Lehman inks deal for management of loan portfolio, sale tied to CLOs

By Caroline Salls

Pittsburgh, July 27 ¨C Lehman Brothers Holdings Inc. requested court approval to enter into an asset management agreement for its commercial loan portfolio and to sell commercial loans to special purpose entities in connection with the issuance of collateralized loan obligations, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

As of July 15, the Lehman debtors and various non-debtor entities under Lehman¡¯s corporate control held commercial loans issued by or equity positions in 157 issuers with a total outstanding principal balance of $3.8 billion, as well as roughly $1.5 billion in unfunded commitments.

The company said it is in the best interests of each of the Lehman debtor and non-debtor entities¡¯ estates to hire a third party to manage the loan portfolio.

In addition, Lehman said it has explored various methods of monetizing the commercial loan portfolio as part of its continuing efforts to maximize the cash available for distribution to creditors as soon as possible after its plan of reorganization takes effect.

Lehman said the most efficient and economical way to monetize the portfolio, while minimizing risk in connection with the management of the loans, may be to establish structures to issue collateralized loan obligations (CLOs).

The net proceeds of the CLOs will be used to purchase a portion of the commercial loan portfolio from the debtors.

The company said it expects to receive $1.6 billion to $2 billion from the contemplated sales of the loans into the CLOs, based on the composition of the loan portfolio at July 15 and discussions on market conditions.

Lehman said this cash will be used to accelerate distributions to its creditors.

Management agreement

WCAS (c)¦ Fraser Sullivan Investment Management, LLC will manage the portfolio and may look to establish the CLOs, the motion said.

Under the management agreement, Fraser Sullivan will, subject to market conditions, use its best efforts to execute a series of CLOs involving at least $500 million of loans no later than 180 days following the agreement¡¯s effective date and at least an additional $500 million of loans no later than the first anniversary of that date.

Upon the closing of one or more CLOs, the debtors and some non-debtor affiliates that sell loans to the CLOs will receive cash and the economic equity interests, which could come in the form of subordinated notes, in the CLOs.

Through the retention of the equity interests, Lehman said the debtors and non-debtor affiliates will retain the benefits of the residual value of the portion of the portfolio sold to the CLOs that remains after the more senior securities issued by the CLO are repaid, and benefit from any increase in the value.

According to the motion, the decisions concerning whether to execute a CLO, the timing of the execution of a CLO and the terms of any CLOs are subject to the approval by the debtors, and there can no assurance that any CLO transactions will be executed.

Fraser Sullivan will also continue to manage the loans that are not sold to an issuer of CLO securities, and, to provide for continuity in the management of the loan portfolio, Fraser Sullivan will hire some of the asset managers at current loan portfolio manager Lamco LLC.

Lehman said the Fraser Sullivan hiring will increase the debtors¡¯ cost for management of the commercial loan portfolio, ¡°but not materially.¡±

A hearing is scheduled for Aug. 17.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008. Its Chapter 11 case number is 08-13555.

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