Marsico restructures buyout debt

Executives at Marsico Capital Management LLC, Denver, have restructured $2.7 billion in debt as they fight for their company's survival three years after a highly leveraged deal to buy back the firm from Bank of America.

The restructuring, which closed Nov. 10, comes as assets under management have plunged at the growth equity shop.

Assets fell to $43.4 billion on Aug. 31, more than 60% off the peak of $110 billion on Oct. 31, 2007. Assets under management stood at $50.5 billion as of Nov. 10, a drop of more than 54% from the high.

The depleted AUM meant the fees generated wouldn't support the debt load, said analysts at rating services Standard & Poor's and Moody's Investors Service.

In interviews, Marsico executives said they have now put the company on a more solid footing with the financial reorganization.

They said the restructuring was necessary because of huge stock losses that mirrored equity market declines in 2008. The company also was affected by outflows from clients.

“We needed a debt restructuring to ensure we had the cash flow needed to maintain our service level to our customers,” said Marsico President Christopher Marsico.

But both S&P and Moody's consider the restructuring a default and have negative outlooks for the company. They have downgraded Marsico Capital's holding company, formerly known as Marsico Parent Co. LLC, to near the bottom of their rating scale.

Ultimately, the restructuring gives the firm more breathing room to show it can prosper, said Deven Kapoor, an analyst with Moody's in New York.

“They have gained some time with this restructuring to show they can outperform and increase the AUM,” said Mr. Kapoor.

On the other hand, he said, “If things get worse for equities or for their funds, it could get very challenging for them.”

The struggles at Marsico Capital Management mirror those at other equity boutiques attempting to weather the move out of equities by institutional investors following the financial crisis.

Marsico, though, has a double burden because CEO and Chief Investment Officer Thomas F. Marsico borrowed $2.5 billion of the $2.65 billion he paid to buy back the investment firm from Bank of America in 2007.

Thomas Marsico contributed $100 million in cash for a two-thirds equity stake; 30 associates at the firm contributed another $50 million for the remaining third.

The debt had increased to $2.7 billion this year because interest payments were added as part of the original agreement.

The firm's troubled recent history is a switch for Thomas Marsico. He had started Marsico Capital in 1997, after generating results for almost a decade that exceeded 20% a year as portfolio manager at the Twenty Fund, Janus Capital Group Inc's premier fund.

His star status was so high that he had Bank of America knocking on his door to buy an initial stake in the company, just two years after he went into business for himself.

BofA brought out Mr. Marsico in 2001, but he remained at the helm of the company. As Marsico Capital prospered, Mr. Marsico decided he wanted to buy back his booming business.

Thomas Marsico declined to be interviewed for the article. Christopher Marsico, his brother, said Marsico Capital never laid off an employee and did not cut budgets despite the decline in AUM. He said company officials remain steadfast in their commitment to maintaining a strong investment process as Marsico moves forward and works to build back AUM.

“Our No. 1 principle is that our clients come first,” he said.

The restructuring plan eradicates $1.1 billion of the company debt: Holders of junior mezzanine debt agreed to a 19% stake in the company in exchange for extinguishing their debt.

The success of the rest of the plan is dependent on investors regaining confidence in equity markets and increasing inflows at Marsico. But Neil L. Gloude, Marsico's executive vice president and chief financial officer, said the restructuring gives the company breathing room if necessary.

He said the plan drops the 10.6% interest rate to a sliding schedule for investors who purchased $600 million in senior subordinated notes. The scale can go as high as 15% but as low as zero, if cash flows aren't adequate to meet the firm's operating needs.

In exchange to agreeing to the new terms, the investors will receive 30% of the company's stock; previously, they had none.

Meanwhile, terms of $1 billion in senior bank debt due December 2014 remain the same, but with an important new covenant. AUM is allowed to drop as low as $30 billion before investors can step in and take control of the company from Thomas Marsico and 30 associates, who now hold 51% of the stock.

Previously, it had been set at $42 billion, an amount the company came dangerously close to breaching in mid-2010.

In the S&P report dated Oct. 11, S&P analysts raised questions about whether Marsico Capital will be able to survive, even with the restructuring.

“This negative outlook incorporates our belief that the fundamental prospects for the company's asset management business will not materially improve in the near team,“ the report stated.

“This is because equities have fallen out of favor with investors and net asset flows at Marsico remain negative. Even under our most optimistic scenario, we do not foresee Marsico generating enough cash flow from operations to repay the $1.0 billion senior-secured term loan in full when it comes due in December 2014.”

Moody's officials also say they have a negative outlook on Marsico and will be reviewing their rating following the close of the debt exchange.

Moody's analysts, however, noted in their report that Marsico has “ample time to return AUM to adequate levels given that the majority of its debt is not due until December 2014, with the remainder maturing in 2020.”

Marsico's Mr. Gloude said institutional investors owning most of the debt approved the restructuring plan almost unanimously. He said Wall Street investors also have been reacting positively to the bond restructuring. He said Marsico's debt, which was trading at 30 cents on the dollar on Oct. 8, is now trading at 50 cents to 60 cents on the dollar in private placement exchanges.

Kenneth M. Johnson, Marsico's executive vice president and director of marketing and client services, acknowledges the company's success will depend not only on performance, but also on convincing potential clients that the equities market is a safe place to invest.

Tom Kerwin, Marsico's executive vice president and general counsel, said completion of the restructuring should help ease concerns of investment consultants that recommend money managers.

One consultant, who requested anonymity, said he has put Marsico back on the list of money management firms he can recommend given the restructuring.

Some clients haven't been willing to wait.

The firm lost an almost $1 billion mandate as a subadviser in July for insurance company USAA's Aggressive Growth Fund, because of what the insurer called “poor performance.”

Marsico's subadvisory business is a crucial revenue driver for the company, because it accounts for two-thirds of the company's business.

ING Group dropped Marsico as subadviser for the $465 million Marsico International Opportunities fund earlier this year. The fund's name will change when T. Rowe Price Associates Inc. takes over in January.

Mr. Johnson said Marsico has lost six major clients in the past eight months, accounting for about $5 billion in net outflows. He wouldn't name them.

He said the company had seen some bright spots from overseas investors, including sovereign wealth funds, accounting for about $500 million in inflows. He said he could not disclose the new clients.

Mr. Kerwin said the company plans to add a sixth strategy in the next few months, an emerging markets fund, hoping to capitalize on interest in those markets. Only one of Marsico's five equity strategies is now internationally focused and accounts for just 5% of AUM, company officials say.

Donald Putnam, managing director of investment bank Grail Partners LLC, San Francisco, said as an operating business, Marsico has had a tough time in the past several years.

“I think the rating downgrades are legitimate,” he said.

Mr. Putnam said what the firm has going for it is a strong track record overall, despite recent difficulties. “This is a superb money manager, and they can rebound very swiftly if America is truly in recovery,” he said. n