In our Communication dated 29 November 2012 (the second announcement), we provided customers with an update in respect of the proposed settlement of the Omnibus Claim. We also set out key elements to be included in a proposal to facilitate a distribution by LBIE to its customers within the Omnibus Claim. A third announcement on 20 December 2012 provided a more detailed disclosure of the approximate composition of the portfolio of securities as at 31 October 2012.
This fourth announcement provides further clarification in respect of some elements of the proposed consensual arrangement.
We are in the process of finalising the terms of the consensual offer which we expect to circulate to clients by the end of February 2013.
LBIE will be using its portal system to manage the end to end despatch and receipt of forms, documentation and customer specific material. Details will be circulated with the proposal. Generic documentation will also be made available on this website.
In the second announcement, we advised that in order for the consensual arrangement to be successful, it will require the support of a significant majority of customers and a high level of acceptance. A high level of acceptance will also maximise the prospects of the proposed settlement agreement with LBI being approved by the US Bankruptcy Court and reduce the diluting adverse impact created by reserving for counterparties who do not wish to be treated under the consensual terms.
The CRA may be amended to incorporate the terms of the proposed consensual arrangements by a vote representing 75%1 of the aggregate voting value of CRA signatories with an LBI asset claim. An amendment so approved by such a majority would bind all affected CRA signatories, making them all accepting customers.
A threshold level of acceptance has also been considered for non-CRA customers. We can now announce that the consensual arrangement will only become effective if (in addition to acceptance by CRA signatories as described above) it is approved by non-CRA customers holding at least 40% of the aggregate Best Claim of all non-CRA customers with an interest in the LBI claim.
If the non-CRA threshold level is met and the modifications to the CRA are approved, accepting customers will represent in excess of 80% of the aggregate of the Best Claims of all customers with an interest in the LBI Omnibus Distribution.
Once the documentation has been published, both constituencies will have a four week window to pass their vote. The Joint Administrators will be recommending that creditors support the proposals. We are in the process of planning what workshops and other forums will be helpful to counterparties to deal with voting and other questions on the proposal. In addition, representatives of the Creditors Committee have offered to share their views on the proposal with other customers.
In the second announcement, we indicated that LBIE was considering the possibility of replicating the concept of the Small Claims Settlement Offer used for unsecured creditors of LBIE, but in this case applied to the claims of CRA and non-CRA customers who accept the consensual arrangements in respect of the LBI Omnibus Distribution.
Following further analysis, we have concluded that it is not feasible to implement such an arrangement as originally considered. As a result LBIE does not intend to implement a Small Claims offer at the time that the consensual agreement is launched. However, the position of small claimants will be considered further at some time after the launch.
LBIE continues to work with its advisers and agents to secure a fair and reasonable US Withholding Tax treatment for customers with an interest in the LBI Omnibus Distribution.
The extent to which customers are subject to US federal income tax on distributions made to them in respect of the proposed settlement and the extent to which LBIE and/or its appointed agent may correspondingly be required to withhold US tax from such distributions will depend on a number of factors, including (but not limited to) the source and character of the payments for US federal income tax purposes, receipt by LBIE of valid US tax forms as described below and/or the tax residency of the relevant customer.
In particular, LBIE is endeavouring to secure an outcome where the character and source of the settlement payments are determined by reference to a particular customer’s entitlement as set out in their Best Claim. We consider this should provide a fair and reasonable outcome for customers and should ensure that customers are taxed by reference to their specific attributes and positions.
US Withholding Tax on income - It is expected that a customer’s entitlement will be subject to US federal income tax withholding of 30% to the extent such entitlement is determined by reference to income on US securities. However such withholding may be reduced or eliminated where the recipient is a properly documented US recipient, through the application of treaty reliefs (if available) or under US domestic exemptions where the customer provides a valid US tax form prior to the payment.
