NEW YORK (AP) – Lehman Brothers Holdings Inc., which wrote off more than $1 billion of leveraged-buyout loans in its fiscal third quarter, has reduced its loan commitments by about $17 billion since the end of the quarter in August, an executive said Wednesday.
Banks and investment banks have been trying to lower their exposure to risky buyout loans, after traditional investors in the loans backed off during the credit crunch of late summer and early fall. Loans stuck on balance sheets require greater degrees of capital and prohibit banks from making further loans.
Lehman ended the third quarter with $27 billion of leveraged-loan commitments, but has since reduced that to about $10 billion, said Ian Lowitt, the company's co-chief administrative officer, at a Merrill Lynch conference.
The reduction resulted partly because some deals haven't gone through, some financing was split with other banks, and others have been sold as the investor market for loans gradually revives. A Lehman official earlier this month said the bank had packaged three collateralized loan obligations — or bonds backed by loans — for sale to investors since the end of the third quarter.
Ballyhooing the company's risk-management procedures, Lowitt also said Lehman has very limited exposure to collateralized debt obligations, whose falling values have caused big write-offs at many competitors. Though he called the bank “the dominant player” in asset-backed securities, it has only a 3.1 percent market share in selling asset-backed CDOs, he said. CDOs often hold large amounts of subprime-mortgage-backed securities.
Lehman's entire subprime-mortgage exposure at the end of the last quarter was $6.3 billion, which is comprised 86 percent by whole loans and is actively hedged, he said. He also noted that Lehman doesn't own or sponsor structured investment vehicles, or SIVs, off-balance-sheet structures that have had trouble with financing because of their subprime holdings.
Lehman served as a lender to several struggling or defunct hedge funds, but avoided losses to funds run by Bear Stearns Asset Management, Basis Capital Management, Sowood Capital Management and Highland Financial among others, Lowitt said, through maintenance of stringent collateral and margining requirements.
Lehman has classified its entire $22.7 billion portfolio of mortgages and mortgage-backed securities as Level III assets, meaning there are no observable markets or other vehicles for establishing a market valuation. But Lowitt said Lehman is “very comfortable” with its valuations, which he said are conservative. The firm has a total of $32.4 billion Level III assets, including $5.1 billion of private-equity investments and $3 billion of nonperforming or distressed corporate loans and debt.
Shares of Lehman, down about 16.7 percent year-to-date, rose $3.04, or 4.8 percent, to $66.53 in afternoon trading Wednesday