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Insol Europe Academic Forum & Centre
for European Company Law
Joint Insolvency Conference
Leiden, 2 july 2010
Cross-Border Crisis Management
in the Banking Sector
The Problems in Practice:
Lehman Brothers Treasury Co. B.V.
by Rutger Schimmelpenninck
Houthoff Buruma, Amsterdam
A Global Investment Bank
-with headquarters in New York
-and regional headquarters in London
and Tokyo
-Non-US net revenue (Europe, Asia)
2005: 37%
2006: 38%
2007: 51%
Was Lehman not saved because of its
large non-US activities?
Chapter 11
 Monday September 15, 2009:
- LBHI files for Chapter 11 (debtor in
possesion)
- Lehman U.K. (Lehman Brothers
International Europe, “LBIE”) in
administration.
Lehman Brothers Treasury Co. B.V.
(“LBT”)
 Bankrupt (in staat van faillissement)
on October 8, 2008
 Faillissement is a court-supervised
proceeding
 Dutch company with limited liability
Lehman Brothers Treasury Co. B.V.
Total assets Dutch Gaap
40,000
35,000
in USD millions
30,000
25,000
20,000
15,000
10,000
5,000
0
2003
2004
2005
Reported years
2006
2007
Financing activities of LBT
LBHI
Individual
Guarantee
(Board Resolution
Guarantee)
Loan
LB swap Derivative
entities
Loan
LBT
Noteholders
+ Derivatives
Structured notes
 Notional amount, maturity date
 No fixed interest rate; value of the
note (at maturity) dependent on
derivative elements
 Linked to equity, commodities, credit
risk, currencies etc.
 Notes are synthetic, no underlying
assets
 Guaranteed by LHBI
Structured Notes
 Risks related to the embedded
derivative elements were internally
hedged (ISDA)
 Notes were sold to professional and
private investors
 Trades via intermediary parties
(banks) and clearing entities
 Claims not due and payable due to
bankruptcy
 Event of Default = acceleration right
“Dutch Power Note 12”
 Typical equity-linked structured note
 Sold to the public
 Value of the note linked to the
performance of basket of listed stock
(Aegon, ING, Shell,KPN)
 No underlying assets
 “protection from stock movements up
to minus 25%”
 ..but if average stock % goes below
25%...
6 years Dutch Power Note 12; equity
linked to ING, Aegon, KPN and Shell
Some observations on Dutch Power
note:
 Maximum performance is capped
(automatic redemption)
 Potential loss can be 100%
 Full note documentation = 517 pages
 Securities note states: “Investor
should be experienced with global
capital markets and derivatives”
 Claims against intermediaries
Challenges on the claims side
1.
2.
3.
4.
5.
6.
Dutch insolvency law rules as to valuation vs. UK law
governed note
Acceleration of claims
Different value dates (bankruptcy dates, ISDA
termination dates), currency differences
Calculation agent (LBIE) in administration
(independent valuator), but LBIE has no resources
(people, systems)
Over 100,000 (ultimate beneficial) noteholders, who
only hold a tradeable economic interest in global notes
held by common depositaries
Keeping the structure of trading and settlement in
place for the purpose of claims admittance and
distributions
Challenges at the asset side
Amount of intercompany claim undisputed
LBHI’s Plan of Reorganization provides for a
50% admittance
LBT is under pressure of creditors not to
accept this haircut
(As the Judge is present at the conference, this is not the
place to exchange arguments)
Closing remarks: practical and equitable
approach needed
 Cross-Border Insolvency Protocol between
Lehman Brothers official representatives:
+ Platform to promote coordination and
avoid unnecessary loss for creditors
+ Procedures Committee for determining
inter-company claims
- Coordination of procedures agreed, but not
put into practice (bar date, POR)
WHY IS LBHI DEBT TRADING AT
15-20%?
-
Bad markets, declining values
Many illiquid assets
Debt to equity extremely low
Many off-balance sheet and guarantee obligations
crystalize post-petition
Chapter 11 triggers “(event of) default” provisions
Knowledge/information drain
Employees leaving
Transfer of part of the business
Computersystems interrupted
Costs
Time factor
Chapter 11 flaws in Lehman
 After BarCap sale: no going business
left so is “debtor in possession”
procedure appropriate?
 When (de facto) liquidating:
independent liquidator is needed who
acts in the best interests of creditors
 Tension between the interests of
legacy creditors and secondary buyers
 Examiner investigated limited issues
Any questions?
No Subcom
Each creditor retains legal position
LBHI
creditors without
guarantee
creditors of the parent
inter co
claims
and
guarantees
Sub 2
Sub 1
creditors with
guarantee
Subcom
All creditors are equal. Some loose. Some win.
LBHI
creditors
Sub 1
creditors
Sub 2
creditors
Rutger Schimmelpenninck
E: [email protected]
DD: +3120 605 6157
M: +316 5118 9185
Houthoff Buruma
PO Box 75505
NL-1070 AM Amsterdam
the Netherlands