Cohen & Co., the Philadelphia firm that built itself into the second-largest manager of collateralized debt obligations, is selling its contracts to oversee CDOs backed by bank capital notes.
A Fortress Investment Group LLC affiliate bought the management rights on $3.8 billion of Alesco CDOs backed by trust-preferred securities, or TruPS, for $5.4 million, Cohen & Co. said yesterday in a Business Wire statement. The Fortress affiliate also agreed to buy the contracts on $3 billion more for $4.1 million, pending approval of certain equity holders.
Cohen & Co. grew to manage almost $32 billion in CDOs that held TRuPS, subprime-mortgage bonds and other assets, by Sept. 30, 2007, before the collapse of such funds helped create a global financial crisis, according to Standard & Poor’s. Hedge fund Hildene Capital Management LLC last year attempted to fire the firm from managing TruPS CDOs, citing conflicts of interest between the business and its brokerage and advisory unit.
The company announced a series of steps yesterday that “are significant developments in providing our firm additional resources for the future of our growth businesses,” Chairman and Chief Executive Officer Daniel G. Cohen said in the statement.
James Golden, a spokesman for the company, couldn’t immediately provide comment. Gordon Runte, a spokesman for New York-based Fortress, didn’t return a telephone message today.
Cohen & Co. may also be paid as much as $12 million more for the Alesco CDO contracts, depending on the amount of defaults and prepayments, according to the statement.
Alesco CDOs
ATP Management LLC, which is affiliated with some of New York-based Fortress’s investment funds, will pay Cohen & Co. as much as $23 million for services related to the deals, the firm said.
The Alesco CDOs generated 40 percent, or $2.5 million, of the company’s asset management revenue in its fiscal second quarter, according to the statement yesterday. CDOs package assets into new securities with varying risks.
A Cohen & Co. unit was “one of a number of market participants to receive a subpoena from the SEC seeking documents and information in an investigation titled In the Matter of Certain CDO Structuring Sales and Marketing Practices” in June 2009, the company said in a March filing with the Securities and Exchange Commission.
“After our dispute last year, Cohen implemented a new system that proactively contacted investors about developments and we considered it to be very investor-friendly,” John Scannell, New York-based Hildene’s chief operating officer, said today in an e-mail.
Losses Sparked
Trust preferred securities have a combination of debt and equity characteristics. They are issued by trusts formed by companies raising cash. Banks count the notes as capital while considering the interest payments tax-deductible.
A total of 31.1 percent of bank TruPS in CDOs were either deferring payments or in default as of June, as U.S. lenders grapple with loan losses sparked by the deepest recession since the 1930s, New York-based Fitch Ratings Inc. said in a July 20 report.
A different Fortress affiliate, TP Management, assumed oversight of Taberna CDOs earlier this year from a unit of Philadelphia-based RAIT Financial Trust, whose chairman is Daniel’s mother Betsy Cohen and where Daniel served as CEO from December 2006 through February 2009. The Taberna CDOs contain TruPS sold by real-estate companies, real-estate investment trusts and lenders.
Chris Ricciardi
Chris Ricciardi, Cohen & Co.’s president, joined the firm in 2006 after leading Merrill Lynch & Co.’s top-ranked CDO underwriting business, and heads its broker-dealer division. He said on a May 7 conference call that it recently began originating and distributing certificates of deposits, and had hired a team to broker equity derivatives between dealers. New businesses might include municipal and emerging-market debt, he said.
TCW Asset Management Co., based in Los Angeles, was the largest CDO manager before the market collapsed, overseeing $41.3 billion of the funds, S&P said. CDO managers are often used to select the initial collateral for the vehicles, sometimes trading and replacing the assets over time.
Hildene said in an October letter to the trustee of four CDOs managed by Cohen & Co. that the CDO manager’s intent in seeking to change certain terms of its contract may have been to win business for its securities arm that helps banks retire TruPS at a discount.
Credit Facility
Cohen & Co. also yesterday announced a new credit facility for its Dekania Investors LLC unit and a tender in which it’s offering to pay 80 cents on the dollar for $9.5 million of subordinated notes issued by Cohen Brothers LLC.
Cohen & Co. rose 18 cents, or 3.7 percent, to $4.99 in NYSE Amex trading as of 4:15 p.m. in New York. Shares have climbed 1.8 percent this year. The stock is down from $117.50 in January 2007 when the company was named Alesco Financial Inc., a real estate investment trust managed by a Cohen & Co. unit, which merged with Alesco Financial in December. Fortress declined 19 cents, or 5.1 percent, to $3.52 in New York Stock Exchange composite trading.
Alesco Financial was created in 2006 when Sunset Financial Resources Inc. bought a Cohen-managed real estate investment trust called Alesco that invested in assets including the lowest-ranking portions of Cohen-managed CDOs.
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net
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