Bear Stearns, Creditors May Help Save Hedge Fund, Person Says

Discussion in 'Wall St. News' started by S2007S, Jun 19, 2007.

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    S2007S

    Bear Stearns, Creditors May Help Save Hedge Fund, Person Says

    By Jody Shenn

    June 19 (Bloomberg) -- Bear Stearns Cos., the biggest broker for U.S. hedge funds, offered to provide $1.5 billion in loans to help rescue a money-losing fund run by its asset- management unit, a person familiar with the situation said.

    The plan calls for New York-based Bear Stearns to provide the money only if some of the hedge fund's creditors, which include Merrill Lynch & Co. and JPMorgan Chase & Co., inject $500 million of cash into the fund, said the person, who declined to be named because the negotiations aren't public.

    Bear Stearns, seeking to stave off liquidation of the fund, made the commitment yesterday in a meeting with creditors after losses forced the sale of $4 billion of mortgage bonds last week. Merrill Lynch and JPMorgan had planned to sell another $800 million of bonds of so-called collateralized debt obligations owned by the fund this week, the person said. The fund's potential closure sparked concern about wider losses in the market for subprime mortgage bonds and CDOs.

    ``It's tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing mark downs or redemptions,'' said Peter Nolan, a product portfolio manager who runs the CDO business at Chapel Hill, North Carolina-based Smith Breeden Associates Inc. The firm manages about $34 billion in fixed- income assets, about a third of which are asset-backed bonds.

    Bear Stearns spokesman Russell Sherman didn't immediately return calls seeking comment. Jessica Oppenheim, a spokeswoman for New York-based Merrill Lynch, declined to comment, as did Brian Marchiony, a spokesman for New York-based JPMorgan.

    Halted Redemptions

    The 10-month-old fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund and run by Bear Stearns senior managing director Ralph Cioffi, began with about $600 million in investors' money. It halted redemptions after investors sought to withdraw $300 million by June 30, the newsletter Hedge Fund Alert reported earlier this month.

    The fund has lost about 20 percent this year, while a sister fund that uses less leverage, or borrowed money, is down a smaller amount.

    The fund had borrowed at least $6 billion from investment banks. Other lenders, including London-based Barclays PLC, would contribute about $250 million of cash under the plan Bear Stearns proposed yesterday, the Wall Street Journal reported today. New York-based Citigroup Inc. is leading a committee of other creditors considering supplying the other $250 million, the Journal said, citing people it didn't identify.

    Creditors gave the fund an additional day to complete its plan. Blackstone Group LP, based in New York, is helping prepare the rescue plan, the New York Post reported today.

    UBS Shutdown

    UBS AG, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit last month, partly because of losses in the mortgage-bond market.

    CDOs repackage loans, derivatives and bonds, including other CDOs, into new securities. Some of that new debt gets higher credit rating than the underlying assets and some of it offers potentially greater returns. Credit derivatives are used to bet on whether bonds or loans will default.

    Bank of America Corp. this week is offering some other CDO securities on behalf of the Bear Stearns fund as part of a previously planned sale, the person said. Louise Hennessy, a spokeswoman for the Charlotte, North Carolina-based bank, declined to comment.

    Danielle Romero-Apsilos, a Citigroup spokeswoman declined to comment. Tom Vogel, a Barclays a spokesman, didn't immediately return a call.