Oaktree’s board battle with Ranger nears a conclusion

The direct lending fund manager is buried by $700,000 in legal fees and looming scepticism over its ability to wind down .

Oaktree Capital Management is leading the charge for control of the wind-down of Ranger Direct Lending Fund, a financially-troubled listed investment company it holds a stake in, with a shareholder vote on the matter slated for Tuesday.

In that vote, shareholders will determine whether or not to replace Ranger’s current board with proposals from both Oaktree and Hong Kong-based LIM Advisors.

Oaktree, a global alternative asset manager with $121 billion in assets under management, outlined its reason for Ranger to wind down its portfolio in a letter to shareholders on 24 April 2018. On Tuesday, Ranger released its April update, highlighting huge and mounting legal and credit costs.

Ranger’s troubles stem from its $55 million investment into the lending platform Princeton, according to Ranger’s December 2017 portfolio update. This investment was marked down to $29 million for the period ending 31 December 2017.

“Princeton filed for bankruptcy [in March], which changed the game for Ranger,” said one source familiar with the situation. “The board is finally agreeing with its critics on the need for a wind-down, but who sits on those board seats for the wind-down matters.”

While listed in the UK, Ranger’s investments are US-focused. The fund’s mandate is to invest in speciality finance paper, whole loans with short maturity and high yields. The fund currently holds 13 different origination platforms.

The Princeton bankruptcy exposed the concentration risk it created in extending outstanding funding lines to at least eleven direct lending platforms. Among the most significant Princeton platforms that filed for bankruptcy was Argon Credit, a Chicago online lender that owed Princeton more than $37 million in December 2016. Another large exposure, Bristlecone, developed software to lend directly to consumers and followed suit with a filing in April 2017. All these proceedings are proving to be costly for Ranger.

“The [Ranger] fund spent close to $700,000 in legal costs related to the Princeton case alone. A new board needs to get control over this. They need a litigation strategy and a Chapter 11 strategy,” said another source familiar with the matter. “Without board experience in the minutiae of a wind-down, Princeton’s damage could be much higher, and recoveries could be much lower.”

The net asset value of the UK-listed investment trust took a hit of more than $1.76 million in April due to legal and credit costs, diminishing monthly NAV returns from 1 percent to 0.17 percent. These losses represent a dangerous run-rate for a fund with just $212 million in cumulative net assets. Princeton legal fees accounted for $679,000 in losses, while credit losses and loan loss reserve activity subtracted $318,000 and $764,000 from April’s bottom line, respectively.

Ranger booked a consolidated pre-tax loss of $6.28 million in 2017, as total expenses jumped from $14.74 million to $43.19 million year-over-year, according to the fund’s 2017 annual report. These damages stem from $26.47 million in credit losses and provisions. These same losses totalled $5.06 million in 2016.

Equity shareholders are also concerned with how Ranger intends to pay back a $76.22 million obligation to zero-dividend preference shareholders, representing 96 percent of its total debt and 26 percent of total assets.

As of 1 May, Ranger’s board of directors determined Ares was the preferred candidate to manage the fund, as opposed to winding down Ranger’s portfolio. However, Ranger announced on Monday that Ares had decided not to take up the appointment. “We think the majority of the shareholders weren’t interested in a new manager coming in,” said the source.

The largest shareholders of Ranger are Invesco (26 percent), Oaktree Capital Management (18.5 percent) and LIM Advisors (9.2 percent). There are four members on Ranger’s board of directors. Oaktree is pushing to replace two of them, and LIM Advisors is proposing to replace the other two.

The resolution of Ranger’s portfolio wind-down could set the tone for how the market deals with lending platform failures. Whoever sits on Ranger’s board in the coming weeks and months will face the challenge of negotiating with multiple creditor classes.