London - Hedge funds that gambled on how much money would be recovered from the bankrupt carcass of Lehman Brothers are set to make hundreds of millions of pounds from a full payout to creditors of the group’s European arm.
Payments to Lehman’s creditors in Europe are on course to top 100 percent some time next year, following a recovery of assets by administrators and legal victories over other parts of the former American investment bank.
“We were reasonably confident there would be some significant funds, but never in our wildest dreams would we have thought it would be 100 pence in the pound,” said Tony Lomas, a joint administrator for Lehman Brothers International Europe (LBIE) and a partner at PwC.
Lehman Brothers’ collapse on September 15, 2008, plunged the global financial system into chaos. Its European arm, based in London, was the largest and most complex unit because it was a hub for trading and investments, spanning asset classes and countries.
Closing the business and recovering assets for creditors has involved unwinding thousands of derivatives contracts and share trades and figuring out who owns what, making it the most complex bankruptcy of a single entity ever.
Creditors’ claims now trade between 120 percent and 135 percent in a secondary or “grey” market for their value, compared with as low as 10 percent in the weeks after the collapse, reflecting an expectation that a premium will be paid.
After creditors are fully paid, LBIE should have cash left over to pay interest to unsecured creditors, who can get 8 percent a year under British law, or subordinated bondholders. But original creditors, including hedge funds which had Lehman as their prime broker, banks, and trade suppliers may not all be winners.
“A lot [of original creditors] have sold their claims,” said Alyson Lockett, a partner at British law firm Simmons and Simmons, who has advised over 100 original creditors and distressed debt investors. The list of hedge funds that bought Lehman paper after the bank’s demise read like a Who’s Who of “distressed debt” funds, and included Baupost Group and Paulson & Co.
The bankruptcy has turned into one of most lucrative trades since the financial crisis for these funds, which pride themselves on snapping up debt when panicked sellers have rushed for the exit.
PwC now expects about £40 billion (R630bn) to be returned to LBIE’s creditors.
More payouts will be made, but the final dividend may take more than a decade because of legal wrangling.
LBIE has had about 500 staff working on the wind-down, complemented by 200 PwC staff, all under Lomas.
Costs, including wages and legal advice, are running at about £300 million a year. Lomas, who worked on the bankruptcies of MG Rover and the European arm of Enron, said: “It’s 20 times as complex and big as Enron. It’s unparalleled.” – Reuters