by the FDIC in August.

“The bizarre interpretation of the indenture by Cohen would permit any institution which had issued securities held by the Issuer to acquire securities of other financial companies, presumably at substantial discounts, and trade them for their own securities – a result that was never contemplated by investors, the Issuer, the rating agencies, the investment bank that structured the transactions, and probably even Cohen itself,” Hildene wrote in the letter, referring to the interpretation Cohen has used to justify the trades it has already executed as exchange offers. “Cohen seems to believe that it can alter the portfolio at-will, even if it conflicts with its fiduciary duty to note holders,” Hildene wrote.

In a side-note of the amendment, Cohen stated that while it is notifying Fitch Ratings of its plans, it will not request approval from the agency. In order to amend a CDO’s indentures, managers are normally required to receive a ratings agency confirmation letter, or a RAC, stating that the move will not adversely affect investors in the CDO. Fitch no longer provides ratings agency confirmations.

As for the other ratings agencies’ consent, it is unlikely that they would reply to the RAC request within 15 days, said one CDO manager. RACs for the simplest amendments take no less than four weeks to arrive, and often as long as eight weeks, he said.

“It’s never going to happen,” said another investor who claimed his peers are on board to block the amendment. “[Cohen is] just as likely to do damage as they are to do good, because they never tell you who the issuers in their deal are [and] they have incentive to make money by hurting these deals [while collecting fees].”

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