Merrill to Sell $800 Million of Bonds From Bear Fund (Update1)
By Jody Shenn
June 20 (Bloomberg) -- Merrill Lynch & Co. plans to auction today about $800 million of bonds held by a money-losing hedge fund run by Bear Stearns Cos. that specialized in mortgage- related assets and so-called collateralized debt obligations, people with knowledge of the offering said.
Merrill Lynch, a creditor to the fund, began distributing a list to investors late yesterday of the bonds it will sell, according to the people, who declined to be named because the details aren't public. Merrill Lynch postponed the auction two days ago while Bear Stearns worked on a plan to bail out the hedge fund. Merrill Lynch and Bear Stearns are based in New York.
The 10-month-old fund, known as the High-Grade Structure Credit Strategies Enhanced Leverage Fund and run by Bear Stearns senior managing director Ralph Cioffi, has lost about 20 percent this year. The fund and a sister fund, which hadn't borrowed as much and was down by a smaller amount, both face pressure from creditors.
Speculation the fund may be dissolved ``will probably add to the sentiment that you need to be cautious,'' said Chris Flanagan, a bond analyst at JPMorgan Chase & Co. in New York.
A slump in the U.S. housing market is leading to rising delinquencies on so-called subprime mortgage loans, those made to homebuyers with poor credit or heavy debt loads. That's pushing down the value of securities backed by mortgages. The subprime crisis has already forced lenders such as New Century Financial Corp. and ResMae Mortgage Corp. into bankruptcy.
Bondholders at Risk
As defaults rise, bondholders stand to lose as much as $75 billion on securities backed by the mortgages, according to an estimate in April from Pacific Investment Management Co., manager of the world's largest bond fund.
The two Bear Stearns funds together once controlled more than $20 billion and had effectively paid down $2.25 billion of their $9 billion in outstanding loans by early yesterday evening in New York, the Wall Street Journal reported today on its Web site, citing unnamed sources. They'd encountered resistance to a bailout plan, the paper reported.
The securities Merrill Lynch is selling are mostly backed by mortgages or home-loan bonds, rated AAA or AA, and represent the entire collateral for loans Merrill Lynch made to the fund, one of the people said.
Russell Sherman, a Bear Stearns spokesman, and Jessica Oppenheim, a spokeswoman for Merrill Lynch, declined to comment.
Pressing Ahead
Merrill Lynch is pressing ahead with the sale even after Bear Stearns, the biggest broker for U.S. hedge funds, offered to provide $1.5 billion in secured loans to help rescue the fund and seek cash investments from some of the fund's existing creditors, which also include Citigroup Inc. and JPMorgan.
Bear Stearns made the commitment in a meeting with creditors after losses forced the fund to sell off $4 billion of mortgage bonds last week. Merrill Lynch and JPMorgan had each planned to sell about $400 million of bonds of CDOs owned by the fund this week. Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment.
The banks may want to avoid an asset sale because that could force them to revalue their own investments and loans they made to other funds, said Josh Rosner, managing director at New York- based investment-research firm Graham Fisher & Co.
``The value that assets are being carried at may well be proved to be far above'' what they're really worth, Rosner said.
`Ripple Effect'
A bailout would be reminiscent of that of Long-Term Capital Management LP, which lost $4.6 billion, in 1998, he said. At the time, lenders met and agreed to take a 90 percent stake in the Greenwich, Connecticut-based fund and slowly liquidated the assets to limit the impact of its collapse.
An ``unraveling'' of the Bear Stearns fund ``threatens to have a ripple effect on valuations,'' Kathy Shanley, a senior analyst in Chicago at Gimme Credit LLC, an independent corporate- bond researcher, said in a report yesterday.
High-Grade Structured Credit Strategies Enhanced Leverage Fund began with about $600 million. It halted redemptions after investors sought to withdraw $300 million by June 30.
The fund borrowed at least $6 billion. New York-based Citigroup Inc. is leading a committee of creditors that may supply another $250 million, the Wall Street Journal reported yesterday, citing people it didn't identify. Danielle Romero- Apsilos, a Citigroup spokeswoman, declined to comment.
The fund had made $11.5 billion of ``bullish'' investments and $4.5 billion of ``bearish'' bets, the Wall Street Journal reported today, citing documents it reviewed. Using borrowed money, or leverage, can magnify a fund's returns if markets move as planned, or increase losses if investments sour.
CDOs are investment vehicles that repackage loans, derivatives and bonds into new securities, providing managers with fees and underwriting revenue to banks. Some of that new debt gets a higher credit rating than the underlying assets and some offers potentially greater return.
Hedge funds are private, largely unregulated pools of capital whose managers participate substantially in any gains on the money invested.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net .
Last Updated: June 20, 2007 04:40 EDT |
