Capital Markets

Lehman Reaction, Now Only a Trickle, Could Flow

Early regulatory filings suggest that the fallout isn't severe — yet.
Tim ReasonSeptember 16, 2008

The impact of the Lehman Brothers bankruptcy began trickling into corporate financial filings late yesterday and today. So far, the pain didn’t seem severe, but it wasn’t clear how strong a flow might eventually result.

By far the largest number of references to Lehman Brothers evident in financial filings over the past 24 hours seemed little more than a reminder of the storied firm’s ubiquitous presence in the financial world. Multiple financial filings cited bond indices maintained by Lehman, or referred to Lehman as a financial advisor, underwriter, or book runner.

Barclay’s bank, which yesterday announced it was postponing a seminar on its investment banking and investment management businesses as a direct result of the Lehman bankruptcy, today confirmed media reports that it was in talks to buy some Lehman assets. Barclays’s decision last week not to acquire all of Lehman was seen as the event that left Lehman with no choice but to file for bankruptcy.

Perhaps the most intriguing Lehman-related finance move announced today was by Fairpoint Communications, which issued an 8-K noting that late last week it had drawn down the remaining $100 million under its $200 million delayed draw term loan facility, as well as $100 million under its $200 million revolving credit facility. Lehman accounted for 30 percent of the loan commitments in both facilities. The company said it would hold the cash from the borrowings on its balance sheet until the financial markets stabilize. “The company believes that these actions were necessary to preserve its availability to capital due to Lehman Brothers’ level of participation in the Company’s debt facilities and the uncertainty surrounding both that firm and the financial markets in general.”

A number of companies, including Great Atlantic & Pacific Tea Co., Exelon, and Florida Power and Light, issued press releases saying they were unaffected by the Lehman bankruptcy or did not expect their exposures to be material.

Exelon noted that its various subsidiaries had multiple dealings with Lehman, and that Lehman also had a commitment to fund $283 million of Exelon’s $7.6 billion credit facility. “Exelon, Generation, ComEd, and PECO do not believe that the potential reduction in available capacity under the credit facilities will have a significant impact on any registrant’s liquidity,” the company noted.

In an announcement likely related to the Exelon and FP&L filings, Moody’s said that it rates “numerous utilities, independent power companies, and project financings where Lehman’s reduced ability to satisfy existing or future financial obligations as a counterparty may have a negative effect on ratings.” Moody’s added that “Lehman’s participation as a provider of, or participant in, various types of credit facilities, as an off-taker in power purchase agreements, or as a shipper in natural gas shipping agreements may result in increased risk in these transactions.” The rating agency said that it was still gathering information to determine the extent to which the utilities and power companies it rates are exposed to risk from Lehman’s bankruptcy. Moody’s also noted that Lehman Brothers Commodity Services — the counterparty in many project finance issuers — has not filed for bankruptcy, but noted that the bankruptcy of its holding company parent represents a technical default.

Despite its assertion that it was unaffected, A&P noted that a Lehman subsidiary in Europe was involved in a December 2007 financing using convertible debt. A&P said it would not including the 3.2 million borrowed shares when calculating its per share results until it knows if the Lehman unit can return the shares.

Louisville-based Humana filed an 8-K noting that the fair value of its investment portfolio as of Friday was $6.6 billion, but that it held direct debt securities of Lehman valued at $25.7 million, as well as $4.9 million in AIG bonds.

Minneapolis-based Ameriprise Financial said in an 8-K that it owns $157 million of Lehman bonds, noting that they were currently trading at approximately 35 percent of par, giving the company an unrealized loss of approximately $102 million. The company said it had offered to purchase, par plus accrued interest, $50 million in Lehman Brothers commercial paper currently held in money market mutual funds managed by Ameriprise’s subsidiary, RiverSource Investments LLC. Like Lehman bonds, the commercial paper is currently trading at 35 percent of par, with an unrealized loss position of approximately $33 million. Ameriprise said it stands ready to purchase up to an additional $50 million in commercial paper to held in RiverSource’s money market funds in order to maintain their $1 net asset value.

Ameriprise also disclosed that it owns approximately $118 million in AIG credit exposures, and $65 million in subordinated notes issued by Washington Mutual.

In a 6-K filing, Toronto-based Sun Life Financial said it held $334 million par value of Lehman bond securities and approximately $15 million net value of Lehman derivative instruments, adding that it held collateral security for its net derivative exposure to Lehman. Sun Life said that under Canadian accounting rules, when a bond backing liabilities is written down in value or defaults, the actuarial assumptions about the cash flows required to support the liabilities will change, resulting in a strengthening of reserves with a corresponding charge to income. Sun Life did not provide an estimate of the charge it would take.

Sun Life was not the only foreign firm announcing exposure to Lehman. Tokyo-based Mizuho Financial Group filed two 6-Ks, the first noting that it had exposure to Lehman, and another a few hours later lowering its earnings estimates “due to additional credit-related costs expected to be recorded in relation to irrecoverable claims to Lehman Brothers Holdings Inc.” The company reported that it had 10 billion yen worth of credit-linked loans that contained credit exposure to Lehman and 1.8 billion yen worth of straight bonds issued by Lehman.

Likewise, Aegon, based in The Hague, the Netherlands, said it had reduced its exposure to Lehman throughout the year, but that it was still exposed to some 265 million Euros. The company said it expected the ultimate effect of Lehman’s default would be lower as a result of taxes and recoveries on claims.