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Archive for July, 2007


Bear Stearns Seizes Most of Fund

Putting another nail in the coffin of the troubled High-Grade Structured Credit Strategies hedge fund, lenders at Bear Stearns Cos. have seized most of the fund’s collateral following its failure to meet a recent margin call.

Bear’s move, which according to someone close to the situation came after more than a week of waiting for additional cash or collateral to repay Bear’s $1.6 billion line of credit, leaves the High-Grade fund with little or no remaining capital and few assets of any value. Both the High-Grade fund and a more-leveraged sister fund have seen the value of their holdings decline precipitously in recent weeks, as the market for risky subprime mortgages, on which the funds bet heavily, has weakened.

Bear is now saddled with some of the same troubled securities that hobbled the hedge fund. Bear is in the process of unwinding the more leveraged fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund, and plans to do the same with the less-leveraged fund in light of yesterday’s news.

The assets it seized consist mostly of the High-Grade fund’s remaining collateralized debt obligations, securities backed by pools of subprime mortgages. Subprime-linked CDOs have seen their values slashed recently as the U.S. housing market has declined. But Bear may be able to preserve the securities’ value by holding on to them until market conditions improve, says the person close to the situation.

Morgan Keegan’s Kelsoe Falls From Top Ranking on Subprime Rout

Jim Kelsoe, a top-ranked junk-bond fund manager since 2000, dropped to last place this year because of losses tied to mortgages for people with poor credit.

Kelsoe’s $1.1 billion Regions Morgan Keegan Select High Income Fund fell 4.2 percent from the beginning of 2007 as defaults on subprime home loans reached a five-year high. The mutual fund had 15 percent of assets in the subprime market and at least the same amount in other mortgage debt in May.

The High Income fund got a boost from the holdings for seven years and now “it’s very easy to be critical” of the investment decision, Kelsoe said in an interview from his office at Morgan Asset Management Inc. in Memphis, Tennessee. The fund had as much as 25 percent of assets in subprime-related securities in 2005.

Kelsoe’s fund ranks last of 93 high-yield rivals and it’s the eighth-worst performer this year of more than 550 U.S.-based bond funds tracked by Bloomberg. Losses accelerated in June after the collapse of two hedge funds run by Bear Stearns Cos. partly because of bad bets on bonds linked to subprime mortgages.

The $1 billion Regions Morgan Keegan Select Intermediate Bond Fund, which Kelsoe manages, also is the worst in its class, down 2.1 percent this year including reinvested dividends.

“A lot of mutual funds didn’t own much of this stuff,” said Lawrence Jones, an industry analyst at Chicago-based research firm Morningstar Inc., referring to the subprime market. The Morgan Keegan fund “is the one real big exception.”

The 44-year-old Kelsoe said that, like fund managers drawn in by Internet stocks at the start of the decade, an “intoxication” with high-yield subprime investments kept him from pulling out completely. Subprime mortgage bonds rated BBB, or investment grade, yielded 2.05 percentage points more than benchmarks in February, compared with 1.53 percentage points for BB-rated, or junk, corporate bonds, according to JPMorgan Chase & Co. in New York.

Morningstar cut its rating on Kelsoe’s High Income fund this month to three stars from four stars, citing above-average risk and underperformance. The highest grade is five. The fund has a one-year Sharpe ratio of minus 0.9, compared with 1.86 for its peers. A higher ratio means better risk-adjusted returns.

The average high-yield fund has gained 2.9 percent this year, according to Morningstar. The top-performing $4.1 billion Pioneer High Yield Fund, run by Andrew Feltus at Boston-based Pioneer Investment Management Inc., has gained 9 percent.

Kelsoe, who has worked at Morgan Keegan for the past 16 years, favors bonds backed by assets such as aircraft leases, and mortgage loans, as well as collateralized debt obligations, or CDOs, instead of corporate bonds, which made up only 21 percent of the fund in March. The $9.5 billion Vanguard High- Yield Corporate Fund, by contrast, has 92 percent of its assets in corporate bonds last month.

