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Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis

12 Months Ended

Oct. 31, 2019

Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis [Abstract]

Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis

7.Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize financial assets and liabilities measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy at October 31, 2019 and 2018:

	October 31, 2019⁽¹⁾
	(in thousands)			Level 1		Level 2		Level 3		Other Assets Not Held at Fair Value		Total
	Financial assets:
	Cash equivalents		$	24,640	$	157,267	$	-	$	-	$	181,907
	Investments held at fair value:
	Debt securities:
	Short-term			-		297,845		-		-		297,845
	Held by consolidated sponsored funds			-		330,966		-		-		330,966
	Held in separately managed accounts			-		55,426		-		-		55,426
	Equity securities:
	Held by consolidated sponsored funds			70,646		112,460		-		-		183,106
	Held in separately managed accounts			21,168		68		-		-		21,236
	Non-consolidated sponsored funds
	and other			9,814		515		-		-		10,329
	Investments held at cost⁽²⁾			-		-		-		20,904		20,904
	Investments in non-consolidated CLO
	entities⁽³⁾			-		-		-		1,417		1,417
	Investments in equity method investees⁽²⁾			-		-		-		139,510		139,510
	Derivative instruments			-		2,075		-		-		2,075
	Assets of consolidated CLO entities:
	Bank loans and other investments			-		1,702,769		1,501		-		1,704,270
	Total financial assets		$	126,268	$	2,659,391	$	1,501	$	161,831	$	2,948,991

	Financial liabilities:
	Derivative instruments		$	-	$	3,314	$	-	$	-	$	3,314
	Liabilities of consolidated CLO entities:
	Senior and subordinated note obligations			-		1,617,095		-		-		1,617,095
	Total financial liabilities		$	-	$	1,620,409	$	-	$	-	$	1,620,409

	October 31, 2018⁽¹⁾
	(in thousands)			Level 1		Level 2		Level 3		Other Assets Not Held at Fair Value		Total
	Financial assets:
	Cash equivalents		$	23,262	$	116,070	$	-	$	-	$	139,332
	Investments held at fair value:
	Debt securities:
	Short-term			-		273,320		-		-		273,320
	Held by consolidated sponsored funds			12,834		392,139		-		-		404,973
	Held in separately managed accounts			521		64,539		-		-		65,060
	Equity securities:
	Held by consolidated sponsored funds			73,291		62,318		-		-		135,609
	Held in separately managed accounts			23,642		419		-		-		24,061
	Non-consolidated sponsored funds
	and other			7,112		3,217		-		-		10,329
	Investments held at cost⁽²⁾			-		-		-		20,874		20,874
	Investments in non-consolidated CLO
	entities⁽³⁾			-		-		-		2,895		2,895
	Investments in equity method investees⁽²⁾			-		-		-		141,506		141,506
	Derivative instruments			-		6,347		-		-		6,347
	Assets of consolidated CLO entities:
	Bank loan investments			-		872,757		1,547		-		874,304
	Total financial assets		$	140,662	$	1,791,126	$	1,547	$	165,275	$	2,098,610

	Financial liabilities:
	Derivative instruments		$	-	$	4,446	$	-	$	-	$	4,446
	Liabilities of consolidated CLO entities:
	Senior and subordinated note			-		873,008		-		-		873,008
	Total financial liabilities		$	-	$	877,454	$	-	$	-	$	877,454

	⁽¹⁾	Amounts at October 31, 2019 reflect the adoption of ASU 2016-01. Amounts at October 31, 2018 reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information.
	⁽²⁾	These investments are not measured at fair value in accordance with U.S. GAAP.
	⁽³⁾	Investments in non-consolidated CLO entities are carried at amortized cost unless facts or circumstances indicate that the investments have been impaired, at which time the investments are written down to fair value as measured using Level 3 inputs.

A description of the valuation techniques and the inputs used in recurring fair value measurements is included immediately below. There have been no changes in the Company’s valuation techniques in the current reporting period.

Cash equivalents

Cash equivalents include positions in money market mutual funds, holdings of Treasury and government agency securities, certificates of deposit and commercial paper with remaining maturities of less than three months, as determined at purchase. Cash investments in daily redeemable money market mutual funds are valued using published net asset values and are categorized as Level 1 within the fair value

measurement hierarchy. Holdings of Treasury and government agency securities are valued based upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short time between the purchase and expected maturity of these investments. Depending on the categorization of the significant inputs, these assets are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

Debt securities held at fair value

Debt securities held at fair value consist of certificates of deposit, commercial paper and corporate debt obligations with remaining maturities of three months to 12 months upon purchase by the Company, as well as investments in debt securities held in consolidated sponsored funds and separately managed accounts.

Short-term debt securities held are generally valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker-dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. These assets are generally categorized as Level 2 within the fair value measurement hierarchy.

