Lehman’s Shares Tumble as Analysts Recommend Rating Cut, Confidence Shaky

After four analysts said they cut their recommendations because the firm's credit rating may be lowered, Lehman Brothers Holdings Inc., this year's worst-performer on the Standard & Poor's 500 Index, fell as much as 46 percent.   
   
Lehman fell $3.25 to $4 in composite trading on the New York Stock Exchange. Shares of the New York-based firm dropped 89 percent this year before today.   
   
The tumble follows Lehman's report yesterday that it had a record $3.9 billion loss for the third quarter. The firm plans to sell a majority stake in its asset-management unit and spin off real-estate holdings in an effort to shore up capital. Standard & Poor's and Moody's Investors Service said the moves may not be enough to avert a rating reduction.   
   
"A downgrade would likely force Lehman to post additional collateral, increase short-term and long-term funding costs, and limit its ability to transact with partners which demand certain credit ratings,'' Goldman Sachs Group Inc. analyst William Tanona wrote in a note today. The restructuring "fell short of what was necessary to lessen the bear case on the stock.''   
   
A reduction in Lehman's ratings of A2 at Moody's and A at S&P would make it more expensive for the firm to borrow money and reduce the number of potential counter-parties on financial transactions. Lehman would be required to post $2.9 billion in collateral if its ratings were downgraded, the company said in a May regulatory filing.   
   
Although Moody's believes liquidity remains firm and has not shown signs of material erosion, the potential for rapid franchise impairment in this environment remains a significant rating concern,'' Moody's said in a statement yesterday.   
   
Lehman was cut to "hold'' from "buy'' by Citigroup Inc. analyst Prashant Bhatia and the firm was reduced to "no opinion'' from "neutral'' by Merrill Lynch & Co. analyst Guy Moszkowski.   
   
"Liquidity and charges had seemed manageable, in our view, but the change in rating agency posture is an unexpected negative that may create a distressed sale situation,'' Deutsche Bank AG analyst Mike Mayo wrote in a note today. He cut his rating to "hold'' from "buy'' and reduced his price target to $11 from $28 a share.   
   
Goldman's six-month price estimate was cut by two-thirds to $7, because of "significant uncertainty'' surrounding management's measures to sell assets and support the balance sheet.   
   
The third-quarter loss creates a "higher probability'' of a cut in Lehman's credit rating, Bhatia said in a note to clients.   
   
"Confidence and perception issues are overwhelming Lehman's franchise value,'' Bhatia said. "We view raising capital in the very near-term as one of the most effective options to address the perception and confidence issues surrounding Lehman shares.''   
   
The cost of default protection on bonds sold by Lehman soared to a record, credit-default swaps show.