Collateralized Loan Obligations (CLOs) and Consolidated Variable Interest Entities

The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. The CLOs are considered variable interest entities.

Telos Asset Management LLC (Telos), is a CLO manager of six CLOs; namely Telos CLO 2014-6, Ltd. (Telos 6), Telos CLO 2014-5, Ltd. (Telos 5), Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007‑2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of TAMCO, the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which was recorded at fair value. The Company became the primary beneficiary and met the requirement to consolidate when it acquired the management rights of the CLOs. Tiptree owns various amounts of Telos 1, Telos 5 and Telos 6 with an aggregate fair market value of $35,783 as of September 30, 2015. Tiptree owned various amounts of Telos 1, Telos 2, Telos 4, Telos 5 and Telos 6 with an aggregate fair market value of $94,342 as of December 31, 2014. In April 2015, the Company sold all of the subordinated notes of Telos 2 held by the Company for total proceeds of $19,740. In May 2015, the Company sold all of the subordinated notes of Telos 4 held by the Company for total proceeds of $19,988.

The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. As of September 30, 2015 and December 31, 2014, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $38,148 and $97,935, respectively, as well as the management fees receivable of $2,647 and $2,782 as of September 30, 2015 and December 31, 2014, respectively. Both the carrying values of the investment in CLOs and management fees receivable are eliminated upon consolidation.

The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated:



	As of
	September 30, 2015		December 31, 2014
Assets:
Cash and cash equivalents – restricted	$	51,879	$	146,281
Investment in loans, at fair value	1,689,282		1,803,205
Investment in trading assets, at fair value	7,141		21,858
Due from brokers	13,114		2,138
Accrued interest receivable	4,620		4,496
Other assets	—		116
Total assets of consolidated CLOs	$	1,766,036	$	1,978,094

Liabilities:
Notes payable	$	1,704,450	$	1,785,207
Due to brokers	6,545		81,623
Accrued interest payable	13,632		10,098
Other liabilities	614		449
Total liabilities of consolidated CLOs	$	1,725,241	$	1,877,377

Net	$	40,795	$	100,717

The beneficial interests retained by Tiptree include (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative as prescribed by ASU 2014-13 (see Note 2) results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by Tiptree as illustrated in the below table:



Beneficial interests:	As of
	September 30, 2015		December 31, 2014
Subordinated notes	$	38,148	$	97,935
Accrued management fees	2,647		2,782
Total beneficial interests	$	40,795	$	100,717

The tables below provide further details regarding the CLOs notes payable amounts of $1,704,450 and $1,785,207 as of September 30, 2015 and December 31, 2014, respectively:



	As of
	September 30, 2015						December 31, 2014
Description	Aggregate principal amount			Spread over three months LIBOR			Aggregate principal amount			Spread over three months LIBOR
Telos 6 (maturity January 2027)
Class A-1	$	161,500		1.50	%		$	161,500		1.50	%
Class A-2	60,000			N/A		⁽¹⁾	60,000			N/A
Class B-1	8,000			2.10	%		8,000			2.10	%
Class B-2	34,000			N/A		⁽²⁾	34,000			N/A
Class C	22,000			3.00	%		22,000			3.00	%
Class D	20,500			3.90	%		20,500			3.90	%
Class E	16,500			5.00	%		16,500			5.00	%
Subordinated	12,400			N/A			12,400			N/A
Mark to market adjustment	(9,178		)				(14,772		)
Telos 6 Fair Value	$	325,722					$	320,128

Telos 5 (maturity April 2025)
Class A	$	252,000		1.55	%		$	252,000		1.55	%
Class B-1	39,000			N/A		⁽³⁾	39,000			N/A



	As of
	September 30, 2015					December 31, 2014
Class B-2	7,500			2.15	%	7,500			2.15	%
Class C	32,750			3.00	%	32,750			3.00	%
Class D	19,750			3.65	%	19,750			3.65	%
Class E	18,000			5.00	%	18,000			5.00	%
Class F	7,750			5.50	%	7,750			5.50	%
Subordinated	10,500			N/A		10,500			N/A
Mark to market adjustment	(13,424		)			(15,078		)
Telos 5 Fair Value	$	373,826				$	372,172

