At a hearing on January 13, 2011, the Chapter 11 Lehman Brothers entities in the United States announced their intention to file in the next 10 days an amended plan, which will include a proposed framework for the settlement of unresolved derivatives claims. The Lehman debtors clarified in court that this would effectively create separate classes of derivatives creditors for each of the Lehman derivatives entities for the purposes of voting to accept or reject the amended plan, and that dissenting members of each such class would be bound by the amended plan if the class as a whole approves the settlement framework and the plan otherwise meets the requirements for confirmation (ie, approval by the bankruptcy court). Creditors will also have an opportunity to object to the proposed confirmation of any amended plan before any hearing to consider confirmation of the plan.
As outlined, the current framework provides an alternative valuation methodology which may differ materially from the contractual terms, and may give to the Lehman debtors broad discretion in determining a final and binding valuation. Further details of the plan and the settlement framework should be available in the next 10 days.
The framework would effectively replace the contractual close-out provisions of the underlying documentation with a new set of valuation principles.
More details of the plan are due to be announced in the coming days, but it is expected to include the following broad principles:
* Starting point for all valuations to be the mid-market pricing on the termination date (pricing taken at close of business unless the counterparty can demonstrate that it valued at an earlier point in that day);
* Portfolios of positions to be aggregated and off-set by reference to maturity buckets, and only the net exposure after such aggregation to be valued;
* Bid/Offer adjustments will be made to the mid-point pricing, but the spread to be determined by Lehman Brothers;
* Possible exceptions to these principles for circumstances where positions were actually replaced or a Market Quotation process was duly carried out on the termination date, in each case in a manner which the Lehman debtors considers to be commercially reasonable.
The Lehman debtors acknowledge that such a proposal will require a compromise by a large number of derivatives counterparties but believe there are benefits to creditors in avoiding litigation costs. The principles outlined so far are likely to be of particular concern for counterparties who:
* Were unable to value as of the termination date (for instance because markets were closed, because of market illiquidity or because it was otherwise not practicable to do so);
* Were shown bid/offer spreads considerably wider than those which the LB debtors decide to impose; and/or
* Did not apply the same (or indeed any) maturity bucketing in grouping transactions together for the purposes of valuation.
It is also not clear whether Lehman debtors will accept the contractual termination date or will seek to impose a uniform valuation date of 15 September, 2008, nor if (and how) this proposal will be extended to a wider universe of derivatives transactions such as repos or stock lending, which can have markedly different close-out mechanics from those proposed.
The Lehman debtors have been in discussions with certain so-called "Big Banks", the larger investment banks who, by value of derivatives claims and size of trade population, are the most significant counterparties, and the plan ultimately proposed will reflect feedback from that group. Lehman estimates that the Big Banks in aggregate account for 48% by value of derivatives claims filed and 85% by number of all derivatives transactions with the Lehman debtors.
Lehman debtors hope to have an agreed set of rules, and resulting valuations, by end April 2011.
Contact Information
Paul Cluley
[email protected]
Partner, London
+44 20 3088 2092
Daniel Guyder
[email protected]
Partner, New York
+1 212 756 1132
John Williams
[email protected]
Partner, New York
+1 212 756 1131
Thomas Jones
[email protected]
Partner, London
+44 203 088 2038
This ePublication is for general guidance only and does not constitute definitive advice.
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