Legg joins effort to 'restore liquidity'

The Baltimore Sun

Legg Mason Inc., the seventh-largest U.S. manager of closed-end funds, said yesterday that it is looking to "restore liquidity" to shareholders of auction-rate preferred stock after the market for such securities dried up amid the credit crisis.

Shareholders of these investments - often issued by municipalities, student loan lenders and closed-end funds - have been unable to sell them.

Managers such as Legg are studying ways to address those limitations despite the fact that many of these auctions are failing to attract enough buyers.

The Baltimore money manager's affiliates advise seven LMP and Western Asset closed-end funds that have issued about $672 million in auction-rate preferred stock. Legg Mason's closed-end funds make up $9.3 billion of nearly $1 trillion in assets under its management. Auction-rate securities are long-term bonds or preferred stock whose interest rates are reset frequently at auction. Often sold as an alternative to cash investments, investors typically can sell these securities at each auction.

But the market to sell and buy such securities has been hurt as investors spooked by the mortgage-related credit crisis stayed away. That has left holders of auction-rate preferred stock without a way to sell their shares and issuers of the securities paying higher interest rates to help make up the liquidity gap.

"People who hold those things historically have had the ability to go back to auction and sell them to someone else. In the past, it hasn't been an issue," said Eric Jacobson, director of fixed-income strategies at Morningstar. "What's happening today is that all the dealers and bankers are hoarding cash.

"The credit quality does remain really, really high," Jacobson added. "The only thing ... wrong with this is there is no structure set up for the holder of the preferred stock to unload them in a hurry if they want to."

Legg Mason said the affected funds, rated Triple-A by their credit agencies, continue to pay interest to preferred shareholders. The company, which is working with banks, brokers and other financial institutions, could not say when it would find potential financing solutions.

"We believe that this continues to be a liquidity issue caused by broader economic conditions and continued severe dislocations in the credit markets; and that it is not a credit issue related to the funds or their portfolios," Legg Mason said in a statement.

Legg Mason is among several asset managers jolted by the auction market crunch.

Earlier this month, Eaton Vance Corp., the second-largest U.S. manager of closed-end funds, said it would buy back auction-rate preferred stock issued by three of its funds.

Nuveen Investments Inc., which has $15.4 billion in auction-rate preferred stock outstanding, said recently that it would refinance a "substantial portion" of $4.3 billion of such securities. BlackRock Inc. also is looking for solutions to help its auction-rate preferred stock shareholders.

UBS AG said yesterday that it is cutting the value of auction-rate securities in its brokerage customers' accounts. The markdowns will range from a few percentage points to more than 20.

Fallout from the troubled credit market has hurt Legg Mason in other ways. It expects to take a $142 million charge this quarter to protect investors who own shares of its money market funds containing some mortgage-backed debt.

Shares dropped $1.80, or 3 percent, to close at $54.12 yesterday.


The Los Angeles Times and Dow Jones contributed to this article.

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