Along with everyone, Legg Mason (LM) has had a difficult year, in part since its star money manager Bill Miller has been such a big underperformer. The stock has lost 82% of its value, and last night the company said it would spend over $500 million to rescue four of its money market funds, which have been hurt by exposure to illiquid SIVs. Familiar situation.
Net of tax, the che company will take a $316 million quarterly charge worth $2.24 per share.
The company also used the occasion to announce that it’s found $120 million worth of fresh cost savings (read: layoffs) as well as changes to debt covenants that give it flexibility to up its leverage ratio.
FBR notes that while the overall news is bad, the covenant modification does give the company some breathing room
LM amended the debt covenants governing its $500 million revolver and $550 million term loan to increase the maximum allowable leverage ratio from 2.5x to 3.0x and increase the amount of cash charges related to SIV exposure excluded from the EBITDA calculation for ratio purposes from $750 million to $2.75 billion. These amendments remove most of the risk associated with tripping these covenants in the near term, although the new terms come at the cost of higher borrowing rates.