Morgan Stanley Buys $320 Million of Fontainebleau Debt

Morgan Stanley bought $320 million of Fontainebleau Las Vegas Holdings LLC debt as a Nevada court decides who will be paid first by the estate of the bankrupt casino company.

Fontainebleau Las Vegas LLC and affiliates Fontainebleau Las Vegas Holdings LLC and Fontainebleau Las Vegas Capital Corp. filed for bankruptcy in Miami in 2009, listing debt of more than $1 billion each. New York-based Morgan Stanley made 67 trades in the company’s claims, SecondMarket Holdings Inc. said today in a report.

Billionaire investor Carl Icahn bought the unfinished Fontainebleau Las Vegas casino resort for about $150 million in 2010. Lenders and contractors are fighting over that money, a dispute that is being decided by Nevada Supreme Court judges who heard arguments in June on who has priority claims.

The Morgan Stanley trades disclosed in July made Fontainebleau the second most actively traded defunct firm after Lehman Brothers Holdings Inc., according to the report. Morgan Stanley was a lender to Fontainebleau.

Wesley McDade, a Morgan Stanley spokesman, declined to comment on the claims-trading report.

Morgan Stanley’s purchases, filed in July, were made in the past year on behalf of clients, said a person familiar with the trades who wasn’t authorized to comment on the issue and asked not to be named.

SecondMarket, which publishes monthly data on claims using bankruptcy court filings, counts trades in the month they are disclosed in court, even if the debt changed hands earlier.

Lehman Claims

Trading volume in Lehman debt, which has dominated the market for distressed companies’ claims, fell by half to $900 million last month, from $1.9 billion in June, according to SecondMarket data.

A spurt of speculation before Lehman made its first payment to creditors pushed the face value of trades as high as $6.4 billion in the 30 days before the March 18 record date, according to SecondMarket.

Lehman, now out of bankruptcy, paid $22.5 billion to claimholders in April, or 53 percent more than it previously estimated was possible. A second payout of undisclosed size is due on Oct. 1 from the defunct firm, which had said it will return 18 cents on the dollar to creditors by about 2016.

The MF Global Inc. brokerage was the third most actively traded company, with $208 million of its debt changing hands in July, followed by AMR Corp., with volume of $26.5 million, the report said.

Computing Claims

The totals refer to the face value of the claims, not the trading prices, which reflect payment prospects and aren’t disclosed. SecondMarket counts trades in the month they are disclosed, not when the debt actually changes hands.

Once the world’s fourth-biggest investment bank, New York-based Lehman filed for bankruptcy in 2008 listing debt of $613 billion. MF Global Holdings Ltd., the brokerage’s parent company, filed the eighth-largest U.S. bankruptcy on Oct. 31 with debt of almost $40 billion.

Big trading firms have been selling Lehman debt they accumulated during the company’s bankruptcy, said Andrew Gottesman, head of claims trading for SecondMarket.

“As a result, there is less activity on the whole across the market,” he said.

The $2.8 billion Fontainebleau Las Vegas project, about 70 percent finished when it failed, was designed for more than 24 acres on the Las Vegas Strip, according to a 2010 lawsuit by Wilmington Trust FSB, agent for lenders, against holders of mechanics' liens asserting claims to the casino’s sale proceeds.

The Lehman case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Fontainebleau case is In re Fontainebleau Las Vegas, 56432, Supreme Court of Nevada (Carson City).

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