Legg acts to brace 3 funds

Firm plans charge of $265.3 million

July 01, 2008|By Eileen Ambrose | Eileen Ambrose,Sun reporter

Legg Mason Inc. said yesterday that it will take a $265.3 million charge in the quarter ended yesterday, more than half of it to shore up more money market funds invested in troubled asset-backed securities.

This is the fifth time since last year that the Baltimore money manager has stepped in to buttress money market funds managed by its subsidiaries. So far, Legg has committed $2.147 billion to bolster six money market funds.

In this latest action, Legg said it would be extending lines of credit totaling $240 million to three funds managed by its Western Asset Management subsidiary in Pasadena, Calif. The money will be contributed to the funds if any of them realize a loss related to certain asset-backed securities in their portfolios, the company said.

"Neither the funds nor their shareholders incurred a loss in these transactions," the company said in a statement.

The credit lines to Western Asset Money Market Fund, Western Asset Institutional Money Market Fund and Western Asset U.S. Money Market Fund will end in nine to 12 months, the company said. Legg has not previously shored up these three funds.

Legg expects to incur a noncash charge of about $146 million in the second quarter. After taxes, the charge will be $90.1 million, or 64 cents per diluted share.

After adding in charges for the reduced value of securities in money funds that have been previously supported, the total noncash charge for the quarter is expected to be $265.3 million. That comes to $154.5 million, or $1.09 per diluted share, after operating expenses and taxes.

Legg suffered its first quarterly loss in its 25 years as a public company in the first quarter because of the costs of shoring up the money market funds. The firm also has suffered from poor performance by a number of its top stock-fund managers.

Money market funds traditionally have been considered safe investments because they invest in high-grade debt, and investors aren't expected to lose their principal. But in pursuit of higher yields for their money market funds, some financial institutions started investing in aggressive securities issued by so-called structured investment vehicles. SIVs have gotten severely scorched by owning bad mortgage debt.

Legg has shored up its money funds to prevent their asset values from falling below $1 a share, a rare and confidence-damaging event known as "breaking the buck." In January, it sold $1.25 billion in debt, convertible into 9 percent of its stock, to the private equity group Kohlberg Kravis Roberts & Co. to strengthen its balance sheet, and more recently raised another $1 billion in a stock sale.

"Legg Mason raised capital during the first six months of 2008 in part to provide the company with additional financial strength to work through potential issues caused by continued uncertainty in the credit markets," said Mark R. Fetting, Legg's president and chief executive. "While there was improvement in the markets during the months of April and May, there has been an adverse market environment for most asset-backed securities in June."

Yesterday's action, Fetting said, "extends our support to every stable value fund that has exposure to SIVs, is part of our continued monitoring of credit market conditions and we may take additional action if we deem it appropriate."

Legg has incurred a total of $873 million in charges related to its money market funds, or $468 million after taxes and operating expenses, spokeswoman Mary Athridge said.

Assets in Legg's money market funds have grown, even though it has had to shore up some of them. Legg had $179 billion in its money market funds at the end of the second quarter, up $9 billion from the quarter that ended in March, Athridge said.

Legg Mason shares closed yesterday at $43.57 a share, down 54 cents.

Eileen.ambrose@baltsun.com

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