Lehman in $30bn spin-off rescue plan

Lehman Brothers is planning one of the largest and most dramatic property transactions in history, by spinning off up to $30bn (£17bn) of its assets as part of its bid to survive.

Lehman announced on Wednesday that it planned to move the bulk of its $32.6bn (£18.6bn) of property assets into a new company and sell a majority stake in its prized investment management business.

The fourth-largest US investment bank, battling America’s worst financial crisis since the Depression, also slashed its dividend, as it reported a $3.9bn third-quarter loss, taking its losses so far this year to about $6.5bn.

‘This is an extraordinary time for our industry, and one of the toughest periods in the firm’s history,’ said chief executive Richard Fuld. ‘The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability.’

Lehman will spin off between $25bn and $30bn (£14bn to $17bn) of property assets into a new, US publicly listed company called Real Estate Investments Global, which will be owned by current Lehman shareholders. It said it hoped the transaction would be completed by the first quarter of 2009.

Chief financial officer Ian Lowitt said 58% of the assets was debt, including commercial mortgage-backed securities; 26% was equity positions in property companies, such as US residential apartment REIT Archstone-Smith and Californian residential developer SunCal; and 16% property securities. Lowitt said 57% of the assets were in the Americas, 26% in Europe and 17% in Asia.

Lehman would need to inject around $5bn to $7bn (£2.8bn to £4bn) of its own equity into the new company, Lowitt said, and would also provide it with debt, which might be syndicated at a later date.

He said the spin-off would reduce Lehman’s exposure to property from 30% of the balance sheet to 5%. The new company will not be a REIT.

‘The concentration of positions in commercial real estate-related assets has become a significant concern for investors and creditors,’ said Fuld. ‘Therefore, Lehman Brothers believes that it is in the best interests of all its constituents to separate these assets from the rest of the firm.’

He said this would allow it to value the assets on the basis that they will be held to maturity, rather than marked to the market value on a quarterly basis.

Fuld claimed this would maximise value for shareholders, reduce volatility, and remove the need for distressed sales. ‘We do not envisage further large real estate writedowns in the context of the current market,’ he added.

As well as the spin-off, Lehman said it was in talks to sell $4bn (£2.3bn) of UK residential mortgages, which it had acquired through the acquisition of UK mortgage lenders, to BlackRock.

It said that this sale would contribute to it reducing its residential mortgage exposure by 31% to $17.2bn (£9.8bn).