Fitch Ratings has downgraded the long- and short-term Issuer Default Ratings (IDRs) and outstanding debt ratings of Lehman Brothers Holdings Inc, (LBHI), parent of Lehman Brothers Inc and other subsidiaries as follows:
--Long-term IDR to 'D' from 'A+';
--Short-term IDR to 'D' from 'F1';
--Senior debt to 'CCC' from 'A+';
--Subordinated debt to 'C' from 'A';
--Preferred stock to 'C' from 'A'.
Fitch has also removed LBHI's long- and short-term ratings from Rating Watch Negative, where they were originally placed on Sept. 9. Today's rating action follows LBHI's declaration of bankruptcy. The ratings of the subsidiaries will remain on Rating Watch Negative and will likely be downgraded as additional information becomes available.
LBHI's declaration of bankruptcy results from an inability to raise additional capital or effect a merger in the very near term. Liquidity has become constrained extremely limiting flexibility, particularly for its UK broker-dealer, Lehman Brothers Holdings, plc. LBHI is expected to explore the sale of several divisions and or subsidiaries including the investment management division which owns Neuberger Berman, the former Lincoln Capital and equity interests in GLG, Spinnaker and DE Shaw. Execution of the proposed structural sales and changes as discussed on LBHI's third-quarter 2008 earnings call are not likely to be executed.
LBHI posted a net operating loss nine months year-to-date of $6.2 billion or ($10.81) per share. Offsetting these cumulative losses have been share raises of $4 billion of common equity and $4 billion of preferred debt which serve to cushion senior debt holders from any future losses. The mark to market nature of securities firms' assets result in regularly updated valuations. Fitch expects the liquidation and lack of financing by counterparties to reduce the most recent valuation of these assets, particularly the $17 billion of residential related securities and whole loans, and the $37 billion of commercial real estate exposures. However, an orderly liquidation should provide substantive cash for recovery at the senior level. At this time, Fitch expects limited to no recovery at the subordinated and preferred debt levels at LBHI.
Fitch will evaluate ratings of various subsidiaries over the next few days with an expectation of downgrades of long-term IDRs of 'CCC' for Lehman Brothers Inc., Lehman Brothers Holdings, plc and Lehman Brothers International (Europe). By law, broker dealer subsidiaries are not subject to bankruptcy but in turn face liquidation. Fitch believes Lehman Brothers Inc, its US broker dealer, will continue to operate for some time. Eventual default remains a real possibility.
LBHI's bank subsidiaries, Lehman Brothers Bank, FSB, Lehman Brothers Commercial Bank and Lehman Brothers Bankhaus AG will also be downgraded; however debt is expected to remain more highly rated than the broker-dealer subsidiaries. US based regulated entities will be protected from cash outflows to the parent. The vast majority of deposits are brokered retail deposits and all below $100,000. Uninsured deposits, while minimal, are expected to be protected by the well-capitalized status of the institutions. Borrowings at Lehman Brothers Bank, FSB are largely from the Federal Home Loan Bank System, and secured by mortgage collateral. Both bank entities have an ability to put weakened assets back to LBHI which will protect their capital base, but increase loss potential for unsecured creditors of LBHI.
Fitch has downgraded the following ratings:
Lehman Brothers Holdings Inc.
--Long-term IDR to 'D' from 'A+';
--Long-term senior to 'CCC' from 'A+';
--Senior unsecured debt to 'CCC' from 'A+';
--Subordinated debt to 'C' from 'A';
--Preferred stock to 'C-' from 'A';
--Short-term IDR to 'D' from 'F1';
--Short term debt to 'D' from 'F1';
--Individual to 'F' from 'B/C'.
All support ratings of subsidiaries are downgraded from '1' to '5'.
Lehman Brothers Holdings Capital Trust III - VII
--Preferred stock to 'C-' from 'A'.
Lehman Brothers UK Capital Trust LP, II and III
--Preferred stock to 'C-' from 'A'.
Lehman Brothers E-Capital Trust I
--Preferred stock to 'C-' from 'A'.
Fitch has also affirmed the following ratings:
Lehman Brothers Holdings Inc.
--Support at '5';
--Support Floor at 'NF'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
SOURCE: Fitch Ratings
Fitch Ratings Eileen Fahey, +1-312-368-5468, Chicago Leslie Bright, +1-212-908-0622, New York Sandro Scenga, +1-212-908-0278, New York (Media Relations)