Insurance subsidiary to buy AMG-affiliated alternative credit firm

Complementary cultures, both highly focused on fixed-income investment, helped seal the deal between alternative credit manager BlueMountain Capital Management LLC and Assured Guaranty U.S. Holdings, a subsidiary of Assured Guaranty Ltd., a financial guaranty insurance company.

Both companies had been searching for a strategic partner for some time: New York-based BlueMountain met with a dozen potential buyers earlier this year while Assured Guaranty screened asset managers for three years.

"BlueMountain is highly complementary to our skill set. BlueMountain invests more in corporate bonds and we invest more in (municipal bonds), but our credit cultures are very similar," said Dominic J. Frederico, president and CEO of Assured Guaranty Ltd., Hamilton, Bermuda, in an interview.

Assured Guaranty announced its intention to acquire the outstanding equity of BlueMountain Capital for approximately $160 million in a deal expected to close late this year.

As part of the deal, Assured Guaranty will buy the 54% equity stake in BlueMountain now held by Affiliated Managers Group Inc., West Palm Beach, Fla., for $91 million in cash, an AMG news release said.

Additionally, Assured Guaranty will invest $500 million from its insurance company subsidiaries' portfolios in BlueMountain strategies over the next three years and will provide $60 million in working capital to the firm at closing and an additional $30 million within a year of the closing.

BlueMountain managed a total of $19.3 billion in alternative credit-oriented strategies as of July 1, of which $11.9 billion was managed in collateralized loan obligations; $3.9 billion in credit opportunity funds and $3.5 billion in credit hedge funds.

Assured Guaranty provides financial guarantees to investors in some of the same sectors in which BlueMountain invests, such as asset-backed securities, including CLOs, student-loan-backed and auto-loan-backed debt, and public finance, including municipal bonds.

As insurers increasingly outsource investment management, Mr. Frederico said the goal of bringing an experienced credit and structured finance asset manager in house is to diversify Assured Guaranty's core business. Adding a fee-based business will increase revenue sources because the insurer's fees are risk-based. Diversifying the firm's investment portfolio also will improve risk-adjusted returns.

Another advantage of the acquisition is the opportunity to offer existing insurance clients access to BlueMountain's suite of credit-oriented strategies. The two firms serve similar asset owners, including pension funds, sovereign wealth funds and mutual funds, Mr. Frederico said.

Issues such as whether BlueMountain will continue to operate independently under its own name remain to be resolved, Mr. Frederico said.

That said, the integration of BlueMountain will be accretive to Assured Guaranty because "we really are in different fields, despite having similar clients and commonality in what we do. We do insurance and they manage funds," Mr. Frederico said.

BlueMountain's 140 employees will become Assured Guaranty employees after the deal is done; staff reductions are not planned.

One piece of the acquisition that has been determined is that Andrew Feldstein will assume the roles of chief investment officer and head of asset management at Assured Guaranty, while retaining his current roles as president and CEO of BlueMountain Capital once the deal has closed. The positions at Assured Guaranty are new.

Mr. Feldstein said in an interview that finding the right partner with the right investment culture was paramount to BlueMountain Capital when executives decided the firm needed to find a new owner.

BlueMountain Capital had setbacks and asset declines over the past few years that caused AMG to initiate a $415 million write-down of the value of its stake in the firm, according to AMG's March 31 10-Q filing with the Securities and Exchange Commission.

AMG said in the filing that "a series of precipitating events" at BlueMountain, including investor redemptions, the closure of a systematically managed equity fund and "scaled-down fundraising expectations," led executives to conclude that BlueMountain's estimated fair value had "declined below its carrying value and that the decline was other-than-temporary."

In restructuring the firm to focus on its legacy credit strengths, Mr. Feldstein said BlueMountain's executives had two goals: building a large-scale, long-duration asset manager and delivering exceptional returns that meet investor expectations.

The response from existing clients to BlueMountain's impending ownership change has been "very positive," Mr. Feldstein said.

One large investor, which Mr. Feldstein declined to name, termed the firm's deal with Assured Guaranty as "transformational for BlueMountain Capital," a sentiment with which Mr. Feldstein agreed.

He noted that managing an additional $500 million of Assured Guaranty's insurance company portfolios will be like "having another client" in terms of the investment strategies used, fees and portfolio optimization.

"I am very excited about the deal," he added.

As part of the deal, he will receive $22.5 million in Assured Guaranty common shares when the deal closes.

Mr. Feldstein will be bound by a five-year lockup on his Assured Guaranty shares.

Danielle Walker contributed to this story.