A Classic Example of what is going on inside the restructuring of the "illiquid assets". LBSF and LB 1 own the equity in a Brazillian Securities Co.
The two entities own a loan to the Brazillian Co. that can pay interest to LBSF and LB1. However, if that interest is paid there will be a tax on the interest paid to a non-Brazillian entity. So LBSF and LB1 are asking court permission to forgive the interest due so the tax does not have to be paid!
Preliminary Statement
1. Libro Companhia Securitizadora de Créditos Financeiros (“Libro”) is a Brazilian affiliate of the Debtors that owns and manages portfolios of distressed assets. Substantially all of the equity of Libro is owned by Lehman Brothers Special Financing Inc.
(“LBSF”). LBSF and LB I Group Inc. (“LB I Group”), a non-debtor affiliate of LBSF, purchased promissory notes issued by Libro in the respective amounts of 301 million Brazilian reais (“BRL”) ($173.5 million1) and BRL156 million ($89.9 million) (collectively, the “Notes”), which funds were used by Libro to purchase various of its assets. Until September, 2009, Libro
was current with respect to principal payments under the Notes.
2. Under Brazilian law, interest payments to non-Brazilian residents, such as LBSF and LB I Group, are subject to withholding income tax at a rate of 15% payable at the time
of remittance. Libro has not remitted interest payments to LBSF since September 30, 2008 and has never made interest payments to LB I Group. As a result, Libro has accrued a payable to the
Brazilian taxing authority (the “Taxing Authority”) that would become due and payable upon the remittance of such interest payments to LBSF and LB I Group (the “Taxes”). The aggregate
amount of the unpaid interest, including the amounts that Libro would be contractually required to gross-up to offset the effect of the Taxes, is approximately BRL97.1 million ($56 million). Of
that amount, BRL82.6 million ($47.6 million) represents the accrued interest (the “Accrued Interest”) on the Notes and approximately BRL14.5 million ($8.4 million) represents the Taxes
that would have to be paid if the Accrued Interest were paid in full.
3. LBSF and LB I Group have determined that they can best maximize the realization on the Notes and LBSF’s equity interest in Libro through a sale process (the “Libro
Sale”).
In connection with their formulation of that process, both LBSF and LB I Group have determined that, as a consequence of the Taxes, any prospective purchaser in the forthcoming. All amounts are for October 31, 2009 unless otherwise indicated and were converted from BRL into U.S. dollars($) using the exchange rate published by the Central Rate of Brazil on November 20, 2009 (U.S.$ 1 = R$1.7348).
2 LBSF will file a separate motion for approval of the sale once the sale process, including the role, if any, of a
stalking horse bidder, has been clarified. LBSF anticipates that the Libro Sale will occur in early 2010.
3
Libro Sale will require either payment, or a reserve for payment from the sale proceeds, of the Taxes, thereby reducing whatever remuneration LBSF and LB I Group might otherwise realize on the Notes.
4. Accordingly, in order to maximize proceeds from the Libro Sale, LBSF and LB I Group intend to waive and forgive a portion of the Accrued Interest equal to BRL56.7 million ($32.7 million). Of that total, LBSF will waive and forgive interest in the amount of BRL13.5 million ($7.8 million), and LB I Group will waive and forgive interest in the amount of BRL43.2 million ($24.9 million). LBSF will agree to compensate LB I Group for its waiver and forgiveness from a portion of the amounts, if any, that LBSF receives pursuant to the Libro Sale that are attributable to its equity interest.
5. By this motion, LBSF seeks approval of (i) such waiver and forgiveness, (ii) certain amendments to the Notes as described below, and (iii) the payment from LBSF’s realization, if any, on the Libro equity of certain compensation to LB I Group for its waiver and forgiveness, all as described below.
Classic...from LBHI Docket #5948
Coach T
