MONTVALE, N.J. — A complicated debt-financing plan that unraveled with the Lehman Bros. bankruptcy last month helped bring about a sudden drop in share price for A&P here, an analyst said last week.
Karen Short of Friedman, Billings, Ramsey and Co., New York, in a research note last week said that investors “shorted” A&P stock in order to cover a swap agreement canceled when Lehman filed for bankruptcy Sept. 15. A&P stock was trading as high as $14 per share on Friday, Sept. 12, but plummeted to close at $8.82 the following Monday when the giant investment bank collapsed.
A&P acknowledged in a press release that day that its balance sheet and liquidity had not been impacted by the Lehman bankruptcy, but also acknowledged that Lehman Europe was party to a 2007 share-lending agreement in connection to a convertible note financing.
According to Short, the agreement called for Lehman to arrange a “hedge” for holders of the convertible debt, whereby 3.2 million shares of A&P stock were loaned into the market. Debt holders were hedged by a derivative swap with Lehman that was settled nightly.
But as news of Lehman's demise spread, convertible holders — “worried that their economic short would no longer be honored,” according to Short — canceled the swap. Those holders subsequently entered a new short position, executed on Sept. 15.
“Under normal market conditions, Lehman … would have been buyers for the short … but because the turmoil transpired so quickly, [Lehman] may not have immediately covered its short position, if at all,” Short wrote. “Several days later, A&P stock did see some buying, and we suspect Lehman may have been the buyer to cover the liability/unhedged position that was created by every convert holder canceling their swap.”
A&P officials last week said they were still waiting to properly assess whether Lehman would be able to fulfill its obligation to return the borrowed shares.