Variable Interest Entities

6 Months Ended

Apr. 30, 2019

Variable Interest Entities [Abstract]

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 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, 2019 and October 31, 2018. Net investment income or (loss) related to consolidated sponsored funds was included in gains and other investment income, net, on 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 attributable to non-controlling and other beneficial interests on 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. Beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

The following table sets forth the balances related to consolidated sponsored funds as well as the Company’s net interest in these funds:

(in thousands)		April 30,2019		October 31,2018
Investments	$	525,162	$	540,582
Other assets		9,684		15,471
Other liabilities		(37,120)		(57,286)
Redeemable non-controlling interests		(252,731)		(244,970)
Net interest in consolidated sponsored funds	$	244,995	$	253,797

Consolidated CLO entities

As of April 30, 2019, the Company deemed itself to be the primary beneficiary of two non-recourse securitized CLO entities, namely, Eaton Vance CLO 2018-1 (CLO 2018-1) and Eaton Vance CLO 2014-1R (CLO 2014-1R), and one non-recourse warehouse CLO entity, namely, Eaton Vance CLO 2019-1 (CLO 2019-1). As of October 31, 2018, the Company deemed itself to be the primary beneficiary of three non-recourse securitized CLO entities, namely, CLO 2018-1, CLO 2014-1R and Eaton Vance CLO 2014-1 (CLO 2014-1). In the first quarter of fiscal 2019, the Company received a final distribution from CLO 2014-1 of $1.9 million related to the residual assets held by the entity as of October 31, 2018.

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.

Eaton Vance CLO 2019-1

The Company established CLO 2019-1, a warehouse phase CLO entity, on January 3, 2019. The Company contributed $10.0 million in capital at the inception of the warehouse entity and concurrently entered into a credit facility agreement with a third-party lender to provide CLO 2019-1 with a $160.0 million non-recourse revolving line of credit. The credit facility agreement requires the Company to maintain certain levels of contributed capital relative to the total outstanding borrowings under the line of credit. During the six months ended April 30, 2019, the Company made additional capital contributions of $30.0 million in order to increase the level of funding available for borrowing under the line of credit. CLO 2019-1 entered the securitization phase towards the end of the second quarter, but did not close prior to April 30, 2019.

While in the warehousing phase, the Company, acting as collateral manager and subject to the approval of the third-party lender, will use its capital contributions along with the proceeds from the revolving line of credit to accumulate a portfolio of commercial bank loan investments in open market purchases in an amount sufficient for eventual securitization. The line of credit is secured by the commercial bank loan investments held by the warehouse and initially bears interest at a rate of daily LIBOR plus 1.10 percent per annum, with such interest rate increasing to daily LIBOR plus 2.0 percent per annum in January 2020. The Company does not earn any collateral management fees from CLO 2019-1 during the warehousing phase and will continue to be the collateral manager of the CLO entity during the securitization phase.

As collateral manager, the Company has the unilateral ability to liquidate the CLO 2019-1 warehouse without cause, a right that, by definition, provides the Company with the power to direct the activities that most significantly affect the economic performance of the entity. The Company’s investment in the warehouse serves as first-loss protection to the third-party lender and provides the Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deems itself to be the primary beneficiary of CLO 2019-1 as it has both power and economics and began consolidating the entity from establishment of the warehouse on January 3, 2019.

Upon initial consolidation, the Company irrevocably elected to subsequently measure the bank loan investments held by CLO 2019-1 at fair value using the fair value option. The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon initial consolidation of the CLO 2019-1 warehouse as these liabilities are temporary in nature. Refer to Note 6 for additional disclosure regarding the fair value of the assets and liabilities of consolidated CLO entities.

Eaton Vance CLO 2018-1

CLO 2018-1 was securitized on October 24, 2018. As of April 30, 2019, the Company continues to hold approximately 93 percent of the subordinated notes that were issued by CLO 2018-1 at closing and is still serving as the collateral manager of the entity. The Company deemed itself to be the primary beneficiary of CLO 2018-1 upon acquiring 93 percent of the subordinated interests of the entity on October 24, 2018 and began consolidating CLO 2018-1 as of that date.

Eaton Vance CLO 2014-1R

CLO 2014-1R was securitized on August 23, 2018. As of April 30, 2019, 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 are 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, 2019 and October 31, 2018 are provided below.

The following table presents the balances attributable to the consolidated securitized CLO entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated Balance Sheets:

			April 30,				October 31,
			2019				2018
(in thousands)			Consolidated Securitized CLO Entities		Consolidated Warehouse CLO Entity		Consolidated Securitized CLO Entities
Assets of consolidated CLO entities:
	Cash	$	59,762	$	1,932	$	216,598
	Bank loans and other investments		912,308		324,821		874,304
	Receivable for pending bank loan sales		19,009		3,516		2,535
	Other assets		3,311		441		1,929
Liabilities of consolidated CLO entities:
	Senior and subordinated note obligations		856,972		-		873,008
	Line of credit		-		151,838		-
	Payable for pending bank loan purchases		59,674		133,570		152,152
	Other liabilities		12,752		1,232		2,033
Total beneficial interests		$	64,992	$	44,070	$	68,173

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 $65.0 million and $68.2 million at April 30, 2019 and October 31, 2018, respectively, being equal to the net amount of the consolidated CLO entities’ assets and liabilities included on the Company’s Consolidated Balance Sheets, as shown above.

