One group of investors holding collateralised debt obligations issued by the collapsed investment banking giant Lehman Brothers will receive an unexpectedly generous $100 million on the $125 million they put into securities between 2005 and 2007.
The out-of-court settlement reached between the Australian trustee of the notes, Perpetual Trustee Company, and the liquidator of Lehman, will mean 1000 retail investors including charities, local councils and a number of superannuation funds will be receiving cheques over the next month.
The agreement will be heavily scrutinised by investors around the world that had poured $10 billion into Lehman CDOs.
The particular series of notes that are the subject of the settlement, for which Perpetual was the trustee, were issued to Australian, New Zealand and Papua New Guinean investors.
Those holding Mahogany Notes Series I will receive 85¢ in the dollar while Mahogany Series II will get 69¢ in the dollar.
While this outcome will not have any impact on many other local investors that have been fighting Lehman to recover funds, it may provide some indication of the willingness for the Lehman liquidators to settle the billions in outstanding claims.
One of the main reasons Perpetual was able to reach agreement with Lehman was that it got in early and started its action before a stay of proceedings was given by the US Bankruptcy Court.
Another reason for the success in retrieving this payout relates to the quality of the underlying security of these two particular series of notes. The higher paying Mahogany Notes Series I was backed by ANZ notes and the Series II by Royal Bank of Scotland.
Perpetual has argued in the British courts that investors could get access to this collateral under the terms of the CDO documents. But Lehman’s liquidator has maintained that in the event of a default, Lehman, rather than the CDO investors, would get priority access to the collateral underlying the investment.
It was this quality of the underlying security that had allowed these Lehman CDO investments to be marketed as AAA rated.
A separate class action being run by another series of Lehman CDO investors, many of which are Australian local councils, is arguing that they were mislead.
The legal jurisdiction of the Perpetual action has also played an important part in its success.
In the New York suit, Perpetual argued that a clause in the documentation for the Mahogany notes favourable to the investors was triggered by the collapse of Lehman Brothers Special Financing in September 2008.
If triggered, the clause gave investors immediate access to the collateral supporting the notes.
In May 2009 Perpetual started its legal action in the High Court because the collateral was held there under a British trust deed – claiming the enforceability of note-holder priority.
Lehman successfully filed an action soon after in the US courts attempting to prove the note holding priority was unenforceable.
While appeals are still on foot at this stage the two legal jurisdictions have conflicting judgments.
The Perpetual legal settlement was agreed to last November, however its terms included a confidentiality agreement on the financial terms until last night.