ETF News

Lehman credit spreads soar to record after loss

NEW YORK (Reuters) - The cost of protecting Lehman Brothers’ debt against default soared to record risk levels on Wednesday after the bank reported a third-quarter loss and provided few details on how it will raise capital.

Wall Street’s fourth-largest investment bank reported a much larger-than-expected third-quarter loss of $3.93 billion, hurt by $5.6 billion of net write-downs.

Lehman also said it plans to sell a majority stake in its investment management division and spin off commercial real estate assets.

Five-year credit default swaps on Lehman Brothers rose 135 basis points to a record 610 basis points on Wednesday, or $610,000 a year to protect $10 million of debt, according to Phoenix Partners Group data.

Those levels exceed spreads of 580 basis points reached in March after the collapse of Bear Stearns, and imply that traders in debt insurance markets view the credit as a riskier bet than Russian banks and emerging market borrowers such as Turkey, Vietnam and Kazakhstan.

“This is scary,” said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, noting risk levels exceed those seen during the Bear Stearns crisis.

Lehman’s shares sank nearly 45 percent on Tuesday amid concerns about the company’s ability to raise capital, and earlier on Wednesday the Korea Development Bank confirmed the end of talks with Lehman over a possible investment.

Spreads for Bear Stearns’ corporate bonds and credit default swaps soared last year after the collapse of two of its hedge funds. Massive losses eventually led to JPMorgan taking over Bear Stearns in March, in a deal orchestrated with the Federal Reserve and U.S. Treasury.

Lehman shares rose on Wednesday in volatile trade, erasing earlier losses tied to the company posting a quarterly loss and slashing its annual dividend.

Shares were last up about 3.2 percent to $8.04 on the New York Stock Exchange.

Spreads for Lehman’s 6.875 percent notes due in 2018 soared to 501 basis points on Wednesday from about 401 basis points on Monday, according to MarketAxess data.

Five-year credit default swaps for KDB rose to 203 basis points on Wednesday versus 190 basis points on Tuesday, CMA DataVision said.

Reporting by Dan Wilchins and Julie Haviv; Editing by Tom Hals