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Market braces for Lehman ABS defaults and firesales

15 Sep 2008

The fate of billions of euros of asset backed securities sponsored by Lehman Brothers, or with the bank as a counterparty, hangs in the balance as Moody’s announced a sweeping review of all such transactions with others expected to follow. Analysts predicted downgrades and defaults in the underlying loans. The threat of forced sales of its real estate assets and asset backed securities also looms large in an already febrile market.

Lehman was one of the UK’s largest sponsors of non-conforming residential mortgage backed securities with several lenders under the Eurosail programme having issued Eu17bn face value of notes. It also has a Dutch subsidiary, ELQ Hypotheken. A Lehman subsidiary, Capstone Mortgage Services, acts as servicer and/or special servicer on all the UK deals, and Lehman also provides currency and interest rate swaps on some.

The administrators are still reviewing Capstone’s future, but said today that it will keep going for a while, at least. “Some of the employees are in the servicer company, which services the various asset backed securities, so those jobs, I imagine, will be around for some time,” said Steven Pearson, a partner at PriceWaterhouseCoopers.

The bank is also involved in many commercial mortgage securitisations, as a lender, borrower, tenant and counterparty. Most notably it provides 21% of the rental income for the Canary Wharf Finance II and 11% in Broadgate Financing, two of the largest European CMBS ever.

It is a swap counterparty in its own Windermere series of CMBS, with eight deals outstanding, and is a borrower (through a joint venture) in two of them. Lehman’s downgrades earlier this year would have required them to cure certain swap triggers, for example by collateralising them or finding a replacement, but is not known whether they have yet to do so or how.

Lehman also acts as a swap provider on several deals for third parties, such as Banco Espirito Santo's Lusitano Mortgages No 4 and 5.

Read EuroWeek on Friday for full analysis of the bankruptcy fallout on Lehman's asset backed deals.

15 Sep 2008