November 8, 2024

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Preston Hollow, Nuveen to cement investment ties next month

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Preston Hollow, Nuveen to cement investment ties next month

Preston Hollow Community Capital and Nuveen expect to close next month on a deal giving Nuveen a stake in its smaller rival in the high-yield muni space.

The investment featured prominently in a settlement ending PHCC’s four-year-old legal pursuit of Nuveen for using what one judge labeled as “lies” and “threats” to damage its access to deals.

Nuveen and Preston Hollow unveiled the settlement agreement and Nuveen’s planned investment April 10, coinciding with Nuveen’s announcement that its prominent head of municipals, John Miller, would step down from the position and retire June 1.

Preston Hollow’s litigation had accused Miller of orchestrating efforts to block the smaller firm’s access to high-yield municipal bond deals.

The firms did not disclose terms of the investment at the time, but additional details were published in an offering statement Wednesday on PHCC’s $150 million of tax-exempt pooled securities, or TEPs, a financing trust secured by a collateral pool of tax-exempt securities.

“On March 31, 2023, the company entered into an agreement to sell ordinary common units to a new institutional investor,” says Preston Hollow’s offering statement on the $150 million transaction. “The company expects to issue ordinary common units to the new investor on a closing date likely to occur in July 2023 following the satisfaction of the conditions to closing, at a negotiated share price to be fixed as of the month-end immediately prior to the closing date.”

Nuveen’s parent TIAA will hold a 12.4% stake after the closing.

Preston Hollow’s ownership structure as of March 31 was led by funds managed by HarbourVest Partners, LLC, with 33.4% and the Stone Point Capital LLC-managed Trident PHC Holdings LLC, with 25%.

Preston Hollow’s directors and executive officers held 12%, and the remaining 29.6% of equity ownership “consisted of other institutional investors, family offices, and high net worth individuals,” according to the offering document.

The ownership structure will shift after closing to HarbourVest at 29.3%, Trident/Stone Point at 21.9%, TIAA at 12.4%, and directors and officers at 10.6%, with the balance held by the smaller investors.

Preston Hollow Capital LLC, which owns Preston Hollow Community Capital, was founded in 2014 by Jim Thompson, chairman and chief executive officer, and Cliff Weiner, head of fixed income. PHC has raised more than $1.2 billion in equity capital.

“PHCC is one of the only direct originators in the tax-exempt nonrated market. It has an established track record, having built a portfolio of approximately $2.6 billion as of March 31, 2023, diversified across 25 U.S. States and the District of Columbia,” the offering statement notes.

PHCC originated more than $4.8 billion in financings cumulatively since its inception and “has also achieved 37 consecutive quarters of positive net income since inception through March 31, 2023,” the offering statement notes.

The information paints a more positive picture of the lender’s business compared to documents seen in the litigation process in which Preston Hollow stressed deep wounds and alleged business losses due to Nuveen’s efforts to block the firm’s access to high-yield transactions.

PHC’s expert witness in its defamation case last year put past and future losses expected through 2023 at more than $600 million and the firm warned of lasting damage beyond.

PHC’s original 2019 lawsuit in Delaware Chancery Court accused Nuveen of defamation, antitrust and unlawful business interference. That case ended with an opinion from Vice Chancellor Sam Glasscock III concluding that Nuveen had committed intentional tortious interference with business relations.

“I find that Nuveen used threats and lies in a successful attempt to damage the plaintiff in its business relationships,” Glasscock wrote in his 59-page opinion. “The record, taken as a whole, shows consistent, systematic efforts by Nuveen to shut down Preston Hollow’s ability to continue to do business.”

Besides court warnings against any future efforts to damage Preston Hollow, Nuveen escaped any tougher sanctions as no monetary damages were sought. The litigation continued with Preston Hollow taking several of its arguments to other courts. In defamation litigation, Preston Hollow sought damages to be determined at trial of no less than $100 million, and attorney fees. It took its anti-trust arguments to federal court, seeking compensatory damages.

Both were pending when the settlement was reached earlier this year.

Preston Hollow Community Capital initially planned an inaugural public offering of TEPs using a collateralized debt obligation structure in March but that $371 million was tabled due to “market conditions” and the firm instead launched a $150 million issue that closed Wednesday at 4.5%, according to Greg May, managing director of corporate development at Preston Hollow.

The Public Finance Authority, a national conduit based in Wisconsin, is the issuer. HilltopSecurities is underwriter.

Preston Hollow Community Capital is the sponsor and administrator under the structure.

The pool was reduced and $100 million of A certificates will be remarketed in 2026, earlier than a 2029 date in the earlier proposed sale. The final maturity is in 2059, May said. Preston Hollow purchased the $50 million of B certificates.

The firm anticipates regular TEP offerings to raise capital for its social lending business and the Nuveen investment doesn’t impact those plans, May said in an email. The goal is twofold: to achieve a lower cost of capital and to expand the firm’s investor base.

PHCC attached a “social” bond label to the certificates based on a second-party opinion from Institutional Shareholders Services that $121.4 million complies with PHCC’s social impact finance framework having financed projects related to education, healthcare services that serve vulnerable populations, affordable sanitation and sewer services, or employment opportunities.

Moody’s Investors Service Wednesday issued its final rating of Aa2 to the Class A certificates. The B certificates were not rated.

“The rationale for the rating is based on our methodology and considers all relevant risks, particularly those associated with the CDO’s portfolio and structure,” Moody’s said. “Moody’s analyzed the credit quality of the underlying bonds by developing credit estimates. In addition, the rating reflects the structural and legal aspects of the transaction.”

The offering statement notes that one bond in the underlying pool, from the Missouri Slope Lutheran Care Center in North Dakota, could become “a watchlist bond” as a violation of debt service ratio covenants is projected June 30.