Och-Ziff legal stockpile drags Q1 earnings

Settlement talks with federal government weigh on performance for the hedge fund firm, which is eyeing expansion into European CLOs. 

Och-Ziff Capital Management reported a $143 million loss for the first quarter of 2016 on its earnings call Tuesday (3 May), saying that it had set aside $200 million in anticipation of the outcome of settlement talks with the federal government. The negotiations relate to the investigation of whether the company knowingly paid bribes to secure investments from Libya's sovereign wealth fund.

Chief financial officer Joel Frank said that the ultimate settlement would likely exceed the reserve and had already necessitated a $120 million draw on its revolving credit facility and a retention of the company's distributable earnings for the quarter. Frank said that while the firm is hopeful the ultimate settlement would be reached by the middle of 2016, there is a possibility that the matter could drag on further.

“We understand that reaching a settlement is as important to you as it is to us and we're doing everything we can to get closer as expeditiously as we can and in the best way possible for the business,” said managing director and head of public markets investor relations Tina Madden.

Absent the settlement reserve, the company said that its distributable earnings for the first three months of 2016 were $57 million, or $0.11 per share.

The company reported $42 billion in assets under management as of 1 May, with distributions of $254 million and $751 million in depreciation so far this year. Net outflows of $2.5 billion have been primarily concentrated in Och-Ziff's flagship multistrategy hedge fund, the OZ Master Fund. Chief executive officer Daniel Och attributed the redemptions to both cyclical headwinds for the entire hedge fund industry and idiosyncratic challenges for the company. Hedge fund performance has been challenged lately overall and several large pension funds have been pulling money from the asset class.

Och said that while the challenging market conditions that dragged on performance in the first quarter were of a greater magnitude and duration than had been expected, there had been an improvement more recently.

“In March, credit markets found renewed footing with positive performance from many corporate and securitised credit assets, constructive developments in energy markets and additional monetary stimulus from the ECB that contributed to an improvement in overall credit market sentiment,” he said.

Och also said that the firm had been particularly active with regard to credit in the first quarter, with its global open-end Credit Opportunities Fund generating returns of 1 percent. Distributions of $505 million from the firm's closed-end opportunistic credit funds outpaced $180 million in performance-related depreciation.

Looking forward, Och-Ziff also said that it planned to expand its US CLO business and enter the European market later in the year.

“The basic business is very similar in terms of what we are trying to accomplish,” Och said. “There are some technical differences which we think create advantages for larger firms such as ours that have scale,” he added.