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Lehman Brothers International (Europe)

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Update from the joint administrators' thirteenth progress report dated 10 April 2015 and webinar dated 30 April 2015

On 10 April 2015, the administrators of Lehman Brothers International (Europe) (LBIE) circulated their thirteenth progress report (the Report) for the period from 15 September 2014 to 14 March 2015 to all known creditors and counterparties. On 30 April 2015, the administrators hosted a one-hour webinar, providing an update on the current progress of the administration, which included a question and answer session. This bulletin summarises some of the key issues raised in the Report and the webinar and highlights other key recent developments.

Key developments

The revised indicative financial outcome shows an increase in the estimated amount of the surplus in both the low and high case scenarios. The potential value range of the surplus, before post-administration interest, currency conversion claims and the subordinated debt, is now estimated to be between £6.01bn and £7.59bn. Creditors should note that their individual entitlement to share in the surplus will depend on a variety of factors including the nature of their underlying contracts with LBIE, the terms of any agreements entered into with LBIE post-administration and the existence of any currency conversion claim.

While the administration continues to focus on the resolution of the issues surrounding creditor entitlement to the surplus, the Report highlights that, pending the resolution of the surplus issues, the administrators: (i) have started to prepare the necessary arrangements for determining and processing claims to the surplus; and (ii) are intending to provide creditors with a surplus indicative financial outcome in the next six-monthly progress report (October 2015). Importantly, the Report highlights that the administrators remain committed to finding a consensual solution to the surplus issues despite the on-going litigation. Other priorities include: (i) agreeing and admitting the remaining creditor claims; and (ii) the substantial resolution of the client money and asset estates within the next six months. It is currently estimated that LBIE’s administration could be completed by 2020.

Payment of interim dividends to unsecured creditors

The fourth unsecured creditor interim dividend of 7.8% paid on 30 April 2014 brought the total cumulative dividend rate to 100%, leaving the surplus to be distributed. While ‘catch up’ dividends continue to be paid on a monthly basis (for creditors reaching agreement with LBIE on their claims) there will be no further distributions over the 100% level until the issues concerning entitlement to the surplus are resolved (see below for further details).

£460m of unsecured claims (in respect of original Proofs of Debt (PoDs) of £720m) were agreed and admitted for dividend in the Report period. This brings the total admitted unsecured claims to £12.19bn with only 2% of claims by value left to be agreed (c.1.31bn). 13 of these claims (representing the vast majority of outstanding claims by value) are subject to unresolved legal proceedings.

Clients who have not yet had their claim agreed and admitted in the LBIE administration will, if their claim is agreed and admitted, be able to receive catch up payments in due course. There remains no hard bar date for filing claims and it is, therefore, still possible to submit a PoD (although any clients who are still to submit a PoD should do as soon as possible). The administrators have made clear that, for all compliant PoDs received but where the claim has not yet been agreed or admitted, that appropriate reserves continue to be made.

Estimated outcome for unsecured claims

There is a revised indicative financial outcome in the Report which shows an increase in the estimated amount of the surplus in both the low and high case scenarios. The gap between the low case and the high case has also narrowed. However, as highlighted below, there remain a number of significant unresolved matters that may materially impact on the final level of the surplus.

The potential value range of the surplus, before post-administration interest, currency conversion claims and the subordinated debt, is now estimated to be between £6.01bn and £7.59bn. This represents an increase of £1.07bn in the low case, and £0.20bn in the high case.

The improvements in the indicative ranges mainly arise from:

  • higher estimates of future dividends to be paid by affiliates (for which see further below);
  • the change in assumption around the treatment of the BarCap claim in the indicative financial outcome – although there remain considerable uncertainties as to the impact of this claim (for which see further below); and
  • the continued admission of claims at below PoD values.

The overall outcome will be affected by numerous outstanding factors, the most significant being:

  • the extent of recoveries from debtors, the largest debtor being AG Financial Products Inc. (AGR) (see AGR litigation below);
  • the amount at which outstanding claims of senior unsecured creditors are determined;
  • the future costs of the administration (which will be sensitive to how protracted any litigation may be, in particular concerning the surplus); and
  • the outcome of any priority claims (these include the pension deficit claim (see below) and potential liability for certain indemnities given post-administration and other potential claims (including tax) that could crystallise in certain circumstances.

Given the litigation concerning the surplus, the Report highlights that it is not possible, at this stage, to give an estimate as to the likely creditor recoveries from the surplus. However, as highlighted above, the administrators intend to provide creditors with an indicative surplus financial outcome in the next progress report.

Distributing the surplus

Waterfall I application

The Waterfall I application (Waterfall I) concerned a number of questions on the ranking of various claims to the surplus (together with LBIE’s shareholders’ obligations to contribute to the debts of LBIE).

