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Blue Sky enters receivership after Oaktree loan covenant breach

Future is unclear for the Brisbane-based asset manager as receivers are appointed after ‘significant instability and uncertainty’ at Blue Sky.

Embattled fund manager Blue Sky Alternative Investments has entered receivership and appointed voluntary administrators after it breached a covenant on a loan from Oaktree Capital Management.

Blue Sky announced earlier this month to the Australian Securities Exchange that it had breached the covenant regarding minimum recurring cash EBITDA on a A$47.7 million ($33.0 million; €29.6 million) convertible note facility from Oaktree as at 31 March 2019.

The firm said then that it was in “constant discussions” with Oaktree to vary or restructure the covenants.

Kim Morison, managing director of Blue Sky’s real assets division which is home to its agriculture and water investments, told PDI‘s sister title, Agri Investor, in February that investors should have “no concerns whatsoever” about the Oaktree negotiations and that the firm was in the early stages of preparing a new fundraise.

Oaktree has now enforced its rights under the convertible note facility, with Mark Korda and Jarrod Villani of KordaMentha appointed as receivers and managers of the company on behalf of the California-based firm. Bradley Hellen and Nigel Markey of Pilot Partners have also been appointed as voluntary administrator by Blue Sky.

In a statement, KordaMentha said: “This appointment is necessary if Blue Sky is to maintain its investment teams, key clients and stabilise the operations and capital structure of the business.”

The restructuring specialist added that its appointment followed a period of “significant instability and uncertainty” at Blue Sky, marked by the threat of class-action lawsuits, turnover of senior executives and the departure of some unnamed LPs.

The highest-profile LP to have cut ties with Blue Sky to date is Canadian pension Public Sector Pension Investment Board, which announced in February that it was terminating its strategic agreement with the fund manager covering some A$200 million of assets.

Australian superannuation fund First State Super said in October 2018 that it had paused all future investments with Blue Sky. When contacted by Agri Investor about the current state of its investments, First State Super head of income and real assets Damien Webb said: “We’ve been watching the situation with Blue Sky for some time, so this announcement is not unexpected and does not adversely affect our underlying investment. We are continuing to assess our asset management options.”

Several senior directors left Blue Sky around the turn of the year. Agri Investor revealed in April that two of those directors, Nick Waters and Patrick Hayden, have since founded a rival asset manager called Riparian Capital Partners with the backing of Pinnacle Investment Management.

Uncertain future

On the next steps for Blue Sky, KordaMentha partner Korda said in a statement: “Our objective during the first phase of the receivership is to stabilize the business as a strategic assessment is undertaken.

“The appointment will not affect the day-to-day operating activities of Blue Sky and its investment management business subsidiaries. Existing management and key contacts for relevant stakeholders, employees and unitholders will continue to be in place as per normal.

“It will also allow greater flexibility for the restructure of Blue Sky and seek to ensure the future of the business as an alternative asset investment management platform.”

It is unclear at this stage whether the appointment is likely to result in asset sales in the firm’s real asset division. A spokesman for KordaMentha said it was “far too early” to speculate on the outcome of the administration process. A first meeting with creditors must be held within a week of the administrator’s appointment and a second meeting within a month.

Blue Sky did not respond to a request for comment.

The appointments do not cover Blue Sky’s ASX-listed Alternative Access Fund or other related entities.

Blue Sky had A$2.8 billion of fee-earning assets under management and A$46.9 million of cash at 31 March, 2019.

The Brisbane-headquartered asset manager’s troubles date back to March 2018 when it was the subject of a scathing report published by US-based short-seller Glaucus that accused the firm of “aggressively, and unjustifiably, marking up the value of its unrealized assets” and charging what it called “extortionate fees.” Blue Sky called the claims “fundamentally flawed and misleading” at the time.

The accusations forced managing director Robert Shand to step down. The firm appointed former Hastings Funds Management chief executive Andrew Day as its chairman in November 2018 before following that up with an overhaul of its board. Blue Sky appointed Joel Cann as its new permanent CEO in April this year.

The firm’s share price fell from a value of A$10.40 prior to the publication of the Glaucus report to just A$0.18 before being suspended from official quotation today.