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Lehman Brothers Files Revised Plan to Exit Bankruptcy

Chief Executive Officer Bryan Marsal
Chief Executive Officer Bryan Marsal aims to raise about $60 billion for creditors by selling assets in the next few years and reducing allowable claims to $322 billion, according to court filings. Source: Alvarez & Marsal via Bloomberg

Lehman Brothers Holdings Inc. revised its plan to exit Chapter 11 bankruptcy, offering bondholders more money after some creditors didn’t support its previous proposals.

The defunct investment bank, which has spent more than $1 billion on advisers during 28 months in bankruptcy, filed the new plan yesterday in U.S. Bankruptcy Court in Manhattan.

Lehman aims to have a court hearing on the amended plan by the end of June and gain the approval of U.S. Bankruptcy Judge James Peck 60 days to 90 days afterward, Chief Executive Officer Bryan Marsal told Bloomberg News in an interview on Jan. 13. Creditors must first vote on the revised proposal. The document outlining the plan didn’t list a voting deadline or propose a date for the confirmation hearing.

Marsal aims to raise about $60 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 in March and April of 2010, when values for Lehman assets were lower. A competing plan was offered up in December by hedge fund Paulson & Co. and other creditors with large claims against Lehman.

Paulson and the other senior bondholders would be paid 21.4 cents on the dollar under the new plan. Marsal originally offered them 17.4 cents. Creditors with general unsecured claims against the parent company would receive a return of 19.8 percent, according to the plan disclosure statement.

Derivative Payouts

Derivatives creditors with claims against 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 Inc., Morgan Stanley, Credit Suisse Group AG, Deutsche Bank AG and Bank of America Corp. filed derivatives claims against the Lehman Brothers Special Financing unit, according to court filings. 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. At the end of the third quarter of 2010 the bank had settled 45.6 percent of those contracts, the plan said.

In its rival payment plan, the group including Paulson 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 Marsal’s first plan, which gave them a right to get paid twice in a so-called “double dip.”

Calpers, Pimco

Among the group’s 10 members are the California Public Employees’ Retirement System, the largest U.S. public pension Fund; Pacific Investment Management Co., which runs the world’s largest bond fund; and Los Angeles-based Canyon Partners LLC, a $19 billion hedge fund. New York-based Paulson manages about $33 billion in hedge funds.

In its disclosure statement, Lehman urged creditors not to support the ad hoc plan which “would engender significant opposition and litigation, and would result in increased expenses and delay” in the case.

The Paulson-Calpers group, which holds about $20 billion in Lehman claims including $16 billion of senior bonds, filed its competing plan, after objecting that Marsal’s original plan created conflict among creditors of Lehman’s units. Lehman said Jan. 13 it would incorporate elements of the other plan into its own document.

Avoiding Consolidation

The Paulson group favors a variant of so-called substantive consolidation, which irons out differences among creditors of a company’s units.

Marsal redistributed some of the anticipated proceeds from liquidating Lehman, without consolidating all units into one.

“The plan affords substantially greater benefits to holders of impaired claims than would any other reasonably confirmable reorganization plan,” Lehman said in its filing.

Lehman ended the year with about $24 billion in cash and $37 billion in real estate, private equity and other assets, according to a court filing.

Once the fourth-largest investment bank, Lehman filed the biggest bankruptcy in U.S. history in September 2008, listing $613 billion in debts.

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

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