Major credit rating agencies may cut Lehman ratings

By Dena Aubin

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.