Energy Finance

Standard & Poor’s Ratings Services said today that its rating on Lehman Brothers Holdings Inc. (A/Negative/A-1) will not be affected by the firm’s announcement of an expected $2.8 billion net loss for the second quarter of 2008.

Its recent downgrade of Lehman integrated an expectation that the firm’s second-quarter performance would meaningfully deteriorate. The loss primarily reflects negative valuation adjustments and hedging losses in the firm’s fixed-income business. An increase in operating expenses (to $3.4 billion), primarily from severance costs, will contribute to the bottom-line loss.

To absorb the loss and strengthen its capital base, Lehman will issue $6 billion in common and noncumulative preferred mandatory convertible stock. Although the mandatory convertible issue enhances liquidity, the benefit to capital measures is mitigated by Lehman’s disproportionately large reliance on hybrid capital. Lehman has maintained a very stable funding profile in a challenging environment, reports S&P.

The firm further bolstered its liquidity in the second quarter, growing its parent company liquidity pool to an estimated $45 billion, while strengthening its unsecured funding profile. Lehman also continues to reduce its exposure to troubled assets. S&P expects this to reduce the gross balance sheet by approximately $130 billion for the quarter.

Although it views Lehman’s efforts to strengthen its balance sheet as positive, S&P reports concern that persistent dislocations in global capital markets could hurt core operating performance for the securities industry as a whole.

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