Fire sale at Lehman Brothers Holdings Inc first of many

``We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets,'' Callan said.
``It's a step in the right direction,'' said CreditSights Inc. analyst David Hendler. ``If you're a smaller player, you need more capital to do business in tough times. They now need to show that they can keep churning profits in this environment.''
Lehman Brothers Holdings Inc. is seeking to raise at least $3 billion from a share sale it says should help quell concern about a shortage of capital that drove the stock down 42 percent this year.
Lehman is offering 3 million convertible preferred shares in a sale that will be ``an endorsement of our balance sheet by investors,'' Chief Financial Officer Erin Callan said in an interview yesterday. Demand for the stock was three times greater than the amount on sale as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to identified before the sale ends today.
Lehman, led by Chief Executive Officer Richard Fuld, fell as much as 48 percent on March 17 on speculation the New York- based firm would face the same cash shortage that broke Bear Stearns Cos. following a run on the company. Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley have also raised cash from investors after more than $200 billion of writedowns and losses tied to the collapse of mortgage markets at the world's biggest financial companies.
The 3 million of convertible preferred shares have a coupon of 7 percent to 7.5 percent, according to the person familiar with the offering. The stock fell 2.8 percent $36.66 in New York trading yesterday after the market's official close, while credit- default swaps declined, showing investors believe Lehman's ability to pay debts has improved. Lehman closed at $37.64 during the regular session yesterday. Credit-default swaps tied to Lehman's senior unsecured bonds narrowed 15 basis points after the announcement to 285 basis points, according to broker Phoenix Partners Group in New York. A decline signals improvement in investor confidence.


Terms of the deal include a conversion premium of 30 percent to 35 percent above the current stock price, according to people familiar with the offering. Final terms will be set when the sale is completed.

The capital increase will provide ``financial flexibility,'' the firm said in the statement. Lehman said on March 18 that it had $30 billion of cash and $64 billion in assets that could easily be turned into cash. The securities firm has access to an additional $200 billion from a Federal Reserve credit facility, according to Prashant Bhatia, an analyst at New York-based Citigroup. Bhatia upgraded his recommendation for Lehman to ``buy'' from ``neutral'' last week, saying the stock price drop was overdone.
``Reality will trump fear,'' Bhatia wrote on March 28. ``Lehman has ample liquidity to run its business.''
The firm's net income declined 57 percent in the quarter, less than analysts estimated, because of a $1.8 billion writedown on mortgage assets. Merger advisory fees jumped 34 percent, investment-management revenue surged 39 percent and equities rose 6 percent. Fuld, 61, has announced plans to cut 5,300 jobs, or 19 percent of the workforce, and closed mortgage units during the past seven months. He also has expanded in Europe and Asia to gain market share in stock trading as part of his initiatives designed to help Lehman grow faster than its peers once markets recover.
The firm now ranks as the largest trader on the London Stock Exchange and Euronext. Lehman has risen to fourth from sixth on the New York Stock Exchange and Nasdaq. Its share of U.S. bond trading has increased by 1 percentage point to 12 percent.
Bear Stearns, formerly the fifth-largest U.S. securities firm, was forced to sell itself to JPMorgan Chase & Co. this month at a fraction of its market value with financial support from the Fed. Merrill Lynch raised $6.6 billion in January by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.
Lehman announced the financing after the close of regular trading on the New York Stock Exchange, where shares finished 23 cents lower at $37.64.