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Bear Stearns not planning to bail out second fund

Date: Wednesday, June 27, 2007
Author: Dan Wilchins, Reuters

NEW YORK, June 26 (Reuters) - Bear Stearns Cos. Inc. (BSC.N: Quote, Profile, Research) does not plan to bail out a second struggling fund that invests in repackaged debt securities, a source familiar with the matter said on Tuesday, while a company the investment bank set up to invest in the securities withdrew plans for an initial public offering.

The hedge fund is one of two managed by Bear Stearns that are suffering from investments in repackaged subprime mortgages, which have suffered from rising defaults as a downturn in the U.S. housing market has proven deeper and lasted longer than expected.

The No. 5 U.S. investment bank said on Friday it would loan up to $3.2 billion to one of the funds to help stabilize the fund and allow it to sell assets in an orderly fashion.

That fund, High-Grade Structured Credit Strategies Fund, was down about 5 percent for the first four months of 2007, and it now owes creditors about $1.6 billion, sources said.

Creditors are still negotiating with Bear Stearns over a second fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, but the bank is unlikely to bail the fund out, the source familiar said. That fund owes creditors about $1.1 billion.

The two funds are just some of the casualties of the subprime mortgage lending crisis, which has forced more than 30 lenders to sell themselves or file for bankruptcy .

Bill Gross, manager of the world's largest bond fund, said on Tuesday that the subprime meltdown could eventually take a toll on the U.S. economy.

Trouble with bonds called collateralized debt obligations, that in some cases are portfolios of subprime mortgages, likely spurred Everquest Financial Ltd., a company formed by Bear Stearns to invest in the securities, to withdraw on Monday its registration for a $100 million initial public offering.

Everquest managed $720 million of collateralized debt obligations as of the end of 2006. It filed plans on May 9 for an IPO.

Ralph Cioffi, the co-chief executive of Everquest, was also the manager of the two troubled Bear hedge funds.

Everquest is a Cayman Islands-registered business jointly run by Bear Stearns Asset Management and Stone Tower Capital LLC, a hedge fund firm specializing in debt.

Bear Stearns' shares were down 44 cents, or 0.3 percent, on Tuesday at $138.74, their lowest level since September.

((Additional reporting by Joe Giannone, Jennifer Ablan, and Nick Zieminski, editing by Tim Dobbyn; Reuters messaging: joseph.giannone.reuters.com@reuters.net;+1 646 223 6184)) Keywords: BEARSTEARNS HEDGEFUND/ Keywords: BEARSTEARNS HEDGEFUND/

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