Wall Street investment bank Lehman Brothers Holdings Inc. announced that it is raising US$6 billion in fresh capital, with US$4 billion of that coming in a public offering of 143 million shares of common stock at US$28 per share, and US$2.0 billion offering of 2 million preferred shares.

The offerings are subject to customary closing conditions and are expected to close on June 12. The firm says that the proceeds from the offerings will be added to the firm’s capital and used for general corporate purposes.

The preferred stock has a liquidation preference of US$1,000 per share, and will pay quarterly cash dividends on a non-cumulative basis at a rate of 8.75% per year on the liquidation preference. Each share of the preferred stock will be mandatorily converted on July 1, 2011 into between 30.2663 shares and 35.7142 shares of Lehman Brothers common stock, unless earlier converted at the option of the holder. The conversion rate is subject to adjustment in certain circumstances.

Separately, Lehman announced it expects to swing to a second-quarter net loss of about US$2.8 billion compared with a net income of US$1.3 billion a year earlier due to challenging market conditions.

Following both announcements, Fitch Ratings downgraded the ratings of Lehman.

The rating agency says that the ratings action results from, “increased earnings volatility, changes in its business mix due to contraction in the securitization and structured credit markets and the level of risky assets exposing earnings to challenges in hedge effectiveness. Earnings volatility has increased and is expected to remain elevated in the near term.”

Fitch says that a successful common equity offering should help mitigate potential future erosion from continued asset sales in residential mortgages and corporate and commercial real estate loans. The amount and composition of the capital raise will be evaluated and included in the resolution of the negative outlook, it notes.

Lehman’s outlook remains negative because profitability is expected to be challenged with continued fixed income volatility, it adds. Despite asset sales, Lehman’s exposure to higher risk asset categories as a percent of Fitch core capital is higher than peers. Lehman’s has been active hedging its exposure in these asset categories. However, its hedging strategy, while generally reducing earnings volatility, has not always been effective, Fitch observes.

Fitch says it may revise the outlook over the next year pending modifications to business mix and profitability. “Lehman’s equity sales and trading and investment banking businesses experienced increases in market shares. Additionally, management has reduced overhead and will continue to adjust its business strategy as the environment changes. Fitch believes Lehman will continue to sell riskier assets and reduce its overall risk in specific asset classes, particularly residential and commercial mortgages,” it says. However, Fitch adds that it is concerned that such sales may remove the most attractive assets, leaving a concentrated level of least desirable or more problematic assets on the balance sheet.