The strategy helped Kelsoe avoid getting pummeled by companies dragged down by concerns about accounting scandals at energy trader Enron Corp. in 2001 and phone company WorldCom Inc. the next year. A large part of his outperformance in recent years came from purchases of beaten-down aircraft-lease bonds after the Sept. 11, 2001, terrorist attacks, Morningstar’s Jones said.

Kelsoe, who graduated from the University of Alabama in Tuscaloosa, started managing the High Income fund in 1999. Morgan Asset Management is a unit of Birmingham, Alabama-based Regions Financial Corp.

Kelsoe’s fund rose 17 percent in 2000, 18 percent the next year and 11 percent in 2002, outperforming 99 percent of its competitors. Since the start of the decade, the fund climbed at an average annual rate of 12 percent, compared with 2.2 percent for the Standard & Poor’s 500 Index of U.S. stocks.

The fund is declining this year amid surging delinquencies on mortgages that may cause bond investors to lose about $100 billion in principal, according to estimates from analysts at New York-based Citigroup Inc.

Kelsoe had $4 million at the end of last year in a security backed by second mortgages that Goldman Sachs Group Inc. created in January 2006. The bond was downgraded twice this year by Moody’s Investors Service to the lowest rating.

Another holding was an unrated piece of a CDO overseen by Deerfield Capital Management LLC that was sold a year ago by Royal Bank of Scotland Group Plc. The $4.8 million security, which a semi-annual report listed with a 15 percent coupon, is mostly backed by subprime and “mid-prime” mortgage securities.

Bear Stearns Tells Fund Investors “No Value Left”

Bear Stearns Cos. told investors in its two failed hedge funds that they’ll get little if any money back after “unprecedented declines” in the value of the securities used to bet on subprime mortgages.

“This is a watershed,” said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.”

Estimates show there is “effectively no value left” in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and “very little value left” in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter. The second fund still has “sufficient assets” to cover the $1.4 billion it owes Bear Stearns, which as a creditor gets paid back first, according to the letter, obtained yesterday by Bloomberg News from a person involved in the matter.

Bear Stearns, the fifth-largest U.S. securities firm, provided the second fund with $1.6 billion of emergency financing last month in the biggest hedge fund bailout since the collapse of Long-Term Capital Management LP in 1998. The losses its clients now face underscore the severity of the shakeout in the market for collateralized debt obligations, or CDOs, investment vehicles that repackage bonds, loans, derivatives and other CDOs into new securities.

SEC Files Action Regarding Amerifirst Funding and Amerifirst Acceptance Corporation

On July 2, 2007, the Securities and Exchange Commission filed an emergency action in Dallas federal court to halt what the Commission contends is a fraudulent offering of securities, known as Secured Debt Obligations (“SDOs”), by Amerifirst Funding, Inc. and Amerifirst Acceptance Corporation (together, “Amerifirst”). The SDOs are notes purportedly secured by automobile financing receivables created or purchased by the defendants. The district court entered, under seal, a temporary restraining order suspending the offering, as well as orders freezing the defendants’ assets and requiring an accounting and repatriation of assets. The court also appointed a receiver to secure assets for investors, and ordered defendants to preserve documents and submit to expedited discovery. On July 3, 2007, the court unsealed all of the orders.

The defendants named in the Commission’s Complaint are:

Jeffrey C. Bruteyn, age 37, of Dallas, Texas, Managing Director of Amerifirst Funding, Inc. and Amerifirst Acceptance Corporation and the Director and sole owner of Hess Financial Corporation;

Dennis W. Bowden, age 55, of Dallas, Texas, the president of Amerifirst Funding, Inc., a director and chief operating officer of Amerifirst Acceptance Corporation and president and COO of American Eagle Acceptance Corporation;

Amerifirst Funding, Inc., a Texas corporation operated and controlled by Bruteyn and Bowden; and

Amerifirst Acceptance Corporation, a Texas corporation operated and controlled by Bruteyn and Bowden.
The Commission’s Complaint also names two relief defendants, seeking return of investor funds they unjustly received:

American Eagle Acceptance Corporation, a Texas corporation controlled by Bowden and held out to be a subsidiary of Amerifirst Funding; and

Hess Financial Corporation, a Texas corporation controlled by Bruteyn.

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