US CREDIT-AIG, Lehman asset sales may still pressure spreads

By Karen Brettell

NEW YORK, Sept 19 (Reuters) - U.S. government plans to
shore up the finance system gave significant relief to credit
investors on Friday, although asset sales at Lehman Brothers
(LEHMQ.PK) and American International Group (AIG.N) may still
weigh on spreads.

The U.S. Treasury is expected to deliver a proposal to
Congress to deal with illiquid debt instruments and shore up
financial companies within 24 hours, congressional aides said
on Friday.

The U.S. Securities and Exchange Commission has also issued
an emergency order temporarily halting the short-selling of 799
financial stocks.

The moves came after markets plunged as investors panicked
over which bank would be next to fail, following a Lehman
Brothers' bankruptcy, a government rescue package for AIG and a
shotgun marriage between Merrill Lynch MER.N and Bank of
America. (BAC.N)

The investment grade credit derivative index tightened 23
basis points to 152 basis points on Friday, following an 11
basis point rally on Thursday, according to Markit Intraday.

However, these levels could come under pressure in the
coming weeks.

"There could be a substantial amount of forced selling of
financial assets as Lehman is unwound and AIG undertakes its
strategic realignment, and this may cause a material repricing
across several securities classes," analysts at Barclays
Capital said in a report on Friday.

Credit derivative players with counterparty exposure to
Lehman have begun unwinding trades with the bank and resetting
some of these with new counterparties. However, market
participants say this process is still far from complete.

Buyers of default protection from Lehman have been left
exposed to the issuer they had sought protection against, and
as such are likely to want to reset these trades with new
banks.

A large number of protection buyers resetting trades would
likely push spreads wider.

Lehman also has portfolios of assets, including mortgages,
that are expected to be sold off, and investors fear that these
could push prices of the securities down even further. That
would create additional write-downs for banks and investors
that have already taken huge losses on the assets.

LESS FUNDS FOR LENDING?

Banks have been curtailing their lending to companies for
several months and now, with the rapid loss of two large
investment banks, lending could dry up further.

"The loss of two large market makers and lenders will at
least temporarily contribute to further tightness in liquidity
and credit availability," Barclays said.

A slowing economy is also expected to result in a weakening
of industrial companies relative to financials, once stability
among banks is restored.

"Industrials and utilities have materially outperformed the
financial sector broadly," Lehman Brothers analysts said in a
report sent on Friday.

"That said, we continue to expect the stresses already
obvious in the financial system to increasingly translate to
weakness in the real economy and nonfinancial corporate
fundamentals as we look out over the fourth quarter of 2008 and
early 2009," they said.

Shocks from this week's events are also likely to make
banks and investors more careful about which companies they are
willing to take exposure to, even outside of the financial
sector.

There will be a "Darwinian differentiation between 'clean'
and 'not-so-clean' credits, as well as the repricing of high
yield valuations versus investment grade," Barclays said.

However, there will also be "the recognition that a host of
larger financials have become temporarily effectively
government sponsored, which should lead to significant
overweight opportunities," the bank added.
(Reporting by Karen Brettell; Editing by Dan Grebler)