UPDATE 2-Lehman needs deal to avoid downgrade -Moody's

Wed Sep 10, 2008 5:36pm EDT

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NEW YORK, Sept 10 (Reuters) - Lehman Brothers LEH.N will have to complete a transaction such as sale of a majority stake in the firm, or the entire company, to avoid a rating downgrade, Moody's Investors Service said on Wednesday.

The bank will also need to take further action beyond the steps it announced on Wednesday to avoid a ratings cut, Moody's analysts said on a conference call.

Lehman sought to restore investor confidence on Wednesday with plans to sell a majority stake in its asset management unit and spin off commercial real estate. For details, see [ID:nN10429539]

Moody's said it would have downgraded Lehman's debt rating earlier on Wednesday, likely to the "triple-B" category, if it did not think a transaction was possible. Any deal would have to calm markets to preserve the ratings, the agency added.

Raising capital alone would also not preserve Lehman's rating, now "A2," as the firm suffers a crisis of confidence, Moody's said.

"Capital is one element but obviously confidence is a key element," said Bob Young, a team managing director at Moody's.

The rating agency on Wednesday put Lehman's ratings under review with the direction uncertain, citing the fluidity of the company's situation.

Moody's added on the conference call that it believes Lehman has ample liquidity to post additional collateral against its derivative positions, were it required by a downgrade of its credit rating. Collateral postings are also not usually the largest drain on a bank's capital, Moody's added. (Reporting by Dena Aubin and Karen Brettell; Editing by Leslie Adler)

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