Update - Launch of the second LBIE admitted claims auction – 15 June 2016

Following today’s separate announcement in relation to the release of the second unsecured claim certificates (the “UCC2s”) which seek to illustrate potential entitlements to the surplus in LBIE’s estate (the “Surplus”), the Joint Administrators (as defined in the Terms and Conditions attached below) of LBIE are pleased to announce the launch of a proposal known as the second LBIE admitted claims auction (the “LACA II”). Building on the success of the previous auction process which was launched on 4 April 2016 (the “LACA”), the LACA II has been designed to provide another opportunity for a majority in number of LBIE’s unsecured creditors (who did not participate in the LACA) to conclude their relationship with LBIE.

The structure of the LACA II is similar to the LACA in a number of respects although there are certain key changes that may appeal to eligible creditors who did not or could not participate in the LACA. Details of these differences are noted below (and further explained in the information available on the LBIE Client Information Portal to eligible creditors) but include a higher reserve price for each claim pool and an increase in the population of eligible creditors.

By way of background, further to the announcement on 12 May 2016, the LACA achieved the following benefits for both the participating creditors and LBIE. Specifically:

• 266 eligible creditors participated in the LACA, with an aggregate admitted claim value exceeding £225 million;
• over 60% in value of the participating claims were allocated to the USD claim pool and a clearing price of just over 47% of the admitted claim value (compared to a reserve price of 38%) was achieved; and
• the clearing price obtained for each of the Euro claim pool and the other currency claim pool also exceeded the relevant reserve price.

In light of these positive results, the Joint Administrators believe it is appropriate to develop and facilitate a second auction process to provide a further opportunity for creditors to conclude their relationship with LBIE in a manner consistent with the Joint Administrators’ general duties that does not impede or cut across the Proceedings (as defined below). LBIE continues to work in conjunction with Lehman Brothers Nominees Limited (“LBNL”) to ensure that the LACA II is structured appropriately.

The Joint Administrators will continue to monitor developments closely and may make further proposals in the future.

The LACA II will provide eligible creditors (as based on LBIE’s books and records where the value, ownership and transfer of claims are recorded) with the option to participate in an auction process pursuant to which it is intended that they will sell their admitted claim to LBNL who will immediately on-sell the admitted claims to third party purchasers. This will enable such eligible creditors to achieve a complete exit from the LBIE administration in relation to such admitted claims (subject to the terms and conditions governing the LACA II).

The Joint Administrators consider the LACA II is appropriate for LBIE given:

• creditors with unsecured admitted claims in the following categories may now also be eligible to participate in the LACA II, increasing the number of creditors who can choose to conclude their relationship with LBIE:
  • counterparties who are signatories to the claim resolution agreement; and
  • creditors whose admitted claims have an admitted claim value of between £10 million and £18 million;

• eligible creditors (and indeed all of LBIE’s other ordinary unsecured creditors, save for a limited number of exceptions) have now received an invitation to review their UCC2 on the LBIE Client Information Portal. The UCC2 illustrates potential entitlements to the Surplus based on a number of assumptions set out in the accompanying UCC2 explanatory note. Although there are continuing uncertainties as to the eventual calculation and timing of the final payment of potential entitlements to the Surplus, the UCC2 and the accompanying UCC2 explanatory note provide creditors with further information to aid their understanding of their potential entitlements to the Surplus and how they might continue to manage these;

• a number of eligible creditors who did not participate in the LACA, particularly those creditors whose admitted claims would have been allocated to the USD claim pool, informed the Joint Administrators they might have participated had the reserve price been higher. Given the clearing price achieved in the LACA, the Joint Administrators consider it appropriate to increase the headline reserve prices for the LACA II. However, as a consequence, there is an increased risk that the relevant reserve price for a claim pool might not be met;

• bidding in the LACA was strong and feedback from a number of potential bidders suggests a continued interest to purchase further admitted claims using a similar process; and

• the Joint Administrators continue to face a number of challenges in finalising creditors’ entitlements to the Surplus. In particular, the Joint Administrators:
  • continue to see no reasonable prospect that there will be a judicial or consensual outcome of the current Waterfall I and Waterfall II proceedings to enable a distribution of the Surplus in the near future and note that a further application (Waterfall III) was made on 25 April 2016 seeking to determine various issues concerning contributory claims and other affiliate issues (the Waterfall I, Waterfall II and Waterfall III proceedings, together the “Proceedings”); and
  • in order to obtain clarity in relation to the question of whether there is an obligation to withhold from distributions of interest from the Surplus pursuant to UK tax law, made an application for directions from the High Court of England and Wales, which was heard on 28 and 29 April 2016. At the conclusion of the hearing, the Judge reserved his judgment.

