Lehman to Sell $3 Billion of Shares to Raise Capital (Update4)

By Yalman Onaran


March 31 (Bloomberg) -- Lehman Brothers Holdings Inc. is selling at least $3 billion of new shares to bolster capital and squash speculation about a cash shortage that pushed the stock down 42 percent this year.

Lehman, the fourth-biggest U.S. securities firm, will offer 3 million convertible preferred shares, the company said in a statement today. Demand for the shares was already three times greater than the amount offered as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to be identified before the sale is completed tomorrow.

``We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets,'' Chief Financial Officer Erin Callan said in an interview. ``This is an endorsement of our balance sheet by investors.''

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 mortgage markets at the world's biggest financial companies.

Shares Fall

The stock fell 2.8 percent $36.60 in New York trading 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. 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 offering include a coupon payment of 7 percent to 7.5 percent. The conversion premium will be 30 to 35 percent above the current stock price, according to people familiar with the offering who declined to be identified.

``They have to make their balance sheet stronger in this environment,'' said CreditSights Inc. analyst David Hendler. ``Banks and brokers need to write down their weak positions, and they need capital in order to do that.''

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.

Reality Check

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.

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.