Lehman to raise $3bn to quash stability fears - Emirates24|7

Lehman to raise $3bn to quash stability fears


Lehman Brothers Holdings Inc, an investment bank beset by rumors of not having enough funding, said it plans to raise $3 billion of capital to quash questions about its stability.

Lehman's shares fell 2.8 per cent to $36.60 in after-market trading after the planned convertible preferred share offer was announced, since it could result in more shares being issued.

Chief Financial Officer Erin Callan told Reuters the deal was meant to end questions about the bank's balance sheet, and the capital was not needed to offset the impacts of write-downs or losses.

"We have not changed our view on our real need for capital, but we have changed our view from a perception perspective," Callan told Reuters.

Questions about whether Bear Stearns Cos Inc had enough capital were enough to force what was once the fifth-largest US investment bank to sell itself for a pittance. Lehman Brothers is the fourth-largest US investment bank, and fears about its stability have helped push down its share price more than 40 per cent since February.

The rationale for the deal struck some investors as odd.

"This just makes me scratch my head. Why do this if you don't have to?" said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, which does not own Lehman shares.

The global financial sector is increasingly starved of capital after sustaining more than $200 billion of losses from subprime mortgages and other assets.

But Lehman says it has more than enough access to funds, and several large institutional investors have agreed to buy at least $2.5 billion of the convertible preferred offering. Smaller funds looking at buying into the deal said demand is strong. Lehman said it can sell up to another $450 million of additional convertible preferreds to meet extra demand.

A person familiar with the matter said investors had placed orders for more than $10 billion of securities in the sale, and that Lehman may ultimately sell $4 billion of securities.

Mike Holland, who oversees more than $4 billion at Holland & Co, is not trying to buy the convertibles, but says if the sale goes well, it could put fears about Lehman to rest.

"If investors thought there were real problems at Lehman, you couldn't find buyers for $3 billion of securities at any price," he said.


Lehman shares trade below their book value, signaling investors see a chance the company will have to write down assets.

Investment bank shares tend to trade at at least a small premium to book value, and during the boom years ending in 2007 typically traded at more than twice their book value.

A person familiar with the matter said the Securities and Exchange Commission is looking into whether short-sellers have spread bogus rumors about Lehman to push the company's shares down. Short-sellers profit when a company's shares drop.

Lehman says it has more than enough access to funds, including some $200 billion of assets it can sell or borrow against if necessary. Like other investment banks, Lehman can also now borrow from the Federal Reserve.

The company posted stronger-than-expected fiscal first quarter results this month. Lehman's business is more diversified than Bear Stearns.

In other financial markets, Lehman seems to be doing fine -- it has not lost any access to short-term secured debt markets, known as repo markets, nor has it lost major trading counterparties in recent weeks.


Adding to Lehman's difficulties, it said it was cheated of some $350 million in a fraud in Japan. The investment bank sued Marubeni Corp on Monday and blamed the Japanese trading house' staff for the swindle.

Lehman said it took appropriate reserves in the first quarter and has insurance coverage to offset any damage from the scam.

Marubeni said in a statement on Saturday its staff had been manipulated and it fired two contract employees involved in the case.

Lehman had been one of the few major global investment banks to avoid raising additional capital during the credit crunch. The other one is Goldman Sachs Group Inc. But Merrill Lynch & Co Inc and Morgan Stanley have each raised billions of dollars of capital in recent months.

Lehman's convertible securities are expected to be sold with a dividend yield of 7 per cent to 7.5 per cent and a conversion premium of 30 per cent to 35 per cent, according to investors looking at the deal. (Reuters)