The relevant documentation for participation in the LACA II is available for eligible creditors to view on the LBIE Client Information Portal. If the LACA II related information does not appear for a creditor on the LBIE Client Information Portal, such creditor is not considered to be eligible to participate in the LACA II. Pro forma copies of the relevant documents are available below, for information only.

The LACA II is similar in structure to the LACA (for example, participating admitted claims will be allocated to one of three claim pools based on the dominant currency of each participating admitted claim and a fee will be deducted from the sale proceeds) and seeks to provide the same benefits, as previously detailed. However, there are a number of notable differences between the LACA and the LACA II:

• each eligible creditor will receive an individual reserve price (in GBP) derived from their potential entitlements to the Surplus as set out in their UCC2. Such reserve price has been calculated by applying a discount to the eligible creditor’s potential entitlements to the Surplus, such discount being identical to the discount applied to all other admitted claims allocated to the same claim pool to which the eligible creditor’s admitted claim will be allocated (see the summary table below); and

• participating creditors allocated to a claim pool will share, pro rata, any amount paid above the reserve price for the claim pool based on their potential entitlements to the Surplus (rather than pro rata on the basis of their admitted claim value).

If all eligible creditors accept the offer to participate in the LACA II, 479 admitted claims of approximately £717 million in total value, which amounts to around 6% of LBIE’s creditor base by value, may be able to conclude their relationships with LBIE. Aggregate claim pool information and associated reserve discount rates are shown below.

Although there can be no certainty as to the outcome of LACA II, by way of example, if the clearing prices achieved in the LACA II are the same as those in the LACA, then the final discount, taking account of the pro rata sharing of the excess over the reserve price as noted above, that would be applied to the potential entitlement to the Surplus relating to an admitted claim (as specified on the UCC2) would be, in respect of the: (i) USD claim pool, approximately 16%; (ii) the Euro claim pool, approximately 14%; and (iii) the other currency claim pool, approximately 11%.

Participation in the LACA II is open to all eligible creditors and is entirely voluntary. In order to participate in the LACA II, the relevant eligible creditor must review all of the LACA II documentation available on the LBIE Client Information Portal and accept the offer to participate in the LACA II by following the instructions as set out on the LBIE Client Information Portal.

The deadline for accepting the offer to participate in the LACA II is 5 p.m. (London time) on 14 July 2016 (or such later date as is notified to eligible creditors by LBNL by email and announced on PwC’s LBIE website).

Eligible creditors who choose not to participate in the LACA II, and creditors whose admitted claims are not eligible to participate in the LACA II, will continue to hold such admitted claims and can choose to (i) await the final outcome of the issues being determined in the Proceedings, which it is expected will inform how the Surplus should be distributed in due course, or (ii) otherwise deal with such admitted claims as permitted by applicable law and any instrument by which their admitted claim has been admitted.

Eligible creditors should seek independent advice (including, without limitation, financial, legal and tax advice) when considering whether or not to participate in the LACA II.

Any person who wishes to register their interest as a prospective purchaser should do so by emailing lacabids@lbia-eu.com.

None of: (i) LBIE, the Joint Administrators or their firm, or LBNL; (ii) the members, partners, directors, officers and employees of those persons identified in (i) (as applicable); and (iii) the agents, advisers or representatives of those persons identified in (i) and (ii), make any representation as to whether any payment made to, or amount received by, any participating creditor pursuant to the LACA II in relation to their admitted claim will be the same, greater or less than any amount such participating creditor would or may have otherwise received in respect of such admitted claim had they not participated in the LACA II, whether on the judicial or consensual resolution of the Proceedings or otherwise, nor do such persons make any representation as to whether the LACA II will provide results similar to, or more or less favourable than, the LACA.

Participating creditors will agree and acknowledge that by participating in the LACA II and having the right to receive payment of the purchase price pursuant to the LACA II in return for the sale of their admitted claim, they will transfer to the purchaser any and all rights in respect of such admitted claim, including (without limitation) any rights to payment of statutory interest or amounts in respect of any currency conversion claims. Additionally, they will provide a full release of LBIE, LBNL and other relevant parties pursuant to the LACA II.

Pro forma documentation for participation in the LACA II:

1. Offer of Participation
2. Terms and Conditions