The initial Waterfall I judgment was handed down on 14 March 2014. For details of this decision click here. The judgment was appealed by all parties and the appeal has now been heard. Transcripts from the hearing can be found here. The conclusions of the Court of Appeal will significantly impact on the issues concerning creditors’ entitlements to share in the surplus. Judgment is expected during the summer of 2015 with an appeal to the UK Supreme Court remaining a possibility. Such an appeal would further delay the distribution of the surplus.

It should be noted that no assumptions have been made in the indicative financial outcome regarding any recoveries in respect of any shareholders’ liability to contribute to LBIE pending resolution of the issues in the Waterfall I appeal.

Waterfall II application

As set out in our client bulletin on the twelfth progress report, which can be found here, the administrators made a further application to the High Court on 12 June 2014 to address issues not covered by Waterfall I that impact upon the nature and extent of creditors’ entitlements to share in the distribution of the surplus. (Waterfall II)

Following a case management hearing in November 2014, the UK High Court directed that the 39 matters contained in Waterfall II should be divided into the following 3 tranches, each to be subject to a separate timetable and a separate hearing.

Tranche A

Primarily dealing with matters of insolvency law including post-administration interest and currency conversion claims. Court hearing concluded on 26 February 2015 – judgment expected during the Summer of 2015.

Tranche B

Dealing with matters concerning the effect of release clauses in post-administration contracts such as Claims Determination Deeds or the Claim Resolution Agreement. Court hearing 18 – 22 May 2015.

Tranche C

Dealing with cost of funding matters, principally arising in respect of claims under ISDA Master Agreements and similar financial contracts. Court hearing commences 9 November 2015 (listed for 7 – 10 days).

The administrators’ principal role in the Waterfall II litigation is to ensure that the court hears all relevant arguments which may affect the rights of creditors generally (not just the respondents in the proceedings). To that end, the administrators continue to encourage any creditors who feel that their views/interests have not been adequately represented in the positions taken by the respondents to contact the administrators at The administrators are keen to ensure that creditors have the opportunity to identify any relevant positions or arguments not currently adopted by any party to the application, so that they may consider whether those arguments should be put before the court. The current arguments made can be accessed here.

Consensual proposal

Despite the on-going litigation, the administrators have reiterated that they are keen to continue working towards a consensual solution with creditors in respect of the distribution of and entitlement to the surplus. The administrators will assess the appropriate windows to put any proposal for a consensual solution to creditors as issues in the Waterfall I and II litigation start to be resolved by the courts.

Mechanism for the distribution of surplus

It remains likely that one or more of a company voluntary arrangement, scheme of arrangement or a company voluntary liquidation will be required to enable the distribution of the surplus. Instructions will be provided by the administrators in due course regarding any action creditors may need to take, if any, in connection with their claims against the surplus.

Client assets

LBI settlement and the arising omnibus trust

For background on the LBI settlement and omnibus trust click here.

A further true-up distribution (releasing excess tax reserves) was paid on 30 October 2014 to eligible beneficiaries.

The administrators have now reached agreement with the US Internal Revenue Service and their withholding agents as to the treatment of distributions in excess of 100% of the best claim value (this will follow, on a pro-rata basis, the methodology applied to amounts distributed up to 100% of best claim value).

As a result of reaching this agreement, a final third distribution at a gross value equal to approximately 4.4% of the best claim value is planned for June 2015. This will take total recoveries to approximately 110% of best claim value. No further distributions will be made.

Other client assets

It is likely that work on the client assets estate will be concluded prior to the end of 2015 allowing LBIE’s role as custodian to cease. The process of issuing final closing statements to client assets claimants (where required) has now begun.

Clients with remaining positions are being targeted to agree a closure of their positions on an expedited and pragmatic basis and efforts will continue in this regard for the next six-months. Any residual client assets remaining will be subject to an application to the UK High Court for an order permitting LBIE to pay into court those client assets that it has been unable to return to the clients for which they are held. Any clients with outstanding client asset issues are therefore urged to engage with the administrators over the next six-months.

Pre-administration client money

The client money estate cannot be resolved until the determination of the BarCap claim. The resolution of this issue could take a significant amount of time. For further details on the BarCap litigation, see below.

Recoveries for the client money estate have included: (i) c. $390m received as catch-up distributions from Lehman Brothers Bankhaus A.G. (LBB); (ii) c. $40m under the Lehman Brothers Holdings Inc (LBHI) guarantee claim; and (iii) c.$20m due from a counterparty in Taiwan. Future recoveries for the client money estate will arise from further distributions in the LBB estate and under the LBHI guarantee claim.

