Blue Sky seals tough Oaktree loan deal, uncovers $4m fee and expense bungle

OAKTREE Capital has squeezed a tough deal from Blue Sky, with the embattled Brisbane-based fund manager agreeing to a $50m loan loaded up with 15% annual interest.

• Blue Sky loses $86m in 2018
• Ex-boss of fund manager sells most of stock

OAKTREE Capital has squeezed a tough deal from Blue Sky, with the embattled Brisbane-based fund manager agreeing to a $50 million loan loaded up with 15 per cent annual interest.

The seven-year loan from California-based Oaktree, renowned in the market for driving hard bargains with struggling entities, was sealed on Friday afternoon for Blue Sky. Oaktree can even convert part of its loan into 30 per cent of Blue Sky’s shares and has capped dividend payouts.

“The funds available … will strengthen our capital and liquidity position,” Blue Sky’s outgoing chairman John Kain said.

The loan is slated for use for Blue Sky’s everyday operations as well as co-investing in funds.

Blue Sky manages 89 funds with investments in ideas from a burrito chain to student accommodation facilities. But its share price, trading at $14.99 in November last year, has tumbled in the past six months amid market concerns about its performance.

That was amplified by a short-sellers’ report that accused the Brisbane outfit of overstating how well funds were going.

Blue Sky denied the allegations but since then has posted an $86 million loss and cut the value of assets such as a childcare venture or apartment projects in Brisbane.

Its shares were locked in a trading halt at $1.585 when the deal was announced on Friday afternoon. The deal with Oaktree allows them to convert amounts owed into shares at $1.87 each. Oaktree could take up to 30 per cent of Blue Sky stock – if shareholders agree - and also potentially gains two board seats.

Blue Sky is also coughing up a $1 million upfront fee to Oaktree. Only 5 per cent of the annual interest rate is being paid in cash initially; the other 10 per cent is capitalised at first.

Sources with knowledge of the transaction said this would assist as Blue Sky funds matured in later years to help with payments.

Oaktree also has the top mortgage over Blue Sky’s assets and certain events – such as the loss of a contract worth more than 5 per cent of revenue – could result in the California-based company seeking the return of all the loan.

Investors in Blue Sky will also face a dividend lockdown, with payouts capped at 50 per cent of “adjusted” profits or $10 million.

The loan amount has dropped from an initially flagged $60 million, which sources said was because the smaller amount was what Blue Sky determined it needed.

The deal was inked as Blue Sky revealed it was repaying more than $4 million in wrongly charged fees and expenses.

The overcharging was discovered during a review, which found Blue Sky between 2007 and 2017 had charged 65 funds more than allowed under rules for those funds. It included fees but most was due to reimbursements Blue Sky received after paying for third-party expenses, which The Courier-Mail understands could include audit fees. In reimbursing Blue Sky for such expenses, the funds had breached caps that limited expenses.

The company also said it had not received any more queries from the Australian Securities and Investments Commission since the corporate watchdog sought documents about the company’s compliance with keeping the stockmarket informed.

Blue Sky’s acting managing director Kim Morison told The Courier-Mail last month that the company had met its obligations and did not think the ASIC probe was a “threat for investors at all”.