By Dan Wilchins - Analysis
NEW YORK (Reuters) - Lehman Brothers LEH.N is considering selling at least a portion of its asset management unit, one of its best-performing assets, which should signal to investors that more write-downs or losses are looming.
Investors are clearly bracing for more pain at Lehman: the fourth-largest investment bank’s shares trade at less than half their book value, implying that the company’s assets are likely to be marked down or sold at a loss.
That in turn will likely force the bank to raise capital in some form, be it by issuing securities or selling valuable assets, analysts said.
“They’re in a position where they’re forced to replenish their capital levels. It’s a perfect storm for Lehman,” said Bill Fitzpatrick, equity analyst at Optique Capital Management in Milwaukee.
Lehman spokesman Mark Lane declined to comment.
It’s fairly obvious which assets may trigger write-downs: Lehman has more than $60 billion of mortgage and mortgage security exposure, where losses are creeping higher even on loans to the highest quality borrowers.
JPMorgan Chase & Co (JPM.N) said last week its mortgage assets racked up $1.5 billion of losses in July and the first half of August.
Writing down those assets could force Lehman to raise more capital, but so could selling them below their book value.
A source said on Tuesday that Lehman is considering selling commercial real estate assets, but the timing for any sale is uncertain, and the company’s exposure could be pared down over time.
Lehman has commercial real estate assets on its balance sheet, including buildings, mortgages and mortgage securities, that are currently valued at about $40 billion but could be sold at a discount.
With Lehman owning such large positions in mortgages and related assets, it may make sense for Lehman’s share valuation to be so cheap, analysts said.
“There’s not enough clarity on the asset values to say this stock is cheap,” said Walter Todd, a portfolio manager at Greenwood Capital Associates.
Several analysts speculated that Lehman may do a deal similar to one that Merrill Lynch & Co Inc MER.N announced earlier this month, where it sold a $30.6 billion portfolio of repackaged debt at a loss, and simultaneously raised capital to help offset losses.
As with Merrill’s deal, the hope in such a transaction would be to shed assets that investors are most concerned about, so the bank could go on with its regular business.
Lehman had a relatively strong capital position after it sold $4 billion of common shares and $2 billion of convertible securities in June. That issuance left Lehman with a tier one capital ratio of more than 13 percent, well above Goldman Sach’s (GS.N) 10.8 percent tier one ratio. Goldman is often seen as the strongest major investment bank.
Lehman’s relatively large capital base theoretically provides it with a large cushion to absorb losses.
But the company itself is evidently concerned about that cushion not being big enough. Lehman is considering selling at least a part of its asset management business, people close to the matter said late Monday.
The asset management business, which includes the Neuberger Berman business that Lehman bought in 2003, is a consistently solid generator of revenue for Lehman. Losing it could be painful, analysts said.
Analysts have pegged the asset management business’ value at around $8 billion, or just about $1 billion less than Lehman’s market capitalization on Tuesday.
“Neuberger is a valuable asset, but these days a balance sheet with enough capital and liquidity is worth more than anything else in the world,” said James Ellman, president at hedge fund Seacliff Capital.
Additional reporting by Megan Davies; Editing by Gary Hill