Variable Interest Entities

6 Months Ended

Apr. 30, 2020

Variable Interest Entities [Abstract]

Variable Interest Entities

4.  Variable Interest Entities (VIEs)

Investments in VIEs that are consolidated

In the normal course of business, the Company maintains investments in sponsored entities that are considered VIEs to support their launch and marketing. The Company consolidates these sponsored entities if it is the primary beneficiary of the VIE.

Consolidated sponsored funds

The Company invests in sponsored investment companies that meet the definition of a VIE. Underlying investments held by consolidated sponsored funds consist of debt and equity securities and are included in the reported amount of investments on the Company’s Consolidated Balance Sheets at April 30, 2020 and October 31, 2019. Net investment income or (loss) related to consolidated sponsored funds was included in gains (losses) and other investment income, net, in the Company’s Consolidated Statements of Income for all periods presented. The impact of consolidated sponsored funds’ net income or (loss) on net income attributable to Eaton Vance Corp. shareholders was reduced by amounts attributable to non-controlling interest holders, which are recorded in net (income) loss attributable to non-controlling and other beneficial interests in the Company’s Consolidated Statements of Income for all periods presented. The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is limited to the amount of the Company’s investment in the sponsored fund and any uncollected management and performance fees. The Company is not obligated to provide financial support to sponsored funds. Only the assets of a sponsored fund are available to settle its obligations. Other beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

The Company consolidated 18 sponsored funds as of April 30, 2020 and 19 sponsored funds as of October 31, 2019. The following table sets forth the balances related to these funds as well as the Company’s net interest in these funds:

(in thousands)		April 30,		October 31,
		2020		2019
Investments	$	374,689	$	514,072
Other assets		16,117		16,846
Other liabilities		(14,929)		(35,488)
Redeemable non-controlling interests		(190,510)		(260,681)
Net interest in consolidated sponsored funds	$	185,367	$	234,749

Consolidated CLO entities

As of April 30, 2020, the Company deemed itself to be the primary beneficiary of three non-recourse securitized CLO entities, namely, Eaton Vance CLO 2019-1 (CLO 2019-1), Eaton Vance CLO 2013-1 (CLO 2013-1) and Eaton Vance CLO 2014-1R (CLO 2014-1R). As of October 31, 2019, the Company deemed itself to be the primary beneficiary of four non-recourse securitized CLO entities, namely, CLO 2019-1, CLO 2013-1, Eaton Vance CLO 2018-1 (CLO 2018-1) and CLO 2014-1R.

The assets of consolidated CLO entities are held solely as collateral to satisfy the obligations of each entity. The Company has no right to receive benefits from, nor does the Company bear the risks associated with, the assets held by these CLO entities beyond the Company’s investment in these entities. In the event of default, recourse to the Company is limited to its investment in these entities. The Company has not

provided any financial or other support to these entities that it was not previously contractually required to provide, and there are neither explicit arrangements nor does the Company hold implicit variable interests that could require the Company to provide any ongoing financial support to these entities. Other beneficial interest holders of consolidated CLO entities do not have any recourse to the Company’s general credit. The Company reports the financial information of consolidated securitized CLO entities on a one-month lag based upon the availability of financial information.

Eaton Vance CLO 2019-1

CLO 2019-1 was securitized on May 15, 2019. As of April 30, 2020, the Company continues to hold 100 percent of the subordinated notes that were issued by CLO 2019-1 at closing and is still serving as the collateral manager of the entity. The Company deemed itself to be the primary beneficiary of CLO 2019-1 upon acquiring 100 percent of the subordinated interests of the entity on May 15, 2019 and began consolidating the entity as of that date.

Eaton Vance CLO 2013-1

The Company deemed itself to be the primary beneficiary of CLO 2013-1 upon acquiring 100 percent of the subordinated notes of the entity on May 1, 2019 and began consolidating the entity as of that date. As of April 30, 2020, the Company continues to hold 100 percent of the subordinated notes that were acquired on May 1, 2019 and is still serving as the collateral manager of the entity.

