Monday, January 24

Lehman’s scraps remain in dispute as Deutsche Bank makes legal offer

More than 13 years after Lehman Brothers filed for bankruptcy, the fight for the last remnants of its carcass continues.

Deutsche Bank AG is leading a last-minute legal bid to get more out of a bet it made on obscure notes issued by Lehman in the years before the US bank collapsed.

The German lender is appealing a decision made by a British court last year, hoping to get more out of its holding of “Capital Enhanced Advantage Preferred Securities” or ECAPS, a series of subordinated notes that Lehman issued through one of its subsidiaries in the UK. The case begins Monday at the London Court of Appeal.

A ruling in favor of Deutsche Bank could cause the ECAPS payment to rise, boosting returns for other holders, which, according to public documents and a person familiar with the matter, include Barclays Plc, Farallon Capital Management and CarVal Investors. If all goes well for the holders, they may receive a windfall of 500 million pounds ($ 678 million) in banknotes that were deemed worthless and given away for next to nothing after Lehman’s bankruptcy.

That said, the case is not without risk, and holders may run out of money entirely. Another Lehman entity is also appealing, which could divert money from ECAPS holders, according to separate court documents.

“There are many hundreds of millions of pounds that investors are still trying to fight for,” said Ed Macnamara, a partner at London-based PricewaterhouseCoopers, who is joint manager of several Lehman UK subsidiaries. PwC has managed the administration of Lehman’s European business since 2008.

A Deutsche Bank spokesperson declined to comment. Spokespersons for CarVal, Farallon and Barclays also said they would not comment.

Lehman Leftovers

While Lehman’s disappearance on September 15, 2008 is remembered as the darkest hour of a global financial crisis, it presented an opportunity for anyone willing to gamble on the bank’s discounted debt. In fact, hedge funds and institutions like Deutsche Bank have been buying the securities for years. That led to a series of legal clashes over how much is owed to them, keeping a legion of Lehman lawyers, accountants and former employees busy for more than a decade. The ECAPS case is probably one of the last.

After the collapse of its parent company, Lehman’s European arm came into administration owing creditors billions of dollars and at the time few imagined that they would receive more than a fraction of what they owed. But PwC has squeezed more out of the company than would have seemed likely in 2008. In fact, creditors ahead of ECAPS holders in the queue will be paid in full with interest and, to the surprise of many, money will likely remain. . upon.

Screenplay Result for ECAPS holders Estimated potential payment
Deutsche Bank loses appeal Holders receive payments from Lehman trustees, limited to about 14% of the cash remaining for holders of subordinated debt. 38 million pounds to 70 million pounds
Deutsche Bank wins appeal Holders anticipate LBHI’s claim and are the first to receive money for subordinate creditors. 168 million pounds, 500 million pounds or even more
Appeal from another successful Lehman entity Another possibility is that another appellant Lehman entity could overturn an earlier ruling. That could put ECAPS holders out of the money entirely, regardless of the outcome of Deutsche’s appeal. Probably nothing

“It took quite some time before people realized that the Lehman administration in the UK had been very successful and that value would flow directly through the capital structure,” Macnamara said in a telephone interview. “It is now at a stage where the battle is in the court of appeal between the creditors of the major UK entities.”

PwC estimated that the surplus could range from £ 280 million to £ 500 million earlier this year, and that money will have to go to someone. In an update to Lehman’s European creditors in October 2017, PwC raised the possibility that the money could end up in the hands of subordinate creditors, a group that is typically one of the last to collect in insolvency proceedings.

Forgotten notes

ECAPS were designed to help bolster Lehman’s capital, placing it at the bottom of a long list of other creditors. In the years after the collapse, they were largely forgotten. Some traded in 2017 for 1.5 cents per euro and even less before that, according to documents seen by Bloomberg and people familiar with the operations.

“Around 2015, we started talking to Lehman holders about trading, but we couldn’t really convince anyone to buy, but in 2018 interest increased,” said Robert Southey, founder of London-based brokerage Southey Capital. .

When it became clear that there was a surplus of money, distraught investors scrambled to find a way in. ECAPS were a way for hedge funds to establish a claim on cash. Some of the notes were trading at more than 20% of their face value in mid-2020, according to data compiled by Bloomberg.

The London High Court’s June 2020 ruling found that the owners of the notes were owed a payment, but much smaller than what Deutsche Bank and many other holders expected. The judge ruled that investors should share 13.7% of what was left after paying the highest-ranking creditors, with the rest going to Lehman Brothers Holdings Inc., or LBHI, the ultimate US parent of the collapsed stockbroker. .

King Street Capital Management and Elliott Management partnered with LBHI to form a joint venture called Wentworth Group that would share claims based on loans the US parent made to its European subsidiary, according to another court file. King Street is also a large holder of ECAPS, according to a separate court document, and will likely receive a portion of the pot through the IOUs or the LBHI company.

If Deutsche Bank succeeds in convincing the court that it should be ahead of LBHI, the payment of its bills may skyrocket. Currently, assuming a surplus of 280 million pounds from the liquidation of Lehman’s European branch, ECAPS holders would receive around 38 million pounds, according to PwC. But if they got ahead of LBHI and claimed interest successfully, they could keep the 280 million pounds.

The amount of money Deutsche Bank is fighting for depends in part on a separate legal dispute between Lehman’s European arm and American bond insurer Assured Guaranty Ltd. Lehman Brothers International Europe is suing the bond insurance company for $ 500 million, arguing that Assured Guaranty was priced incorrectly for credit default. exchanges in a case that is scheduled to begin next month. Any money earned in this case could reach the ECAPS holders.

“We feel good about the Assured Guaranty claim,” said Russell Downs, another London-based PwC partner who is working in the management of Lehman’s European branch. If the lawsuit is successful, “a large part of that money will flow to subordinate creditors.”

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