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Variable Interest Entities

12 Months Ended

Oct. 31, 2020

Variable Interest Entities [Abstract]

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 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, 2020 and 2019. 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) loss 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 Company consolidated 17 sponsored funds as of October 31, 2020 and 19 sponsored funds as of October 31, 2019. The following table sets forth the aggregate balances related to these funds as well as the Company’s net interest in these funds at October 31, 2020 and 2019:

(in thousands)		2020		2019
Investments	$	376,098	$	514,072
Other assets		9,407		16,846
Other liabilities		(10,017)		(35,488)
Redeemable non-controlling interests		(195,451)		(260,681)
Net interest in consolidated sponsored funds	$	180,037	$	234,749

Consolidated CLO entities

As of October 31, 2020, the Company deemed itself to be the primary beneficiary of four non-recourse securitized CLO entities, namely, Eaton Vance CLO 2020-1 (CLO 2020-1), Eaton Vance CLO 2019-1 (CLO 2019-1), Eaton Vance CLO 2014-1R (CLO 2014-1R), and Eaton Vance CLO 2013-1 (CLO 2013-1) (collectively, the consolidated securitized CLO entities), and one non-recourse warehouse CLO entity, namely, Eaton Vance CLO 2020-2 (CLO 2020-2). As of October 31, 2019, the Company deemed itself to be the primary beneficiary of four non-recourse securitized CLO entities, namely, CLO 2019-1, Eaton Vance CLO 2018-1 (CLO 2018-1), CLO 2014-1R and CLO 2013-1.

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. The Company reports the financial results of consolidated securitized CLO entities on a one-month lag, based upon the availability of financial information. The financial information of consolidated warehouse CLO entities is reported as of the end of the Company’s fiscal period.

Consolidated warehouse CLO entity

The Company established CLO 2020-2 as a warehousing phase CLO entity on September 28, 2020. The Company entered into a credit facility agreement with a third-party lender to provide CLO 2020-2 with a non-recourse revolving line of credit of up to $160.0 million upon inception of the entity. The Company contributed a total of $40.0 million in capital to the CLO 2020-2 warehouse during the year ended October 31, 2020. CLO 2020-2 entered the securitization phase in the fourth fiscal quarter, but did not close prior to October 31, 2020.

While in the warehousing phase, the Company, acting as collateral manager and subject to the approval of the CLO entity’s third-party lender, used its capital contributions along with the proceeds from the revolving line of credit to accumulate a portfolio of commercial bank loan investments in open-market purchases in an amount sufficient for future securitization. The line of credit is secured by the commercial bank loan investments held by the warehouse and initially bears interest at a rate of daily LIBOR plus 1.3 percent per annum, with such interest rate increasing to daily LIBOR plus 2.0 percent per annum in September 2021. There were $43.6 million in outstanding borrowings against the line of credit as of October 31, 2020. The Company does not earn any collateral management fees from CLO 2020-2 during the warehousing phase and will continue to be the collateral manager of the CLO entity during the securitization phase.

As collateral manager, the Company has the unilateral ability to liquidate the CLO 2020-2 warehouse without cause, a right that, by definition, provides 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 serves as first-loss protection to the third-party lender and provides 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 deems itself to be the primary beneficiary of CLO 2020-2, as it has both power and economics, and began consolidating the entity from establishment of the warehouse on September 28, 2020.

Subsequent event – CLO 2020-2 securitization

The securitization of CLO 2020-2 closed on November 3, 2020. Upon closing, proceeds from the issuance of senior and subordinated note obligations were used to purchase the warehouse bank loans, repay the third-party revolving line of credit and return the Company’s total capital contributions of $40.0 million. The Company acquired 100 percent of the subordinated notes issued by CLO 2020-2 at closing for $34.5 million and will provide collateral management services to this CLO entity in exchange for a collateral management fee. The Company deems itself to be the primary beneficiary of CLO 2020-2, as it has both

power and economics, and began consolidating the securitized entity at closing. CLO 2020-2 had total assets of approximately $400 million at closing.

Consolidated securitized CLO entities

As of October 31, 2020, the Company continued to deem itself to be the primary beneficiary of CLO 2020-1, CLO 2019-1, CLO 2014-1R and CLO 2013-1, as it has both power and economics by virtue of its role as collateral manager and the Company’s 100 percent interest in the subordinated notes of these entities.

The Company established CLO 2020-1 as a warehousing phase CLO entity on July 13, 2020, and consolidated CLO 2020-1 during the warehousing phase. In the fourth quarter of fiscal 2020, CLO 2020-1 entered the securitization phase. Contemporaneous with the close of the CLO 2020-1 securitization on August 25, 2020, the proceeds from the issuance of senior and subordinated note obligations were used to purchase the portfolio bank loans held by the CLO 2020-1 warehouse, repay a third-party revolving line of credit provided to the CLO 2020-1 warehouse and return the Company’s $30.0 million of capital contributions to the warehouse. The Company acquired 100 percent of the subordinated notes issued by CLO 2020-1 at closing for $39.5 million and will provide 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 2020-1 upon acquiring 100 percent of the subordinated interests of CLO 2020-1 on August 25, 2020 and began consolidating the entity as of that date.

