Lehman Brothers – consensus model blue print for large bankruptcies

Date 10-02-2014

The bankruptcy of Lehman Brothers is the largest bankruptcy filing in US history with Lehman holding over US$ 600 billion in assets. The Netherlands based Lehman Brothers Treasury Co B.V. ("LBT") was the most important financing entity of the Lehman Brothers group and by far the largest creditor in the US bankruptcy. At LBT's bankruptcy date (8 October 2008), over US$ 30 billion of nominal value worth of financial instruments (notes) were outstanding. These notes were held by retail as well as professional investors throughout Europe and Asia. Following the settlement agreement in 2011 between the bankruptcy trustees and the ultimate U.S. parent, LBT obtained a US$ 34.5 billion allowable claim in the U.S. Chapter 11 proceedings.

After having dealt with the asset side of the case, the trustees Rutger Schimmelpenninck and Frédéric Verhoeven, partners of Houthoff, had to tackle the challenges of the liability side. The liability side consists mainly of 3.789 (series of) notes. The notes are highly complex financial instruments. This is the first time ever that these kind of products have been unravelled. Each note has unique features. Often the principal, as well as any return to investors, is linked to reference values (i.e. indices, baskets of equities, commodities or other securities). The insolvency of LBT did not cause automatic acceleration of the notes. As a result, many of the notes remained unmatured after the bankruptcy date and continued trading. These circumstances caused complex legal questions, one of these being the appropriate valuation method for the claims under the notes. Leaving these questions unanswered would lead to the risk of massive litigation. This would seriously have slowed down the distribution process of LBT.

By designing and implementing a resolution process the LBT trustees could maintain consensus amongst the creditors along every step of the way. The process meant that the valuation principles were set by the bankruptcy trustees. These principles came to existence through a step-by-step process in coordination with the various noteholder constituencies.

The principles were published at different stages between 2010 and 2012 to make it possible for noteholders to provide feedback or raise objections. This ground breaking innovative approach of taking each step in consensus and having creditors waive rights to litigation prevented endless future litigation by deep-pockets creditors. Finally, the definitive valuation principles were, together with the actual valuations of each note (expressed as a percentage of its original nominal value), presented to the creditors through a composition plan. After a sophisticated consent solicitation process, wherein creditors could participate through their respective banks, the composition plan was accepted in March 2013 by a 96 percent majority. This set the path to distributions by LBT.

Via this unprecedented composition plan, LBT is able to make distributions to its creditors in the most efficient manner. To date, LBT has distributed in total an amount of US$ 5.6 billion and further distributions are expected in the coming years.