Variable Interest Entities

12 Months Ended

Oct. 31, 2019

Variable Interest Entities [Abstract]

Variable Interest Entities

6.Variable Interest Entities

Investments in VIEs that are consolidated

In the normal course of business, the Company maintains investments in sponsored entities that are considered VIEs to support their launch and marketing. The Company consolidates these sponsored entities if it is deemed the primary beneficiary of the VIE.

Consolidated sponsored funds

The Company invests in sponsored investment companies that meet the definition of a VIE. Underlying investments held by consolidated sponsored funds consist of debt and equity securities and are included in the reported amount of investments on the Company’s Consolidated Balance Sheets at October 31, 2019 and 2018. Net investment income or (loss) related to consolidated sponsored funds was included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for all periods presented. The impact of consolidated sponsored funds’ net income or (loss) on net income attributable to Eaton Vance Corp. shareholders was reduced by amounts attributable to non-controlling interest holders, which are recorded in net income attributable to non-controlling and other beneficial interests on the Company’s Consolidated Statements of Income for all periods presented. The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is limited to the amount of the Company’s investment in the sponsored fund and any uncollected management and performance fees. The Company is not obligated to provide financial support to sponsored funds. Only the assets of a sponsored fund are available to settle its obligations. Other beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

The following table sets forth the aggregate balances of consolidated sponsored funds and the Company’s net interest in these funds at October 31, 2019 and 2018:

(in thousands)		2019		2018
Investments	$	514,072	$	540,582
Other assets		16,846		15,471
Other liabilities		(35,488)		(57,286)
Redeemable non-controlling interests		(260,681)		(244,970)
Net interest in consolidated sponsored funds	$	234,749	$	253,797

Consolidated CLO entities

As of October 31, 2019, the Company deemed itself to be the primary beneficiary of four non-recourse securitized CLO entities, namely, Eaton Vance CLO 2019-1 (CLO 2019-1), Eaton Vance CLO 2013-1 (CLO 2013-1), Eaton Vance CLO 2018-1 (CLO 2018-1) and Eaton Vance CLO 2014-1R (CLO 2014-1R). As of October 31, 2018, the Company deemed itself to be the primary beneficiary of three non-recourse securitized CLO entities, namely, CLO 2018-1, CLO 2014-1R and Eaton Vance CLO 2014-1 (CLO 2014-1). In the first quarter of fiscal 2019, the Company received a final distribution from CLO 2014-1 of $1.9 million related to the residual assets held by the Company as of October 31, 2018.

The assets of consolidated CLO entities are held solely as collateral to satisfy the obligations of each entity. The Company has no right to receive benefits from, nor does the Company bear the risks associated with, the assets held by these CLO entities beyond the Company’s investment in these entities. In the event of default, recourse to the Company is limited to its investment in these entities. The Company has not provided any financial or other support to these entities that it was not previously contractually required to provide, and there are neither explicit arrangements nor does the Company hold implicit variable interests that could require the Company to provide any ongoing financial support to these entities. Other beneficial interest holders of consolidated CLO entities do not have any recourse to the Company’s general credit.

Eaton Vance CLO 2019-1

The Company established CLO 2019-1 as a warehousing-phase CLO entity on January 3, 2019. The Company entered into a credit facility agreement with a third-party lender to provide CLO 2019-1 with a $160.0 million non-recourse revolving line of credit upon inception of the entity. The Company contributed a total of $40.0 million in capital to the CLO 2019-1 warehouse, which it used together with the proceeds from the revolving line of credit to accumulate a portfolio of commercial bank loan investments for eventual securitization.

As collateral manager, the Company had the unilateral ability to liquidate the CLO 2019-1 warehouse without cause, a right that, by definition, provided the Company with the power to direct the activities that most significantly affect the economic performance of the entity. The Company’s investment in the warehouse served as first-loss protection to the third-party lender and provided the Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deemed itself to be the primary beneficiary of the CLO 2019-1 warehouse as it had both power and economics, and began consolidating the entity from establishment of the warehouse on January 3, 2019.

