Legg Mason to raise $1B; CEO Fetting 'sees some daylight'

Baltimore money manager Legg Mason reported a larger-than-expected quarterly loss Tuesday and said it would raise $1 billion to keep the company's balance sheet strong.

Legg Mason (NYSE: LM) posted a loss of $256 million, or $1.81 per share, for its fourth fiscal quarter, which ended March 31. On average, analysts surveyed by Thomson Financial had predicted a loss of 27 cents per share. In the same quarter a year ago, Legg earned $173 million, or $1.19 per share.

For the quarter, revenue fell by 6 percent to $1.07 billion. Legg's assets under management shrank by 5 percent during the quarter to $950 billion. Market downturns accounted for $29 billion of the decline, and clients pulled $19 billion in investments out of the firm. Some of Legg's top fund managers have had weak performances over the past several quarters, and investors have pulled money out of funds.

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Since October, Legg has had to shore up the value of securities that it held in its money market funds. Legg had warned that it would have to do so again in the fourth quarter, and it took a charge of $2.06 per share to provide financial support for the funds.

But Legg announced Tuesday an additional charge of 66 cents per share. That charge was a writedown of the value of management contracts acquired seven years ago by Legg subsidiary Private Capital Management, and surfaced during a regular quarterly review, officials said on a conference call with analysts Tuesday morning.

CEO Mark Fetting, who took the reins from longtime Legg head Raymond A. "Chip" Mason in January, said the quarterly loss was Legg's first since going public in 1983.

"We are disappointed in these results," Fetting told analysts. "We are determined to deliver improvements."

But Fetting said that "for the first time in more than a year, we are gratified to see some daylight on the horizon." The nationwide credit crunch had frozen up chunks of the bond market for months, but moves by the Federal Reserve appear to be prompting bond investors to take on more risk, Fetting said.

A hiker and mountain climber, Fetting likened Legg's path through the credit crisis to a tough climb: Legg thinks it has passed the summit, but the trek downward will hold its own challenges.

Legg already sold $1.3 billion in bonds earlier this year to private equity giant Kohlberg Kravis Roberts to raise money. On Tuesday, Legg said it planned to sell 20 million equity units for $50 each to raise $1 billion. Each equity unit being offered in the complex deal includes a contract to purchase Legg common stock and a 5 percent interest in a $1,000 senior note.

In explaining why they are raising the money, Legg officials touched on a common theme among financial firms these days: You can't have too much money on the balance sheet. Fetting said Legg wants to have enough funds on hand so it can infuse more cash into the money-market products -- although it ultimately may not need to. If Legg doesn't have to give the funds an infusion, it can use the money to pay down its nearly $3 billion in debt or to fund acquisitions, officials said. Despite its challenges, Legg continues to look for deals, especially ones that would boost its international presence.

Legg investment sage Bill Miller's Value Trust fund illustrates the challenges facing Legg's fund managers. After a 15-year streak of beating the Standard & Poor's 500, Value Trust just had its worst quarter ever relative to the S&P. But Value Trust's performance against the S&P improved in April, officials said.

And even as some investors are pulling money out of funds, Miller has an exciting new opportunity, Fetting said: He won an assignment from a sovereign wealth fund -- a pool of money that a country sets aside for investments. Fetting did not provide specifics on the wealth fund or the assignment Miller has received from it, and a Legg spokeswoman said the firm could not comment further.

Sovereign wealth funds have been increasingly active in U.S. markets since the credit crunch, with Abu Dhabi's state fund pouring $7.5 billion into investment giant Citigroup (NYSE: C) last year.

For the fiscal year, Legg earned $268 million, or $1.86 per share, on revenue of $4.6 billion. In the previous fiscal year, Legg earned $647 million, or $4.48 per share, on $4.3 billion in revenue.

At quarter's end, about 2 percent of Legg's $176 billion in "liquidity assets" like money market funds was in structured investment vehicles -- complex instruments affected by the credit crunch. Legg has pared that exposure since October, when about 6 percent of its liquidity assets were in SIVs.

Legg shares closed Tuesday down 10 percent to $56.30.