Progress has been made with creditors with unresolved client money entitlements (CME). 20 CME claims (with a value of $20m) have been resolved in the Report period, however 111 claims remain outstanding and counterparty engagement has not been possible for the majority of those claims. It is expected that court directions will be required to resolve the outstanding claims.

As has been the case for almost all pre-administration client money claims, the administrators expect the majority of further outstanding CMEs to be assigned to LBIE’s nominee (Laurifer) in satisfaction of indebtedness due to LBIE or in exchange for the admission of an unsecured claim.

Other key litigation and the resolution of disputes

13 creditor claims are subject to litigation and these relate to PoDs totalling around £1.04bn. Further litigation is expected to be needed in respect of both debtor and creditor claims.


The AGR litigation concerns potentially the highest value debt owed to LBIE and remains on-going before the New York court. The litigation involves a dispute over the valuation of an ISDA OTC derivatives valuation concerning 28 derivative transactions, which AGR terminated in July 2009. As a result of expert valuation reports being exchanged, the high case recovery outcome has been reduced with current estimated recovery ranges from nil to £330m (excluding any additional pre-judgment interest (of 9% p.a.) which may be payable). The trial is currently set to take place in 2016.

Subordinated debt and contribution claims against shareholders

There are inter-linking issues impacting on the determination of the claims relating to both LBIE shareholders (Lehman Brothers Limited and Lehman Brothers Holdings Intermediate 2 Limited), their ranking in the eventual returns to creditors and the rights between the shareholders themselves. These issues continue to be considered in Waterfall I and Waterfall II. As a result no account will be taken of the potential recoveries under any LBIE contribution claim as part of the indicative financial outcome until the waterfall proceedings have been resolved.

Pension scheme deficit

Following the settlement of the pension scheme deficit litigation, LBIE has agreed to contribute towards the pension scheme deficit. As mentioned in our client bulletin on the twelfth progress report, which can be found here, LBIE is negotiating the purchase of a bulk annuity policy with a third party insurance company, at which point the precise amount of the LBIE contribution will be determined. The deficit amount is not expected to exceed the £120m already envisaged by previous indicative financial outcome statements.

LBIE’s contribution to the pension deficit will be treated as a priority claim of the administration rather than as a senior unsecured claim.

LBI and BarCap

  • BarCap alleges that it acquired LBI’s client money claim in accordance with a sale and purchase agreement entered into in September 2008. The on-going US litigation between LBI and BarCap continues to affect the resolution of the client money estate and, even once the US litigation is completed, the administrators may need to commence UK legal proceedings to ascertain whether a BarCap claim exists against LBIE. However, given that the US Supreme Court has denied LBI's appeal, it should now be easier for the administrators to resolve the outstanding issues.  The treatment of the claim in the indicative financial outcome statement has changed, to take no account of an indemnity granted by LBI. The change in the accounting treatment of the claim does not materially impact the level of surplus available, but in the low case outcome, it would increase the ordinary unsecured claims pool for the purpose of eventually calculating entitlements to the surplus.

Lehman affiliates

The Report highlights that further progress has been made with a number of affiliates. Key developments are set out below. Notably, going forward, higher recoveries by LBIE are now anticipated from affiliates.

  • Lehman Brothers (Luxembourg) S.A. (LB Lux)
    LBIE has received a further £0.80m from LBHI as its share of distributions from the LB Lux estate.
  • LBB
    Further to the settlement agreement admitting 50% of LBIE’s €0.81bn client money claim as an unsecured claim in the LBB estate, LBIE has recovered c.£40m in distributions from LBB.
  • LBIE Seoul Branch
    £30 million has been recovered. Remaining surplus funds from the liquidation remain held in the Seoul branch, pending return to LBIE. The return of the surplus is expected by the end of 2015, subject to the resolution of a number of disputed affiliate claims and regulatory compliance issues.
  • LBIE Zurich Branch
    Surplus funds continue to be held in Zurich pending local clearance, which is expected very shortly. The balance of funds will be repatriated to LBIE once the liquidation is complete.
  • Mable Commercial Funding Limited (MCF)
    Dialogue between MCF and LBIE continues and the resolution of regulatory issues by MCF has improved the low case recovery scenario by LBIE from MCF. A further third distribution of c. £20m was received on LBIE’s £0.60bn claim.
  • Lehman Brothers Hong Kong (LBHK)
    Following the 345 holdings of LBHK client assets returned to counterparties in the last report period, LBIE has received c. £70m in distributions from LBHK on LBIE’s unsecured claims. There is one competing claim from one of LBIE’s clients which LBIE expects to resolve before the end of the year.

Administrators’ webinar

The administrators hosted a one-hour webinar on 30 April 2015 at 14:00 (London time), giving creditors an opportunity to hear a summary of the current circumstances of the administration and to participate in a question and answer session. The webinar can be accessed again here.