Merrill going ahead with bond sale plan

Merrill Lynch & Co. is proceeding with a plan to sell about $800 million of bonds from a money-losing hedge fund run by Bear Stearns Cos., a day after delaying a similar auction, people with knowledge of the offering said.

Merrill Lynch, a creditor to the fund, began distributing a list to investors of bonds it may offer in the sale, according to the people familiar with the bond offering.

The preparations by Merrill came as Bear Stearns tried to pull together a rescue plan to bail out the hedge fund. Bear Stearns, the biggest broker for U.S. hedge funds, has offered to provide $1.5 billion in loans to help rescue the fund and is seeking cash infusions from some of the fund’s existing creditors, which also include Citigroup Inc. and JPMorgan Chase & Co.

The hedge fund’s threatened closure has sparked concern about potential wider losses in the market for bonds backed by sub-prime mortgages and for other types of asset-backed securities.

“It’s tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing markdowns or redemptions,” said Peter Nolan, a product portfolio manager at Chapel Hill, N.C.-based Smith Breeden Associates Inc. The firm manages about $34 billion in fixed-income assets, about a third of which are asset-backed bonds.

Bear Stearns made the lending commitment in a meeting with creditors after losses forced the fund to sell $4 billion of mortgage bonds last week. Merrill Lynch and JPMorgan had each planned to sell about $400 million of bonds owned by the fund this week.

Merrill is said to have decided Tuesday to increase its sale to $800 million. The securities, which are mostly backed by mortgages or home-loan bonds and rated AAA or AA, are said to represent the entire collateral for Merrill’s loans.

Representatives of Bear Stearns, Merrill Lynch and JPMorgan, declined to comment.

The banks may be considering a bailout because asset sales could force them to revalue their own investments and those of other funds they lend to, said Josh Rosner, managing director at investment-research firm Graham Fisher & Co. in New York.

The 10-month-old fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund and run by Bear Stearns senior managing director Ralph Cioffi, began with about $600 million in money from investors.

The fund halted redemptions after investors sought to withdraw $300 million by June 30.

The hedge fund, which has lost about 20% this year, is said to have borrowed at least $6 billion. Other lenders to the fund include Citigroup Inc. and London-based Barclays.