Lehman Considering Mortgage and Real Estate Spin Off

Lehman Brothers (LEH) is considering shifting approximately $32 billion of commercial mortgages and real estate to a new company, nicknamed Spinco, using a good-bank, bad-bank model of the 1980s (see a recent SeekingAlpha article on the good bank, bad bank debate). Lehman would fund the bank with $8 billion of equity coming from Lehman (Korea Development Bank is in discussions to purchase 25 percent of Lehman for $6 billion), with the remaining $24 billion borrowed from Lehman or outside investors (see Bloomberg article).

The Spinco option would allow Lehman to off-load 80 percent of its commercial mortgages, establishing a company capitalized and managed by outside investors. One benefit of spinning off the mortgages to its own shareholders is that Lehman can allow existing shareholders to benefit from any recovery in asset prices, thereby eliminating the need to sell at fire sale prices. If the plan fails, Lehman may be forced to seek out private equity funds and sell parts of the company, such as its asset management business Neuberger Berman (see previous post here and here).

While Lehman Brothers certainly seems to be getting hit from every direction (see comments on Opsraie's problems here, of which Lehman has a 25 percent stake), it is certainly trying to be creative in how it pulls the company out of potential failure. While taking the Merrill Lynch (MER) route of selling assets for 22 cents on the dollar (and financing much of the sale themselves) may have not even been a possibility for Lehman, current actions do indicate the company seems to think the worst is behind it, at least as far as the credit crisis is concerned.

Maybe it has no other alternatives. Liquidity and confidence issues remain, but if it can get the needed capital, and keep from selling the entire company and its assets on the cheap, Lehman may in fact come out stronger, or at least be able to survive. Of course, this really depends first on staying afloat and not becoming the next Bear Stearns (BSC).

Fortunately for Lehman, so far it has appeared to have a little less panic from its nervous investors (not much), a few more options available to it, and a little more time than a weekend to get something done. But as they say, paraphrasing, "act now - while 'capital' supplies last."

Disclosure: None

Comments

[stock picks:]

Why would someone invest in the spin off unless their investment is
at discount to book value to account for the same risks as before it
was spun off.

2008 Sep 07 08:32 AM

[venividivici:]

I haven't read a single word from Lehman about what they intend to do, just an endless torrent of unsubtanciated articles about some new white knight riding to their rescue or some new scheme of arrangement that would turn their hopeless financial situation around. It is all rather pathetic.

2008 Sep 07 09:28 AM

[williambanzai7:]

I agree. Just imagine what happens when other public companies behave this way. The sharks move in for the kill. But not Lehman, they can do whatever they want, stumbling through the potatoe filed in the deads of night.

2008 Sep 07 11:51 AM