Monday, February 2, 2009

Stock plan for Lehman creditors

By Julie MacIntosh, Francesco Guerrera and Nicole Bullock in the Financial Times:

Creditors of Lehman Brothers would receive stock rather than cash under a plan that could separate its illiquid assets into two companies, which would force them to wait for repayment but potentially boost their returns.

The plan would allow Lehman to cordon off difficult-to-sell assets and wait for the markets to improve, preventing a fire sale of its holdings, said Bryan Marsal, co-head of Alvarez and Marsal, which is managing Lehman’s liquidation. It is now in its preliminary stages but, if it is adopted, the two standalone companies could be publicly listed within two years.

One of the companies would include Lehman’s real estate holdings, now valued at $43bn, which could prove difficult to sell at a time when the commercial real estate market is only just starting to suffer from corporate lay-offs and liquidations.

The bank’s other illiquid assets, including private equity investments and proprietary investments such as its stake in SkyPower, a Canadian renewable energy company, would be gathered into the second company.

Lehman had $12.3bn in principal investments as of September 30, plus additional commitments that it had not yet funded.

Lehman, which filed for the largest bankruptcy in history in September, would distribute stock in those companies into a trust that would benefit its creditors. That stock would eventually be converted to cash as assets are sold.

Lehman is considering the future of the industrial bank it operates in Utah and Lehman Brothers Bank, its thrift. It may try to convince US regulators that the two banks are financially viable and, therefore, eligible to sell loss-making assets into the $700bn troubled asset relief programme.

Lehman approached the US Treasury late last year to request inclusion in the Tarp but was denied, said Mr Marsal. The bank plans to reapply for Tarp assistance.

Lehman’s advisers have hired more than 200 former Lehman employees to help sell its securities and other liquid assets, which range from derivatives to corporate jets. Dick Fuld, the company’s former chief executive, is working on a month-to-month basis to help lobby counterparties for better recovery terms.

Lehman’s US operations managed $26bn of the total $47bn in global derivatives receivables Lehman was owed when it filed for bankruptcy. Alvarez and Marsal has collected on $2.5bn of that exposure.

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