By Patrick Fitzgerald
CarVal Investors LLC, the hedge-fund subsidiary of agribusiness
company Cargill Inc., said it is offering 250 million British
pounds ($398 million) more than two rival hedge funds that recently
agreed to buy a multibillion-dollar Lehman Brothers bankruptcy
claim at a discount.
Lawyers for CarVal said Tuesday that it would pay GBP900 million
($1.4 billion) for the bankruptcy claim against Lehman Brothers
International (Europe), the U.K. arm of the collapsed investment
bank. That is 38% more than hedge funds Elliott Management and King
Street Capital Management LP have agreed to pay for the claim.
CarVal's lawyers said, however, that Lehman conducted a "closed"
sale process and shut out the hedge fund from bidding on the
claim.
"It is not surprising that a 'closed' sale--an unorthodox
approach that contradicts fundamental tenets of the Bankruptcy
Code--whose terms remain undisclosed to anyone but the Lehman
sellers and the proposed purchasers, may not maximize value,"
CarVal's lawyers said in a filing in U.S. Bankruptcy Court in
Manhattan.
Car Val, which manages several funds that invest in distressed
debt, wants to take a closer look at the trade to determine if the
proposed sale maximizes value to Lehman's creditors. To that end,
CarVal is asking U.S. Bankruptcy Judge James Peck to question
members of Lehman's board and its bankruptcy administrators about
the sale before it closes.
At issue is Elliott's and King Street's proposed deal to buy LB
Holdings Intermediate 2 Ltd.'s GBP1.25 billion ($2 billion)
subordinated claim against Lehman Brothers' U.K. business in return
for an initial payment of GBP650 million ($1.04 billion). LB
Holdings Intermediate 2, or LBHI2, is the corporate parent of
Lehman's main U.K. unit.
The proposed deal also allows the parent's creditors to share in
claims the hedge funds have against Lehman Brothers' U.K. arm.
Ultimately about 87% of all distributions from the Lehman U.K.
unit's parent will go to Lehman Brothers Holdings, the failed
investment bank's New York-based holding company. CarVal manages
funds holding more than $12 billion in claims against the Lehman's
holding company.
Minneapolis-based Cargill, whose business runs from beef
processing to energy trading, formed CarVal in 1987 as the
company's proprietary trading arm. It was spun off as an
independent subsidiary in 2006. The hedge fund's interest in the
Lehman claim shows how so-called distressed debt investors are
still profiting from Lehman's demise more than five years after its
collapse.
Representatives for Elliott, King Street, Lehman and
PricewaterhouseCoopers, which is winding down the U.K. units,
declined to comment.
The Lehman dispute also sheds a light on the little-noticed
world of bankruptcy-claims trading, where billions of dollars in
claims trade each month as distressed-debt investors buy up claims
from creditors on the cheap and then jockey for a position in the
order to receive payment.
The trading of claims has been particularly active with respect
to Lehman Brothers International (Europe), or LBIE, in recent
months. Royal Bank of Scotland Group PLC (RBS, RBS.LN), for
example, last month snapped up a GBP350 million ($567 million)
claim against LBIE from New York investment firm Goshen
Investments.
The U.K. unit's administrators have recently doled out $7.8
billion to the unit's so-called omnibus trust creditors. LBIE's
administrators eventually hope to return about GBP40 billion ($63.8
billion) to the U.K. arm's creditors.
People familiar with the matter said claims against LBIE have
recently traded like they are worth more than 130 cents on the
dollar on the secondary market, reflecting investors' expectation
of a significant payout. The value of the claims reflects the more
than $40 billion already paid out by LBIE's administrators.
Lehman's Chapter 11 filing in September 2008 triggered foreign
bankruptcy proceedings for more than 80 of the bank's far-flung
affiliates.
The New York-based holding company has reached settlements on
intercompany claims with virtually all of its foreign affiliates,
including those in the U.K., Japan, Switzerland and Hong Kong, as
well as the liquidators of its U.S. broker-dealer.
Lehman Brothers Holdings paid creditors nearly $50 billion to
creditors since officially exiting from bankruptcy protection in
March 2012. That figure is expected to grow to more than $80
billion, Lehman said earlier this summer.
The remnants of Lehman, under a new board of directors, still
exists in the billions of dollars in assets being overseen by a
team of restructuring lawyer and financial advisers.
The company's liquidation is expected to continue for several
more years as the team sells off Lehman's remaining real-estate and
private-equity holdings and unwinds its derivative positions.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
-Joseph Checkler contributed to this article,
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires