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Rating Action:

Moody's Downgrades and Withdraws Ratings on Lehman Brothers DPCs

20 Jan 2009

New York, January 20, 2009 -- Moody's Investors Service announced today that it has withdrawn the Counterparty Ratings of Lehman Brothers Derivative Products Inc. ("LBDP") and Lehman Brothers Financial Products Inc. ("LBFP").

The Counterparty Ratings of LBDP and LBFP were each also downgraded immediately prior to withdrawal. The rating actions are as follows:

Lehman Brothers Derivative Products Inc.

Current Counterparty Rating: Withdrawn

Counterparty Rating Immediately Prior to Withdrawal: B3

Former Counterparty Rating: B1 on review for downgrade

Lehman Brothers Financial Products Inc.

Current Counterparty Rating: Withdrawn

Counterparty Rating Immediately Prior to Withdrawal: Caa3

Former Counterparty Rating: B1 on review for downgrade

The Counterparty Ratings were withdrawn because Moody's believes it lacks adequate information to maintain and monitor the ratings. Please refer to Moody's Withdrawal Policy on moodys.com.

The downgrade of each Counterparty Rating immediately prior to withdrawal results primarily from the bankruptcy filings of LBFP and LBDP on October 5, 2008 ("DPC Bankruptcy Filing"), which left each entity unable to make scheduled payments as a result of the automatic stay. Moody's notes that, as of the date of the DPC Bankruptcy Filing, based on information provided by both vehicles to Moody's, LBFP and LBDP were each sufficiently capitalized to make scheduled payments.

In the case of LBDP, the key driver behind its downgrade is the delay in making scheduled payments that has persisted since the DPC Bankruptcy Filing. Due to LBDP's structure as a termination vehicle, its operating guidelines required that all of its outstanding trades be terminated as a result of the trigger event caused by the earlier bankruptcy of Lehman Brothers Holdings, Inc. on September 15, 2008 ("Lehman Bankruptcy Filing"). Pursuant to LBDP's operating guidelines, the associated termination payment amounts were set as of the termination date and therefore are not subject to further market or credit risk. As of the date of the DPC Bankruptcy Filing, based on information LBDP provided to Moody's, LBDP was sufficiently capitalized to make these termination payments. However, the due date for LBDP's payment of its termination amounts had passed without LBDP confirming that it had made such payments to its counterparties, and the ultimate date of payment is highly uncertain due to its dependence upon the resolution of the bankruptcy proceedings. As a result, Moody's further downgraded the Counterparty Rating of LBDP immediately prior to the withdrawal of the rating to B3 from B1 on review for downgrade.

In the case of LBFP, the key driver behind its downgrade is a delay in making scheduled payments similar to that experienced by LBDP. However, LBFP is also subject to the additional factor of unhedged market risk which has the potential to impair capital sufficiency and the ability to make scheduled payments. LBFP is a continuation vehicle, which means that upon the Lehman Bankruptcy Filing, LBFP could not enter into new customer transactions but existing ones would continue until either their legal final maturity or, where agreed with individual counterparties, earlier novation or termination. Until the outstanding trades mature or are otherwise terminated or novated, LBFP is obligated to make all scheduled payments under each swap, evidence of which has not been provided to Moody's. In addition, as a result of the Lehman Bankruptcy Filing, the mirror trades between LBFP and an affiliate of its parent were terminated pursuant to LBFP's operating guidelines and therefore LBFP's portfolio became unhedged. Although one of the responsibilities of LBFP's continuation manager was to establish replacement hedges to protect LBFP's portfolio from market risk, Moody's was informed by LBFP that the continuation manager was terminated prior to it having accomplished this task. According to reports provided by LBFP to Moody's at the time of the DPC Bankruptcy Filing, LBFP had sufficient capital to make its scheduled payments at that time, but continuation of the unhedged market risk increases the chance of capital insufficiency in the future. For the reasons stated above, Moody's further downgraded the Counterparty Rating of LBFP immediately prior to the withdrawal of the rating to Caa3 from B1 on review for downgrade.

The last rating actions for both LBFP and LBDP were taken on October 10, 2008 when the Counterparty Rating for each was downgraded to B1 on review for possible downgrade from Baa3 with direction uncertain. In addition to the specific factors discussed above, the methodology used in the rating actions taken today is described in the following publications available on Moodys.com: Counterparty Risk and Capitalization for Derivative Product Companies (9/14/1994); Moody's Approach to Evaluating Derivative Products Subsidiaries (10/15/1993).

New York
William May
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William Harrington
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades and Withdraws Ratings on Lehman Brothers DPCs
No Related Data.
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