Lehman Hong Kong Minibond Holders Offered Higher Settlement

Lehman HK Minibond Holders to Get ‘Significant’ Payout
The bankruptcy triggered a slump in the value of the notes and sparked almost daily protests by buyers who said they had been misled. Photographer: Adam Dean/Bloomberg

Hong Kong holders of Lehman Brothers Holdings Inc.-linked structured notes may get as much as 96.5 percent of their money back as banks make a second attempt to settle a dispute that forced them to change the way they sell investment products.

Investors in some series of the so-called minibonds will get 70 percent to 93 percent of their money back, receiver PricewaterhouseCoopers LLP said yesterday. Lenders offered an additional payment that will bring eligible investors’ recovery levels to as high as 96.5 percent. An agreement is conditional on noteholders voting in favor of the settlement.

The offer covers about 31,000 buyers whose investments were almost wiped out when Lehman Brothers collapsed in September 2008. A July 2009 repayment offer of at least 60 cents on the dollar in Hong Kong failed to mollify all investors, with some staging daily protests outside bank branches across the city.

“The settlement is a much better deal for investors than the previous one,” said Billy Mak, an associate professor in the department of finance and decision sciences at the Hong Kong Baptist University. “If they insist on a 100-percent refund by filing lawsuits, there’s going to be costs in taking legal actions and the final compensation could be less.”

About 43,000 investors in Hong Kong bought an estimated $1.8 billion of Lehman minibonds that were sold by lenders before the New York-based investment bank succumbed to the financial crisis. Almost daily protests outside bank branches, featuring banging of cymbals and bullhorns blaring pre-recorded statements, became a nuisance for lenders and their customers.

Want Money Back

“This latest repurchase proposal doesn’t reflect the large-scale violations in regulations by the banks,” said Eddy Chan, a representative of the Alliance of Lehman Brothers Victims in Hong Kong. “We want 100 percent of our money back as a minimum. They should disclose more of the details of the negotiations.”

Chan said the group previously comprised of about 6,000 minibond investors though the number may have shrunk as some have accepted the settlement.

“I won’t accept the latest proposal,” Esther Ip, 58, who invested HK$1 million in a minibond product in 2008, said in an interview today. “Why should they only include investors of some minibond series?

Ip was among about 50 protesters gathered outside the main office of Bank of China Ltd. in Hong Kong who were waving banners with slogans including “Lehman not settled” and “BOC uses tricks to cheat money from citizens.”

The July 2009 agreement originally covered about 29,000 investors. HSBC Holdings Plc is the trustee for the minibonds.

Extra Payments

“This seems to be a good outcome,” said David Webb, a Hong Kong-based shareholder activist. “The agreement doesn’t cover all the bonds, but this should reduce the number of people who are still thinking of going to court over this issue to very small numbers.”

An estimated 4 percent of note holders would get at least 90 percent of their investments back, and 65 percent of those eligible would get 80 percent to 90 percent. The “ex gratia” payment is on top of that and covers minibond investors who have already settled with their banks.

Some 96 percent of minibond holders eligible for repayments under the original agreement had already accepted offers to repurchase their bonds before yesterday’s announcement by the receivers and Lehman Brothers Special Financing Inc.

Collateralized Products

“This is a very decent offer,” K.C. Chan, the Hong Kong secretary for financial services and the Treasury, said in a statement today. “Regarding the redemption of collateralized products, the issue should have been completely resolved.”

BOC Hong Kong (Holdings) Ltd., Bank of China’s Hong Kong unit, said in a statement late yesterday that it will make HK$160 million ($20.5 million) available for the settlement of the minibonds, and that it plans to write back part of the provisions for the investments.

A Hong Kong court in February cleared a BOC Hong Kong (Holdings) Ltd. manager of fraudulently or recklessly inducing retail clients to buy Lehman minibonds. A second employee is awaiting a verdict on the same charges.

The lender, along with 15 banks, agreed in an earlier settlement to pay at least 60 cents on the dollar, for HK$6.3 billion. That agreement was reached with the Securities and Futures Commission and the Hong Kong Monetary Authority.

BOC Hong Kong, the biggest seller of the notes in the city, offered in July 2009 to pay HK$3.11 billion to the minibond investors, almost half the total compensation extended by the banks. The lender also said then it would make an aggregate provision of HK$3.63 billion for the settlement.

Lump Sum Payment

The 16 banks have offered to pay a lump sum of up to 50 percent of the shortfall in the amount invested in minibonds to people who already came to individual agreements with banks over the issue, according to yesterday’s statement. Bondholders will vote on the settlement at a series of meetings and payments may start in June, the banks said.

“This outcome would have been as impossible in the months following the collapse of Lehman,” according to a statement issued by the Securities and Futures Commission yesterday. “We are pleased to note that investors of the relevant mini bond series will benefit from the high level of recovery.”.

The inquiry into the sale of minibonds prompted the Hong Kong Monetary Authority, the city’s de facto central bank, to propose that lenders physically separate deposit-taking and investment businesses at their branches and tape all conversations related to sales of investment products.

The notes were sold to investors including the elderly and poorly educated people as well as mentally ill individuals, according to an investigation by the city’s central bank made public by lawmakers in April 2009.

Editors: Philip Lagerkranser, Tan Hwee Ann

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