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UBS: Lehman Will Make Large Asset Sale

BANGALORE (Reuters) – Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) is likely to make a sizable asset sale, which may include a sale of its investment management unit Neuberger Berger, in a move to address problems, particularly those related to its asset exposures and potential client erosion, said analysts at UBS.

“While a sizable asset sale would remove some risk from Lehman's balance sheet, it would also generate a pretty big hit to book value (not sure on another capital raise), so there is no free lunch,” wrote analysts Glenn Schorr and Mike Carrier in their note to clients.

The main issues plaguing the fourth-largest U.S. investment bank were its remaining “problem” asset exposures, fears over its client franchise, the less than favorable macro-economic backdrop as well as lingering concerns over the future structure of the industry, the analysts said.

“We think Lehman has a handful of potential scenarios it is working on which could alleviate the current pressure, but as with most things in life, timing is critical,” wrote the two analysts.

These potential scenarios are: a sale of a significant block of risky assets worth more than $30 billion; a sale of the whole firm; privatization; a sale or initial public offering for Neuberger, which Lehman bought in 2003 for about $3.1 billion; a strategic partnership with a “very credible” partner; or a meaningful share buyback, Schorr and Carrier said.

“We feel the most likely scenario is the sale of a large block of risky assets, possibly in concert with the sale of Neuberger as a way to partially plug any hit to book value realized on the asset sale to possibly avoid another capital raise,” the analysts said.

However, a sale would need to take place in weeks, and not months, as there could be an increasing supply of risk assets coming into the market as other financial firms look to offload risk as well, Schorr and Carrier said.

The company also has to be concerned about “perception becoming reality” when it comes to protecting its client franchise, they said.

“While clients and employees are nervous, from what we can tell, there's only been modest client erosion at this point,” they added.

Investors have been speculating about the fate of Lehman, the smallest of the major Wall Street investment banks, since the collapse of storied rival Bear Stearns Cos Inc in March.

Discredited rumors in recent weeks have pushed down the company's share price.

“The longer the concerns about the firm's viability linger, the pressures on the client franchise will likely intensify,” the analysts said.

Lehman, however, has more “staying power” partly due to its healthy liquidity profile and strong capital ratios, Schorr and Carrier said.

The company has raised about $12 billion of capital this year to strengthen its balance sheet, sold off assets, and shaken up top management.

Despite repeated assurances by Lehman management about the investment bank's capital and liquidity position, its stock has fallen about 70 percent this year.

They cut their price target on stock to $22 from $32, but maintained their “neutral” rating.

Shares of Lehman were trading up about 1 percent at $20.39 in afternoon trade on the New York Stock Exchange.

By Tenzin Pema

(Editing by Jarshad Kakkrakandy)