Hedge funds, which 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 European arm.
Five years on from the collapse, payouts to Lehman’s creditors in Europe are on course to top 100 per cent some time next year, following a recovery of assets by administrators and legal victories over other parts of the ex-US 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, joint administrator for Lehman Brothers International Europe (LBIE) and partner at PwC.
The collapse of Lehman Brothers on September 15, 2008, plunged the global financial system into chaos. Its European arm, headquartered in London, was the largest and most complex part of the group because it was a hub for trading and investments, spanning asset classes and dozens of countries.
Closing down the business and trying to recover 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 and 135 per cent in a secondary or “grey” market for their value, compared to as low as 10 per cent in the weeks after the collapse, reflecting an expectation that a premium will be paid.
After creditors are fully paid, LBIE should also have cash left over to pay interest to unsecured creditors — who can get 8 per cent a year under UK law — or subordinated bondholders.
The list of hedge funds, which bought Lehman paper after the bank’s demise, reads like a Who’s Who of so-called “distressed debt” funds, and includes Baupost Group, Elliott Management, King Street Capital and Paulson & Co, industry sources said.
PwC expects about £40 billion ($63.3 billion) to be returned to LBIE’s creditors, including near £23 billion for trust claimants and about £16 billion for up to 3,400 unsecured creditors.