Lehman brokerage finalises $44bn worth of settlements

April 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

The remaining unpaid customers of Lehman Brothers Holdings Inc. finally moved a step closer to having their money returned to them in February, when the brokerage finalised settlements with its parent company and European unit. Approximately $44bn worth of customer claims were resolved in the three-party agreement, which paves the way for full repayment to the brokerage’s approximately 400 former customers, many of which were institutions and prime brokerage customers.

Although details of the deals were originally announced in 2012, they were finalised in paperwork filed in a US bankruptcy court in Manhattan, New York on 26 February. The filing notes that Lehman’s parent company will be granted a $2.3bn customer claim against the brokerage as well as a $14bn lower priority unsecured claim. At the time of writing, the terms of the deals are yet to be approved by the court. A court hearing has been set for 16 April; the settlement of the European unit’s claim must be approved by an English court.

The $14bn claim will be met in accordance with Lehman’s longstanding creditor payback plan, which was court approved in 2011. Under the terms of the plan, creditors of the holding company will receive just over 20 cents in the dollar. Those creditors with claims against subsidiaries and affiliates will likely receive more. “The settlement, consistent with the views of the global creditor base, will enable Lehman Brothers Holdings Inc., to accelerate distributions to creditors with allowed claims,” said Daniel Ehrmann, Lehman’s head of international operations, in a statement.

As per the terms of the latest settlement Lehman’s European division will receive a $9bn customer claim, a significantly lower figure than the $24bn it had originally sought. The European unit will also receive a $4bn unsecured claim. Although the settlements will allow Lehman to make full payouts to customers, any additional money remaining will be distributed to other classes of unsecured creditors, said the liquidator of Lehman’s brokerage, James Giddens, although how much they would receive has not yet been established.

The outstanding intercompany claims were one of the few remaining roadblocks preventing Mr Giddens from making full payouts to customers. In a statement, Mr Giddens, who is winding down the brokerage in accordance with the Securities Investor Protection Act, said that “If judicially approved and implemented, securities customers should receive full satisfaction of their claims and distributions from the general estate will be facilitated. We are delighted these agreements have been reached.”

Lehman filed for Chapter 11 bankruptcy protection in September 2008, in the biggest bankruptcy case in US history. In its bankruptcy filings the firm reported bank debt of $613bn, $155bn of bond debt, and assets worth $639bn. Lehman emerged from bankruptcy protection in March 2012 as a liquidating company. The bank is scheduled to make its next payment to creditors in April.

To date, Lehman has paid creditors approximately nine cents in the dollar, tantamount to half of what it expects to pay by approximately 2016. According to figures released by Lehman, December 2012 saw $3.9bn raised for creditors during the quarter ended 30 September. An additional $1.6bn was raised in October and November 2012. The $6.5bn sale of the Archstone property portfolio to Equity Residential and AvalonBay Communities Inc., is also due to close in March. With these deals, the completion of the investment bank’s liquidation is inching ever closer.

Since the liquidation process began, Lehman has raised over $30bn for its creditors via asset sales, with additional distributions due to creditors in the Spring. Under the bankruptcy plan approved in 2011, Lehman will pay back approximately $65bn to creditors of its parent and other subsidiaries. The 110,000 retail customers of Lehman’s brokerage received all of their money soon after the bank’s collapse – a total of $92.3bn was returned to retail customers.

Tony Lomas, one of the administrators liquidating Lehman’s European arm, called the settlement a “defining transaction”, noting that it concludes “the most complex inter-affiliate” clash in Lehman’s insolvency process.

Richard Summerfield