The Lehman Group Holding Co.'s Chapter 11 filing was followed by its London-based European holding subsidiary being placed in administration. Pricewaterhouse Coopers was appointed administrator to manage the wind-up.
Lehman's direct exposure to the European ABS market takes several forms. The bank had a large stake in the European securitization market, which was focused on two sectors - RMBS and CMBS - where it acted as an originator/seller and, sometimes, as a servicer.
The bank holds multiple roles in various CMBS transactions, said Hans Vrensen, director and head of securitization research at Barclays Capital. As the obligor, Lehman is a key tenant in the Canary Wharf II and Broadgate Financing deals, providing 21% of rents in the Canary Wharf II transaction and 11% of rents in the Broadgate Financing transactions. Even if Lehman remains as a paying tenant, the multi-notch downgrade of this major tenant would lead to a rating review of the CMBS bonds, according to Barclays.
In its swap counterparty role, Lehman acts as a fixed-floating, basis and currency swap counterparty in the bank's Windermere CMBS transactions, with Windermere VII-XIV remaining outstanding.
The transactions had requirements in their legal structures in the case of a swap counterparty downgrade.
"Given the June 2 downgrade by Standard & Poor's and the July 17 downgrade by Moody's Investors Service of Lehman Holding to 'A'/ 'A2', it is yet to be confirmed that each of the Windermere issuers acted in compliance with the downgrade triggers to either find an appropriate replacement swap counterparty; procure another person to become co-obligor or guarantor; or collateralize its obligations under the hedging arrangements," Vrensen said.
Lehman also fulfills the role of an interest rate swap provider in a number of securitizations that are not its own. These include several Italian deals from the Berica, Italease, Sestante series, along with a number of Portuguese transactions under the Lusitano deals.
Lehman also provides interest rate caps in several of its own-originated transactions, Deutsche Bank analysts said. These securitizations were executed after the second half of 2007 and were likely to have been used as central bank repo collateral.
"In the case of these swap agreements the insolvency of the Bank is a termination event, requiring novation to a suitably rated counterparty in order to avoid rating downgrades on the bonds," Deutsche analysts said. "Any downgrade of the senior-most single-A rated bonds would make [this] paper ineligible for [European Central Bank] (ECB) liquidity and potentially pose recovery risks to the central bank, just one week after the ECB refined its collateral eligibility rules to specifically mitigate such risks."
Lehman has also acted as sponsor for a number of loans backing CMBS deals. According to Barclays, Lehman acts as a joint venture partner in at least three loans. This includes the Windermere XII Coeur Defense, where the single loan is backed by a Lehman joint venture, and an additional two loans in Windermere XI where Lehman serves as a joint venture partner.
On the RMBS side, the outstanding amount of Lehman's securitized assets in the U.K. and Dutch near-prime and nonconforming business is >8.4 billion ($11.9 billion) from roughly >12.75 billion of assets at origination, according to the ABSXchange database.
Through its subsidiaries Preferred Mortgages and Southern Pacific Mortgages, Lehman is the main originator behind the Preferred Residential securities PLC, 11 series; Southern Pacific Funding and Southern Pacific Securities PLC, 3 and 13 series; and Eurosail PLC, 13 series. These were all non-prime RMBS deals. The entity that is both normal and special servicer on the deal, Capstone Mortgage Services, is also a Lehman subsidiary.
It is yet unclear if the Capstone will be called on, and there have been no indications as to whether servicing will continue on as normal for now, or whether the operations will be wound down immediately. Analysts at Deutsche Bank said that in the event that normal servicing functions are interrupted, the back-up servicer, Homeloan Management, a subsidiary of the Skipton Building Society, would take over.
"The impact of Lehman's bankruptcy should be limited to the extent that in order to reach "AAA' level, securitization structures are bankruptcy-remote and protected from counterparty risk," explained Jean-David Cirotteau, an analyst at Societe Generale. "Also, reading the RMBS transactions, Lehman subsidiaries operated in well-developed markets, i.e. markets which have reached a high level of businesses tiering. What we mean here is that for the U.K. and the Netherlands, originating and servicing functions are performed by independent counterparties with genuine possibilities of backup functionalities if required."
However, in the case of Lehman's Dutch RMBS deals, while the primary servicer is Stater BV, a subsidiary of ABN AMRO, the special servicer is the Lehman subsidiary ELQ Hypotheken.
"As far as we can tell, there is no contingent backup special servicer in the Lehman Dutch mortgage securitizations," Deutsche analysts said.
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