naked capitalism

Ah, now the script that everyone was trying to avoid, that of an institution failing, selling assets in bulk leading to distressed prices, which forces other players to mark their books down to the new market prices, leading to losses and reductions of already-scarce equity, is now playing at your local credit market.

Lehman has started selling LBO loans, and unlike many recent sale of this sort of paper, will not be providing financing. Fortunately, this sale, at $852 million, is not at all large, but in this market, even what would have otherwise been a manageable sale may not attract great bids. We’ll see soon enough where this trades.

From Bloomberg:

Lehman Brothers Holdings Inc. is trying to sell $852 million of high-yield, high-risk loans, signaling it’s dumping some assets after filing for bankruptcy, according to people familiar with the sale.

Bids for the loans, some of which helped finance leveraged buyouts for First Data Corp. and TXU Corp., are due by 2 p.m. tomorrow…..

The price of the average actively traded leveraged loan has fallen from above face value in June 2007 to 86.64 cents on the dollar, compared with a low of 86.3 cents reached in February, according to Standard & Poor’s LCD, which earlier reported the loan auction. Prices fell 1.64 cent in the past week.

“We’re basically at all-time lows for good credits,” Blackstone President Tony James said in a presentation last week at a New York investor conference sponsored by Lehman. “Because of capital pressures, and regulatory capital pressures in particular, by the holders of the loans, they are forced sellers at well below intrinsic value.”

Update 11:20 AM: I just saw this piece in the UK’s Times, wihich disputes the idea that we suggested above, namely, that Lehman assets will be sold in sufficiently large volumes at any one time so as to constitute a “fire sale”.

While that may indeed be the objective, with AIG on the ropes, unless there is a quick and happy resolution on that front, buyers are shedding risk, and many of Lehman’s assets involve a fair amount of complexity. Thus it may only take comparatively small sales to produce a “fire sale” outcome.

For instance, I wouldn’t be selling anything tomorrow unless I had to…..which is when the LBO debt sale described tomorrow will come off.

From the Times:

Any hope of a quick firesale of Lehman Brother’s assets was dashed last night when the administrator in charge of winding down the bank said there was no mad rush to secure any deals. Nor was it clear what, if anything, could be salvaged from America’s biggest bankruptcy to date.

Bankers at rival institutions in London said that apart from Lehman’s asset management business, which was excluded from the bankruptcy filing and is for sale, it was debatable whether any of the bank’s sales and trading or investment banking operations could be saved.

One banker, whose office overlooks Lehman’s European headquarters in Canary Wharf, said that staff had been turned away all day and all that was visible in the bank’s offices was an army of workers packing up computers and carrying out expensive gym equipment. He said: “It is literally a liquidation of everything in Europe, machine by machine, desk by desk.”

PricewaterhouseCoopers, which is handling the administration in London, sought to allay fears that the company was disintegrating by the second and said any value in the business units would hopefully be extracted over time.