Preston Hollow v. Nuveen breaks open high-yield muni world
Preston Hollow Capital, a non-bank direct lender with less than $2 billion in assets, opened a window on the cutthroat competition in the high yield municipal market this month, accusing investment powerhouse Nuveen of strong-arm tactics to control market share.
The Dallas-based lender’s March 5 lawsuit against Nuveen raises issues of price fairness, investment competition for a scarce product, broker-dealer complicity, and clout and puts the reputations of the two firms on the line, according to sources representing various factions of the municipal business. Most agreed to speak only on the condition of anonymity.
Preston Hollow lays out its claims in eye-popping detail. It accuses Nuveen of unlawful and strong-arm tactics in its effort to thwart its business opportunities by wielding its power and cash to run interference with broker-dealers. The firm takes on not just Nuveen but its prominent head of municipals, John Miller.
“This comes at a time when there is intense competition for product and so this is reflective of the competition that exists in the industry,” Thomas Doe, president of Municipal Market Analytics, said of conflicts laid out in the litigation. “You are fighting for any product and any opportunity you can find.”
Does the case drive a change in market behavior or is it one-off dispute between two firms? “It’s too early to tell,” Doe said.
The suit filed in the Delaware Chancery Court accuses Miller of a concerted effort to damage Preston Hollow’s business through a “series of threatening, anti-competitive and defamatory communications” to leading broker-dealers and to Preston Hollow’s primary lender.
Miller is accused of directly threatening to withhold Nuveen revenue from financial institutions that conducted business with Preston Hollow and defaming its business model.
“These communications from Miller and Nuveen employees working at his direction are intended to harm Preston Hollow financially and, ultimately, to significantly impair Preston Hollow’s ability to compete against Nuveen for investment opportunities in the high-yield municipal bond market,” reads the lawsuit.
Preston Hollow did not return requests for further comment on the lawsuit.
Nuveen said in a statement: “We believe these claims are without merit and intend to vigorously defend ourselves against these allegations.”
The court is expected to rule soon on whether to expedite the case, paving the way for an advanced discovery process that would allow Preston Hollow’s attorneys to subpoena communications including possible recorded phone calls that the lawyers argue support their claims, according to a source. Filings from both parties on the request are sealed as confidential.
The lawsuit asserts that phone “recordings must exist for some or all of the calls Miller and his team placed” to coerce firms because regulated institutions that trade in derivatives are required to record telephone calls and employees are required to conduct business on those lines.
The case pits the Dallas-based lender, which describes itself as a well-capitalized, non-bank finance company specializing in high-yield municipal specialty finance with more $1.8 billion in assets and $1.3 billion in equity capital, against an institutional powerhouse. Nuveen has $930 billion of assets under management including $154 billion in municipals and is a top high-yield manager.
Market participants described the lawsuit as a rarity and possibly unprecedented, as disputes are often the subject of speculation but resolved without public litigation that lays bare insider business dealings.
The lawsuit casts a spotlight on a series of issues confronting the market, including the current competition for municipals — especially high-yielding paper — and the lengths, based on the alleged claims, that a giant like Nuveen might go to to protect its traditional institutional business.
“You’ve seen tensions like this before but I can’t think of another incident where an investment manager was accused by another of cutting off business opportunities,” said one veteran market source. "The lawsuit really raises a multitude of questions on clout and fairness. That’s a pretty strong accusation to suggest that any one firm has that kind of power to tell broker-dealers who they can do business with.”
While the lawsuit is surprising, the aggressive tactics Nuveen is accused of are less so, some market sources said.
“The lawsuit is very rare in the municipal industry, yet that doesn’t negate its potential severity,” according to a veteran municipal buyside representative, who added he’s never seen anything like it in the municipal world before. “This violates various issues: fair market practice, market manipulation, and collusion" if Preston Hollow prevails in court.
“Nuveen is the proverbial 300 pound gorilla,” he said. “Their high-yield fund has massive inflows to invest and limited supply of high-yield bonds to purchase.”
And Nuveen likely views Preston Hollow’s model as taking supply for the higher-yielding financing out of the market, said another market source.
REPUTATIONS AT STAKE
Many in the market are pondering the outcome but are hard-pressed to guess at it.
The big question, said one market source, is whether Nuveen will negotiate a settlement or let the case be tried or arbitrated.
The filing followed quickly on the heels of an unnamed broker’s notification to Preston Hollow that it would no longer work with the firm on direct, 100% placements, which don’t allow for any other investment participation. One unnamed firm said it would limit the types of issuances.
The decision was due to Nuveen’s threats, the lawsuit alleges.
“Miller’s efforts to weaponize Nuveen’s considerable market power and use its leverage with those institutions pose a serious risk to Preston Hollow and its business, causing Preston Hollow to suffer irreparable harm,” the lawsuit asserts.
Broader implications are at stake too, Preston Hollow contends. “Left unchecked … Miller and Nuveen will be emboldened to similarly attack other, smaller competitors to the detriment of the municipal markets as a whole,” the lawsuit says.
Many are still assessing motive as Preston Hollow is taking a risk by suing. The public airing could inflict damage on its business if broker-dealers opt on their own to avoid any conflicts with Nuveen and shun the firm, but it also could emerge a big victor.
“There's no question that Nuveen can throw its weight around. Do they have such strong evidence or witnesses that they feel can win their case? Or is it just meant to be a public rebuke to Nuveen to back off?” one market source asked.
“I don’t think the lawsuit helps anybody,” said a municipal analyst, as it may cause some embarrassment to Nuveen while Preston Hollow could face its own reputational backlash with issuers and broker-dealers by highlighting its feud.
Another source familiar with the allegations said Preston Hollow believes it has the proof to support its claims and predicts the lawsuit could take a toll on Nuveen’s business, relationships, and Miller’s standing.