In the second quarter of fiscal 2019, CLO 2019-1 entered the securitization phase. Contemporaneous with the close of the CLO 2019-1 securitization on May 15, 2019, the proceeds from the issuance of senior and subordinated note obligations were used to purchase the portfolio of bank loans held by the CLO 2019-1 warehouse, repay the third-party revolving line of credit provided to the CLO 2019-1 warehouse and return the Company’s total capital contributions in the warehouse of $40.0 million. The Company acquired 100 percent of the subordinated notes issued by CLO 2019-1 at closing for $28.9 million and provides collateral management services to this CLO entity in exchange for a collateral management fee. The Company deemed itself to be the primary beneficiary of CLO 2019-1 upon acquiring 100 percent of the subordinated interests of CLO 2019-1 on May 15, 2019 and began consolidating the entity as of that date.

Eaton Vance CLO 2013-1

As of October 31, 2018, the Company held 100 percent of the Class E senior notes of CLO 2013-1 with a carrying value of $1.4 million. The Company deemed itself to be the primary beneficiary of CLO 2013-1, for which it is the collateral manager, upon acquiring 100 percent of the subordinated interests of the entity on May 1, 2019 for $25.4 million and began consolidating the entity as of that date.

On August 9, 2019, CLO 2013-1 refinanced certain tranches of its senior note obligations. Contemporaneous with the close of the refinancing, the proceeds from the issuance of new senior note obligations were used to redeem certain tranches of the old senior note obligations of CLO 2013-1. The senior and subordinated note tranches held by the Company were not affected by the refinancing, and the Company continues to serve as collateral manager of the entity. Accordingly, the Company continues to deem itself as the primary beneficiary of CLO 2013-1 as it has both power and economics, and continues to consolidate the entity.

Eaton Vance CLO 2018-1

CLO 2018-1 was securitized on October 24, 2018. As of October 31, 2019, the Company continues to hold approximately 93 percent of the subordinated notes that were issued by CLO 2018-1 at closing and is still serving as the collateral manager of the entity. The Company deemed itself to be the primary beneficiary of CLO 2018-1 upon acquiring 93 percent of the subordinated interests of the entity on October 24, 2018 and began consolidating the entity as of that date.

Eaton Vance CLO 2014-1R

CLO 2014-1R was securitized on August 23, 2018. As of October 31, 2019, the Company continues to hold 100 percent of the subordinated notes that were issued by CLO 2014-1R at closing and is still serving as the collateral manager of the entity. The Company deemed itself to be the primary beneficiary of CLO 2014-1R upon acquiring 100 percent of the subordinated interests of the entity on August 23, 2018 and began consolidating the entity as of that date.

The Company elected to apply the measurement alternative to ASC 820 for collateralized financing entities upon the initial consolidation and for the subsequent measurement of the securitized CLO entities consolidated by the Company (collectively, the consolidated securitized CLO entities). The Company determined that the fair value of the financial assets of these entities is more observable than the fair value of the financial liabilities. Through the application of the measurement alternative, the fair value of the financial liabilities of these entities are measured as the difference between the fair value of the financial assets and the fair value of the Company’s beneficial interests in these entities, which include the subordinated interests held by the Company and any accrued management fees due to the Company. The fair value of the subordinated notes held by the Company is determined primarily based on an income approach, which projects the cash flows of the CLO’s assets using projected default, prepayment, recovery

and discount rates, as well as observable assumptions about market yields, callability and other market factors. An appropriate discount rate is then applied to determine the discounted cash flow valuation of the subordinated notes. Aggregate disclosures for the securitized CLO entities consolidated by the Company as of October 31, 2019 and 2018 are provided below.