As of April 30, 2019 and October 31, 2018, there were no bank loan investments in default and no unpaid principal balances of such loans that were 90 days or more past due or in non-accrual status. 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 following tables present the balances attributable to the consolidated securitized CLO entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated Statements of Income:

			Three Months Ended
			April 30, 2019
(in thousands)			Consolidated Securitized CLO Entities		Consolidated Warehouse CLO Entity		Total
Other income (expense) of consolidated CLO entities:
	Gains and other investment income, net	$	17,355	$	4,439	$	21,794
	Interest and other expense		(9,680)		(1,141)		(10,821)
Net gain attributable to the Company		$	7,675	$	3,298	$	10,973

			Six Months Ended
			April 30, 2019
(in thousands)			Consolidated Securitized CLO Entities		Consolidated Warehouse CLO Entity		Total
Other income (expense) of consolidated CLO entities:
	Gains and other investment income, net	$	21,933	$	5,302	$	27,235
	Interest and other expense		(17,925)		(1,232)		(19,157)
Net gain attributable to the Company		$	4,008	$	4,070	$	8,078

The amounts included in the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2018 related entirely to the warehouse CLO entity consolidated by the Company in fiscal 2018.

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:

(in thousands)			Three Months Ended April 30, 2019		Six Months Ended April 30, 2019
Economic interests in Consolidated Securitized
CLO Entities:
	Distributions received and unrealized gains on the
	subordinated interests held by the Company	$	6,445	$	1,871
	Management fees		1,230		2,137
Total economic interests		$	7,675	$	4,008

Subsequent event – CLO 2019-1 securitization

The securitization of CLO 2019-1 closed on May 15, 2019. Upon closing, the proceeds from the issuance of senior and subordinated note obligations were used to purchase the warehouse bank loans, repay the third-party revolving line of credit and return the Company’s total capital contributions of $40 million. The Company acquired 100 percent of the subordinated notes issued by CLO 2019-1 at closing for $28.9 million and will provide collateral management services to this CLO entity in exchange for a collateral management fee. The Company deems itself to be the primary beneficiary of CLO 2019-1 as it has both power and economics and began consolidating the securitized entity upon closing.

Other entity

As of October 31, 2018, the Company held variable interests in, and was deemed to be the primary beneficiary of, a privately offered equity fund that was seeded towards the end of fiscal 2018. The Company’s variable interests consisted of a $10,000 investment in the fund and a promissory note that enabled the fund to borrow up to $25.0 million from the Company. As of October 31, 2018, the Company’s risk of loss with respect to this entity was limited to the Company’s investment in the fund and the outstanding borrowings under the promissory note of $3.7 million. The Company invested an additional $10,000 upon launching of the fund in December 2018, at which time the total outstanding borrowings were repaid to the Company and the promissory note was canceled on January 14, 2019. As of April 30, 2019 the Company’s variable interest in the fund is limited to its $20,000 investment in the fund. The Company is no longer the primary beneficiary of the fund as it no longer has an obligation to absorb losses of, or the right to receive benefits from, the fund that could potentially be significant to the entity.

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 Notes 3 and 6.

Non-consolidated CLO entities

The Company is not deemed the primary beneficiary of several 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 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, 2019. Collateral management fees receivable for these entities totaled $0.1 million on both April 30, 2019 and October 31, 2018. Investors in these CLO entities have no recourse against the Company for any losses sustained in the CLO structures. 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 years 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.

Subsequent event – Eaton Vance CLO 2013-1 (CLO 2013-1)

On May 1, 2019, the Company purchased 100 percent of the subordinated interests of CLO 2013-1 for $25.4 million. As of April 30, 2019, the Company held 20 percent of the Class E senior notes of CLO 2013-1 as an investment in non-consolidated CLO entities with a carrying value of $1.4 million. The Company is the collateral manager of CLO 2013-1. Upon acquiring 100 percent of the subordinated interests of the entity on May 1, 2019, the Company deems itself to be the primary beneficiary of CLO 2013-1 as it has both power and economics. The Company began consolidating CLO 2013-1 as of that date.

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 $24.3 billion and $21.8 billion on April 30, 2019 and October 31, 2018, 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 receivables from, the entities as of April 30, 2019. The Company held investments in these entities totaling $0.5 million and $2.7 million on April 30, 2019 and October 31, 2018, respectively, and investment advisory fees receivable totaling $1.4 million and $1.3 million on April 30, 2019 and October 31, 2018, respectively. 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 $3.5 million at both April 30, 2019 and October 31, 2018. 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, 2019. 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.