Major credit rating agencies may cut Lehman ratings

NEW YORK (Reuters) - Major credit rating agencies said on Wednesday they may cut ratings on Lehman Brothers Holdings Inc debt after the bank posted a bigger-than-expected third-quarter loss and announced plans to bolster capital.

Lehman will have to complete a significant transaction such as the sale of a majority stake in the firm, or even the entire company, to avoid a downgrade, Moody's analysts said on a conference call.

Raising capital alone would not preserve Lehman's "A2" rating as it suffers a crisis of confidence.

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

Moody's placed Lehman's ratings under review with the direction uncertain, citing the fluidity of the company's situation.

Standard & Poor's said it is mulling a downgrade of Lehman's ratings after the bank reported a $3.9 billion loss for the quarter, hurt by $7.8 billion in writedowns on residential and commercial real estate assets.

Lehman's loss "is significantly larger than we had assumed as of June 2, 2008, when we lowered the long-term counterparty credit rating on the holding company to 'A' from 'A+'," S&P credit analyst Scott Sprinzen said in a statement.

Fitch Ratings also placed Lehman's ratings on negative watch and warned that any downgrade could be by more than one notch and come in the near-term. Fitch announced the move late Tuesday ahead of the earnings announcement.

The smaller Toronto-based agency, DBRS, cut all of Lehman's long-term ratings to 'A' from 'AA' and said it may cut them even further.

"The difficult operating environment has constrained Lehman's earnings as market activity has slowed and some fixed-income business will not recover quickly," said the agency.

Signs of sustained weakness in the bank's franchise or earnings profile would pressure ratings, said DBRS.

MARKETS NEED CALMING

Lehman needs to complete a transaction with a strategic partner that will have the effect of calming markets, according to Moody's analysts.

Moody's would already have cut the bank's ratings if it did not think such a deal possible, the agency said. Analysts also said they believe Lehman has ample liquidity to post additional collateral against its derivative positions, were it required to do so by a downgrade, or other credit event.

Collateral postings are not typically the main drain on a bank's capital, they said.

Lehman said it is planning to sell a majority stake in its asset management business and spin off its commercial real estate arm, but equity and debt investors remained cautious.

Lehman shares closed down 7.0 percent, extending the 45 percent slide from the previous session.

The cost of protecting Lehman's debt against default soared to record levels. Five-year credit default swaps rose 135 basis points to 610 basis points at their highest level, or $610,000 a year to protect $10 million of debt.

S&P said it expects the asset management transaction to benefit reported tangible book value by more than $3 billion through a reduction in goodwill.

"However, we do not view capital enhancement accomplished in this form in the same favorable light as new equity issuance," said analyst Scott Sprinzen

"Not only will Lehman be giving up a portion of the revenues and earnings attributable to its substantial investment management business, but it will still require equity to support its minority interest in the business."

Still, Lehman's liquidity remains "satisfactory" and its contingent funding plan is "sound," said Sprinzen.

He noted that Lehman has access to Federal Reserve borrowing facilities that were opened to broker dealers following the near-collapse of Bear Stearns in March.

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

(Additional reporting by Ciara Linnane, Karen Brettell, Walden Siew in New York)