The Company did not consolidate any warehousing-phase CLO entities as of October 31, 2019 or 2018. The following table presents the aggregate balances attributable to the consolidated securitized CLO entities included in the Company’s Consolidated Balance Sheets at October 31, 2019 and 2018:

(in thousands)		2019		2018
Assets of consolidated CLO entities:
Cash	$	48,704	$	216,598
Bank loans and other investments		1,704,270		874,304
Receivable for pending bank loan sales		24,193		2,535
Other assets		3,846		1,929
Liabilities of consolidated CLO entities:
Senior and subordinated note obligations		1,617,095		873,008
Payable for pending bank loan purchases		33,985		152,152
Other liabilities		17,137		2,033
Total beneficial interests	$	112,796	$	68,173

Although the Company’s beneficial interests in the consolidated securitized CLO entities are eliminated upon consolidation, the application of the measurement alternative results in the Company’s total beneficial interests in these entities of $112.8 million and $68.2 million at October 31, 2019 and 2018, respectively, being equal to the net amount of the consolidated CLO entities’ assets and liabilities included on the Company’s Consolidated Balance Sheets.

As of October 31, 2019 and 2018, no bank loan investments held by consolidated CLO entities were in default and no unpaid principal balances of such loan investments were 90 days or more past due or in non-accrual status. Additional disclosure of the fair values of assets and liabilities of consolidated CLO entities that are measured at fair value on a recurring basis is included in Note 7.

The Company did not consolidate any warehousing-phase CLO entities during the year ended October 31, 2017. The following table presents the aggregate amounts attributable to consolidated warehousing-phase CLO entities included in the Company’s Consolidated Statements of Income for the years ended October 31, 2019 and 2018:

		Consolidated Warehouse CLO Entities
(in thousands)		2019		2018
Other income (expense) of consolidated CLO entities:
Gains and other investment income, net	$	3,308	$	6,618
Interest and other expense		(1,490)		(3,490)
Net gain attributable to the Company	$	1,818	$	3,128

The Company did not consolidate any securitized CLO entities during the year ended October 31, 2017. The following table presents the aggregate amounts attributable to consolidated securitized CLO entities included in the Company’s Consolidated Statements of Income for the years ended October 31, 2019 and 2018:

		Consolidated Securitized CLO Entities
(in thousands)		2019		2018
Other income (expense) of consolidated CLO entities:
Gains and other investment income, net	$	66,964	$	10,264
Interest and other expense		(57,860)		(11,796)
Net gain (loss) attributable to the Company	$	9,104	$	(1,532)

As summarized in the table below, the application of the measurement alternative results in the Company's earnings from consolidated securitized CLO entities subsequent to initial consolidation, as shown above, to be equivalent to the Company's own economic interests in these entities:

(in thousands)		2019		2018
Economic interests in Consolidated Securitized CLO Entities:
Distributions received and unrealized gains (losses) on the
senior and subordinated interests held by the Company	$	3,266	$	(2,319)
Management fees		5,838		787
Total economic interests	$	9,104	$	(1,532)

Eaton Vance CLO 2015-1 (CLO 2015-1)

On November 1, 2017, the Company purchased 100 percent of the subordinated interests in CLO 2015-1 for $26.7 million. The Company is the collateral manager of CLO 2015-1. The Company deemed itself to be the primary beneficiary of CLO 2015-1 upon acquiring 100 percent of the subordinated interests in the entity on November 1, 2017 and began consolidating CLO 2015-1 as of that date.

In the first quarter of fiscal 2018, CLO 2015-1 refinanced its senior note obligations. Contemporaneous with the close of the refinancing on December 22, 2017, the proceeds from the issuance of new senior note obligations were used to redeem the old senior note obligations of CLO 2015-1. Concurrent with the close of the refinancing, the Company sold 95 percent of its subordinated interests in CLO 2015-1 for $24.7 million and simultaneously purchased interests in certain of the newly issued senior note obligations of CLO 2015-1 for $28.1 million. The Company recognized a loss on disposal of its subordinated interest of $0.6 million, which is included in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income for the year ended October 31, 2018. Although the Company continues to serve as collateral manager of the entity, the Company concluded that it no longer had an obligation to absorb losses of, or the right to receive benefits from, CLO 2015-1 that could potentially be significant to the entity. As a result, the Company concluded that it was no longer the primary beneficiary of CLO 2015-1 upon the sale of 95 percent of its subordinated interests on December 21, 2017 and deconsolidated the entity as of that date.

