Are Negotiations For CMBS At Lehman Breaking Down?

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Despite this morning's Wall Street Journal story about analysts predicting losses at Lehman Brothers, Dick Fuld's fraternity isn't faring that badly on the market this morning. There was a huge downdraft at opening but it's recovered since then so that it's now trading down just 2.5%, only slightly below where most of its Wall Street rivals are trading. (Actually, it seems the Fuldistas are beating Merrill Lynch this morning.) But there may be trouble on the horizon. We're hearing this morning that talks are not going well in Lehman's attempt to sell off $40 billion of commercial real estate assets.
Last week, Henny Sender of the Financial times reported that there was a wide price gap between what potential buyers such as Blackstone and BlackRock are willing to pay and what Lehman thinks they are worth. This morning a source familiar with the back-and-forth, although not party to the actual talks, told us that the negotiations have all but come to a halt.
(Cautionary note: even our source admits that these things are very fluid, so don't assume that just because someone said 'pencils down' recently that the negotiations are dead and buried. Like zombies and herpes, deals often rise again. What's more, you ought to be suspicious of the motivations of anonymous sources. Our source is actually friendly to Lehman, and so this may be an attempt to pressure the would-be buyers in some way. We haven't yet asked Lehman about the state of the talks, and suspect we wouldn't be told anything anyway.)
A sticking point may be Lehman's inability to provide the kind of financing for the asset purchase that Merrill provided when it sold real estate linked assets to Lone Star. Merrill reportedly provided 75% of the capital in a deal that will only pay off if the values of the assets don't fall much further, a risky bet in today's markets. Lehman, with an even more precarious financial situation than Merrill, probably can't afford a similar move.
The speculation is that Lehman may simply try to spin off the assets into a separate entity, in a Good Bank-Bad Bank scenario. But that move is also being criticized. "A spin-off could meanwhile mean taking an upfront hit to capitalise the newly formed entity, without raising funds for the core business," Lex writes in their cutie-pie British way.
Peter Cohan gives voice to the thoughts on the minds of many bearish speculators. "With $8 billion in writedowns and losses and $13 billion in capital raised, the race for survival goes on between capital raising and real-estate write-downs," he writes. "I am not confident that Lehman can win that race."

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