Lehman Taking Steps, But Clock May Be Ticking

The week will apparently end without a much-anticipated sell-off of securities and assets by Lehman Brothers Holdings Inc., but speculation continues about how the company’s next move will influence the real estate capital markets in the next few quarters and beyond. In some respects, Lehman is making progress, Fitch Ratings managing director Eileen Fahey told CPN this afternoon. The firm is in the process of trimming its commercial real estate exposure from $50 billion to $40 billion. Lehman’s issuer default rating–a much-cited risk measurement–remains at A+, identical to Merrill Lynch & Co., Fahey pointed out. That said, Lehman could still have a big impact on market value of securities if it a lot of paper at a discount. In doing so, Lehman would follow in the footsteps of Merrill Lynch, which sold some $30 billion worth of collateralized debt obligations to Lone Star Funds last month for $6.7 billion. For its part, Lehman is said to be marketing in securities and assets to a rumored group of suitors including BlackRock Inc. “Lehman is a big player in the commercial real estate market, so a large pool of sales by them could result in write-offs by others,” Fahey said. She noted that once Lehman traded securities for an actual price, institutions that use mark-to-market or fair-value accounting standards would have to re-value their holdings to reflect the sales. The current environment also makes it extremely challenging to find buyers willing to pay what Lehman would consider good prices for troubled assets, she added. Less clear is the impact on real estate finance of a buyout of Lehman similar to JPMorgan Chase’s rescue of Bear, Stearns & Co. earlier this year. “It depends on what (a buyer would) view as the value in such a transaction,” Fahey explained. Concerns about Lehman’s health intensified this week after reports emerged of the possible default of a $225 million mortgage included in a CMBS pool owned by Lehman. That loan, made in early 2007, was based on optimistic underwriting of an apartment building redevelopment project in northern Manhattan’s Harlem district. Developers counted on being able to easily convert many of the units in the 1,200-unit Riverton Apartments complex to market prices. However, lack of progress has placed the project at greater risk of defaulting the loan and prompted Fitch to place the property on a negative ratings watch this week. Lehman may yet find a way out of its current situation short of selling out to an investment bank or other buyer, said Fahey. The firm escaped such a fate a decade ago. However, she noted that the clock is ticking: “We believe we’re doing what they can,” she said, “but at some point, time could run out.”