Lehman Brothers wind down continues

January 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Five years after it helped push Lehman Brothers Holding Inc into bankruptcy, Archstone – the premium property portfolio – will now go some way to repaying the investment bank’s numerous creditors.

On 26 November the Lehman estate announced that Equity Residential (EQR) and AvalonBay Communities (AVB) had entered into a definitive agreement to purchase Archstone in a deal worth $6.5bn in cash and stock. Both companies will pay $2.68bn in cash and approximately $2.8bn in stock. The shareholdings will see Lehman hold a 9.8 percent and 13.2 percent stake in the two companies respectively. The deal, expected to be completed in Q1 2013, will also see EQR and AVB assume $9.5bn of Archstone’s debts, taking the total value of the transaction to $16bn.

Archstone’s sale to Equity Residential and AvalonBay is an extremely positive outcome for creditors, explained Owen Thomas, chairman of Lehman’s board of directors. “Further, we believe our shareholdings in EQR and AVB, both industry leading companies with significant market capitalisation and trading below their respective consensus net asset values, provide us with the potential for further appreciation and substantial liquidity for our remaining investment,” he said.

As part of its continuing wind-down process Lehman had been attempting to offload Archstone, its largest remaining asset, for some time.

Negotiations with both EQR and AVB are believed to have been ongoing since summer 2011. Due to the sporadic nature of those talks Lehman had also explored the possibility of issuing an IPO for the unit. Archstone filed to go public in August 2012, and hoped that any potential flotation would raise $3.45bn on the New York Stock Exchange. These plans have now been scrapped; EQR and AVB will have complete ownership.

The decision by the estate to offload the property unit now represents a much better option for the company’s litany of creditors, REIT analyst Alexander Goldfarb told Bloomberg. “It’s a reflection of being able to take the money today at a known value versus going through the IPO process,” he noted. Indeed, the IPO market is currently enduring a period of uncertainty.

The desire to sell the Archstone business for a concrete fee was also solidified by the $2.88bn outlay the estate was required to make in 2012. Bank of America and Barclays both partnered Lehman in the original purchase of Archstone. Accordingly, in order to facilitate the sale to EQR and AVB, Lehman first had to acquire the shares of both banking groups. “The transaction delivers significant return on the investment we made earlier this year to fully control Archstone and has generated immediate and considerable proceeds for our next distribution to creditors,” stated Mr Thomas. Regarding the timing of the sale, analyst Laurel Durkey told Bloomberg “this is the best execution for Lehman today, while sentiment on the apartment sector was more positive earlier in the year, the Archstone portfolio was not in a position to be brought to market at that time given leverage levels”.

The 2007 purchase of Archstone came at a heavy price for Lehman. Although it won the race to acquire the group, beating out a number of competitors, the $23bn deal was heavily leveraged, representing one of the biggest ever real estate gambles undertaken by the group. It was a gamble that ultimately did not pay off.

The housing boom of the 2000s was already beginning to subside when the deal was completed and the complex nature of the transaction left Lehman with a substantial amount of debt, considerably weakening its position in the market. Indeed, the purchase of Archstone has been identified as being a significant contributor to Lehman’s eventual bankruptcy filing.

The Archstone sale notwithstanding, the estate has raised over $30bn through the liquidation of its assets. As per the winding down agreement approved in 2011, the group is attempting to raise $65bn. The process is expected to last until at least 2017 and creditors are due to receive 18 cents in every dollar owed. The deal for Archstone has also gone some way to bringing investors back to the apartment market following a four month, 13 percent decline in apartment stocks. On the back of the deal EQR sold 19 million shares at $54.75 per share, generating approximately $1.2bn.

Richard Summerfield