Seventh Announcement in Respect of the Settlement of the Omnibus Claim 14/05/2013

Introduction and English Court Order

In our communications dated 22 March 2013 and 25 April 2013 we confirmed that the hearing in respect of the application to the English High Court for directions to cause LBIE to perform its obligations under the settlement agreement, entered into by the Trustee for Lehman Brothers Inc. (“LBI”), Lehman Brothers International (Europe) (“LBIE”) acting by the Joint Administrators and the Joint Administrators (the “Settlement Agreement”) was listed to take place on 1 May 2013.

We are pleased to announce that the hearing did take place on 1 May 2013 and the English High Court made an Order in the terms sought. Counsel for LBI supported our application and no other interested parties submitted representations. A copy of the Order is available here.

This Seventh announcement also provides customers with an update to the composition of the portfolio of securities that LBIE expects to recover from LBI (the “LBI Portfolio”). These were previously presented in our Third, Fifth and Sixth announcements on 20 December 2012, 27 February 2013 and 21 March 2013. We also take the opportunity to provide updates on levels of acceptances, disputes and reserves and set out a revised illustrative estimated outcome for customers sharing in the distribution of the LBI Portfolio based on certain simplifying assumptions. In addition we give further clarity around our planning for the first interim distribution.

LBI Portfolio composition

The aggregate estimated value of the cash (including post filing income), common stock and equity type products and fixed income securities in the LBI Portfolio is set out below.

Common stock and equity type products have risen in the period from 30 November 2012 to 28 March 2013 reflecting market conditions. Cash has increased due to the combined effects of corporate actions and redemptions. The latter has resulted in a reduction in fixed income securities.

LBIE cannot guarantee 100% accuracy in respect of this information nor confirm that the information or the assumptions made in rolling the securities forward for corporate actions fully reflect what has actually occurred. The ultimate value of the LBI Portfolio is dependent upon the delivery of the LBI Portfolio to LBIE by LBI, the cash proceeds realised from the liquidation of the non cash assets and the resolution of the continuing uncertainties as regards tax.

Details of the LBI Portfolio are included in the tables below together with comparisons from the fifth announcement.

• Table A – Details of common stock and equity type products by geography, type and industry
• Table B – Concentration of common stock and equity type products
• Table C – Market Capitalisation of applicable common stock and equity type product issuers
• Table D– The country of issue for fixed income securities and their maturity profile
• Table E – Industry and rating information for fixed income securities
• Table F – Concentration of fixed income securities

Acceptance levels, disputes and claims pool

The overall acceptance level for the Consensual Proposal is 95% by Best Claim. Of the population of 269 customers, 244 with Best Claims totalling $8.202bn will participate in the Consensual Proposal.

Fewer than 20 customers raised disputes in relation to their Best Claim. These are being reviewed by LBIE and will be discussed with the customers concerned in the next few weeks. We anticipate that the majority of these disputes will be resolved on an amicable basis ahead of the first distribution. A handful of disputes appear to relate to a challenge of greater significance and we are reviewing how best to resolve these. The level of disputes under consideration totals nearly $50m.

There are currently 25 customers, with an aggregate Best Claim of approximately $0.436bn, that have chosen not to participate in the Consensual Proposal. Of these, only three claims exceed $75m in size and 19 customers have small individual claims which collectively total approximately $2m. LBIE will be contacting all these customers to establish how they would propose to resolve their LBI Asset Claims.

Estimated outcomes

Further to the successful close of the Consensual Proposal, we set out below our updated estimates of potential recoveries. These estimates have been revised based on the disclosures made in this announcement. Please note the final outcome is dependent on the final realised value from the LBI Portfolio which remains subject to ongoing market movements.

Notes

• The Level of overall acceptance by customers is based on actual acceptances and reflects the overall acceptance of 95%. No alternative acceptance scenarios have been modelled.
• LBI Portfolio headline value has been updated whereas the Provisions remain unchanged from our previous announcement and provide a High and Low indicative outcome reflecting variability in outcomes for costs arising on liquidation of the LBI Portfolio, adverse movements from the historical valuation to realised proceeds once the securities are liquidated and other general provisions (not related to beneficiaries).
• Reserves for Non Consenting Beneficiaries are based on the 25 customers (approximately 5% of Best Claims) who have not committed to the Consensual Proposal. Specific provisions have been made for the claims of each of these customers reflecting their particular circumstances together with a modest general provision. LBIE expects to maintain cash rather than securities reserves for Non Consenting Beneficiaries in most cases.
• The Aggregate of Consenting Beneficiaries’ Best Claims reflects the total value of Consenting Beneficiaries’ Best Claims before deductions for indebtedness, taxes and fees. It has been adjusted to reflect disputes of $45m raised by Consenting Beneficiaries that are still under review by LBIE. It does not indicate that all Consenting Beneficiaries will be Qualifying Beneficiaries pursuant to Part 4 of the Common Terms. Best Claims maybe subject to change in limited circumstances under the Common Terms.
• Illustrative return as % of Best Claim assumes full utilisation of the Non Consenting Beneficiaries’ reserves and Provisions where included. Illustrative returns do not represent a minimum or a maximum recovery and are in most cases based upon the historic 30 November 2012 claim values. If the returns had been calculated on a current view of the value of the claims then the rate of indicative return would be lower recognising that the value of claims has risen broadly in line with the increased value of the LBI Portfolio since 30 November 2012.
• This analysis is shown before adjustment for taxes, indebtedness and any other deductions.
• The 19/9 shortfall claim (pre cap) is the aggregate shortfall for customers whose gross recovery is lower than their 19 September 2008. This is $10m in the Low case and $0m in the High case.