Another market source said Nuveen is just so big, it’s unclear how much damage the suit could inflict. “When there’s a scarcity of paper, whoever has the most clout and the best relationships will get the most consideration on purchases,” said the source. “Nuveen has great relationships” now, but the firm could suffer depending on how the dust settles.
Another issue for discussion raised by the claims is broker-dealer complicity. While the lawsuit attacks Nuveen for exerting the pressure, some firms appeared to acquiesce, according to the allegations. “Broker-dealers have a choice,” said one veteran market source.
While competition may be at the heart of the claims, one market source said there’s a legitimate debate to be had over issuer fairness in deal pricings. Nuveen allegedly sought to portray Preston Hollow’s deals as overpriced and in one case corrupt.
Preston Hollow in the suit calls those allegations “utterly false” and lays out the lengthy due diligence process it said it undertakes with legal and advisory financial advisors and defends the higher yields that are typically demanded in such offerings over a conventional deal.
“There are those that would argue that the open market is what’s best for the borrower and some fear that in the end when you don’t use the open market you can prey on naive borrowers,” said one market source, who also offered the alternative argument that direct lending, 100% placements, can offer a better alternative for borrowers in search of a specific structure that meets their needs and can move the transaction along more quickly.
The suit filed on behalf of Preston Hollow by its lead attorneys Judson Scaggs Jr. and Elizabeth Mullin of Morris, Nichols, Arsht & Tunnel LLP names Nuveen LLC, Nuveen Investments Inc., Nuveen Securities LLC, and Nuveen Asset Management LLC as defendants. It cites four causes of unlawful action including Tortious Interference with Contract, Tortious Interference with Prospective Business Relations, violations of the Donnelly Antitrust Act, and Defamation.
The complaint asks the court for a preliminary and permanent injunction ordering Nuveen to cease the alleged conduct in the high yield municipal bond market, to order Nuveen to rectify the harm already caused by withdrawing and disavowing retaliatory threats, and asks that Nuveen be directed to adopt supervisory procedures to ensure ban future misconduct that is alleged.
“In the absence of such relief, Preston Hollow will suffer incalculable and irreparable harm,” the lawsuit reads. The firm gets its equity support from an investor base that includes founding management, institutional investors and family wealth organizations.
Preston Hollow which set up shop in 2014 lays out in stark detail its business model, its vulnerability to interference, details of Nuveen’s mounting interference after two deal closings late last year, and demands to Nuveen to halt its tactics.
The firm’s direct 100% purchases “provide issuers with the benefit of Preston Hollow’s sector expertise, including flexible and customized solutions that meet an issuer’s specific needs” and “since Preston Hollow is a permanent capital vehicle, not a fund that must provide daily liquidity to its investors, it is a stable, secure funding source with certainty of execution,” the lawsuit says.
Preston Hollow “is highly dependent upon its relationship with broker-dealers, since the investment bankers are able to identify which of their issuer clients and transactions will benefit from Preston Hollow’s unique positioning and sector expertise,” and its business will be “significantly impaired” if broker-dealers refuse to participate as an underwriter or share information on deals, the lawsuit claims.
Preston Hollow began hearing in 2017 that Miller and Nuveen were taking “an aggressive posture toward institutions who were conducting business” with the firm. It initially dismissed the incidents as isolated but the reports grew throughout 2018 and came to a head in December 2018 after the firm closed on two direct placements — one for $32 million and another for $200 million — refinancing debt for university clients.
The latter appears to be a debt restructuring undertaken by Roosevelt University in Chicago, which sold through the Illinois Finance Authority. Roosevelt University’s chief finance officer did not return a call or email to comment.
After the closings, the lawsuit accuses Miller and his staff of initiating a series of phone calls and meetings with representatives of leading broker-dealers during which he “threatened to use Nuveen’s considerable market power to withhold business from any broker-dealer that engaged in limited public offerings with Preston Hollow.”
Preston Hollow claims it was told that Nuveen had accused it of misconduct in the municipal bond market by charging excessive rates for its investments and that the $32 million university housing deal was rushed and corrupt.
Because of Nuveen’s threats in late February one unnamed firm told Preston Hollow it would no longer participate in 100% placements and another firm said it would limit the types of issuances. Miller allegedly then contacted various broker-dealers demanding to know the identity of all deals that Preston Hollow was working on as sole purchaser.
“The firms subject to Miller’s campaign of intimidation are the key national players in the municipal finance market, and Nuveen is typically the largest revenue counterpart for most of these broker-dealers’ municipal bond departments,” much more than what Preston Hollow generates, the lawsuit claims.
On Jan. 15, Preston Hollow said it sent a cease and desist letter to Nuveen demanding that Miller and Nuveen cease the claimed intimidation and undertake an internal investigation to identify all persons and institutions to whom Miller and his staff had communicated with regarding Preston Hollow.
On Feb. 22, the lawsuit claims, Nuveen’s head of legal issued a letter to the legal department at each of the firms Preston Hollow had identified as having received threats from Miller.
Nuveen’s letter did not admit Miller’s alleged threats, but acknowledged recent business discussions between Nuveen and trading personnel of the various firms that may have included discussions of the Preston Hollow. It disavowed any agreement or commitment from the firms regarding PHC, the lawsuit claims.
“Far from mitigating the harm done, Nuveen boldly reminds these firms of its power to make good on Miller’s anticompetitive threats in the letter’s penultimate sentence allegedly reading ‘Of course, Nuveen reserves the right to conduct its trading business with firms within its lawful discretion and to hold and express its views and judgments in pursuing its investment advisory and trading activities,’ ” the lawsuit reads.
— Lynne Funk Posner and Richard Williamson contributed to this story.