During the year ended October 31, 2018, the Company sold its interests in the senior note obligations of CLO 2015-1 for $28.0 million and recognized a loss on disposal of $0.1 million, which is included in gains

(losses) and other investment income, net, on the Company’s Consolidated Statement of Income for the year ended October 31, 2018. As of October 31, 2019, the Company maintains its residual five percent subordinated interest in CLO 2015-1 as an investment in non-consolidated CLO entities.

Other entity

As of October 31, 2018, the Company held variable interests in, and was deemed to be the primary beneficiary of, a privately offered equity fund that was seeded towards the end of fiscal 2018. The Company’s variable interests consisted of a $10,000 investment in the fund and a promissory note that enabled the fund to borrow up to $25.0 million from the Company. As of October 31, 2018, the Company’s risk of loss with respect to this entity was limited to the Company’s investment in the fund and the outstanding borrowings under the promissory note of $3.7 million. The Company invested an additional $10,000 upon launching of the fund in December 2018, at which time the total outstanding borrowings were repaid to the Company and the promissory note was canceled on January 14, 2019. As of October 31, 2019, the Company’s variable interest in the fund is limited to its $20,000 investment in the fund. The Company no longer deems itself the primary beneficiary of the fund, as it no longer has an obligation to absorb losses of, or the right to receive benefits from, the fund that could potentially be significant to the entity.

Investments in VIEs that are not consolidated

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as equity securities when it is not considered the primary beneficiary of these VIEs. The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 4 and Note 7.

Non-consolidated CLO entities

The Company is not deemed the primary beneficiary of certain CLO entities in which it holds variable interests. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that, although it has variable interests in each such CLO by virtue of its beneficial ownership interests in the CLO entities, these interests neither individually nor in the aggregate represent an obligation to absorb losses of, or a right to receive benefits from, any such entity that could potentially be significant to that entity.

The Company’s maximum exposure to loss with respect to these non-consolidated CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of October 31, 2019. Collateral management fees receivable for these entities totaled $0.1 million on both October 31, 2019 and 2018. Other investors in these CLO entities have no recourse against the Company for any losses sustained. The Company did not provide any financial or other support to these entities that it was not previously contractually required to provide in any of the fiscal years presented. Income from these entities is recorded as a component of gains (losses) and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields. Additional information regarding the Company’s investment in non-consolidated CLO entities, as well as the combined assets under management in the pools of non-consolidated CLO entities, is included in Note 4.

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $26.3 billion and $21.8 billion as of October 31, 2019 and 2018, respectively. The Company’s variable interests in these entities consist of the

Company’s direct ownership therein, which in each case is insignificant relative to the total ownership of the fund, and any investment advisory fees earned but uncollected. The Company’s maximum exposure to loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivable from, these entities as of October 31, 2019. The Company held investments in these entities totaling $0.5 million and $2.7 million on October 31, 2019 and 2018, respectively, and investment advisory fees receivable totaling $1.3 million on both October 31, 2019 and 2018. The Company did not provide any financial or other support to these entities that it was not contractually required to provide in any of the periods presented. The Company does not consolidate these VIEs because it does not have the obligation to absorb losses of, or the right to receive benefits from, these VIEs that could potentially be significant to these VIEs.

The Company’s investments in privately offered equity funds are carried at fair value and included in non-consolidated sponsored funds and other, which are disclosed as a component of investments in Note 4.

The Company also holds a variable interest in, but is not deemed to be the primary beneficiary of, a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s variable interest in this entity consists of the Company’s direct ownership in the private equity partnership, equal to $3.5 million at both October 31, 2019 and 2018. The Company did not provide any financial or other support to this entity. The Company’s risk of loss with respect to the private equity partnership is limited to the carrying value of its investment in the entity as of October 31, 2019. The Company does not consolidate this VIE because the Company does not hold the power to direct the activities that most significantly affect the VIE.

The Company’s investment in the private equity partnership is accounted for as an equity method investment and disclosures related to this entity are included in Note 4 under the heading Investments in equity method investees.