Other Updates

Distributions to Accepting Customers

LBIE expects that the first distribution of the proceeds from the LBI Portfolio will be in the previously quoted range of 60 to 70% (pre indebtedness, tax etc.). The actual level will be materially influenced by its timing and the progress achieved in the liquidation of the securities portfolio.

Liquidation of securities

LBIE expects to liquidate the securities through a series of open market transactions in an orderly and timely manner. Our priority is to maximize recoveries whilst minimising the impact in the market place. LBIE does not intend to exercise speculative market views on individual securities or portfolios of securities.

Given the portfolio split outlined above, LBIE intends in most cases to follow different execution strategies for equity and equity like products as compared to fixed income products. For equity and equity like products, LBIE expects to sell the securities:

a. Through a number of portfolio trades using several leading brokers

b. On an agency basis (although for certain securities, at its discretion LBIE will consider risk trades where it deems it appropriate)

c. Subject to pre-defined algorithms which will, amongst other factors, cap market participation on a security by security basis

LBIE will track execution performance against pre-defined benchmarks.

The fixed income securities will be sold by LBIE on a principal basis predominantly through a series of competitive auctions. LBIE intends to auction individual securities as well as portfolios of securities through a series of BWICS (bids wanted in competition). Each security or portfolio will be shown to a minimum of three bidders. All bids will be required within specific deadlines and LBIE will reserve the right not to sell one or more bonds if it is dissatisfied with the levels of the bids. A number of securities have a final maturity within two months of the expected receipt by LBIE of the LBI Portfolio and LBIE might therefore, taking factors such as liquidity and pricing into account, choose to hold these securities to their maturity rather than selling them.

LBIE anticipates that more than 90% of the expected settlement proceeds will have been received within one month of the liquidation commencement and LBIE will provide an update once 90% has been completed. A bespoke approach will be taken with the remaining population.

US withholding taxes

As set out in the Fourth announcement, LBIE has made a formal submission to the US Internal Revenue Service with a view to obtaining guidance with regard to the character and source of the settlement payments as reflected in a customer’s Best Claim. We continue to work constructively with the IRS to resolve these issues although we cannot yet commit to a definitive timetable for completion.

Timetable for interim distributions

The timing of resolving the withholding tax treatment with the IRS may impact the timing and quantum of interim distributions to customers. We have targeted the end of June as a decision point to finalise our interim distribution plans and will provide customers with a firm update at that time. We are developing a flexible capability to ensure that we are able to capitalize on the circumstances prevailing at that time. This may mean for some customers the interim distribution may need to be wholly or partially deferred pending resolution of US withholding tax consequences. However, our previously published target of Q3 2013 remains a realistic goal for an interim distribution (to some if not all of the population of Consenting Beneficiaries).

Operational matters

A key feature of the LBI Settlement is for LBIE to appoint a US withholding agent to administer payments to customers and effect the necessary tax withholding and reporting. Negotiations with potential custodians together with detailed operational planning are proceeding well. In order to ensure that customers obtain the most appropriate US withholding tax treatment, it is important that they promptly furnish properly completed US tax forms to LBIE. All omnibus customers (including those who have not entered into the Consensual Proposal) are strongly encouraged to provide US withholding tax forms (and where applicable, allocation statements) as soon as possible.

UK Trust Issues

LBIE continues to engage with HMRC with a view to obtaining comfort that any trust relationship that arises as a result of the Consensual Proposal is not subject to UK tax.

Dual Depot

Under 13.1.2 of the Common Terms, LBIE identified a limited number of circumstances and where securities were held in both the LBIE and LBI depots would give rise to an adjustment to the Best Claim amounts included in the Information Pack for certain Consenting Beneficiaries. Following further analysis LBIE has identified the small number of customers where this adjustment needs to be made. In the aggregate this adjustment is a reduction of $26m to the Best Claims’ value. The customers that are impacted by this adjustment will be notified of their revised Best Claim value shortly after the Common Terms Effective Date. As set out in paragraph 13.2.1 these customers will have an alternative claim against LBIE in relation to the securities or proceeds removed from their Best Claim.

Future Announcements

LBIE is intending to provide the following scheduled updates ahead of the first distribution

1. A short update once the Common Terms become effective.
2. Notification once 90% of the portfolio is liquidated.
3. A substantive update before the end of June on the timing of the interim distribution and the population expected to participate in it.

Important Notice – US tax

To ensure compliance with Treasury Department Circular 230, customers are 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, for the purpose of avoiding penalties that may be imposed 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.

Important Disclaimer

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 and/or information provided by LBI, which has not been audited and 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 LBI positions or any shortfall in recovery of the LBI positions.