Debt securities held in consolidated sponsored funds and separately managed accounts are generally valued on the basis of valuations provided by third-party pricing services as described above for short-term debt securities. Debt securities purchased with a remaining maturity of 60 days or less (excluding those that are non-U.S. denominated, which typically are valued by a third-party pricing service or dealer quotes) are generally valued at amortized cost, which approximates fair value. Depending on the categorization of the significant inputs, debt securities held in consolidated sponsored funds are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

Equity securities held at fair value

Equity securities measured at fair value on a recurring basis consist of domestic and foreign equity securities held in consolidated sponsored funds and separately managed accounts and investments in non-consolidated funds.

Equity securities are valued at the last sale, official close or, if there are no reported sales on the valuation date, at the mean between the latest available bid and ask prices on the primary exchange on which they are traded. When valuing foreign equity securities that meet certain criteria, the portfolios use a fair value service that values such securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued securities. In addition, the Company performs its own independent back test review of fair values versus the subsequent local market opening prices when available. Depending on the categorization of the significant inputs, these assets are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

Equity investments in non-consolidated mutual funds are valued using the published net asset value per share and are classified as Level 1 within the fair value measurement hierarchy. Sponsored private open-end funds are not listed on an active exchange but calculate a net asset value per share (or equivalent) as

of the Company’s reporting date in a manner consistent with mutual funds. The Company’s investments therein do not have any redemption restrictions and are not probable of being sold at an amount different from their calculated net asset value per share (or equivalent). Accordingly, investments in sponsored private open-end funds are measured at fair value based on the net asset value per share (or equivalent) of the investment and are categorized as Level 2 within the fair value measurement hierarchy. The Company does not have any unfunded commitments related to investments in sponsored private open-end funds at October 31, 2019 and 2018.

Derivative instruments

Derivative instruments, further discussed in Note 5, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Futures and swap contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Foreign exchange contracts are valued by interpolating a value using the spot foreign exchange rate and forward points, which are based on spot rates and currency interest rate differentials. Derivative instruments generally are classified as Level 2 within the fair value measurement hierarchy.

Assets of consolidated CLO entities

Consolidated CLO entity assets include investments in bank loans and equity securities. Fair value is determined utilizing unadjusted quoted market prices when available. Equity securities held by consolidated CLO entities are valued using the same techniques as described above for equity securities. Interests in senior floating-rate loans for which reliable market quotations are readily available are generally valued at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the categorization of the significant inputs, these assets are generally categorized as Level 2 or 3 within the fair value measurement hierarchy.

Liabilities of consolidated CLO entities

Consolidated CLO entity liabilities include senior and subordinated note obligations. Fair value is determined using the measurement alternative to ASC 820 for collateralized financing entities. In accordance with the measurement alternative, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (1) the fair value of the beneficial interests held by the Company and (2) the carrying value of any beneficial interests that represent compensation for services. Although both Level 2 and Level 3 inputs were used to measure the fair value of the CLO liabilities, the senior note obligations are classified as Level 2 within the fair value measurement hierarchy, as the Level 3 inputs used were not significant.

Level 3 assets and liabilities

The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy for the fiscal year ended October 31, 2019 and 2018:

				Bank Loans and Other Investments of Consolidated CLO Entities
	(in thousands)			2019		2018
	Beginning balance		$	1,547	$	-
	Consolidation of CLO entities⁽¹⁾			1,323		3,935
	Paydowns			(25)		(6)
	Sales			-		(1,440)
	Net gains (losses) included in net income			(48)		114
	Transfers out of Level 3⁽²⁾			(1,296)		(1,056)
	Ending balance		$	1,501	$	1,547

	⁽¹⁾	Represents Level 3 bank loans and other investments held by consolidated CLO entities upon the initial consolidation of these entities during the period.
	⁽²⁾	Transfers out of Level 3 were due to an increase in the observability of the inputs used in determining the fair value of certain instruments.

Financial Assets and Liabilities Not Measured at Fair Value

Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at October 31, 2019 and 2018:

			2019					2018
	(in thousands)		Carrying Value		Fair Value	Fair Value Level		Carrying Value		Fair Value	Fair Value Level
	Loan to affiliate	$	5,000	$	5,000	3	$	5,000	$	5,000	3
	Debt	$	620,513	$	658,615	2	$	619,678	$	607,391	2

As discussed in Note 21, on December 23, 2015, Eaton Vance Management Canada Ltd. (EVMC), a wholly-owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The carrying value of the loan approximates fair value. The fair value is determined annually using a cash flow model that projects future cash flows based upon contractual obligations, to which the Company then applies an appropriate discount rate.

The fair value of the Company’s debt has been determined based on quoted prices in inactive markets.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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