Is it worth to still hold on to investment products issued by Lehman Brothers? Or is it time to say goodbye, sell these products in the secondary market and redeploy the proceeds elsewhere? In this short note we provide investors with some background and a framework to make an informed decision. The two main dimensions are the amount of additional recoveries and the expected timing of these cash flows.
The filing of Lehman Brothers Holding Inc. (“LBHI”) for Chapter 11 protection on September 15, 2008 started the largest and probably most complex bankruptcy proceeding in history. A myriad of Lehman investment products, such as capital protected or yield enhancing notes, were distributed to thousands of investors across Europe. Today these products still are among the most widely held illiquid legacy assets in investor portfolios. Many of these structures were issued by Lehman Brothers Treasury Co. B.V. (“LBT”) backed by a guarantee of its parent LBHI.
When looking at the potential recovery amounts of these products the following factors need to be taken into consideration:
– Product value at default: Many investment products have incurred substantial mark-to-market losses during the unfolding of the sub-prime crisis and were valued well below their notional amounts at the default date. An investment product’s claim value against the bankruptcy estate is determined by its market value on September 15, 2008 and limits the potential recovery amount. Across all LBT-issued products the average admissible amount is only 76% of the notional amount and can range from less than 5% to more than 100%.
– Recovery through Lehman liquidation: Lehman’s liquidators are trying to recover as much value as possible through carefully selling off assets such as real estate and private equity investments. The amount ultimately recovered is yet unknown and will depend on how markets develop over the coming years. What is clear today is that the value of Lehman’s assets are not sufficiently covering its liabilities. Depending on the seniority of a claim against Lehman, there is a very substantial loss that will not be recoverable.
– Distributions to date: Over the past eight years most of the higher quality assets have been sold off by the liquidators of Lehman and proceeds have been distributed to creditors through semi-annual distributions. Of course, the more has been distributed to creditors the lower the estimate for the remaining payouts. It is widely believed that more than half of the ultimate total recovery has already been paid out.
How long will it take to fully liquidate Lehman? When we look other complex and multi-jurisdictional insolvency proceedings, we see that the liquidation of LBHI to last for another ten years is quite likely. What is also evident is that future distributions tend to become smaller and smaller.
An investor owning Lehman products today faces the following decision:
– Sell: There are specialized buyers and intermediaries, such as Multiplicity, that facilitate secondary market transactions on Lehman bonds resp. claims against LBHI. The settlement of such transactions has become relatively standardized and easy to process. An investor can quite easily clean out his portfolio of residual Lehman products and reinvest the money.
– Wait-and-see: An investor can also hold on to his/her Lehman position and hope to collect distributions that exceed what is currently paid in the secondary market. As the market for defaulted bonds tend to dry up at some point, a plan to sell out the assets a few years down the road might not be optimal.
Please do not hesitate to contact us for an indicative pricing on your Lehman products, or any other impaired investments you may hold.