By Dow Jones Business News, October 24, 2013, 03:19:00 PM EDT
By Patrick Fitzgerald
A U.S. judge Thursday cleared the way for Paul Singer's hedge fund Elliott Management and King Street Capital
Management L.P. to buy a multibillion-dollar bankruptcy claim owed to a Lehman Brothers U.K. subsidiary at a discount.
Judge James Peck of the U.S. Bankruptcy Court in New York rejected a bid by a rival group of hedge funds to take a
closer look at the deal, the details of which have been cloaked in secrecy. Those funds, including such major
distressed-debt investors such as John Paulson's Paulson & Co. and Seth Klarman's Baupost Group, had argued rival
bidders had been shut out of the sale process.
"I have no factual basis to that there is anything about this transaction that is truly suspect," Judge Peck told the
assembled lawyers and onlookers in a Manhattan courtroom. "No facts have been presented, only suspicions."
Elliott and King Street have agreed to buy a bankruptcy claim against Lehman Brothers' U.K. business that's valued,
with interest, at 1.8 billion British pounds ($3 billion) in return for an initial payment of 650 million British pounds
plus the right to "future contingent sums."
The secrecy surrounding the deal had prompted concern from other funds with big investments in Lehman debt. One fund,
CarVal Investors LLC, the hedge-fund subsidiary of agribusiness company Cargill Inc., said it would pay 900 million
British pounds for the bankruptcy claim, 250 million British pounds more than Elliott and King Street.
Lehman officially exited bankruptcy last year under a Chapter 11 approved by its creditors, including the hedge funds
involved in the dispute, and isn't operating under the restrictions of the bankruptcy code.
"Inquiring minds want to know, but so what?" said Judge Peck in response to a protest about the deal's opacity from
one funds' lawyer.
Lehman's Chapter 11 plan delegated decision-making authority to the reorganized Lehman's new board, which is required
to maximize value for creditors. The judge said he was loath to set a precedent where big hedge funds could interfere
with the business decisions of a reorganized company's board.
"I'm not prepared today to create a precedent that is unwise," he said.
The Lehman dispute 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 U.K.-based 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 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 New York-based holding company 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
The company's liquidation is expected to continue for several more years as the team sells off Lehman's still-
considerable 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
Write to Patrick Fitzgerald at email@example.com
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