Sell Side

Barclays to Acquire Lehman's Broker-Dealer

CHICAGO - Professionals in Lehman Brothers' North American investment banking and capital markets operations returned to their jobs yesterday amid the more positive news that British banking giant Barclays PLC will acquire their business from Lehman's bankrupt holding company for $1.75 billion.

Barclays and Lehman announced the deal late Tuesday and its approval is pending before Judge James Peck in the U.S. Bankruptcy Court in the Southern District of New York. A hearing on the matter is expected later this week. The deal includes a termination provision that allows for the cancellation of the asset sale if not approved by Sept. 24.

The sale price includes $250 million for Barclays Capital's acquisition of the investment banking and capital markets businesses and $1.45 billion for the bank's acquisition of Lehman's Manhattan headquarters on Seventh Avenue and two data centers in New Jersey.

Barclays Capital also agreed to provide $500 million in debtor-in-possession financing for Lehman Brothers Holdings Inc. A "substantial" interim credit facility for the investment banking and capital markets operations - that do business as Lehman Brothers Inc. - was also provided to ensure its "continued operations and ability to meet client expectations," according to a statement from Lehman. "Lehman Brothers Holdings Inc.'s U.S. registered broker-dealers will continue their normal operation."

The units included in the businesses being acquired are investment banking, fixed-income and equities sales, trading and research operations. They employ about 10,000 employees that will join Barclays. Lehman lists in its tax-exempt group about 121 employees in the Municipal Marketplace book. Statements from Lehman and Barclays did not address potential cuts. The acquisition includes trading assets valued at $72 billion and liabilities of $68 billion, with little mortgage exposure reported.

Lehman withheld its more profitable businesses, including its broker-dealer, its investment management division, and some other units from those included in the bankruptcy filing in hopes of finding buyers for them.

"This is a wonderful outcome for a great number of our employees that will preserve and strengthen our terrific franchise," Richard Fuld, chief executive officer of Lehman, said in a statement. Board approvals are complete and no shareholder approval is needed.

The firm's president, Bart McDade, said the deal puts the broker-dealer in a position to expand its foothold. "Together with Barclays, these businesses will be a part of a global financial services powerhouse delivering a comprehensive suite of products and service to our clients," he said.

With bankruptcy court and regulatory approval still needed, much remains unclear about the fate of Lehman's tax-exempt group and Barclays plans as it folds Lehman's business into its own. Still, the news proved calming for employees and some market participants.

"I'm more hopeful I will have a job today than yesterday," said one public finance professional.

The news capped a tumultuous ride begun on Monday as news spread then that the 158-year-old firm, which has grown to 26,000 employees from its roots as a dry-goods and cotton trade business started by Henry and Mayer Lehman in Alabama, could not find a buyer without federal guarantees and would file for bankruptcy. Several employees said they left last Friday feeling strongly that the firm would find a buyer.

The bankruptcy announcement sparked widespread near-term unrest among issuers with pending deals, or relationships with Lehman as its remarketing agent or swap counterparty. It also prompted long-term concerns over the potential loss of a another top 10 broker-dealer following UBS's exit from municipals, JPMorganChase & Co.'s acquisition of Bear Stearns & Co. Inc., and the Monday announcement that Bank of America Corp. would acquire Merrill Lynch & Co.

The deal could benefit some municipal issuers that still have outstanding swaps with Lehman, depending on which Lehman subsidiary acted as a counterparty. All swaps written by Lehman Brothers Derivative Products terminated automatically with the bankruptcy, but most written by Lehman Brothers Special Financing did not, according to Peter Shapiro, managing director of Swap Financial Group LLC. Barclays could assume some of those swaps, although "it's too early to know " if they will, Shapiro added.

"If Barclays agrees to come in and credit enhance those swaps or otherwise assumes them, and Barclays assumes them under the same terms our clients had agreed to with Lehman Brothers, then that could be another positive outcome," Shapiro said. "If not, those swaps will need to be terminated in an orderly fashion, and our clients will need to replace Lehman as swap counterparty with a new credit-worthy counterparty."

A calculation at the time of termination based on market conditions determines which counterparty owes money on the swap, while a similar swap entered with a new counterparty would require the reverse payment. An issuer that owes Lehman at termination is in a better position because it would receive roughly the same payment from the new counterparty. If Lehman owes an issuer, that issuer would have to pay to enter the new swap, and it might have difficultly collecting the payment - which would offset it - from Lehman, Shapiro said.

Shapiro praised the work of Lehman's bankers the past two days ensuring orderly terminations on the swaps. "I have to take my hat off to the Lehman crew, I really mean that," Shapiro said. "You could have understood why people would have gone home and buried their head under a pillow, and these people didn't do that."

Lehman has already lost some business amid the turmoil and uncertainty of recent days. In a deal Lehman was scheduled to underwrite, Seattle-Northwest Securities will now price Idaho's Boise-Kuna Irrigation District $41 million in Arrowrock Hydroelectric Project Revenue Bonds next week.

St. Louis had selected the firm as an underwriter on an upcoming airport deal, but were considering replacing it as of Tuesday, sources said. Marquette University appeared to have dropped the firm from its upcoming $110 million bond sale that was to underwritten by both Lehman and Robert W. Baird & Co.

Proposals are due today from underwriters interested in participating in Wisconsin's restructuring of its remaining $1.4 billion of outstanding tobacco bonds and capital finance director Frank Hoadley said yesterday he was "waiting to see what if anything we receive" from Lehman. The former Bear Stearns banker Kym Arnone who worked on the original deal is now at Lehman.

The headaches caused by the bankruptcy extend to the already struggling insurers who have been hit with downgrades over their subprime mortgage securities exposure. Ambac Financial Group Inc. and MBIA Inc. earlier this week detailed their exposure to Lehman Brothers.

Ambac has limited direct exposure to Lehman, but indirect exposure through guaranteed investment contracts, including $1.3 billion in GICs backing credit linked notes where Lehman is the CDS counterparty. MBIA has $96 million in direct exposure, and some indirect exposure through investment-grade corporate collateralized debt obligations it insures.

While several months ago Fuld said he believed Lehman had weathered the worst of its losses relating to its holding of subprime and lower-rated mortgage securities, the firm's stock continued to plummet in value and, earlier this month, officials reported the loss of $3.9 billion and plans to sell a majority stake in its investment-management business. It held talks with both Bank of America and Barclays late last week, but both shunned a deal without federal guarantees.

Lehman operates offices in Los Angeles, San Francisco, Washington, Chicago, Boston, New York City, Philadelphia, San Juan, Houston, and Seattle. Lehman officials, including public finance head Ronald Stack, did not return calls to provide further details.

The firm ranked 7th last year among senior managers on all deals with $24.8 billion of bonds managed in 252 deals. It ranked sixth a year earlier, according to rankings from Thomson Reuters.

Since 2004, Lehman ranks sixth among senior managers on all issuance. On competitive deals, Lehman ranked third and was ranked sixth on negotiated deals. In education, Lehman ranked fourth while in electric power, it ranked eighth. In the environmental sector, it ranked seventh.

On general purpose bond transactions, Lehman ranked fifth and in health care it ranked 10th. In the housing sector, it ranked fourth while in public facilities it ranked fourth. In the transportation sector, it ranked sixth while in utilities, it ranked ninth. In the development sector, Lehman ranked second.

The 300-year-old Barclays - which employs 147,000 - currently operates businesses that include retail and commercial banking, credit cards, investment banking, wealth management, and investment management services in 50 countries in Europe, the U.S., Africa, and Asia. The investment banking arm - Barclays Capital - carries a double-A long-term rating and employs 16,300 in its offices around the world.

"This is a once in a lifetime opportunity for Barclays," Barclays president Robert E. Diamond Jr. said in a statement. "We will now have the best team and most productive culture across the world's major financial markets, backed by the resources of an integrated universal bank. We welcome the opportunity to add Lehman's people and capabilities to the Barclays team."

Barclays said Lehman would provide a "highly complementary fit" that will elevate it to a top three position in the U.S. capital markets and largest in the world. The bank plans a rapid integration process to minimize disruption to employees, clients and counterparties.

In a conference call for analysts and investors yesterday, the firm elaborated on the appeal of Lehman's investment banking operations. "We satisfied ourselves in the due diligence that took place in the back-end of last weekend and over this weekend that the franchise of much of Lehman's and, in particular, the U.S. broker-dealer business remains strong and healthy," Barclays Group chief executive John Varlay said.

"I do feel and I have said quite often ... that when I think about optimal asset allocation, I have felt for some time that we are underweight America," Varlay said. "I would like us to see a greater percentage of our overall earnings come from the United States, and this transaction allows us to do just that."

The deal has the approval of Britain's main financial regulator, the Financial Services Authority, Barclays said. U.S. approval is also expected as regulators have been involved in discussions that led to the acquisition announcement.

In a statement SEC chairman Christopher Cox said: "This is welcome news for every one of Lehman's customers. If approved by the court, customers will be able to look forward to an immediate transition of their accounts. Even before the transaction is completed, they will benefit because the broker-dealer and 10,000 Lehman employees will be able to continue their work with clarity about their future, and with greater funding resources for the broker-dealer's operations."

The Securities and Exchange Commission said it had been working along with the Federal Reserve Bank of New York, bankruptcy counsel, the Securities Investor Protection Corp., the Financial Industry Regulatory Authority, and other regulators to address the issues generated by the filing for protection under Chapter 11 by the broker-dealer's parent company and have been on-site at Lehman's headquarters.

Lynn Hume contributed to this story.


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