Eaton Vance CLO 2018-1

CLO 2018-1 was securitized on October 24, 2018. The Company deemed itself to be the primary beneficiary of CLO 2018-1 upon acquiring 93 percent of the subordinated interests of the entity on October 24, 2018 and began consolidating the entity as of that date. On January 15, 2020, the Company sold its entire interest in the subordinated notes of CLO 2018-1 to an unrelated third party for $27.3 million and recognized a loss of $7.2 million upon the sale included within gains and other investment income, net of consolidated CLO entities in the Company’s Consolidated Statement of Income for the six months ended April 30, 2020. Although the Company continues to serve as collateral manager of the entity, the Company concluded that it no longer had an obligation to absorb the losses of, or the rights to receive benefits from, CLO 2018-1 that could potentially be significant to the entity. As a result, the Company concluded that it was no longer the primary beneficiary of CLO 2018-1 upon the sale of the subordinated interests of the entity on January 15, 2020 and deconsolidated the entity as of that date.

Eaton Vance CLO 2014-1R

CLO 2014-1R was securitized on August 23, 2018. As of April 30, 2020, the Company continues to hold 100 percent of the subordinated notes that were issued by CLO 2014-1R at closing and is still serving as the collateral manager of the entity. The Company deemed itself to be the primary beneficiary of CLO 2014-1R upon acquiring 100 percent of the subordinated interests of the entity on August 23, 2018 and began consolidating CLO 2014-1R as of that date.

The Company elected to apply the measurement alternative to ASC 820 for collateralized financing entities upon the initial consolidation and for the subsequent measurement of the securitized CLO entities consolidated by the Company (collectively, the consolidated securitized CLO entities). The Company determined that the fair value of the financial assets of these entities is more observable than the fair value of the financial liabilities. Through the application of the measurement alternative, the fair value of the financial liabilities of these entities is measured as the difference between the fair value of the financial assets and the fair value of the Company’s beneficial interests in these entities, which include the subordinated interests held by the Company and any accrued management fees due to the Company. The

fair value of the subordinated notes held by the Company is determined primarily based on an income approach, which projects the cash flows of the CLO assets using projected default, prepayment, recovery and discount rates, as well as observable assumptions about market yields, callability and other market factors. An appropriate discount rate is then applied to determine the discounted cash flow valuation of the subordinated notes. Aggregate disclosures for the securitized CLO entities consolidated by the Company as of April 30, 2020 and October 31, 2019 are provided below.

The following table presents the balances attributable to the consolidated securitized CLO entities included on the Company’s Consolidated Balance Sheets:

			April 30,		October 31,
(in thousands)			2020		2019
Assets of consolidated CLO entities:
	Cash	$	42,081	$	48,704
	Bank loans and other investments		1,135,609		1,704,270
	Receivable for pending bank loan sales		2,341		24,193
	Other assets		3,214		3,846
Liabilities of consolidated CLO entities:
	Senior and subordinated note obligations		1,088,574		1,617,095
	Payable for pending bank loan purchases		28,559		33,985
	Other liabilities		10,895		17,137
Total beneficial interests		$	55,217	$	112,796

Although the Company’s beneficial interests in the consolidated securitized CLO entities are eliminated upon consolidation, the application of the measurement alternative results in the Company’s total beneficial interests in these entities of $55.2 million and $112.8 million at April 30, 2020 and October 31, 2019, respectively, being equal to the net amount of the consolidated CLO entities’ assets and liabilities included on the Company’s Consolidated Balance Sheets. As noted above, the consolidated securitized CLO entities are reported on a one-month lag. The Company evaluated the disruption to the economy and financial markets attributable to the global pandemic during the month of April 2020 and the impact on the valuation of its beneficial interests in the consolidated securitized CLO entities. There are no material changes in the value of the Company’s beneficial interests in the consolidated securitized CLO entities as of April 30, 2020.

The collateral assets held by consolidated CLOs primarily consists of senior secured bank loan investments from a variety of industries. Bank loan investments mature at various dates between 2020 and 2028 and pay interest at LIBOR plus a spread of up to 11.0 percent. Approximately 0.6 percent of the collateral assets held by consolidated CLO entities were in default as of April 30, 2020. Additional disclosure of the fair values of assets and liabilities of consolidated CLO entities that are measured at fair value on a recurring basis is included in Note 6.

The consolidated securitized CLO entities, including the portioned owned by the Company, held notes payable with a total par value of $1.3 billion at April 30, 2020, consisting of senior secured floating rate notes payable with a par value of $1.2 billion and subordinated notes with a par value of $117.4 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.7 percent to 8.5 percent. The principal amounts outstanding of these note obligations mature on dates ranging from January 2028 to July 2030.

