Credit ratings agency Standard & Poor's put Lehman Brothers on watch for a possible downgrade because of a rapidly declining share price and potential difficulties raising capital.
S&P said the long-term 'A' rating and short-term 'A-1' counterparty credit ratings are under scrutiny.
"The CreditWatch listing stems from heightened uncertainty about Lehman's ability to raise additional capital, based on the precipitous decline in its share price in recent days," said S&P in a report by analysts Scott Sprinzen and Tanya Azarchs.
Shares of Lehman are down $5.24, or 37%, to $8.93 on Tuesday. The decline comes after reports that talks between Lehman and the Korean Development Bank have broken off. Since February, Lehman shares have declined 87%.
Lehman has been seeking to spin off its Neuberger Berman investment management unit or to sell a significant stake in the firm, but CNBC reported on Tuesday that bids for the unit were as much as $2 billion below what the company was hoping for.
S&P said Lehman's capital ratios "appeared adequate" at the end of May and that near-term liquidity remains satisfactory, but losses could be accelerating.
"We now believe that the company incurred a substantial net loss in the third quarter because of persisting difficult conditions in the investment-banking trading markets and write-downs from deteriorating market valuations of its mortgages and mortgage-related securities," S&P said.
S&P also warned that some of the capital raising options Lehman has reportedly been mulling could have negative implications.
"Lehman's capital-raising needs could be exacerbated if the company pursues measures to further accelerate the divestiture of certain problem assets, including its commercial real estate portfolio, which the company is widely reported to be contemplating," S&P said.
S&P emphasized that Lehman's liquidity position and contingent funding plan are sound. They noted that Lehman could be buffeted by drawing on the Federal Reserve's credit facilities.
By Adam Button and edited by Sarah Sussman
©CEP News Ltd. 2008