Lehman scraps still in dispute as Deutsche Bank makes legal bid

London

MORE than 13 years after Lehman Brothers filed for bankruptcy, the fight for the last scraps of its carcass is still going on.

Deutsche Bank is leading a last-ditch legal bid to squeeze more from a bet it made on obscure notes issued by Lehman in the years before the US bank's collapse. The German lender is appealing a decision made by a British court last year, hoping to gain more from its holding of "enhanced capital advantaged preferred securities" or ECAPS, a series of subordinated notes Lehman issued via one of its UK subsidiaries. The case started on Oct 4 at the Court of Appeal in London.

A ruling in Deutsche Bank's favour could see the payout on the ECAPS rise, boosting the returns of other holders, which, according to public documents and a person familiar with the matter, include Barclays, Farallon Capital Management and CarVal Investors. If all goes well for the holders it's possible they could receive a windfall of £500 million (S$920 million) on notes that were deemed worthless and given away for next to nothing in the aftermath of Lehman's bankruptcy.

That said, the case isn't without its risks, and it's possible that holders could be cut out of the money altogether. Another Lehman entity is also appealing, potentially diverting money away from ECAPS holders, according to separate court documents.

"There are many hundreds of millions of pounds that investors are still looking to try and fight over," said Ed Macnamara, a London-based partner at PricewaterhouseCoopers who is a joint administrator on a number of Lehman's UK subsidiaries. PwC has handled the administration of Lehman's European business since 2008.

A spokesperson for Deutsche Bank declined to comment. Spokespeople for CarVal, Farallon and Barclays also said they wouldn't comment.

Though Lehman's demise on Sep 15, 2008 is remembered as the darkest hour of a global financial crisis, it presented an opportunity for anyone willing to make bets on the bank's discounted debt. In fact, hedge funds and institutions such as Deutsche Bank have been snapping up the securities for years. That has led to a series of legal showdowns over how much they are owed, keeping a legion of lawyers, accountants and former Lehman employees busy for well over a decade. The ECAPS case is likely one of the last.

After the collapse of its parent, Lehman's European arm went into administration, owing creditors billions of dollars and at the time few imagined that they would receive more than a fraction of what they were due. But PwC has wrung more out of the firm than would have seemed likely in 2008. In fact, creditors ahead of ECAPS holders in the queue will be paid out in full with interest and, to the surprise of many, there will probably be money left over.

PwC estimated the surplus could be anything from £280 million to £500 million earlier this year, and that money will have to go to someone. In an update for Lehman's European creditors in October 2017, PwC raised the possibility that money could end up in the hands of subordinated creditors, a group normally one of the last to get paid in insolvency proceedings.

The ECAPS were designed to help bolster Lehman's capital, placing them at the bottom of a long list of other creditors. In the years following the collapse, they were largely forgotten. Some traded in 2017 for US$0.015 on the euro and for even less before that, according to documents seen by Bloomberg and people familiar with the trades.

The June 2020 judgment from London's High Court found that owners of the notes were due a payout, but a far smaller one than Deutsche Bank and many other holders would have hoped for. The judge ruled that investors should share 13.7 per cent of whatever was left after paying higher-ranking creditors, with the rest going to Lehman Brothers Holdings Inc, or LBHI, the ultimate US parent of the collapsed broker-dealer.

King Street Capital Management and Elliott Management teamed up with LBHI to form a joint venture called the Wentworth Group that would share claims based on loans that the US parent made to its European subsidiary, according to another court filing. King Street is also a large ECAPS holder, according to a separate court document, and will likely receive a share of the pot either through the notes or the LBHI venture.

If Deutsche Bank is successful in convincing the court that it should rank ahead of LBHI, the payout on its notes may balloon. Currently, assuming a £280 million surplus from the wind-up of Lehman's European arm, ECAPS holders would receive about £38 million, according to PwC. But if they were to move ahead of LBHI and successfully claim interest, they might take the entire £280 million. BLOOMBERG