Sept. 11 (Bloomberg) -- Lehman Brothers Holdings Inc., this year's worst-performer on the Standard & Poor's 500 Index, fell as much as 46 percent after four analysts said they cut their recommendations because the firm's credit rating may be lowered.

Lehman fell $3.25 to $4 in composite trading on the New York Stock Exchange. Shares of the New York-based firm dropped 89 percent this year before today.

The tumble follows Lehman's report yesterday that it had a record $3.9 billion loss for the third quarter. The firm plans to sell a majority stake in its asset-management unit and spin off real-estate holdings in an effort to shore up capital. Standard & Poor's and Moody's Investors Service said the moves may not be enough to avert a rating reduction.

``A downgrade would likely force Lehman to post additional collateral, increase short-term and long-term funding costs, and limit its ability to transact with partners which demand certain credit ratings,'' Goldman Sachs Group Inc. analyst William Tanona wrote in a note today. The restructuring ``fell short of what was necessary to lessen the bear case on the stock.''

A reduction in Lehman's ratings of A2 at Moody's and A at S&P would make it more expensive for the firm to borrow money and reduce the number of potential counterparties on financial transactions. Lehman would be required to post $2.9 billion in collateral if its ratings were downgraded, the company said in a May regulatory filing.

`Rapid' Impairment

``Although Moody's believes liquidity remains firm and has not shown signs of material erosion, the potential for rapid franchise impairment in this environment remains a significant rating concern,'' Moody's said in a statement yesterday.

Lehman was cut to ``hold'' from ``buy'' by Citigroup Inc. analyst Prashant Bhatia and the firm was reduced to ``no opinion'' from ``neutral'' by Merrill Lynch & Co. analyst Guy Moszkowski.

``Liquidity and charges had seemed manageable, in our view, but the change in rating agency posture is an unexpected negative that may create a distressed sale situation,'' Deutsche Bank AG analyst Mike Mayo wrote in a note today. He cut his rating to ``hold'' from ``buy'' and reduced his price target to $11 from $28 a share.

Goldman's six-month price estimate was cut by two-thirds to $7, because of ``significant uncertainty'' surrounding management's measures to sell assets and support the balance sheet.

Rating Concern

The third-quarter loss creates a ``higher probability'' of a cut in Lehman's credit rating, Bhatia said in a note to clients.

``Confidence and perception issues are overwhelming Lehman's franchise value,'' Bhatia said. ``We view raising capital in the very near-term as one of the most effective options to address the perception and confidence issues surrounding Lehman shares.''

The cost of default protection on bonds sold by Lehman soared to a record, credit-default swaps show.

Contracts protecting $10 million of Lehman debt for one year cost 11 percent upfront and 5 percent a year, according to CMA prices at 8:50 a.m. in New York. That's up from 1,200 basis points at the close of trading yesterday. The price means it costs $1.1 million in advance and $500,000 a year to protect the bonds compared with $1.2 million a year yesterday.

To contact the reporters on this story: Joyce Moullakis in London at jmoullakis@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: September 11, 2008 10:07 EDT