Bear seizes assets of its High-Grade hedge fund
After lending $1.6 billion to fund, bank says $1.3 billion is left
By Alistair Barr, MarketWatch
Last Update: 5:40 PM ET Jul 26, 2007
SAN FRANCISCO (MarketWatch) -- Bear Stearns Cos. said late Thursday that it seized assets from its High-Grade Structured Credit Strategies Fund after the hedge fund suffered huge losses in mortgage-backed securities and structured-finance markets.
The bank lent $1.6 billion to the hedge fund earlier this month after the losses. On Thursday Bear said that $1.3 billion of the loan remained.
Bear took control of the assets because the fund couldn't meet its margin obligations as part of the loan agreement, the bank explained.
"We do not anticipate any material change in financial exposure to Bear Stearns as a result of this action," the company said in a statement.
We will continue to liquidate the fund in an "orderly" way and will be able to set up hedges to protect against any further declines in the value of the portfolio, if appropriate, the bank added.
The High-Grade fund lost 91% of its value in the first half of 2007, while a smaller, more leveraged fund called the High-Grade Structured Credit Strategies Enhanced Leveraged Fund was totally wiped out, Bear told clients last week. The two funds had about $1.6 billion in assets at one time, but through leverage they controlled more than $10 billion in mortgage securities and credit-related securities. See full story.
The crisis has dented the reputation of Bear Stearns, which has been known for its expertise in the mortgage market. Other hedge funds have also blamed the two Bear funds for triggering broader losses and margin calls in other parts of the asset-backed securities market. End of Story
Bear Seizes Most of Fund's Collateral [WSJ]
By KATE KELLY
July 27, 2007; Page C5
Putting another nail in the coffin of the troubled High-Grade Structured Credit Strategies hedge fund, lenders at Bear Stearns Cos. have seized most of the fund's collateral following its failure to meet a recent margin call.
Bear's move, which according to someone close to the situation came after more than a week of waiting for additional cash or collateral to repay Bear's $1.6 billion line of credit, leaves the High-Grade fund with little or no remaining capital and few assets of any value. Both the High-Grade fund and a more-leveraged sister fund have seen the value of their holdings decline precipitously in recent weeks, as the market for risky subprime mortgages, on which the funds bet heavily, has weakened.
Bear is now saddled with some of the same troubled securities that hobbled the hedge fund. Bear is in the process of unwinding the more leveraged fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund, and plans to do the same with the less-leveraged fund in light of yesterday's news.
The assets it seized consist mostly of the High-Grade fund's remaining collateralized debt obligations, securities backed by pools of subprime mortgages. Subprime-linked CDOs have seen their values slashed recently as the U.S. housing market has declined. But Bear may be able to preserve the securities' value by holding on to them until market conditions improve, says the person close to the situation.
"The decision to assume control of the assets was dictated by the fund's inability to satisfy margin obligations under the agreement," said Bear in a statement, adding that the firm does not anticipate any "material change" in the parent company's financial exposure.
It is the latest disappointment for Bear and its asset-management unit, which in June saw the worth of two prominent hedge funds dwindle to practically nothing. Last month, fears of investor losses caused the High-Grade fund and the more leveraged sister fund to hit the rocks amid a slew of redemption requests and markdowns on the values of CDOs. Late last month Bear extended it an 11th-hour secured credit line of $1.6 billion.
Through the sale of some assets in early July, High-Grade fund was able to pay back about $300 million of that loan, according to a recent regulatory filing. But after a mid-July margin call couldn't be met, Bear creditors moved to take control of most of the fund's remaining assets.
As the broad market swooned yesterday, Bear shares were down nearly 4% to $124.25. That was an improvement from the stock's price earlier in the afternoon, when it hit $119.55, setting a new 12-month low. |
