Law360, New York (March 23, 2011) -- A New York bankruptcy judge reluctantly approved Lehman Brothers Holdings Inc.'s discounted purchase of $1.5 billion of notes for $957 million from its German affiliate Wednesday, saying that he still didn't understand how the 37 percent discount was reached.
"I suppose I'm satisfied, although I still have some questions about how the discounted amounts came to be," Judge James M. Peck of the U.S. Bankruptcy Court for the Southern District of New York said, noting that the approval was "an important building block" in the ultimate plan approval process in Lehman's Chapter 11 proceedings.
The discounts referred to the deal Lehman got on a complex transaction to transfer notes with a face value of $1.543 billion from its Lehman Brother Bankhaus AG affiliate to the investment bank's American estate.
The various notes are tied to special purpose entities called SASCO 2008-C2 Ltd., Spruce CCS Ltd., and Verano CCS Ltd. and have underlying assets in commercial and real estate loans.
Under the deal approved Wednesday, Lehman will pay $332 million for Bankhaus' interest in the Spruce and Verano notes, a discount of about 30 percent, and $625 million for the SASCO notes, for a discount of about 42 percent, according to court documents.
By buying the notes, Lehman is able to gain complete control of the notes' capital structure and the underlying assets, while Bankhaus can monetize the notes and proceed with its German liquidation, which needs to be completed well before Lehman itself exits bankruptcy protection, Lehman attorney Richard P. Krasnow of Weil Gotshal & Manges LLP told the judge.
The deal is also tied to a wide-ranging settlement of Bankhaus' $6.6 billion claim against Lehman. The potential volatility of the notes' value complicated the parties' efforts to agree on a price to a settlement, so transferring the notes to Lehman allowed the dispute to settle.
But if the settlement isn't ultimately included in a reorganization plan, then the agreement calls for Lehman to pay Bankhaus a $100 million penalty on the price of the SASCO notes, Krasnow said.
"There's very much a connection, and that's why the administrator [of the German insolvency proceedings] insisted that if his claims weren't allowed ... that he should get an incremental purchase price for his creditors," Krasnow said.
While Judge Peck was initially skeptical that there was no auction, he seemed to come around after testimony from Lehman and Bankhaus officials involved in the negotiations showed that the underlying complexity of the notes made it difficult to structure an auction, and that a third-party purchaser probably wouldn't be that interested in a minority stake anyway.
"I view the transaction not only as a rational transaction but as a creative and productive one," the judge said.
The motions to approve the deal were unopposed, and attorneys for Bankhaus and various creditor groups supported the arrangement.
Founded in 1987, Bankhaus is a stock corporation whose sole shareholder is Lehman Brothers, according to court documents. Its banking activities include mortgage-backed lending and mutual fund investment.
In its Chapter 11 filing in the New York bankruptcy court, Lehman Brothers listed $639 billion in assets and $613 billion in debts.
SNR Denton represents Bankhaus in its Chapter 15 proceeding.
Weil Gotshal & Manges LLP represents Lehman in the Chapter 11 proceeding.
Milbank Tweed Hadley McCloy LLP represents the official creditors committee.
White & Case LLP represents the ad hoc creditors committee.
The Chapter 11 case is In re: Lehman Brothers Holdings Inc., case number 08-13555, in the U.S. Bankruptcy Court for the Southern District of New York.
The Chapter 15 case is In re: Lehman Brothers Bankhaus AG, case number 1:09-bk-12704, in the U.S. Bankruptcy Court for the Southern District of New York.
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