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Deals

S&P may still downgrade Lehman after loss

NEW YORK (Reuters) - Standard & Poor’s said on Wednesday that it is keeping its ratings on Lehman Brothers Holdings Inc on review for a possible downgrade after the bank reported a $3.9 billion loss for the third quarter.

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.

Lehman said earlier it took $7.8 billion in writedowns on residential and commercial real estate assets in the third quarter, pushing it to a far wider-than-expected loss for the period.

Wall Street’s fourth-biggest investment bank said it is planning to sell a controlling stake in its asset management unit and the spinoff of its commercial real estate business as it struggles to boost capital and restore investor confidence.

S&P said it will closely monitor whether these measures improve Lehman’s risk profile.

“We will also consider the risks related to retained capital inherent in the other asset positions Lehman will continue to hold when the proposed transactions are completed,” said Sprinzen.

S&P is expecting 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 the agency. “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.”

Lehman is unlikely to attempt to issue equity following a steep decline in its share price in recent sessions, said S&P.

Shares on Wednesday fell 6.9 percent to $7.25, a day after they fell as much as 45 percent.

S&P said it remains concerned about the bank’s longer-term earnings potential as asset sales bring changes to its business mix. The rating agency also noted the risk of damage to its business franchise following the recent turmoil and the uncertainty about when market conditions might improve.

In the near term, Lehman’s liquidity is “satisfactory,” said Sprinzen.

“Overall, and despite nervous market sentiment in recent months, Lehman has maintained a very stable funding profile,” he said. “We consider its excess liquidity position and contingent funding plan to be sound.”

The analyst 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.

The cost of protecting Lehman’s debt against default soared to record levels on Wednesday. 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. They had recently eased slightly to 590 basis points.

Reporting by Ciara Linnane; Editing by Jonathan Oatis

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