Shares in Lehman Brothers fell more than 45% after opening this morning in New York amid fears that clients could pull business and fears sparked by Moody's modified outlook for the bank's debt—all of which has fueled concerns that a second US investment bank might collapse under the weight of the credit crunch.
Lehman Brothers share price fell 46.4% to $21.02 at 1:23pm EST after closing at $39.26 on Friday.
For its assessment of Lehman Brothers, Moody's cited fears over liquidity and asset concentrations.
Moody's senior vice president, Blaine Frantz said: "Rising illiquidity across financial markets has resulted in asset concentrations on Lehman's balance sheet that have proven to be somewhat larger than optimal for the firm."
Separately, weekend reports suggested that at least one client, Singapore's DBS, had ceased trading with Lehman over liquidity fears, but both parties told Reuters today that it was still "business as usual."
However, a spokeswoman for DBS added that southeast Asia's largest bank had become more vigilant on treasury transactions given current market conditions "and is reviewing all transactions on a case-to-case basis."
Lehman Brothers immediately released a statement to the media: "Our liquidity position has been and continues to be very strong. We consider the liquidity framework under which we have operated for almost a decade to be a competitive advantage."
Dick Fuld, Lehman's chairman and chief executive, said in a statement: "The Federal Reserve's decision to create a lending facility for primary dealers and permit a broad range of investment grade securities to serve as collateral improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table."
Shares fell 30% in pre-trading before recovering to $33.17 when the US market opened. At that level, they are 15.5% down from Friday's closing price.
At the same point, Morgan Stanley was down 7.8%, Citigroup 5% and Merrill Lynch 6.9%.
The cost of insuring Lehman's debt from default in the credit derivatives market rose by 40 basis points to 490 basis points after the fire sale of Bear Stearns sparked fears of more damage from the global credit crisis.
The rise in the cost of its credit default swaps—derivative contracts that offer a type of insurance against default—means it costs $490,000 (€311,000) a year for five-years to protect $10m of Lehman Brother’s outstanding debt.
Lehman will report results for the fiscal first quarter tomorrow.
Although Moody’s Investors Service maintained its A1 rating for Lehman, it downgraded its outlook for Lehman’s ratings from positive to stable and said its current exposure to commercial and residential real estate as well as leveraged loans was likely to challenge profitability for at least the next several quarters.
The ratings agency said it anticipates revenues from investment banking to slow as a result of the decline in mergers and acquisitions and underwriting backlogs due to the uncertain and volatile funding environment across equity and debt markets.
Its assessment added: “Today's rating action recognizes that Lehman has navigated quite well to date through persistently volatile and challenging financial markets, the sharp market-wide decline in valuations across numerous asset classes, tight global liquidity conditions, and the strong head winds facing Lehman's (and other securities firms') core-earnings drivers.
"However, these conditions have decreased the upward pressure on Lehman's rating, and therefore a positive outlook is no longer warranted.”
Moody’s added that Lehman's A1 rating reflects the firm's good product and geographic earnings diversification, which it said “has improved materially over the past five years on steady growth in primary equities, global advisory, and investment banking.”
The rating agency also said that the recent events impacting numerous financial institutions and culminating with Bear Stearns' liquidity problems highlight unprecedented stress on financial systems that has emerged over the past eight months.
Deutsche Bank analyst Mike Mayo said the bank would maintain its buy rating for Lehman Brothers because the bank is positioned much better than Bear Stearns. Mayo argued that Lehman Brothers has more liquidity, a more experienced chief executive and more diversified business.
As of the end of last year, Lehman had $35bn of excess liquidity combined with $63bn of free collateral, said Mayo, who added that the level of its collateral suggests that $98bn is available for liquidity, or $70bn more than is needed for its unsecured short-term debt.
He added: “While it also has $180bn of repo lines, we take comfort that 40 banks extended credit on Friday and believe that some of the repos are likely to be termed at least to some degree… We maintain our buy rating given a belief that Lehman will weather this storm and our estimate of a price to adjusted. book value ratio of 83%."
Bonds issued by Bear Stearns and Lehman were seeing the most active trading in the high-grade corporate bond market, said a fixed-income investor. Lehman Brothers paper is wider about 100 bps, while Bear's is about 20 bps tighter.
Credit default swaps on the two are also trading briskly, Dow Jones reports.
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