Lehman Raises $6 Billion, Discusses Financials

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Lehman sold $4 billion of common stock and $2 billion of convertible preferred this morning. The key terms of the convert:

The Preferred Stock has a liquidation preference of $1,000 per share, and will pay quarterly cash dividends on a non-cumulative basis, when, as and if declared by the Board of Directors, at a rate of 8.75% per year on the liquidation preference. Each share of the Preferred Stock will be mandatorily converted on July 1, 2011 into between 30.2663 shares and 35.7142 shares of Lehman Brothers common stock, unless earlier converted at the option of the holder. The conversion rate is subject to adjustment in certain circumstances.

The price on the common was $28, which is 13% below the closing price on Friday. As of this writing, the stock is above the offer price (note that since this was a public offering, Lehman is permitted to stabilize, so you’d expect the price to be at or above $28 today).

Note that there is also some reporting that is missing the implications of Lehman’s moves today. The firm, as noted by Bloomberg, for instance, sold $130 billion of assets. However, as reader S mentioned and is indicated in a press release, that $130 billion is gross assets. The figure that counts in terms of the firm’s leverage is the $60 billion reduction in net assets disclosed. Similarly, note that the reported 35% reduction in acquisition-related-finance assets may include sales financed by Lehmnan; the press release did not provide sufficient detail to know either way. Guess we’ll have to wait for the quarterly earnings filing.

In addition, the commentary from analysts appears to be turning more jaundiced. Moody’s lowered the outlook on its debt rating to negative. Some additional comments suggest doubts about management credibility:

“It’s kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,” said David Hendler, an analyst at CreditSights Inc. in New York. “They’ve got to start thinking about selling a strategic stake or selling the firm because there’s just not enough business to go around.”

The most entertaining convert to the skeptic camp is Jim Cramer (hat tip reader M):

Why doesn’t Lehman (LEH) raise $15 billion? Or $20 billion. How about $30 billion?

Would it then not have to come back to the market? Maybe for $40 billion we could lose what has become a cancer on the market.

The question we all must ask this morning is how bad are the portfolios that these firms are stuck with, and how bad is every attempt to undo them? Where did they come from? Who put them into these bonds? Which clients dumped them on Lehman? Who allowed this? Have they been fired? Why did the firm exude any confidence? Why did it hold on to this stuff for so long? How undercapitalized was it really?

All of these things spring to mind because the previous capital raise, the preferred raise, clearly meant nothing. No more than the raises that Merrill (MER) has done and will no doubt have to do more of.

It’s the denials that get me. Or the “soft denials,” the ones that tell us, “Look, things are fine.” Because that’s all quicksand.

Here’s the rub with this era. Everyone who has been in trouble stays in trouble. Bank of America (BAC) , with its ludicrous buy of Countrywide (CFC) , that could actually sink this great bank; Wachovia (WB) ; National City (NCC) ; Washington Mutual (WM) . They are all still in need of capital. Because if you are a regulated business, you can’t hedge this stuff properly and you need to raise capital, and no one wants these bonds — whatever the heck’s in there — so more money needs to be raised.

We have lacked any transparency about what’s in these portfolios. We don’t know what JPMorgan (JPM) bought from Bear. We don’t know what Lehman owns. 2006 California HELOC? Brokered loans from Novastar? Fremont General no-doc paper? How bad can it be? We don’t have a clue.

We do know that there are $480 billion in losses written off and we are still nowhere, including Lehman.

So, these “fund raisings” mean nothing to me.

Here’s the new rule of thumb I am using: If an institution needs capital, sell it. Let the dumb institutional and mutual fund chumps do the buying. I can’t find a single one of these infusion situations that doesn’t need more infusions. Why be a banking piñata?

Michael Shedlock also takes a harsh view of the latest Lehman developments in a post that concludes, “From where I sit the worst is still ahead of Lehman.” It’s clearly no longer accurate (if it ever was) to stereotype the Lehman doubters as “shorts”.

Moreover, Lehman said on its conference call that Lehman does not intend to lower leverage from its current level, which is a net leverage ratio of 12.5 versus 15.4 at the end of the first quarter (gross leverage had fallen to 22 times). Analysts have noted that the reduction in leverage will lead to a fall in profitability. Per the Wall Street Journal:

The preferred and common stock sales were oversubscribed. “We do not expect to use the proceeds to further decrease leverage,” [Callan] says, noting that the firm will use the capital for taking more risks in the markets.

The firm was also asked how it would answer critics’ charges that the assets sold were the easiest to unload. Callan said stated that most of the assets that were sold were not the best in quality (note that while that may be true, the relevant metric is how the compared to the average of what the firm held) and included whole loans.

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  1. Anonymous

    BIG news at WM, LEH and Wachovia, Mer, C,…all too big to fail and The Fed may be getting a little thin if they have to bail out 4 or 5 BIG banks!

    Gas @ $4.00 and the market going up … right! We have a depression unfolding and this magic rabbit show is running out of magic!

  2. sc

    Spot on! For once I concur with Cramer. The unwind of leverage takes no prisoners and this is a top-down unwind complicated by a bottom-up unwind with consumers. Bad times ahead. The pressure on the govt for further bailouts will mount making it hard to be short the credit of banks but by all means be short the equity as dilution lies ahead.

  3. Anonymous

    Yves — nice post. I am bit dense tho, and would benefit from a bit more explanation of the difference between gross and net assets. I sort of had the image that Lehman had sold $130b of assets and repaid an equal amount of debt, but I gather is not quite right …


  4. Richard Kline

    *hehhehheh* Cramer sounds like he had Lehman paper in his portfolio which is now so diluted he can read the rising negative indices throught it. [I have no idea if that’s really true.] What gets me is this: We are likely not halfway through the losses from the Securitization Bubble _exclusive_ of any major CDS ‘events’ or even significant drop in the equities market from econo-cyclical fundamentals. Any banking institution stating that their present capital is sufficient is, shall we say, lacking in candor.

    Riddle me this: What happens when the cowboys run out of bullets before outrageous fortune runs out of autochthons? The pokes get their final haircut. Now, do you, dear capitalist, want to join their wagon circle or ride for the horizon? Eat my dust, is _my_ answer.

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