Bear Stearns Fund Won't Hurt Earnings, Lehman Says (Update2)

Date: Tuesday, June 26, 2007
Author: Allan Wan, Bloomberg

June 26 (Bloomberg) -- Bear Stearns Cos.'s bailout of a money-losing hedge fund doesn't put the firm's earnings at risk because it won't have to sell the fund's investments at depressed prices, according to an analyst at Lehman Brothers Holdings Inc.

Bear Stearns, the fifth-biggest U.S. securities firm, may commit $1.6 billion to rescue its High-Grade Structured Credit Fund, half as much as it offered last week, two people with knowledge of the situation said yesterday.

``We do not expect that this short-term liquidity financing will have a meaningful impact on Bear's earnings,'' Lehman analyst Roger Freeman wrote in a note to investors today. The firm has ``indicated that it believes that by providing this much needed liquidity, the fund will be able to de-lever and liquidate at appropriate valuations,'' the New York-based analyst said.

Freeman's view compares with that of Sanford C. Bernstein & Co. analyst Brad Hintz, who says the hedge-fund debacle and the risks Bear Stearns faces in the mortgage market may cost the New York-based firm 7.2 percent of earnings this year. Merrill Lynch & Co. analyst Guy Moszkowski told clients yesterday that Bear Stearns may be forced to ``stump up'' even more to salvage the High-Grade Structured Credit Enhanced Leveraged Fund.

Freeman agreed with Moszkowski, saying the second, ``much more highly leveraged fund is at a far greater risk of failure.'' Bear Stearns officials have declined to comment this week about plans for the funds.

Shares of Bear Stearns are ``attractively valued,'' trading at 1.5 times book value, said Freeman, who has an ``overweight'' rating. The stock may be ``under pressure while the market gains comfort that the new financing doesn't pose a material risk to the company's equity capital base,'' he said.

Bear Stearns shares rose for the first time in three days, gaining 98 cents, or 0.7 percent, to $140.08 as of 1 p.m. in New York Stock Exchange composite trading. They have gained 2.7 percent over the past year, compared with a 14 percent advance for the Standard and Poor's Financials Index.

To contact the reporter on this story: Allen Wan in New York at awan3@bloomberg.net .