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Bundesbank, Lehman in U.K. Battle Over $4.2 Billion CDO Deal

July 27 (Bloomberg) -- Lehman Brothers Holdings Inc. asked a U.K. judge to block Germany’s central bank from seizing control of a 2.9 billion-euro ($4.2 billion) securitization vehicle set up weeks before Lehman’s collapse.

Lehman in 2008 packaged up a group of European commercial real estate loans and sold 2.1 billion euros of senior notes in the security to the Bundesbank.

The central bank’s lawyers told a London court yesterday the securitization, known as Excalibur Funding No. 1, has been in technical default since January. Lawyers for Lehman, which holds 722 million euros of junior debt in Excalibur, argued it has enough cash to meet obligations.

Under the terms of the 2008 securitization deal, if Excalibur defaults, the Bundesbank as senior noteholder could force it to sell assets and return cash to investors. New York-based Lehman filed for bankruptcy in September 2008 with assets of $639 billion, sparking a global contraction in the credit markets and a flurry of litigation around the world.

Martin Pascoe, an attorney for Lehman, said the judge must decide “whether something has happened that could potentially trigger the complete collapse of this securitization.”

If Excalibur were wound down, Lehman would lose most of the 722 million euros invested in it as a result of losses in the underlying portfolio of collateralized debt obligations.


“In order to get anywhere near the event-of-default test being fulfilled, it was necessary for the portfolio to underperform significantly,” said Antony Zacaroli, a lawyer representing the German Central Bank.

Twenty-one of the CDOs wrapped into Excalibur were in default and the portfolio’s performance had worsened since the beginning of the year, Pascoe said.

Judge Michael Briggs said he would decide the Bundesbank case next week.

Kimberly Macleod, a spokeswoman for Lehman, declined to comment on the case. A Bundesbank spokesman said the bank wouldn’t comment on pending court decisions.

Zacaroli, the Bundesbank lawyer, said there were “unusual features” in the Excalibur deal that gave Lehman, as holder of junior or B notes, sway over the assets held in the entity.

“The event of default is the one action where control of the destiny lies in the A noteholders’ hands,” he told the court.

Lehman reported a $2.8 billion loss in the second quarter of 2008 and was forced to raise capital.

‘A’ Rating

Standard & Poor’s Financial Services LLC gave Excalibur’s senior notes an ‘A’ rating after the security was issued in 2008. The ratings firm in March lowered its rating to ‘D’, saying it thought it was unlikely the senior notes would be repaid in full.

In a separate ruling today, the U.K Supreme Court decided Lehman shouldn’t receive collateral ahead of bondholders in two swap agreements, dismissing an appeal by the bank.

Trustees for the noteholders, Perpetual Trustee Co. and Belmont Park Investments Pty Ltd., argued the investors they represented were entitled to the collateral after Lehman defaulted by filing for bankruptcy.

The Bundesbank case is: LB RE Financing No.3 Limited v Excalibur Funding No.1 Plc and Deutsche Bundesbank and US Bank Trustees Ltd., U.K. High Court of Justice (Chancery Division), 11-01164.

To contact the reporter on this story: Kit Chellel in London at

To contact the editor responsible for this story: Anthony Aarons at

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