Telos 4 (maturity July 2024)
Class A	$	214,000		1.30	%	$	214,000		1.30	%
Class B	46,500			1.80	%	46,500			1.80	%
Class C	29,000			2.75	%	29,000			2.75	%
Class D	19,250			3.50	%	19,250			3.50	%
Class E	16,000			5.00	%	16,000			5.00	%
Class X	700			0.95	%	1,750			0.95	%
Subordinated	37,000			N/A		10,700			N/A
Mark to market adjustment	(20,314		)			(14,023		)
Telos 4 Fair Value	$	342,136				$	323,177

Telos 3 (maturity January 2024)
Class A	$	225,000		1.42	%	$	225,000		1.42	%
Class B	36,500			2.25	%	36,500			2.25	%
Class C	26,500			3.00	%	26,500			3.00	%
Class D	18,000			4.25	%	18,000			4.25	%
Class E	15,000			5.50	%	15,000			5.50	%
Class F	6,000			5.50	%	6,000			5.50	%
Subordinated	34,350			N/A		34,350			N/A
Mark to market adjustment	(17,322		)			(13,995		)
Telos 3 Fair Value	$	344,028				$	347,355

Telos 2 (maturity April 2022)
Class A-1	$	34,355		0.26	%	$	97,181		0.26	%
Class A-2	40,000			0.40	%	40,000			0.40	%
Class B	27,500			0.55	%	27,500			0.55	%
Class C	22,000			0.95	%	22,000			0.95	%
Class D	22,000			2.20	%	22,000			2.20	%
Class E	16,000			5.00	%	16,000			5.00	%
Subordinated	44,000			N/A		2,000			N/A
Mark to market adjustment	(21,231		)			(142		)
Telos 2 Fair Value	$	184,624				$	226,539

Telos 1 (maturity October 2021)
Class A-1D	$	—		—	%	$	2,927		0.27	%
Class A-1R	—			—	%	7,805			0.29	%
Class A-1T	—			—	%	10,732			0.27	%
Class A-2	22,313			0.40	%	60,000			0.40	%
Class B	27,200			0.49	%	27,200			0.49	%
Class C	22,000			0.85	%	22,000			0.85	%
Class D	22,000			1.70	%	22,000			1.70	%
Class E	16,000			4.25	%	16,000			4.25	%
Subordinated	40,223			N/A		40,223			N/A
Mark to market adjustment	(15,622		)			(13,051		)
Telos 1 Fair Value	$	134,114				$	195,836

Total notes payable - CLOs	$	1,704,450				$	1,785,207


(1)	Tranche A-2 Notes in Telos 6 have a fixed rate of 3.46% over the life of the CLO. This fixed rate exposure is partially hedged by a $60,000 interest rate swap with BNP Paribas.


(2)	Tranche B-2 Notes in Telos 6 have a fixed rate of 4.78% over the life of the CLO. This fixed rate exposure is partially hedged by a $60,000 interest rate swap with BNP Paribas.


(3)	Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.

The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Income:
Net realized and unrealized losses	$	(8,593	)	$	(6,041	)	$	(23,261	)	$	(11,986	)
Interest income	24,169			20,517			73,533			59,160
Total revenue	15,576			14,476			50,272			47,174
Expenses:
Interest expense	16,504			11,306			47,255			31,646
Other expense	495			434			1,782			1,078
Total expense	16,999			11,740			49,037			32,724

Net (loss) income attributable to consolidated CLOs	$	(1,423	)	$	2,736		$	1,235		$	14,450

As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 (see Note 2) results in the consolidated net income summarized above to be equivalent to Tiptree’s own economic interests in the CLOs which are eliminated upon consolidation:



Economic interests:	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Distributions received and realized and unrealized gains and losses on the subordinated notes held by the Company, net	$	(4,069	)	$	(120	)	$	(6,984	)	$	5,462
Management fee income	2,646			2,856			8,219			8,988
Total economic interests	$	(1,423	)	$	2,736		$	1,235		$	14,450