Highland In Fight To Keep Citi CLO

Mar 21 2012 | 1:42pm ET

Highland Capital Management is fighting to hold on to an $867 million collateralized loan obligation as its partner, Citigroup, fights to pry its hands from the vehicle in a bid to liquidate it.

Citi has moved to replace Highland as the manager of the 2005 CLO with Babson Capital Management. If the bank succeeds, it and Babson will presumably liquidate the vehicle.

But Highland is showing tenacity in its bid to hold on to Liberty CLO; the hedge fund has been in talks with Citi for months and has threatened to sue the bank if a deal cannot be struck. According to Highland, Citi's plan to liquidate Liberty would violate the CLO's terms.

"Highland's opposition to the liquidation has nothing to do with a reduction in assets under management"—and the millions in fees that come with them—"and everything to do with Citi asking us to violate the terms of the CLO's portfolio management agreement," Highland said. Highland added it cannot cover all of the bonds by liquidating the CLO.

In the years since the CLO's launch, Citi has bought up some two-thirds of Liberty's outstanding bonds and also owns a majority of the CLO's stock, The Wall Street Journal reports. Babson is also a Liberty investors. The purchases, mostly at a steep discount, would pay off under Citi's plan, which would receive full value for the bonds.

Highland chief Jim Dondero has been in talks with Citi executives since at least the summer. But those talks, while ongoing, have so far failed to bridge the differences, and Highland last week warned Citi that it would sue if Citi continued to try to fire Highland.

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