Lehman Brothers, after a remarkably smooth rise to the top tier of the syndicated lending business, has run into major turbulence.
Bankers in a group that lent $650 million to Exide Corp. last year are grumbling about Lehman's management of the deal.
What bothers them is that Exide paid Lehman $6 million in October to cover a derivatives loss. Just a month earlier, Lehman and Exide had persuaded the bank group to ease repayment terms on the loan.
"People are wondering what happened," said a bank group member. "They feel there is something going on. There is a lot of unhappiness out there."
Bankers also complain that Lehman got its payment-from a $45 million interest rate swap-during one of Exide's worst quarters on record. In the last three months the Bloomfield Hills, Mich., battery company lost three top executives and reported a 72% earnings decline, and its stock price fell to a 52-week low.
A Lehman Brothers spokesman declined to comment on an existing client relationship.
Those partial to Lehman are saying the payment was small compared with Exide's $1.2 billion debt and $2 billion of revenue. "Critics should be worried about whether Exide is going to sell batteries this winter," said a banker involved in the deal. "But I can understand there is heightened interest in anything called an interest rate swap after what happened to Long-Term Capital Management."
Critics say the situation recalls Bankers Trust Corp.'s problems with derivatives deals in the mid-1990s, notably a $195 million loss suffered by Procter & Gamble Co.
A major difference in this case, sources say, is that lenders had full access to reports filed in June that showed Exide was investing in derivatives. "In light of the P&G-BT deal, of course, people are concerned," one banker said.
Members of the bank group include Credit Suisse First Boston, BHF Bank Group, Banque Nationale de Paris, CIC-Union Europeenne, Societe Generale, and CoreStates Bank.
The Exide reaction has become the first major blemish on Lehman's syndicated loan business-"a real black eye for them," said a banker-and it may indicate that the lending community will turn on the investment bank.
Since starting its lending division in 1994, Lehman has been in the traditional territory of commercial banks such as Chase Manhattan Corp. and J.P. Morgan & Co. Indeed, the bank establishment cricticized investment banks as too inexperienced for the rapidly changing loan market.
By contrast, Lehman's top lenders-Bill Gates, who heads loan origination, and trading chief Chris Ryan-have spoken respectfully of their competitors.
But Lehman may be doing too well to be ignored. It has progressed by specializing in the kinds of profitable, leveraged loans that are made to credit-stressed companies.
Through the third quarter Lehman ranked sixth in structuring and pricing leveraged loans. For full-year 1997 it finished out of the top 25.
At least one chief of syndicated lending at a rival investment bank said he sympathized with Lehman's experience with Exide, a loan he acknowledged to be troubled.
"To be fair, Lehman has had a great year and has had a lot of successful deals," the banker said. "A lot of the criticism is bogus. People are just piling on, trashing the deal."