The following table presents the balances attributable to consolidated securitized CLO entities included in the Company’s Consolidated Statements of Income:

			Consolidated Securitized CLO Entities
			Three Months Ended				Six Months Ended
			April 30,				April 30,
(in thousands)			2020		2019		2020		2019
Other income (expense) of consolidated
	CLO entities:
	Gains (losses) and other investment
	income, net	$	(4,841)	$	17,355	$	10,722	$	21,933
	Interest and other expense		(11,647)		(9,680)		(29,043)		(17,925)
Net gain (loss) attributable to the Company		$	(16,488)	$	7,675	$	(18,321)	$	4,008

The Company recognized net income of $3.3 million and $4.1 million from a warehouse CLO entity that the Company consolidated during the three and six months ended April 30, 2019, respectively.

As summarized in the table below, the application of the measurement alternative results in the Company's earnings from the consolidated securitized CLO entities subsequent to initial consolidation, as shown above, to be equivalent to the Company's own economic interests in these entities:

			Consolidated Securitized CLO Entities:
			Three Months Ended				Six Months Ended
			April 30,				April 30,
(in thousands)			2020		2019		2020		2019
Economic interests in consolidated
securitized CLO entities:
	Distributions received and gains (losses)
	on senior and subordinated interests
	held by the Company	$	(17,907)	$	6,445	$	(21,667)	$	1,871
	Management fees		1,419		1,230		3,346		2,137
Total economic interests		$	(16,488)	$	7,675	$	(18,321)	$	4,008

Investments in VIEs that are not consolidated

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as equity securities when it is not considered the primary beneficiary of these VIEs. The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 3 and Note 6.

Non-consolidated CLO entities

The Company is not deemed the primary beneficiary of certain CLO entities in which it holds variable interests. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that, although it has variable interests in each such CLO by virtue of its beneficial ownership

interests in the CLO entities, these interests neither individually nor in the aggregate represent an obligation to absorb losses of, or a right to receive benefits from, any such entity that could potentially be significant to that entity.

The Company’s maximum exposure to loss with respect to these non-consolidated CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of April 30, 2020. The Company held investments in these entities totaling $1.4 million on both April 30, 2020 and October 31, 2019. Collateral management fees receivable for these entities totaled $0.1 million on both April 30, 2020 and October 31, 2019. Other investors in these CLO entities have no recourse against the Company for any losses sustained. The Company did not provide any financial or other support to these entities that it was not previously contractually required to provide in any of the fiscal periods presented. Income from these entities is recorded as a component of gains (losses) and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields. Additional information regarding the Company’s investment in non-consolidated CLO entities, as well as the combined assets under management in the pools of non-consolidated CLO entities, is included in Note 3.

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $26.9 billion and $26.3 billion on April 30, 2020 and October 31, 2019, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership therein, which in each case is insignificant relative to the total ownership of the fund, and any investment advisory fees earned but uncollected. The Company’s maximum exposure to loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivable from, these entities as of April 30, 2020. The Company held investments in these entities totaling $0.5 million on both April 30, 2020 and October 31, 2019 and investment advisory fees receivable totaling $1.3 million on both April 30, 2020 and October 31, 2019. The Company did not provide any financial or other support to these entities that it was not contractually required to provide in any of the periods presented. The Company does not consolidate these VIEs because it does not have the obligation to absorb losses of, or the right to receive benefits from, these VIEs that could potentially be significant to these VIEs.

The Company’s investments in privately offered equity funds are carried at fair value and included in non-consolidated sponsored funds and other, which are disclosed as a component of investments in Note 3.

The Company also holds a variable interest in, but is not deemed to be the primary beneficiary of, a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s variable interest in this entity consists of the Company’s direct ownership in the private equity partnership, equal to $3.3 million and $3.5 million on April 30, 2020 and October 31, 2019, respectively. The Company did not provide any financial or other support to this entity. The Company’s risk of loss with respect to the private equity partnership is limited to the carrying value of its investment in the entity as of April 30, 2020. The Company does not consolidate this VIE because the Company does not hold the power to direct the activities that most significantly affect the VIE.

The Company’s investment in the private equity partnership is accounted for as an equity method investment and disclosures related to this entity are included in Note 3 under the heading Investments in equity method investees.