Fitch Ratings has revised its outlook on the ratings of Lehman Brothers Holdings Inc. to negative from stable, citing increased earnings pressure.

The rating agency also affirmed the firm’s current ratings, noting that they reflect a globally diversified franchise in equity and fixed income sales and trading, improved market share in investment banking, and a growing asset management business. Fitch most recently upgraded the rating in June 2007 due to improved revenue and business diversification, improvements in funding structure and capital build.

However, the outlook revision to negative from stable results from, “increased earnings pressure and leverage as inventory expanded in residential and commercial real estate related securities and loans and corporate loans and commitments”. Fitch says it is concerned that the lack of an active securitization market will negatively impact earnings either from future valuation changes or realized losses as Lehman reduces its exposures throughout 2008.

It notes that approximately US$146.8 billion of long-term debt is outstanding including current year maturities of US$18.5 billion with US$7.8 billion of commercial paper.

“Market liquidity is expected to remain challenging for an indeterminate period. Liquidity remains strong with Lehman’s lower reliance on short-term funding relative to its peers providing support for Fitch’s short-term ratings,” it says.

Nevertheless, it notes that Lehman continues to report strong cash and unencumbered securities at its parent, good net cash capital levels, and no reliance on free credit balances within its smaller prime brokerage operations. Fitch says it believes Lehman has managed its liquidity particularly well in the last eight months. Measures by the U.S. Federal Reserve will provide additional flexibility while it continues to rely on its banks for less credit sensitive funding, it adds. Fitch says that it believes that Lehman Brothers manages its market risk well, and diversification has improved.