Should Investors “Cash Out” or “Substitute” their Legacy Lehman Bonds?

Amicus recently wrote to all our retained clients advising them whether to take the offer of “Substitute Bonds” or the “Cash Out” option on their legacy Lehman Brothers Treasury (LBT) notes.  Australian clients typically hold what is colloquially known at the Lehman Property Note or the standard Lehman corporate bonds.

The background to this offer is that LBT has for the past 7 years largely been acting as a conduit for the distribution of dividends from its parent company Lehman Brothers Holdings Inc (LBHI) with LBHI paying a dividend in USD to LBT and then a couple of weeks later LBT paying this dividend onto its over 10,000 individual noteholders who collectively hold 3,797 individual notes denominated in 21 different currencies.  Distributions are made on a pro rata basis according to individual note face values converted to EUR at the time of LBT’s bankruptcy.  LBT’s total dividend payments to date are equal to 99.56% of the total USD 12 billion + in dividend payments it has received from LBHI.

This process was efficient in the early years of LBT and LBHI’s bankruptcy when dividend payments were larger and there was likely more monies to be distributed from LBHI than this is currently.  However with LBHI dividends becoming smaller and smaller, the process has become inefficient both in the need to employ large numbers of staff at LBT to administer the bankruptcy and ongoing dividend payments, but also in terms of custodian and registry fees to hold the nearly 4,000 individual notes.  These costs are all ultimately borne by LBT noteholders.

As a result, LBT plans to sell a proportion of its LBHI claim (probably around half) and “Cash-Out’ some of its noteholders.  The remaining noteholders (Retained Noteholders) will have their notes converted into a “Substitute Note” denominated in USD.  In this way LBT’s bankruptcy will be greatly simplified going forward in that it will still receive ongoing dividends from LBHI but pay these out in the form of a single Substitute Note denominated in a single currency (USD) and held in a one registry system for the benefit of a far smaller number of noteholders.

Holders of the LPN and any other LBT notes now need to make a choice whether they are “Cashed Out” or receive “Substitute Notes” with this decision needing to be made effectively by the end of February 2019.  If investors do nothing they will be automatically “Cashed Out”, but if investors want to receive “Substitute Notes” they need to go through the process of filing an “Instruction to Retain” with the “Consent Agent” (Deutsche Bank).

In deciding which option to take, we would recommend investors consider factors that fall into two different categories as listed below:

Economic Factors Put simply the question is:  Are you likely to receive more monies by retaining your holding in the form of Substitute Notes or by taking the Cash Out option?

Other FactorsThese include:  For some holders cashing out will finalise their holding of this investment, but for the majority they will still receive ongoing dividends directly from LBHI as part of their third party guarantee claim.  Monies received going forward from the Substitute Notes will be in USD rather than AUD.  Investors will need to go through the hassle of filling in the Instruction to Retain as opposed to doing nothing.

We believe the correct decision will be different for each individual investor depending on the size of their holding and their individual circumstances.

Amicus is providing advice on this issue on a pro bono basis to any holder who wishes to call Amicus up to discuss the options and what might be best for them in their individual circumstances.  Please feel free to call us rather than waste monies on lawyers’ fees in what is basically a financial rather than a legal decision.

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