Lehman Brothers’ sub-debt holders have reached a last-minute settlement on how to split a surplus in the estate of the failed bank’s UK arm, vacating hearings set to take place in the Court of Appeal this week.
On 3 October, the English Court of Appeal granted a consent order to dismiss an appeal brought by the bank’s US parent, Lehman Brothers Holding Inc (LBHI), against a lower court’s ruling that LBHI was not entitled to a share in a £440 million (US$576 million) surplus in the estate of Lehman Brothers Holding (LBH) until statutory interest on a set of sub-notes has been paid.
In an announcement on the same day, LBH’s administrators, PwC partners Edward Macnamara and David Kelly and director Gillian Bruce in London, said LBH and the sub-noteholders had reached a settlement agreement that “will save costs and resolve further outstanding areas of dispute” the previous day.
As GRR reported last month, LBHI and the joint liquidators of LB GP 1, a Lehman general partner holding €790 million (US$867 million) in sub-notes, had proposed a settlement outlining how distributions from LBH’s surplus would be divided.
The sub-notes mature in 2035 and 2036 and were purchased by three Lehman limited partnerships to which LB GP 1 was general partner. Those partnerships issued Enhanced Capital Advantaged Preferred Securities (ECAPS) to investors to fund the acquisition of the LBH-issued sub-notes.
LB GP 1’s liquidators, RSM UK Restructuring Advisory partners Matt Haw and David Shambrook in London, had given ECAPS holders until 30 September to support the settlement.
The new iteration of the agreement also resolves a “partial discharge issue” – a dispute surrounding the correct way to calculate unsubordinated creditors’ remaining entitlement to post-administration statutory interest when they have already received payments from LBHI as guarantor.
Under the settlement, one unnamed unsubordinated creditor will receive a final distribution, while other relevant parties have agreed not to bring any future claims or complaints relating to the partial discharge issue.
The settlement is based on a 2023 agreement between LBHI, LB GP 1 and other relevant parties, including Deutsche Bank as the unofficial representative of the ECAPS holders, which settled all but one of a series of priority issues.
The administrators asked the court for directions on the remaining question of statutory interest, and Mr Justice Hildyard ruled in November that LBHI should stand back further in the queue to LB GP 1’s claim. The finding meant that the statutory interest on LB GP 1’s claim ranked ahead of LBH’s principal on three subordinated debt facilities worth US$1.9 billion.
Under the 2023 agreement, the parties agreed to split the distribution of the £440 million (US$586 million) surplus into three tiers – “Tier X”, “Tier Y” and “Tier Z”.
Tier X saw LBH’s administrators distribute £187.2 million (US$249 million) to the two entities, 92% of which went to LB GP 1, while the remaining was paid to LBHI.
The distribution of the Tier Y and Tier Z, previously dependent on LBHI’s appeal, has been agreed under the most recent settlement between the parties. LBH’s administrators will distribute 26.2% of a £225 million (US$295 million) surplus to LBHI and the rest will go to LB GP 1 in the Tier Y distribution.
The amount available to the sub-debt claimants in Tier Z will depend on the outcome of an appeal of a judgment against LBH’s ultimate European parent, Lehman Brothers International (Europe) (LBIE) in the New York Supreme Court. If LBIE is successful in its claim, the money will flow upstream to LBH, which will ultimately use it to pay its subordinated debt.
The dispute revolves around whether New York-based investment consultancy AG Financial Products (AGFP) correctly valued the termination of a series of credit default swaps governed by a 1992 ISDA agreement.
In March 2023, the US court rejected LBIE’s request for US$485 million in damages over the alleged incorrect valuation, instead finding that AGFP had reasonably calculated the value of the terminated transactions. AGFP claims that LBIE owes it US$20 million from the credit default swaps.
LBIE’s administrators, PwC’s Macnamara, Kelly, Bruce and director Alison Grant in Leeds, sought permission to appeal to the New York Supreme Court’s Appellate Division this March, but it confirmed the lower court’s order.
GRR understands they have now requested permission to appeal to the New York State Court of Appeals.
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