Lehman Brothers Holdings offered bondholders more money to appease a dissident group including hedge fund Paulson & Co., while threatening to take away the extra payment if the dissidents don't support the defunct firm's revised plan to pay creditors $61 billion.
Paulson and other senior bondholders are being offered 21.4 cents on the dollar in Lehman's amended plan, filed Tuesday in U.S. Bankruptcy Court in New York. Their payout will go back down to about 17 cents on the dollar, if they oppose Lehman's new plan, according to the filing.
Lehman's 450-page liquidation plan was filed after 28 months in Chapter 11 bankruptcy protection at a cost of more than $1.1 billion for managers and advisers. Lehman said the proposal incorporates elements of a rival plan filed in December by Paulson, the $228.5 billion California Public Employees' Retirement System, and other creditors who together hold about $16 billion of senior Lehman bonds.
“We think this is the fairest way to deal with all the legal issues,” said Lehman President John Suckow in a phone interview Wednesday. “We're hoping to get people to rally around this plan in coming weeks and months.”
Lehman won't start soliciting votes for the plan until after the summer, once U.S. Bankruptcy Judge James Peck has said the current documents have enough information for creditors, Mr. Suckow said. It may be near the end of the year before the plan gets final court approval, he said. An official committee of Lehman creditors supports the plan, he said.
The Paulson-CalPERS group will vote its bonds as part of a class of senior bondholders who have more than $80 billion in claims, according to Lehman's data.
Lehman CEO Bryan Marsal aims to raise a total of $61 billion for creditors by selling assets in the next few years and reducing allowable claims to $322 billion, according to court filings. That would give the average Lehman creditor 18.6 cents on the dollar, an increase from 14.7 cents in its first plan, outlined last March and April, when values for Lehman assets were lower.
Some $37 billion in relatively illiquid assets will be on the block, Mr. Marsal said in court on Jan. 13. Real estate accounts for about $12.1 billion in potential recoveries, and derivative contracts could fetch $6 billion more, according to the new plan documents.
Money management firm Neuberger Berman, which is 48% owned by Lehman, could bring as much as $2 billion in a sale, or twice the original estimate, according to the filings.
Lehman and its affiliates ended the year with about $22 billion in cash, according to a court filing. That puts Mr. Marsal about one third of the way toward his $61 billion goal.
Giving more money to bondholders, Mr. Marsal took it from banks holding derivatives claims.
Derivatives creditors of Lehman Brothers Special Financing, which handled much of the collapsed bank's swap contracts, would get 22.3 cents, down from a prior estimate of 24.1 cents.
Big banks such as Goldman Sachs Group, Morgan Stanley, Credit Suisse Group, Deutsche Bank and Bank of America filed derivatives claims against the Lehman Brothers Special Financing unit, according to court filings.
If they don't support Lehman's new plan, they might lose extra money they're entitled to as part of a guarantee of LBSF debts, according to Lehman's disclosure statement.
At the time it filed bankruptcy, Lehman was involved in about 1.2 million derivative transactions, with about 6,500 different counterparties, it said in court papers. As of Sept. 30, the bank had settled 45.6% of those contracts, the plan said.
Creditors with general unsecured claims against the parent company would receive a return of 19.8%, according to the plan disclosure statement.
In its rival payment plan, the Paulson-CalPERS group allocated 24.5 cents to bondholders and cut derivatives creditors' payout to 25.7 cents, from what the group calculated as 38.8 cents under Mr. Marsal's first plan, which gave them a right to get paid twice in a so-called “double dip.”
Among the group's members, Pacific Investment Management Co. runs the world's largest bond fund, and Canyon Partners is a $19 billion hedge fund. Paulson manages about $33 billion in hedge funds.
Once the fourth-largest investment bank, Lehman filed the biggest bankruptcy in U.S. history in September 2008, listing $613 billion in debts.