Legg sheds toxic debt

$1.8 billion from money market funds is sold at loss to clear books

March 06, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

Legg Mason Inc. has wiped out the last of the toxic securities from its money market funds that have troubled the money manager for almost two years - a move that executives said will allow the company to focus on improving the performance of its struggling mutual funds.

The Baltimore company said yesterday that it sold $1.8 billion of so-called structured investment vehicles for 25 cents on the dollar. SIVs issue debt, some backed by mortgage-linked securities, that has plummeted in value amid the credit turmoil.

SIVs were popular investments for money funds looking to increase yields, but they proved riskier than managers anticipated.

The company will retain $49 million in SIVs that it had been carrying on its balance sheet.

The sale resulted in a net cash outflow of $1.2 billion, Legg said. Reflecting the transaction and the reduced value of the retained SIVs, Legg expects to take a $610 million gross charge in the quarter ending March 31.

After operating expenses and taxes, the charge amounts to $367 million, or $2.59 per diluted share.

Yesterday's "milestone" move frees the company to be "singularly focused on protecting and building value for Legg Mason clients and its shareholders," said Legg Chairman and Chief Executive Officer Mark R. Fetting.

"As you know, we've been working through the situation for the past 18 months and as we achieve this final solution, we can dedicate our full resources to managing money for our clients," Fetting said yesterday during a conference call.

Besides costs related to propping up its money funds exposed to SIVs, Legg has been hurt by weak performance of its key mutual funds, including the flagship Value Trust fund managed by Bill Miller, and client redemptions.

Last year, clients pulled nearly $135 billion out of Legg funds.

As a result, the company reported four consecutive quarterly losses, including $1.5 billion in the three months ended Dec. 31.

Its stock, which traded as high as $66.44 in May, lost 8 cents to close at $12.29 yesterday.

To compensate for the volatile market and its poor financial performance, Legg implemented corporate cost-cutting measures to save $120 million, but it expects to exceed $135 million in savings. The moves included laying off 200 people at the corporate level - about 99 employees in the Baltimore region.

Fetting said yesterday that the company expects to make more cuts as market challenges continue. He did not provide details on how those cuts would be made.

He said investment performance is Legg's highest priority. The company's assets under management dropped to $665 million at the end of January, from $698.2 billion Dec. 31.

But Fetting said client outflows in January were significantly less than the prior quarter, with that trend continuing in February.

"We're not out of the woods yet, but we're encouraged," he said.

With yesterday's SIV sale, Legg expects $500 million in a tax refund in the summer, which could be used to pay debt or other corporate actions.

After receiving the tax refund, Legg said it will have $1 billion in cash beyond what it needs to run the business.

Morningstar analyst Alan Rambaldini said Legg can now concentrate on improving its core business after spending so much time and effort to resolve its SIV issue.

"That's doing well by your investors and getting assets under management growing again," he said. "And it doesn't hurt that they have a billion dollars of free cash to spend either to try to improve operations or reduce debt or buy back shares."

At its peak, Legg's SIV exposure in its money market funds was $10 billion in October 2007. Legg's money market funds carry $156 billion in assets.

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