How long can Och-Ziff Capital Management remain a publicly traded company?
The question is being raised after the once high-flying multistrategy hedge fund firm headed by Daniel Och suffered yet another body blow on Monday, when S&P Global Ratings lowered its credit rating from BB+ to BB. This moved the firm’s debt rating to an even lower level of junk status. S&P also said the outlook for the rating is negative.
“The downgrade reflects the expense guidance Och-Ziff recently provided on compensation and non-compensation costs,” the rating agency stated in the report.
“We now believe that the company’s fixed costs are a bigger proportion of its expense base than we initially projected, which results in lower EBITDA at a time when the company’s revenues are under stress due to lower assets under management and a lower management fee rate,” it adds.
Shares of Och-Ziff, one of the only publicly traded hedge fund firms, plunged at the open, dropping more than 5 percent at one time after dropping nearly 10 percent over the previous three trading days. However, midway through Tuesday’s trading session, the stock abruptly reversed course and closed up 3.5 percent, at $2.38 per share. The stock is still down about 85 percent from its all-time high of nearly $16, hit in January 2014.
Och-Ziff has suffered $13 billion in redemptions over the past 13 months — including nearly $5 billion in the first month of this year — in the wake of its settlement of charges that it bribed government officials in several African countries.
Last September, Och-Ziff, including its subsidiary OZ Africa Management, agreed to pay $413 million to settle the charges. In addition, CEO Daniel Och agreed to pay nearly $2.2 million to on charges that he and CFO Joel Frank caused violations of the Foreign Corrupt Practices Act (FCPA). Frank also agreed to settle the charges. Och-Ziff also said it expected to enter into a deferred prosecution agreement with the Justice Department as part of a parallel criminal investigation.
In January the Securities and Exchange Commission filed bribery charges against two additional former executives it called “the driving forces behind a far-reaching bribery scheme.” It alleged that Michael Cohen, formerly head of the European office, and Vanja Baros, an investment executive on Africa-related deals, “caused tens of millions of dollars in bribes to be paid to high-level government officials in Africa.” The SEC also alleged that they “induced” the Libyan Investment Authority’s sovereign wealth fund to invest in Och-Ziff funds.
Assets and fees are very important to a publicly traded firm like Och-Ziff. They drive revenues and therefore profits, which investors then place a multiple on to determine what they are willing to pay for the stock. Fees also drive how much Och-Ziff pays out in dividends, which has been another big component of gains for shareholders.
Meanwhile, a week or so ago, Bloomberg reported that the firm has recently suffered the loss of several key people, including Drew Gillanders, deemed to be a top European equity analyst; James Brown, head of global investor relations; and Paula Drake, chief compliance officer.
Investors are also apparently unhappy with the February news that Och-Ziff gave James Levin, the head of global credit, a huge package of units that vest over 10 years, which some reports valued at as much as $280 million. In 2013 he was given about $119 million in stock awards. But those shares have since crumbled in value.
Och-Ziff’s 2016 proxy has not yet been filed. Last year it became available on March 28. The firm’s flagship fund, OZ Master Fund, had gained 3.12 percent this year through February, while OZ Asia Master Fund returned 4.93 percent and OZ Europe Master Fund rose 1.75 percent. This was better than most other large multistrategy funds. However, last year the flagship OZ Master Fund gained just 3.82 percent.
“We could revise the outlook to stable in the next 12 months if the company reverts to positive net flows for several consecutive quarters while stabilizing investment performance,” S&P asserted in its report.
Before that happens, however, it would make a lot of sense for Och and his key executives to do a management buyout and simply take the firm private.