Oct. 11 (Bloomberg) -- Lehman Brothers Holdings Inc. bondholders didn't get a clear indication of how much they will recover in the firm's bankruptcy from an auction of insurance on its debt, two analysts said.

Yesterday's auction determined that investors who bet on a default of Lehman's debt by buying derivatives called credit- default swaps should get 91.375 cents on their dollar. The price was set by auction administrators Creditex Group Inc. and Markit Group Ltd., with 14 financial institutions bidding. That figure was calculated based on an ``inside market midpoint'' price of 8.625 cents on the dollar for Lehman's debt.

The auction has little to do with what bondholders will recover once Lehman's bankruptcy, filed Sept.15, has been fought out in court by creditors, said Matt Dundon, managing director of distressed analysis at Miller Tabak Roberts Securities.

``I take very little directionality on the ultimate value of the bonds from the CDS auction,'' Dundon said.

Such auctions rarely come close to predicting the true price of bonds because of the disparity between insurance on debt and the debt itself, Dundon said. He called the difference between the auction price of 8.625 cents and the recent trading price of most bonds at about 10 cents ``insignificant.''

Kevin Starke, an analyst with CRT Capital Group LLC said there are too many unknowns so far in the Lehman case to accurately predict recoveries.

Upside, Downside

``From the starting point of 8.625 cents on the dollar, you could have upside or downside'' said Starke. Potential downside includes JPMorgan Chase & Co.'s secured claim of $23 billion. The $110.5 billion in senior notes in the case could also see upside, he said, adding that it's difficult to gauge at this point because Lehman hasn't filed financial statements or monthly operating reports in the bankruptcy court.

``I think this has been a very hard bankruptcy for the distressed investing community,'' Starke said. ``The case is so massive, there are no discreet elements.''

CDS, or over-the-counter derivative contracts that are similar to insurance policies on debt are estimated to be a $55 trillion market. The payout by New York-based Lehman, once the fourth-largest U.S. securities firm, will mark the largest ever, as sellers of the insurance are expected to deliver $270 billion.

Some of that protection may be delivered to parties that are involved as creditors in the case. Creditors aren't required to disclose whether they hold insurance on bonds, which has been a contentious topic in bankruptcy law. Concerns include creditors who could get more than 100 cents on their dollar if they held insurance and got a recovery in the case.

Creditors' Interest

Creditors that serve on committees that influence recoveries in a case may not have to reveal whether they own CDS.

``There are very few legal precedents'' on this matter, said Andrew DeNatale, a partner at White & Case. DeNatale said a decree by the U.S. Securities and Exchange Commission in 2005 involving a bondholder who was a creditor in the WorldCom Inc. bankruptcy and hadn't disclosed a short position, could be read to suggest positions in insurance on debt should also be disclosed.

``The point of the matter is, if you're long and short you don't have any skin in the game,'' DeNatale said. ``If you have CDS coverage of the bonds, people would argue it's the same thing.''

Janet E. Limprecht, a spokeswoman for the U.S. Trustee, a government agency responsible for forming creditors committees and evaluating potential conflicts, didn't return a call seeking comment yesterday.

While Lehman's CDS auction may not affect its bankruptcy, it has drawn unprecedented attention from those involved in the case, said Jonathan Henes, a partner at Kirkland & Ellis.

`Complete Microscope'

``Everything occurring here is under a complete microscope,'' Henes said.

Participants in yesterday's auction included Banc of America Securities LLC, Barclays Bank Plc and Citigroup Global Markets Inc. None of the participants serve on Lehman's unsecured creditors committee. Sometimes committee members or banks act as agents for other investors.

The history of such auctions in bankruptcy cases is short, and many bankrupt companies that set prices in such auctions years ago haven't emerged from bankruptcy. Those companies include auto-parts maker Delphi Corp., which, at a November 2005 auction set a price of 63 cents on the dollar with $186 million in bids and $285 million in offers.

A 2005 Northwest Airlines Inc. auction brought a settlement price of 28 for its debt. The auction resulted in J.P. Morgan Securities Inc. buying $10 million in bonds from Bear Stearns & Co., at a price of 27.75 cents on the dollar, according to Creditex's Web site. When Northwest approved its plan on May 21, 2007, it was predicted that unsecured creditors would recover from 66 percent to 83 percent of their claims. It wasn't disclosed whether J.P. Morgan traded in the debt throughout the case or would have profited from that.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York bankruptcy court at tkary@bloomberg.net

Last Updated: October 11, 2008 00:01 EDT