On January 15, 2020, the Company sold its 93 percent interest in the subordinated notes of CLO 2018-1 to an unrelated third party for $27.3 million and recognized a loss of $7.2 million upon the sale. The loss is included within gains and other investment income, net, of consolidated CLO entities in the Company’s Consolidated Statement of Income for the twelve months ended October 31, 2020. Although the Company continues to serve as collateral manager of the entity, the Company concluded that, subsequent to the sale of the subordinated notes, it no longer has an obligation to absorb the losses of, or the rights to receive benefits from, CLO 2018-1 that could potentially be significant to the entity. As a result, the Company concluded that it was no longer the primary beneficiary of CLO 2018-1 upon the sale of the subordinated interests of the entity on January 15, 2020 and deconsolidated the entity as of that date.

The Company applies the measurement alternative to ASC 820 for collateralized financing entities upon initial consolidation and for subsequent measurement of securitized CLO entities consolidated by the Company. 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 is 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 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, 2020 and 2019 are provided below.

The following table presents the balances attributable to the consolidated securitized CLO entities and the consolidated warehouse CLO entity that were included on the Company’s Consolidated Balance Sheets at October 31, 2020 and 2019:

		2020				2019
		Consolidated Securitized CLO Entities		Consolidated Warehouse CLO Entity		Consolidated Securitized CLO Entities
(in thousands)		Consolidated Securitized CLO Entities		Consolidated Warehouse CLO Entity		Consolidated Securitized CLO Entities
Assets of consolidated CLO entities:
Cash	$	91,458	$	337	$	48,704
Bank loans and other investments		1,698,155		365,978		1,704,270
Receivable for pending bank loan sales		23,885		-		24,193
Other assets		3,683		476		3,846
Liabilities of consolidated CLO entities:
Senior and subordinated note obligations		1,616,243		-		1,617,095
Line of credit		-		43,625		-
Payable for pending bank loan purchases		108,178		284,270		33,985
Other liabilities		7,095		19		17,137
Total beneficial interests	$	85,665	$	38,877	$	112,796

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 $85.7 million and $112.8 million at October 31, 2020 and 2019, respectively, being equal to the net amount of the consolidated CLO entities’ assets and liabilities included on the Company’s Consolidated Balance Sheets.

The assets of consolidated CLOs primarily consist of senior secured bank loan investments that are diversified by industry, mature at various dates between 2020 and 2029, and pay interest at LIBOR plus a spread of up to 13.8 percent. Approximately 0.8 percent of the collateral assets held by consolidated CLO entities were in default as of October 31, 2020. 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 consolidated securitized CLO entities held notes payable with a total par value of $1.8 billion at October 31, 2020, consisting of senior secured floating-rate notes payable with a par value of $1.6 billion and subordinated notes with a par value of $162.1 million. These note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 0.7 percent to 8.5 percent. The principal amounts outstanding of these note obligations mature on dates ranging from January 2028 to April 2031.

The following table presents the balances attributable to consolidated securitized CLO entities included in the Company’s Consolidated Statements of Income for the years ended October 31, 2020, 2019, and 2018:

		Consolidated Securitized CLO Entities
(in thousands)		2020		2019		2018
Other income (expense) of consolidated CLO entities:
Gains and other investment income, net	$	36,527	$	66,964	$	10,264
Interest and other expense		(55,104)		(57,860)		(11,796)
Net gain (loss) attributable to the Company	$	(18,577)	$	9,104	$	(1,532)

The Company recognized net gains (losses) from consolidated warehouse CLO entities of $(0.5) million, $1.8 million and $3.1 million for the twelve months ended October 31, 2020, 2019 and 2018, respectively.

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:

		Consolidated Securitized CLO Entities
(in thousands)		2020		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	$	(24,939)	$	3,266	$	(2,319)
Management fees		6,362		5,838		787
Total economic interests	$	(18,577)	$	9,104	$	(1,532)

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 and is the collateral manager of the entity. 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 interest, 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, 2020. The Company held investments in these entities totaling $1.1 million and $1.4 million as of October 31, 2020 and 2019, respectively. Collateral management fees receivable for these entities totaled $0.1 million on both October 31, 2020 and 2019. 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 periods 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 $31.7 billion and $26.3 billion as of October 31, 2020 and 2019, 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, 2020. The Company held investments in these entities totaling $0.6 million and $0.5 million on October 31, 2020 and 2019, respectively, and investment advisory fees receivable totaling $2.0 million and $1.3 million on October 31, 2020 and 2019, respectively. 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 $0.2 million and $3.5 million on October 31, 2020 and 2019, respectively. 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, 2020. 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.