S&P says may cut Lehman's rating after shares fall

NEW YORK (Reuters) - Standard & Poor's on Tuesday said it may cut its debt rating on Lehman Brothers Holdings, citing heightened uncertainty about the investment bank's ability to raise additional capital.

S&P's move came after Lehman's shares sank as much as 40 percent on concern that talks on a possible investment from Korea Development Bank had broken down.

S&P said it cannot rule out cutting Lehman's ratings by more than one notch. A two-notch downgrade would cut Lehman's current "A" rating, the sixth-highest investment grade, to the "triple-B" range.

Doubts about whether Lehman can raise more capital are based on the "precipitous decline in its share price in recent days," S&P said in a statement.

Lehman's capital ratios appeared adequate as of May 31, but S&P said it now believes the company incurred a substantial net loss in the third quarter because of difficult investment-banking conditions and write-downs from mortgages and related securities.

"We continue to view Lehman's near-term liquidity as satisfactory, however," S&P said.

If it needed to, Lehman could draw on credit facilities extended by the Federal Reserve after the near-collapse of Bear Stearns in March, S&P said.

"However, Lehman ultimately depends on the confidence of the capital markets and its trading counterparties to carry on its core business activities," the rating agency said.

The cost of protecting Lehman's debt with credit default swaps for five years rose to 450 basis points, or $450,000 a year to protect $10 million of debt, up from 325 basis points on Monday, according to Phoenix Partners Group.

(Reporting by Dena Aubin; Editing by Tom Hals)