Och-Ziff Doubles Reserve to $414 Million to Settle Probeby
Company in talks with partners to commit up to $500 million
The shares rally 12% on news, the most since February
Och-Ziff Capital Management Group LLC, the hedge fund firm run by Daniel Och, more than doubled the money it’s setting aside for a settlement with U.S. authorities and is in talks to raise capital from partners to help cover the cost. Shares rallied.
The firm reserved $214.3 million for the probe in the second quarter, bringing the total for the anticipated settlement to $414.3 million, the company said Tuesday in a statement. Chief Financial Officer Joel Frank said on a conference call today that settlement talks with the government are in advanced stages.
The company founded by Och, 55, has been in the cross hairs of investigators for at least five years over whether it knowingly paid bribes to get an investment from Libya’s sovereign wealth fund and to participate in deals elsewhere in Africa. The legal woes, coupled with a decline in assets and mediocre performance in the firm’s main multistrategy hedge fund, have taken a toll on the company’s stock, which has fallen about 71 percent in the past year through yesterday. The shares gained 12 percent at 9:43 a.m. in New York, the most since February.
“While the settlement is still under discussion, we don’t expect it to be higher than the amount of the reserve we’ve taken,” Frank said. “Pinpointing the exact timing of the settlement remains difficult, but we are hopeful that we are able to resolve this matter in the near term.”
Och-Ziff is in talks with some of its partners to commit up to $500 million through the purchase of perpetual preferred units to help pay for the settlement, as well as for general corporate purposes, Frank said. The company has already drawn down $120 million from its revolving credit line.
“The capital commitment being discussed would strengthen our balance sheet,” said Frank. “It’s all about flexibility on the balance sheet until we see a resolution of this thing,” he added. “We’ll determine, like we always do, if we have excess cash what the best thing is to do with that excess cash for our shareholders.”
The company also appointed former Attorney General William Barr to its board.
In its earnings report today, Och-Ziff posted a loss of $184.3 million in distributable earnings, or 35 cents per share, including the reserve. That compares with a profit of $95.2 million, or 18 cents, a year earlier. Excluding the reserve charge, earnings of 6 cents a share missed the 7 cent average of nine analysts in a Bloomberg survey.
Revenue slowed as assets and fees dropped. Clients pulled a net $3.1 billion from the firm’s funds in the 12 months through June, and an additional $3 billion since then through Aug. 1, bringing assets down to $39.1 billion. That compares to $44.6 billion at the start of the year.
The OZ Master Fund is down 1.7 percent through July 31, the Asia fund lost 4.3 percent and a European fund declined about 1 percent, the company said. The S&P 500 Index returned 7.7 percent over the period.
The company is making changes to its U.S. long-short equities strategy as it’s weighed on this year’s returns, Och said on the conference call. Joseph Samuels, Och-Ziff’s head of U.S. equities trading, last week left the hedge-fund firm after 13 years, Bloomberg reported July 27.
The investigation has weighed on assets, causing many investors “to remain on the sidelines and current LPs to reduce allocations,” Amy DeBone, an analyst at Compass Point Research & Trading, wrote in a July 6 report. Once the investigation is resolved, capital inflows to the hedge fund firm will improve, she wrote.
The Justice Department is pushing for a guilty plea to criminal charges of bribery while securities regulators are seeking civil sanctions of as much as $400 million from Och-Ziff, the Wall Street Journal reported in April, citing people familiar with the matter.
Och-Ziff said in May that it had entered into settlement talks with authorities, hoped for a conclusion to the investigation by the middle of 2016, and set aside $200 million for a potential legal settlement -- leading to an earnings loss of $142.5 million in the first-quarter.
S&P Global Ratings cut the company’s credit rating to BBB last month, citing concerns that the ultimate settlement may exceed what’s been reserved and that Och-Ziff’s debt load could increase as a result.