By Patrick Fitzgerald
A U.S. judge Thursday cleared the way for Paul Singer's hedge
fund Elliott Management and King Street Capital Management L.P. to
buy a multibillion-dollar bankruptcy claim owed to a Lehman
Brothers U.K. subsidiary at a discount.
Judge James Peck of the U.S. Bankruptcy Court in New York
rejected a bid by a rival group of hedge funds to take a closer
look at the deal, the details of which have been cloaked in
secrecy. Those funds, including such major distressed-debt
investors such as John Paulson's Paulson & Co. and Seth
Klarman's Baupost Group, had argued rival bidders had been shut out
of the sale process.
"I have no factual basis to that there is anything about this
transaction that is truly suspect," Judge Peck told the assembled
lawyers and onlookers in a Manhattan courtroom. "No facts have been
presented, only suspicions."
Elliott and King Street have agreed to buy a bankruptcy claim
against Lehman Brothers' U.K. business that's valued, with
interest, at 1.8 billion British pounds ($3 billion) in return for
an initial payment of 650 million British pounds plus the right to
"future contingent sums."
The secrecy surrounding the deal had prompted concern from other
funds with big investments in Lehman debt. One fund, CarVal
Investors LLC, the hedge-fund subsidiary of agribusiness company
Cargill Inc., said it would pay 900 million British pounds for the
bankruptcy claim, 250 million British pounds more than Elliott and
King Street.
Lehman officially exited bankruptcy last year under a Chapter 11
approved by its creditors, including the hedge funds involved in
the dispute, and isn't operating under the restrictions of the
bankruptcy code.
"Inquiring minds want to know, but so what?" said Judge Peck in
response to a protest about the deal's opacity from one funds'
lawyer.
Lehman's Chapter 11 plan delegated decision-making authority to
the reorganized Lehman's new board, which is required to maximize
value for creditors. The judge said he was loath to set a precedent
where big hedge funds could interfere with the business decisions
of a reorganized company's board.
"I'm not prepared today to create a precedent that is unwise,"
he said.
The Lehman dispute sheds a light on the little-noticed world of
bankruptcy-claims trading, where billions of dollars in claims
trade each month as distressed-debt investors buy up claims from
creditors on the cheap and then jockey for a position in the order
to receive payment.
The trading of claims has been particularly active with respect
to U.K.-based Lehman Brothers International (Europe), or LBIE, in
recent months. Royal Bank of Scotland Group PLC (RBS, RBS.LN), for
example, last month snapped up a GBP350 million claim against LBIE
from New York investment firm Goshen Investments.
The U.K. unit's administrators have recently doled out $7.8
billion to the unit's so-called omnibus trust creditors. LBIE's
administrators eventually hope to return about GBP40 billion ($63.8
billion) to the U.K. arm's creditors.
People familiar with the matter said claims against LBIE have
recently traded like they are worth more than 130 cents on the
dollar on the secondary market, reflecting investors' expectation
of a significant payout. The value of the claims reflects the more
than $40 billion already paid out by LBIE's administrators.
Lehman's New York-based holding company paid creditors nearly
$50 billion to creditors since officially exiting from bankruptcy
protection in March 2012. That figure is expected to grow to more
than $80 billion, Lehman said earlier this summer.
The company's liquidation is expected to continue for several
more years as the team sells off Lehman's still-considerable
real-estate and private-equity holdings and unwinds its derivative
positions.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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