By Christopher Condon and Miles Weiss
Nov. 12 (Bloomberg) -- Legg Mason Inc., the second-largest publicly traded U.S. mutual-fund company, propped up three money-market funds as a cushion against potential losses on commercial paper linked to subprime mortgages.
The Baltimore-based company invested $100 million in one of its money funds in October and arranged $238 million in credit to support two others this month, according to a Nov. 9 filing with the U.S. Securities and Exchange Commission.
Legg Mason holds $10.7 billion in debt issued by structured investment vehicles, or SIVs, representing 6 percent of its $167 billion in money-market assets. Credit-rating companies told Legg Mason to bolster the liquidity of the funds to maintain their AAA/Aaa ratings, spokeswoman Mary Athridge said.
``It's a no-brainer: You either prop up your fund with $100 million to solve the problem or watch your multibillion-dollar franchise go down the drain,'' said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter.
SIVs borrow money by selling short-term commercial paper and medium-term notes and buying higher-yielding assets such as financial company debt and mortgage-backed bonds. Investors began shunning the debt in August on concern they may hold assets linked to U.S. subprime mortgages. Those loans, made to the riskiest borrowers, have been defaulting at record rates.
`No Guarantees'
Money-market funds, considered to be among the safest investments, are required to hold debt with top ratings that matures in 13 months or less. Money-market funds never allow their share price to rise above or fall under $1.
``The investments have not affected the $1 per share net asset value of the funds and Legg Mason does not expect that they will, although no guarantees are given,'' the company said in the filing.
Legg Mason, home to star stock-fund manager Bill Miller, is at least the third fund company to prepare to help out money funds that invest in SIVs.
SunTrust Banks Inc. in Atlanta received regulatory approval on Oct. 26 to support two money-market funds if they suffer losses on debt issued by Cheyne Finance LLC, which is liquidating.
Wachovia, the fourth-largest U.S. bank, reported a $40 million loss on asset-backed commercial paper it purchased from its Evergreen Investment Management Co. unit. Wachovia is based in Charlotte, North Carolina.
Credit Changes
Legg Mason didn't purchase any debt from its funds, which are sold to institutional investors, Athridge said. She declined to disclose the names of the funds and the SIV investments that led to the liquidity crunch.
Some ``of the asset-backed commercial paper held by the liquidity funds that Legg Mason's subsidiary manages have recently been placed on credit watch or downgraded by ratings agencies,'' according to the filing.
Legg Mason also manages three retail money-market funds that have invested in SIV debt including the $54.1 billion Citi Institutional Liquid Reserves fund. It holds $4.89 billion in SIV debt, of which $1.6 billion worth has been in default or downgraded. Athridge said Legg Mason hasn't sought to support those funds.
Legg Mason shares rose 37 cents to $72.86 at 4:25 p.m. in New York Stock Exchange composite trading. The stock has fallen 23 percent this year, the worst performance on the Standard & Poor's 500 Asset Management and Custody Banks Index. BlackRock Inc., the biggest publicly traded U.S. fund company, has risen 24 percent in New York trading this year.
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