2nd UPDATE: Lehman To Raise Up To $3.45B In Fresh Capital

Mar.31, 2008 in Market Outlook

NEW YORK (Dow Jones)–Lehman Brothers Holdings Inc. (LEH), facing persistent if
vague rumors of financial trouble, is turning to the markets to raise up to $3.45
billion in fresh capital.

Lehman said Monday it will try to sell up to 3.45 million shares of convertible
preferred stock as early as Tuesday. Officials at the bank say their liquidity is
sound, but they are scrambling to staunch market rumors that painted it as
heading the way of Bear Stearns Cos. (BSC) despite better-than-expected earnings
and repeated assurances of financial strength.

The decision to raise capital was made Friday, after a week in which Lehman’s
shares lost more than a fifth of their value and options traders placed heavy
bets that the declines would continue. Lehman Chief Financial Officer Erin Callan
said the bank needed to act quickly to try to turn around sentiment.

“We still don’t need the capital, but the rumor mill was getting ahead of us,”
Callan said. “There was a growing negative momentum, and we had to stop that.”

She added: “We had to make a very bold statement.”

In three days of premarketing, Lehman already has orders for $9 billion of the
preferred stock, but the maximum it would raise is $4 billion. The bank has a
market capitalization of about $21 billion. Lehman’s shares were down 2.6% at
$36.65 in after-market trading.

A good percentage of the offering may go to a small group of U.S. institutional
investors who already hold the stock. The bank hopes that will send a stronger
vote of confidence to the market than raising funds from overseas investors or
borrowing heavily from the Federal Reserve’s discount window.

Specifically, Lehman will offer 3 million shares of noncumulative perpetual
convertible preferred stock valued at $1,000 a share. It could sell another
450,000 shares if demand is sufficient. The preferred shares will likely pay a
dividend around 7.5%, compared with 1.9% for Lehman’s common stock, and will
convert to common stock at a price 30% to 35% above current levels.

Many of Lehman’s Wall Street cohorts - including Merrill Lynch & Co. (MER),
Morgan Stanley (MS) and Citigroup Inc. (C) - have sold billions of dollars in
convertible securities to shore up their capital bases in the wake of billions of
dollars in losses tied to credit-market bets that went bad. Much of that money
was raised from foreign investors.

Lehman, while much smaller than those banks, until now has indicated it did not
need additional capital. Earlier this month, Callan said she had been approached
by, but turned down, at least one sovereign wealth fund interested in investing
in the storied firm.

The bank wrote down $2.4 billion in asset value last quarter, bringing its total
hit since the start of the credit crisis to nearly $4 billion, far less than its
most deeply troubled peers.

Yet Lehman still carries large exposures to commercial and residential mortgage
loans, promising further write-downs and complicating its efforts negotiating
tricky markets, Alliance Bernstein analyst Brad Hintz wrote March 19.

While the firm is generally seen as well-managed, its small size and exposure to
mortgage markets invite comparisons to Bear Stearns and leave it, according to
Standard & Poor’s, “prone to negative investor and media sentiments.”

Lehman executives continue to believe that their stock has been hammered in the
wake of the near-collapse of Bear Stearns by short sellers who have been
spreading rumors about the company’s lack of liquidity.

Regulators who oversee activity in the country’s stock and options markets are
investigating such rumors. On Monday, the Financial Industry Regulatory
Authority, NYSE Regulation and the Options Regulatory Surveillance Authority
warned they will “vigorously and aggressively” investigate attempts to
intentionally spread false rumors that could hurt a company’s financial position.

But Callan said Lehman didn’t have time to wait on regulators. She said the bank
remains financially strong, and the rumors have not at this point led trading
counterparties or clients to back away from the firm. But Lehman felt it had to
act before its stock plummeted to $30 or the cost of insuring its debt against
default rose even higher.

One large investor approached Lehman last Friday, and over the weekend the
company talked to three other large investors. That gave it confidence it could
raise at least $3 billion.

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