Lehman Brother Holdings Capital Trust Preferred Stocks: Still Trading After All These Years
Dec. 17, 2015 9:16 AM ET
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Wayne Olson, CFA
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Summary
Four Lehman Brothers Holdings Capital Trust preferred stocks continue to be traded in the over-the-counter market.
Capital Trust preferred stocks are designed to be hybrid securities that possess characteristics of both debt and equity.
Capital Trust preferred stocks are designed to be “bankruptcy proof.”.
Investors should do their own due diligence. It is not possible to predict the outcomes of ongoing and potential litigation with respect to these capital trust preferred stocks.
Four Lehman Brothers Holdings Inc. (LBHI) capital trust (CT) preferred stocks continue to trade in the over-the-counter market. These are the 6.00% Series M (OTCPink:LHHMQ), the 6.375% Series K (OTCGrey:LEHKQ), the 6.375% Series L (OTCPink:LEHLQ), and the 6.24% Series N (OTCPink:LEHNQ). Each of these CT preferred stocks has a liquidation amount of $25. There are 48 million shares of these CTs, with a liquidation amount of $1.2 billion.
Dividends have been suspended since 2008 (the prospectuses of these CT preferreds allow the preferred dividends to be suspended for only 20 quarters). In recent weeks, these CT preferred stocks have traded in the 10 to 20 cent range, which is less than one cent on the dollar in terms of market price to liquidation value.
Ali Meskati of T11 Capital has said that he views the Lehman Brothers Capital Trust Preferred shares (LBCTP) as "basically a call option on a positive outcome for the reemergence of Lehman in a yet to be determined form."
"Bankruptcy Remote"
CT preferred stocks are a type of special purpose vehicle (SPV) that are designed to be "bankruptcy remote." The LBHI CTs are hybrid securities comprised of: (1) CT preferred stocks; and (2) subordinated debentures. The LEHNQ prospectus specifies:
"Upon any dissolution, winding-up or liquidation of the trust involving the liquidation of the subordinated debentures, the holders of the preferred securities will be entitled to receive, out of assets held by the trust, subject to the rights of any creditors of the trust, the liquidation distribution in cash. Upon any voluntary or involuntary liquidation or bankruptcy of Holdings, the property trustee, as holder of the subordinated debentures, would be a subordinated creditor of Holdings, subordinated in right of payment to all senior debt as set forth in the subordinated indenture, but entitled to receive payment in full of principal and interest before any stockholders of Holdings receive payments or distributions. Because Holdings is the guarantor under the guarantee and, under the subordinated indenture, has agreed to pay for all costs, expenses and liabilities of the trust (other than the trust's obligations to the holders of the preferred securities), the positions of a holder of preferred securities and a holder of the subordinated debentures relative to other creditors and to stockholders of Holdings in the event of liquidation or bankruptcy of Holdings would be substantially the same."
Suffice it to say that the holders of the CT preferreds have not as yet received the liquidation distribution in cash. Rather, the bankruptcy process appears to have overridden this in order to flow the funds to senior creditors, i.e., the CT subordinated debt is included in Class 10B, with the distributions that they would have received reallocated to certain senior creditors. The CT preferred stock does not appear to be part of the bankruptcy process at the present time.
This issue appears to be the subject of an ongoing dispute in the bankruptcy proceeding (LETTER addressed to Judge Richard J. Sullivan from Rickey Gregory, dated 11/6/14 re: MOTION FOR INTERVENTION: UNDER RULE 24, UPON THE COURT'S PERMISSION. (NYSE:SC),Filed: 11/10/2014, Entered: 11/13/2014 ). It is my understanding that the parties are to apprise Judge Sullivan of their discussions regarding these and related matters by December 31, 2015. [Edit: This deadline has been postponed to February 1, 2015.] However, there can be no assurance at this time that the parties are properly considering the issues related to the LBHI CTs.
Nor is it clear that the property trustee (JPMorgan) has complied with its apparent obligation to pay off the holders of CT preferreds and then wait in line to be reimbursed for doing so via the bankruptcy process. The LEHNQ prospectus states that:
"If the property trustee fails to enforce its rights under the subordinated debentures, any holder of preferred securities may institute a legal proceeding against Holdings to enforce the property trustee's rights under the subordinated debentures. If a trust enforcement event has occurred and is continuing and such event is attributable to the failure of Holdings to pay interest or principal on the subordinated debentures when due, the registered holder of preferred securities may institute a direct action for payment on or after the due date."
Thus, if the property trustee has failed to comply with its legal obligations as property trustee with respect to the LBHI CT preferreds, it is possible that the property trustee's conduct might become the subject of future litigation.
Other Paths
Ali Meskati of T11 Capital has said that:
"The [LBHI CT'S] receiving a creditor recovery is a low probability proposition. However, there is a possibility that the [CTs] can be converted into new equity representing the various profitable operating remnants of Lehman to take advantage of the $50 billion-plus net operating loss that is leftover. … The most logical move forward would be to create a public traded company that would take advantage of the NOLs leftover from Lehman …. This would give former equity, including the [CTs], a stake in the newly formed company. The stick in the wheel is the cancelation of debt income that can nullify the NOL. There is precedent through the courts for preservation of the NOLs working around the cancelation of debt income requirements, however."
While this possibility may be a few years down the road, it does seem conceivable that the LBHI CTs could become part of the equity capitalization of a "newco" at some point in the future.
Conclusion and Some Caveats
The LBHI CT preferred stocks are still trading after all these years. Ongoing litigation is very on point with respect to the LBHI CTs. Judge Sullivan has required the parties to apprise the Court of the status of their discussions by December 31, 2015. [Edit: the schedule has been postponed to February 1, 2016.] While the probability that the parties will "do the right thing" with respect to the LBHI CTs is low, appeals may be possible.
If that doesn't work out, it is possible that the CTs could eventually become part of the equity capitalization of a "newco."
The prospects of the LBHI CTs remain uncertain given the current status of the bankruptcy process, but may be attractive to some investors given their current low market value relative to liquidation value. Investors need to do their own due diligence.
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