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.