Announcement on Proposed Settlement of Waterfall III Proceedings - 29 March 2017

The Joint Administrators are pleased to set out below an update in respect of the further progress made with interested parties concerning the commercial terms upon which the Waterfall III proceedings might be settled.   

This proposal is entirely separate and is not conditional on the other announcement of today’s date concerning the outline terms for an interim interest distribution.

The Joint Administrators would like to receive creditor feedback concerning these outline terms.  In summary, if these terms are finalised and appropriate directions are handed down by the High Court, LBIE will have achieved a resolution of its relationship with its shareholders on terms that will provide a reserve fund (based on maximum projected recoveries from its shareholders of £913m) that would be available in the event of a shortfall in respect of the claims against LBIE’s surplus for statutory interest and non-provable liabilities.

A general update on progress in the Administration will be made in our creditors’ webinar scheduled for 27 April 2017 and in our Seventeenth Progress Report (for the period 15 September 2016 to 14 March 2017) which will be published in April.  If appropriate, we will make reference to creditors’ feedback (if any) during the webinar.

Settlement of the Waterfall III proceedings

In their Sixteenth Progress Report dated 7 October 2016, the Joint Administrators noted various discussions had taken place with LB Holdings Intermediate 2 Limited (in administration) (“LBHI2”) and Lehman Brothers Holdings Inc. (“LBHI”) to consider the basis upon which the Waterfall III proceedings might be settled.  The scope of the settlement arrangements envisaged has now widened to include certain other UK estates.

The key outline terms of the proposed arrangements are as follows: 

Contribution Reserve

  • In place of its contribution claims against its unlimited liability shareholders, LBL and LBHI2 (the “Contribution Claims”), LBIE would establish a “Contribution Reserve” which would act as a substitute for the value that would likely otherwise be recovered by LBIE in respect of the Contribution Claims.  In order to achieve this, LBIE would enter into an agreement with (i) LBHI (ii) the holders of claims against LBIE referred to as “Retained Funding Claims” (see below) and (iii) the holders of other claims against LBIE referred to as “Standby Funding Claims” (also see below). 
  • The Contribution Reserve would be used by LBIE to fund a shortfall (if any) that might arise in relation to “Third Party Creditors” (i.e. all LBIE’s unsecured creditors other than (i), (ii) and (iii) above), between (a) the amount that would have been distributed to Third Party Creditors in respect of post-administration interest and non-provable liabilities if the Contribution Claims had in fact been made against LBIE’s unlimited liability shareholders and an appropriate recovery received; and (b) the amount that will in fact be distributed to them in respect of post-administration interest and non-provable liabilities, without the Contribution Claims being made.
  • The value of the Contribution Reserve would at all times be at least equal to the Third Party Creditors’ proportionate share of LBIE’s projected recovery from its unlimited liability shareholders in respect of the Contribution Claims.  This projected recovery is tied to LBIE’s potential shortfall in respect of all post-administration interest and non-provable liabilities, in the following manner:

Final shortfall £’m

Projected recovery* £’m

  0-500

0-500

     700

   645

     900

   771

  1,100

   838

  1,300

   880

  1,500

   913

  1,500+

   913

*This table represents a summary

  • The Contribution Reserve would comprise the following components:
    • the notional value of all projected future distributions due to the holders of Retained Funding Claims in respect of (i) post-administration interest and (ii) non-provable liabilities; and
    • all distributions (in respect of (i) post-administration interest and (ii) non-provable liabilities) actually made to the holders of Retained Funding Claims which, in the first instance, will not be paid to the claim holder but will instead be retained by LBIE.
  • Holders of Standby Funding Claims would agree that no payments would be made to them from the Contribution Reserve in respect of their Standby Funding Claims.
  • The Contribution Reserve would only be used to fund payments to Third Party Creditors as described above, and would not be available for any other purpose.  In the event that some or all the Contribution Reserve is not required to fund payments to Third Party Creditors, such funds will be returned to the Retained Funding Creditors and / or LBHI.

Avoiding a liquidation of LBIE

  • LBIE and the Joint Administrators would undertake not to place LBIE into liquidation without the prior written consent of LBL and LBHI2 and to take steps both to maintain LBIE’s administration and to resist any application by any other person to place LBIE into liquidation.
  • The Joint Administrators consider that a liquidation of LBIE would be unnecessary if the proposed settlement agreement is completed because the contractual arrangements described above are designed to replicate the inherent value to LBIE arising from the Contribution Claims that would otherwise flow to it in liquidation.
  • LBIE’s administration has already been extended to 30 November 2022, allowing sufficient time to make further significant progress to conclude various key matters, including those relating to the Waterfall II proceedings.
  • A liquidation of LBIE may in any event trigger certain adverse consequences for ongoing asset recovery and tax planning.

Supreme Court decision on Waterfall I

  • Whilst recognising that there may be a number of possible outcomes, the arrangements described in this announcement are predicated upon the assumption that the existing Waterfall I Appeal Court decision will be unchanged by the Supreme Court. However, the complexity of issues at play means that settlement terms can only be finalised once the Supreme Court judgment has been delivered.

Waterfall III proceedings

  • The relevant parties are continuing to discuss the nature of the proposed stay of the Waterfall III proceedings.  An agreed position will need to be reached prior to the finalisation of the settlement.

Claims between LBIE and its unlimited liability shareholders

  • LBIE and Lehman Brothers Limited (“LBL”), and separately, LBIE and LBHI2, would need to agree the nature and scope of releases between themselves, including in relation to the Contribution Claims.

Inter affiliate arrangements

  • Other arrangements involving various of the other UK domiciled Lehman affiliates would be entered into at the same time, in order to allow for timely distributions from the Administrations of certain of these affiliates, including from LBIE’s unlimited liability shareholders.

Omnibus application

  • All relevant UK affiliates, including LBIE, are working together to finalise the transaction documentation and prepare an application to the High Court seeking appropriate directions in relation to the proposed arrangements.   

Notwithstanding the continuation of the other Waterfall proceedings and the attendant appeals later this year and beyond, there would be considerable benefit to LBIE’s creditors in LBIE entering into the proposed arrangements. In particular:

  • the proposed arrangements would expedite the recovery of the inherent value in the Contribution Claims (without affecting the position of Third Party Creditors) and would give LBIE control of the resulting funds;
  • the £913m maximum projected recovery represents a level of recovery that is near to the upper limit of what might otherwise be recovered in due course, through a Court-contested pursuit of Contribution Claims against both shareholders; and
  • the proposed arrangements would avoid the uncertainty and costs incurred by LBIE in continuing with the Waterfall III proceedings and potentially having to enter liquidation to secure a recovery from the Contribution Claims.

The Joint Administrators will update creditors on these discussions in the coming weeks, and more particularly once the judgment has been handed down by the Supreme Court in the Waterfall I proceedings and has been fully considered by the Joint Administrators.

Should you have any queries regarding this update, please contact LBIE’s Communications and Counterparty Management team at generalqueries@lbia-eu.com.

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.

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