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Companies hit by crunch raise cash

August 21, 2007|From the Associated Press

Three companies swept up in the struggling credit markets said Monday they sold pieces of themselves or their investments to fund ongoing operations, underscoring how tight those markets still were despite government intervention last week.

The buyers in these deals include a major investment bank and several well-known hedge funds.

While most of the deals were done at a discount -- in some cases a very steep discount -- they suggested bargain hunters would eventually snap up the weakened bonds and lenders that have thrust the mortgage industry into distress.

"Some of the buyers for these assets will be well-rewarded," said Les Satlow, a portfolio manager for Cabot Money Management. "This is not the first time that distressed assets have been sold and proven to be wildly underpriced."

The exodus of buyers from the markets where mortgage lenders raise money has brought an entire industry to its knees. More than 50 lenders have gone bankrupt, and entire swaths of the industry have suddenly disappeared.

Most lenders say the problem is not that mortgage debt is worthless, but simply that nobody is buying it or other kinds of debt like the short-term loans known as commercial paper.

Still, with financial backers pulling the plug and in many cases demanding money back, lenders have scrambled to raise enough cash to stay alive.

Thornburg Mortgage Inc. said Monday it sold $20.5 billion of its safest bonds to raise cash. The Santa Fe, N.M., lender said reshuffling its portfolio to carry less debt will cost $930 million.

Luminent Mortgage Capital Inc., a San Francisco-based mortgage investor that has been the subject of bankruptcy speculation, offered Arco Capital Corp. a majority stake at a substantial discount in exchange for a $60-million loan and an agreement to buy some of the company's investments for $65 million.

And KKR Financial Holdings Inc. arranged to sell up to $500 million of its stock to investors including Morgan Stanley and the hedge fund Farallon Capital Management, as well as the San Francisco investment fund's own shareholders.

Cabot Money Management's Satlow said these assets were hard to sell no matter how undervalued they were. Any buyer would need to have a strong stomach for risk, a lot of money and little or no reliance on borrowing, he said.

Plus, a lot of would-be buyers for distressed mortgage assets -- lenders and investment funds that understand mortgage risk -- have cash troubles of their own. For example, he suggested there were plenty of hedge funds that would like to buy this debt but could not raise enough money, leaving only the biggest players able to do so.

Blackstone Group and Goldman Sachs Group Inc. said recently they planned to buy some distressed debt if the price was compelling.

KKR Financial Holdings Chief Executive Nino Fanlo on Monday emphasized that the debt markets had not improved in the last few days, even with the Federal Reserve on Friday taking steps to make it cheaper for troubled banks to borrow money. The Fed cut its "discount rate," the rate it charges for direct loans to banks, to 5.75% from 6.25%.

The cut in the discount rate accompanied a $38-billion cash injection, representing the Federal Reserve's attempt to soothe the market and restore order.

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