By Dan McCrum and Telis Demos in New York
John Paulson?s hedge fund has made a profit of $554m, before legal fees, on more than 2,000 trades in Lehman Brothers bonds that started the day the investment bank filed for bankruptcy in 2008, according to an analysis of court documents by the Financial Times.
The settlement agreed between warring creditorsto the largest corporate failure in history, driven in part by hard bargaining by Paulson and his allies, is a much needed victory for the $38bn hedge fund which has struggled with poor performance and high profile mistakesin recent months.
Under the final agreement Lehman?s holding company bonds will receive 21.1 cents for each dollar in face value, versus the 17.4 cents proposed initially by the Lehman estate.
Mr Paulson?s funds hold the bonds at an average of 7.3 cents on the dollar, meaning they own bonds with a face value of $4bn that it paid $290m, net of sales, to acquire.
While Paulson & Co bought Lehman bonds on September 15 2008 at 35 cents on the dollar, prices declined as the fund spent $890m to accumulate debt with a face value of $6.8bn over two-and- a-half years. Profitable sales from late 2009 onwards improved the position further.
By comparison, hedge fund Fir Tree paid a net $340m, or 22.7 cents per dollar, for $1.5bn of notional Lehman bonds. Peer Taconic paid 21.0 cents for the $2bn of face value debt it owns.
The market price for the bonds on Friday stood at 26 cents, reflecting an expectation that recoveries for all bondholders may improve if Lehman recognises fewer claims, or if the value of Lehman?s remaining assets rise substantially through successful sales or improving values.
If it can sell its bonds at that price, Paulson & Co?s profit on Lehman would rise to $780m, a stark contrast to some high profile reversals in recent months.
These include a C$562m ($585m) loss on Sino Forest, the Chinese Forestry company fighting accusations of accounting irregularities. Premier Foods, a UK food manufacturer in which Paulson & Co had reported a 12 per cent stake in October, has dropped about 23 per cent after a profit warning on Thursday.
The profits in the Lehman bankruptcy were hard won.
Paulson & Co has been a member of a group of Lehman bondholders, including hedge funds and large asset managers, such as Calpers, the largest US pension fund, and Pimco, manager of the world?s largest bond fund. Those managers acquired the debts at face value well before 2008.