NEW YORK -(Dow Jones)- A judge on Wednesday approved a nearly $1 billion sale of notes to Lehman Brothers Holdings Inc. (LEHMQ) from its German affiliate, part of a larger settlement between Lehman's bankruptcy estate and its second-largest foreign affiliate.
Judge James Peck of U.S. Bankruptcy Court in Manhattan questioned Lehman lawyers on how they arrived at a $957 million price for a group of real estate- and commercial-backed notes with principal amounts totaling $1.5 billion, saying he was uncomfortable approving such a large sale without knowing more about how the two sides came up with the discounted figure.
Ultimately, after hearing witness testimony from Lehman and the Germany-based Lehman Brothers Bankhaus LG, Peck was satisfied that the negotiations on a price were sufficient, even though no formal auction was held.
"In a transaction such as this we're not achieving market value as much as we are achieving a negotiated number which takes into account the particulars of these highly structured assets," Peck said. He called the transaction "creative and productive."
Creditors of the German subsidiary and Lehman, as well as Lehman's bankruptcy trustee, said they support the sale of the notes. A lawyer for an ad-hoc group of Lehman creditors said Wednesday that while he wished Lehman was paying a bigger discount for the notes--thus meaning more recovery for other creditors--the deal was "rational" even if it wasn't "great." Peck quoted the "rational" line in his ruling.
Last month, Lehman struck a $6.6 billion deal with LB Bankhaus that settled all intercompany relationships between the two, with LB Bankhaus agreeing to support Lehman's plan to distribute the remainder of its assets. Both the settlement and Lehman's plan still must be approved by the court, with the latter expected by the end of the year.
CDS Sale
Also on Wednesday, Peck approved a deal between Lehman and an affiliate of hedge-fund manager Magnetar Capital LLC that calls for Lehman to sell for $90 million its 20% stake in a credit derivatives company the two firms started.
The derivatives business, called Quadrant Structured Products Co., was founded in 2007 and wrote credit default swaps on corporate debt. Lehman's initial investment in the company was $80 million, while Magnetar's was $320 million.
CDS-based businesses like Quadrant "ceased to be a viable business" when the credit crash of 2008 hit, according to Lehman's court papers. Quadrant's business is now considering purchasing existing CDS-related portfolios rather than write credit protection, Lehman's filing says.
Quadrant's Chief Executive is Gene Park, the former American International Group Inc. executive described by Michael Lewis in a 2009 Vanity Fair article as the "most hated man on Wall Street" for his efforts in shutting down AIG's CDS business. As a member of Quadrant's management team, he's among the purchasers of Lehman's stake, according to court filings.
Evanston, Ill.-based Magnetar Capital was founded in 2005 by Alec Litowitz, a former trader at Citadel Investment Group. The firm was a major player in the market for mortgage-linked derivatives during the boom years.
Magnetar has denied playing a crucial role in picking the mortgages that went into collateralized-debt obligation deals that later failed spectacularly in the global collapse. It has also denied betting on the failure of the CDOs while acknowledging it made money on its short positions in the deals.
Lehman's collapse in September 2008 marked the largest bankruptcy case ever filed. Since then, a team of hundreds of bankruptcy professionals under the direction of restructuring firm Alvarez & Marsal have managed Lehman's assets, which include real-estate holdings, corporate debt and derivatives, for the benefit of creditors.
Lehman last month unveiled details of a new plan to distribute its assets, a proposal that would give creditors a better recovery than the investment bank's original plan disclosed last April.
Creditors holding senior unsecured claims against Lehman would recover 21.4% under the new plan, up from 14.7%. Those creditors must vote for the plan to get their recovery. Creditors of several Lehman subsidiaries may see even better improvements.
A group of senior noteholders, including hedge fund manager Paulson & Co., in December filed its own plan for Lehman that would provide a better recovery to creditors of the original Lehman parent company while offering a smaller payout to some creditors of Lehman subsidiaries. Lehman said in January it would incorporate some of that group's ideas into its plan, but said last month it doesn't support the competing proposal.
Lehman estimated earlier this year that it will likely have $322 billion in allowed claims against the estate, with $272 billion from the parent company and about $50 billion from its various subsidiaries. The bank increased creditors' expected net recovery by $2.6 billion from the $57.5 billion it estimated in a September court presentation.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
--Patrick Fitzgerald contributed to this article.
Read more: http://www.foxbusiness.com/industries/2011/03/23/judge-oks-lehman-purchase-notes-german-affiliate/#ixzz1Ij5szNcx
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