Fitch lowers Legg outlook

Change to `negative' laid to SIV debt

November 17, 2007|By Bloomberg News

A major rating service lowered its outlook yesterday on Legg Mason Inc. to "negative" on concerns about exposure that the Baltimore firm's money market mutual funds have to losses on debt issued by so-called structured investment vehicles.

The previous outlook was "stable," Chicago-based Fitch Ratings said in a statement. It was Fitch's first outlook change on a money-fund manager related to debt issued by structured investment vehicles, also called SIVs. Legg Mason's debt ratings were left at "A," Fitch said.

Legg Mason disclosed Nov. 9 that it had invested $100 million in one of its money funds and arranged $238 million in credit for two others to cushion them against SIV losses. The funds invested in debt issued by SIVs, some of which have defaulted.

The company "will provide additional support to sponsored money-market funds if needed," Fitch said.

"Providing such support, under a stressed-case scenario, could exert financial pressures on LM's balance sheet liquidity," Fitch said.

In a research note yesterday, an analyst at Wachovia Capital Markets wrote that "the issues at LM are severe and getting worse." Analyst Douglas Sipkin recommended avoiding the stock despite its recent declines.

Funds run by Legg Mason held about $10 billion of SIV debt, half of which is not sponsored by banks, Fitch said. SIV debt accounted for 6 percent of the company's money market assets at the end of October.

Legg Mason Chief Executive Officer Raymond A. "Chip" Mason said in a conference call with investors Wednesday that the firm would likely protect money fund investors from losses.

Legg Mason shares fell 5 cents to $71.73 in New York Stock Exchange composite trading yesterday. They have slumped 25 percent this year, making them the worst performer in the 14-member Standard and Poor's Supercomposite Asset Management & Custody Banks Index, which has gained 14 percent.

Money funds, considered among the safest investments, loaded up on asset-backed, short-term debt issued by SIVs and others with the hope of increasing returns.

SIVs were set up by banks and investment firms to profit by borrowing money at low rates and owning securities that pay higher yields. They sell short-term debt including commercial paper, which matures in 270 days or less, and buy longer-dated assets such as bank bonds and mortgage-backed securities.

Some SIVs haven't been able to repay debt because of falling values of mortgage-backed securities.

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