Lehman Brothers Holdings Inc. hired BlackRock Inc. to oversee about $3 billion of loans it provided to companies before filing the largest bankruptcy in U.S. history, as the bank accelerates efforts to repay creditors.
The BlackRock Solutions advisory group, which has helped the Federal Reserve Bank of New York sell toxic debt taken on during the 2008 bailout of American International Group Inc., was assigned the contract, according to two people with knowledge of the matter, who asked not to be identified because the terms are private. WCAS Fraser Sullivan Investment Management LLC previously oversaw the loans, which are typically for high-yield, high-risk companies.
“The manager was changed by mutual agreement between the company and the prior manager due to a shift in strategy,” Kimberly Macleod, a Lehman spokeswoman, said in an e-mail, citing confidentiality agreement in declining to name BlackRock.
Lehman switched to BlackRock, the world’s largest money manager, after emerging from bankruptcy in March and as it seeks to raise $53 billion through 2016 to pay creditors an average of 18 cents on the dollar. A new board is taking advantage of rising appetite for assets ranging from commercial property to corporate debt that helped sink the investment bank in September 2008. Last week Lehman moved to take apartment owner Archstone Inc. public to capitalize on soaring demand for rentals.
Farrell Denby, a spokesman for New York-based BlackRock, and John Fraser, co-founder of WCAS Fraser Sullivan, declined to comment.
Lehman was the seventh most active underwriter of U.S. leveraged loans in 2007, arranging $54.8 billion of deals, according to data compiled by Bloomberg. Under Chief Executive Officer Richard Fuld, the bank helped finance takeovers for First Data Corp. and TXU Corp. as private-equity firms took advantage of cheap financing to undertake a wave of buyouts.
Demand for the debt started to dry up in July 2007 and effectively vanished when Lehman’s September 2008 bankruptcy froze credit markets and led to the worst financial crisis since the 1930s. The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index plunged to a record low 59.2 cents on the dollar in December 2008 after starting the year at 94.8 cents.
Lehman, which retained portions of credit lines and loans to companies, was stuck with debt it couldn’t sell.
The bankruptcy court approved WCAS Fraser Sullivan to manage $5.3 billion of the debt in August 2011, including $1.5 billion of unfunded loan commitments. The plan was for the New York-based money manager to hire 10 people from Lehman’s Legacy Asset Management Co., or LAMCO, and securitize some of the loans, according to an August 2011 statement.
The firm would create at least two CLOs, a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return, by August 2012. Lehman would receive interest payments from the lowest portions of the funds.
The bank, which said it engaged a new manager to oversee the portfolio, according to a July 30 regulatory filing, changed course as values of loans recovered. Prices have risen 3.99 cents to 94.74 cents this year, the highest level since July 2011.
The change in manager doesn’t mean Lehman is liquidating the portfolio, according to one person with knowledge of the strategy. Lehman has avoided forced asset sales, such as with its real estate holdings, since the bankruptcy.
BlackRock Solutions has worked with the U.S. government, helping the New York Fed sell more than $70 billion of toxic debt assumed during the bailout of AIG and JPMorgan Chase & Co.’s takeover of Bear Stearns Cos. That includes subprime bonds and CDOs tied to commercial mortgage backed securities. It’s also assisted governments in Ireland and Greece by evaluating their troubled banks.
The New York Fed has benefited this year as the Federal Reserve has held interest rates near zero, fueling demand by fixed-income investors for higher-yielding assets. Leveraged loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.