Lehman raises 2 bln pounds of capital to hush critics

Lehman raises 2 bln pounds of capital to hush critics
By Dan Wilchins Reuters - 1 hour 32 minutes ago

NEW YORK (Reuters) - Lehman Brothers Holdings Inc raised $4 billion (2 billion pounds) of capital on Tuesday in a preferred stock deal designed to stop questions about the Wall Street investment bank's stability.

Lehman's shares rose 17.8 percent as investors snapped up the offering, quelling rumours of looming write-downs that had left some worried Lehman could face a run on the bank similar to the one suffered by Bear Stearns Cos Inc.

"The deal appeared to have gone pretty well. People feel comfortable with Lehman, unlike the situation around Bear Stearns," said Lee Delaporte, director of research at Dreman Value Management.

Investors have been jittery about investment banks, and particularly Lehman, after Bear's demise and more than $200 billion of write-downs industry-wide tied to subprime mortgages and other toxic assets.

But Lehman's convertible preferred deal allayed fears about the financial sector, and lifted U.S. stocks more than 3 percent. At the same time, prices dropped on U.S. Treasury debt, which is often seen as a safe haven in stormy markets.

In addition to the Lehman deal, UBS AG and Deutsche Bank AG said they would record more than $23 billion of write-downs, pushing European financial stocks dramatically higher. Investors saw the write-downs as a signal that banks are getting their problems behind them.

Still, some question whether Lehman has written down enough of its $73.4 billion of mortgage and real estate assets. Lehman has said its valuation measures are fair.

Lehman suspects short sellers have spread false rumours about the company to profit from share declines. The company said last month that it has nearly $100 billion of assets at its holding company that could be easily sold or borrowed against.

Despite the confidence investors showed in Lehman on Tuesday, the convertible preferred share sale is not completely positive for the company.

The offering will cut into future earnings, because it requires $290 million of annual dividend payments, thanks to its 7.25 percent dividend yield. And the convertibles, which can used to buy Lehman shares at $49.87 apiece, could boost Lehman's share count by about 15 percent.

Ratings agency Fitch changed the medium-term outlook on Lehman's ratings to "negative," saying with securitization markets still tight, Lehman's earnings could be strained.

Problems have not entirely dissipated from the banking sector. Goldman Sachs forecasts that global credit losses could top $1.2 trillion in total and include current losses from the credit crunch and that U.S. banks, brokers, hedge funds, and government-sponsored enterprises will suffer roughly $460 billion of credit losses.

These difficulties are forcing financial firms to reduce their reliance on borrowed capital relative to their equity in a process known as deleveraging. Lehman's convertible preferred offering will reduce its borrowings relative to equity.

PERPETUAL AND PREFERRED

Lehman Chief Financial Officer Erin Callan told Reuters on Monday that the investment bank has had no trouble financing itself in a short-term secured market known as the repo market, and that its counterparties have no problem trading with it.

Any concerns about Lehman have played out mainly in the stock and options markets, where investors are making bearish bets.

"Unfortunately, we're in a market where perception trumps reality," Callan said on the business cable network CNBC on Tuesday.

Lehman sold a large chunk of the convertible preferred shares to long-term shareholders. There were orders for more than four times the $3 billion of securities Lehman had originally planned to offer.

The convertible preferred securities rose 15 percent to 115 cents on the dollar on Tuesday, reflecting the strong demand.

The securities are perpetual, but Lehman can buy them back after five years. A number of banks have offered similar securities in recent months, including Bank of America Corp, Citigroup and Washington Mutual Inc.

Lehman's securities were priced at about 13 percentage points above five-year Treasuries, including the value of the conversion feature, a portfolio manager said. That's about double the premium over Treasuries for the Citi and Bank of America issues.

Following Tuesday's gains, the Lehman securities were trading at about 10 percentage points more than Treasuries, about the right amount of additional yield for an investment bank compared with a commercial bank, the portfolio manager said.

Lehman's shares rose $6.70 to close at $44.34 on the New York Stock Exchange. With those gains, Lehman's shares trade at about 1.1 times their book value. On Monday, the shares traded at a modest discount to book value, signalling that investors expected more write-downs at Lehman.

Still, Lehman's share valuation is low by the standards of recent years, when investment banks typically traded at more than twice book value.

Lehman's shares have fallen 32 percent this year, including Tuesday's gains, compared with a 19 percent decline in the broker-dealer sector as measured by the Amex Securities Broker Dealer index.