Lehman entities reach deals to resolve billions in intercompany claims

By Caroline Salls

Pittsburgh, Feb. 27 - Lehman Brothers Holdings Inc. (LBHI), Lehman Brothers Inc. (LBI) and Lehman Brothers International (Europe) (LBIE) reached milestone agreements that resolve billions in intercompany claims and clears the path for additional distributions to LBI and LBIE customers and LBHI creditors, according to a news release.

Specifically, the trustee for LBI, LBHI and some of its debtor and non-debtor subsidiaries and the joint administrators of LBIE entered into two separate agreements settling all intercompany claims.

The Lehman entities said these separate agreements settle billions of dollars of complex intercompany claims and liabilities between the parties and provide a final resolution of all legal and factual issues regarding intercompany relationships between LBI and LBHI and between LBI and LBIE.

The settlement agreements, along with a number of related motions, are subject to approval in the LBI Securities Investor Protection Act (SIPA) proceeding and an order of the English High Court.

Upon approval, the settlements will allow LBI's trustee to proceed with plans to allocate and distribute enough cash and securities to customer claimants, including LBHI and LBIE, to enable the trustee to satisfy valid customer claims in full.

The entities said this is a critical step in obtaining significant value to return to LBIE's counterparties included in its omnibus claim and to LBHI's creditors.

As part of the resolution, the parties also agreed to a protocol for the settlement of claims remaining against the LBI estate as the trustee focuses on liquidating remaining assets and the allowance of general estate claims.

"After more than four years of arduous negotiations involving the analysis of hundreds of thousands of transactions with unique legal challenges, on behalf of myself and the hundreds of professionals involved, we are delighted that these agreements have been reached," LBI trustee James Giddens said in the release.

LBHI head of international operations and co-head of derivatives Daniel Ehrmann said in the release, "This milestone agreement with LBI resolves billions of dollars of complex intercompany claims, provides LBHI and its affiliates more than $2.3 billion in customer claims and $14 billion in general unsecured claims, avoids costly and extensive litigation, and contributes significantly to recoveries for LBHI's creditors.

"The settlement, consistent with the views of the global creditor base, will enable LBHI to accelerate distributions to creditors with allowed claims."

LBIE joint administrator Tony Lomas said in the release, "The depth and complexity of the business relationship between LBIE and LBI, the client and house components, the different insolvency regimes and the sheer size of the claims in both directions makes this by some significant margin the most complex inter affiliate settlement completed in the Lehman insolvency.

"It paves the way for a $9 billion consensual asset return plan for LBIE's underlying omnibus claimants and will also enable us to set a clearer path to address a number of the remaining issues for our unsecured creditor estate, as well as members of our client money and client asset communities."

LBI/LBHI agreement

Key terms of the LBI/LBHI agreement include the following:

• LBHI's customer claims against LBI will be allowed in an amount of $2.32 billion. LBHI will receive a cash distribution of $1,977,000,000 from the LBI estate, which includes cash in lieu of securities and cash receipts from post-petition redemptions and maturities in connection with securities, $350 million of consideration from Lehman ALI Inc. in the form of an assignment of a settled intercompany note and the return of securities from the LBI estate;

• LBI will allow LBHI a claim for post-bankruptcy dividends and interest through Dec. 31, 2013, of about $122 million, as well as any other post-bankruptcy dividends and interest collected by the trustee for securities that make up LBHI's allowed customer claims;

• LBI will allow LBHI a $240 million priority unsecured claim in connection with tax-related disputes resolved through the settlement;

• LBHI will be allowed general unsecured claims of $13,984,000,000, including $1.5 billion related to a subrogated claim by JPMorgan against LBI; and

• The settlement is conditional on the trustee achieving 100% payout on remaining customer claims.

LBI/LBIE agreement

Meanwhile, the key terms of the LBI/LBIE agreement, which are consistent with terms agreed in principle in October, including the following:

• LBIE's omnibus customer claim against LBI will be allowed in an amount of $7.5 billion, valued as of Sept. 19, 2008. Taking a Nov. 30, 2012, value date, LBIE values the settled claim at $8.4 billion made up of cash and securities, and this claim will be augmented by roughly $600 million in post-filing income;

• LBIE's house claim against LBI will be allowed in an amount of $500 million in cash as a customer claim and a further amount of $4 billion as a general estate claim. LBI's unsecured claim against LBIE will be eliminated entirely;

• LBI's client money claim against LBIE and the former's custodied assets held by LBIE will be assigned to LBIE's nominee and LBIE, respectively;

• LBI will create a $777 million reserve to deal with claims into LBIE from Barclays arising from the LBI/Barclays September 2008 asset purchase agreement;

• All litigation will cease between the parties and all other claims will be released; and

• The settlement is conditional on the elimination of duplicate claims filed by claimants into the LBI estate, the trustee achieving 100% payout on remaining customer property claims, the approval of a post-filing income methodology, approval of the trustee's allocation motion to identify the amount of realizations to be credited as customer property and the receipt of court approvals.

Portfolio, outcome updates

In a separate news release, the Lehman entities updated the composition of the portfolio of securities that LBIE expects to recover from LBI and set out an illustrative range of estimated outcomes for customers sharing in the distribution of the LBI portfolio based on simplifying assumptions.

The total estimated value of the cash, common stock and equity-type products and fixed-income securities in the LBI portfolio includes $4.53 billion in cash value estimated as of Nov. 30, up from $4,429,000,000 estimated at Oct. 31; $3,597,000,000 of common stock and equity-type products, up from $3,559,000,000 at Oct. 31; and $763 million in fixed-income securities as of Nov. 30, up from $697 million at Oct. 31.

In addition, the LBI portfolio headline value would be $8.9 billion. Based on acceptance by 100% of customers, this would yield a 93% illustrative return on best claims on the low end and 97% on the high end; based on acceptance by 90% of customers, the value would yield an 88% on the low end and 96% on the low end; and based on an 80% customer acceptance, the value would yield an 81% return on the low end and 92% on the high end.

The joint administrators said the outcome depends on the realized value from a securities population of $4.36 billion, which remains subject to ongoing market movements. The date when these securities may be available for liquidation is not yet known.

Conference postponed

Finally, in a third release, the joint administrators of Lehman Brothers International (Europe) and other U.K. affiliates said the case management conference related to a joint application seeking a ruling on various issues concerning their shareholding and other relationships has been rescheduled to March 27 from March 1.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company emerged from bankruptcy on March 6, 2012.

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