Fitch assessing Lehman counterparty exposure

(The following was released by the rating agency)

Sept 15 - Following its rating downgrade of Lehman Brothers Holdings Inc.'s (LBHI) long- and short-term Issuer Default Ratings (IDRs) to 'D' on its declaration of bankruptcy, Fitch Ratings is reviewing LBHI and subsidiaries' counterparty exposure in global structured finance (SF) transactions. Credit default swap (CDS) counterparty, eligible security and reference entity exposure will be discussed in a separate commentary to be issued shortly by Fitch.

In addition to those actions, Fitch is evaluating ratings of various LBHI subsidiaries, the long term IDRs of which were also downgraded by Fitch ('Fitch Downgrades Subsidiaries of Lehman Brothers Holdings Inc.').

The subsidiaries include:--Lehman Brothers Inc.;--Lehman Brothers Holdings, plc;--Lehman Brothers International (Europe);--Lehman Brothers Bank, FSB;--Lehman Brothers Commercial Bank.Counterparty risk in SF transactions is subject to Fitch's criteria for hedge counterparties. For SF transactions rated 'BBB+' or higher with counterparties that are downgraded to below 'BBB+/F2', Fitch expects that the actions of choice by the issuer should be to replace the counterparty or arrange for the hedge obligations to be guaranteed by a rated entity that is consistent with Fitch's criteria. During the time a replacement or guarantor is sought, Fitch expects collateral to be posted as a measure of protection. Fitch's hedge counterparty criteria provides for a 30-day cure period before a security is placed on Rating Watch Negative following a counterparty downgrade.

However given the severity of the downgrades to LBHI and its subsidiaries, Fitch will move more quickly to indicate which structured finance transactions are at risk of downgrade, should no replacement counterparty or guarantor assume Lehman's hedge obligations. Fitch will provide lists of transactions in the U.S., EMEA and Asia with exposure to the various Lehman entities over the next few days. The resolution of the Rating Watch Negative status will reflect the rating of the specific counterparty, terms of the hedge contract, the likelihood of cure, and when a cure is not expected, analysis of transactions cash flows without benefit of existing hedges.