US Backup Withholding Tax – Payments treated as the proceeds from the sale of securities comprised in the LBI Omnibus Distribution distributed to a customer may be subject to Backup Withholding Tax at 28% of the gross proceeds unless the customer provides a valid US tax form.
FATCA - New rules which take effect from 1 January 2014 under the Foreign Account Tax Compliance Act (“FATCA”) may require LBIE or its agent to withhold 30% on payments made to customers in certain circumstances. Such Withholding Tax (if any) could depend, amongst other things, on the character and source of the payments made (discussed above) and the customers’ classification under the applicable Chapter of the US Internal Revenue Code.
LBIE has approached the US Internal Revenue Service (“IRS”) with a view to obtaining guidance that the character and source of the settlement payments to be made to customers out of the LBI distribution are determined by reference to each customer’s entitlement as set out in their Best Claim. There is no guarantee that the guidance issued will conform to our expected withholding tax treatment. We aim to provide periodic updates in this regard as matters develop.
There are US federal income tax risks associated with the proposed settlement.
Fuller details will follow in the proposal itself. However we would highlight that the potential worst case tax exposure might see US Withholding Tax being applied against the entirety of the LBI Distribution or on a customer’s distribution, pending further consideration and having regard to customers’ individual circumstances where appropriate.
As noted previously, in order to potentially reduce the amount of tax that LBIE or its agent may be required to withhold under US law, customers will be requested to provide completed US Withholding Tax forms. These will be loaded onto the client asset portal together with related instructions once the offer is made.
LBIE may at its absolute discretion defer any distribution of the LBI Omnibus Distribution to a customer pending receipt of a valid tax form.
An update on the composition of the cash and securities portfolio that we expect to recover from LBI as at the end of November 2012 is being prepared and will be published shortly.
If you have any queries with regards to this announcement, please contact generalqueries@lbia-eu.com.
1Note that voting values under the CRA will be by reference to the relevant assets and liabilities of a CRA signatory under the CRA and not solely by reference to their LBI related claims.
To ensure compliance with Treasury Department Circular 230, you are hereby notified that: (a) any discussion of US federal tax issues in this announcement is not intended or written to be relied upon, and cannot be relied upon, by you for the purpose of avoiding penalties that may be imposed on you under the Internal Revenue Code; (b) such discussion is included herein by LBIE in connection with the promotion or marketing (within the meaning of Circular 230) by LBIE of the transactions or matters addressed herein; and (c) you should seek advice based on your particular circumstances from an independent tax adviser.
The information and contents of this update communication are being provided to you by LBIE for discussion purposes only. This update does not constitute a commitment or offer on the part of LBIE or its Joint Administrators, and should not be construed as such, nor does it constitute any form of advice to the recipients. The contents of this communication are based on provisional analysis by LBIE. LBIE reserves the right without specifying any reasons to amend all or part of this communication.
Any party (including any recipients) who obtains access to and chooses to rely on this update communication (or any part thereof) will do so entirely at its own risk. No person has, nor is held out as having, any authority to give any statement, warranty, proposal or undertaking on behalf of LBIE or its Joint Administrators in connection with this communication.
LBIE and its Joint Administrators will be under no obligation to provide the recipients with access to any additional information, to update this document or to correct any inaccuracies in it which may become apparent.
LBIE and its Joint Administrators, and their respective officers, employees and agents, disclaim any liability which may arise from this communication, or any other written or oral information provided in connection herewith, and any errors and/or omissions herein or therein.
Nothing contained in this update communication is an acknowledgement of any claim that a recipient or any other claimant may have against LBIE or any other entity. Neither LBIE nor its Joint Administrators shall have any liability to any recipient or to any other person in respect of the information contained herein or for any defect or incompleteness in it. No representation is made by LBIE or its Joint Administrators about any claim that may be asserted against LBIE in respect of the settlement of the Omnibus Claim or any shortfall in recovery of positions represented in the Omnibus Claim.