Deutsche Bank Scores Big Win on Lehman Brothers’ Debts

Lucca de Paoli, Bloomberg News

Lehman Brothers headquarters in New York in 2008. , Photographer: Michael Nagle/Getty Images

(Bloomberg) -- Deutsche Bank AG and other creditors holding obscure notes issued by Lehman Brothers before its collapse have been handed a big win by a London court, with a first payout set for next month after years of wrangling.

The Enhanced Capital Advantaged Preferred Securities (ECAPS), once regarded as worthless and sold for next-to-nothing, could pay out more than £390 million ($495 million), according to a ruling Wednesday from the UK’s High Court and Bloomberg’s calculations. That would be more than double what investors were awarded by a previous court decision.

This marks one of the final issues to be decided before Lehman and its debts can finally be laid to rest. So much money has been recovered by administrators at PricewaterhouseCoopers LLP from Lehman’s UK arm that questions over who should be paid first remain highly contentious. Creditors that held little hope of getting anything back are now in the money.

“This judgment relates to a further instalment of the Lehman saga,” Judge Robert Hildyard said. “It arises out of the unusual circumstance of the process of administration having resulted, not in deficiency, but in considerable recoveries in excess of the claims of unsubordinated creditors.”

The case effectively pitted Deutsche Bank and other ECAPS holders against Lehman’s US holding company, which has a competing claim to money recovered in the defunct lender’s London subsidiary. Both claims were subordinated to other debts, but senior lenders have already been paid in full and more money is waiting to be sent to creditors.

Read more: Deutsche Bank Poised for Big Win as Last Lehman Legal Fight Ends

Deutsche Bank and New York-based Whitefort Capital Management LP are the two members of a creditor committee of the general partner of the ECAPS notes, according to people familiar with the matter. Other investors in the notes have included Barclays Plc, Farallon Capital Management and CarVal Investors.

In a trial last year, the handful of distressed debt investors scored a win as the ECAPS claim was found to rank ahead of Lehman Brothers Holdings Inc. (LBHI), but there was an outstanding question around statutory interest on that claim. Statutory interest is a charge a creditor can levy if they have been paid late, and in the UK it is accrued at 8% each year.

Hildyard decided that statutory interest on ECAPS notes ranked ahead of the repayment of principal on the competing debt, leaving LBHI further down the pecking order when it came to receiving money. That decision has boosted the payout for ECAPS holders, potentially adding £221 million, according to an agreement established between the two parties prior to Wednesday’s judgment and Bloomberg calculations.

An initial payment will be sent to ECAPS holders on Dec. 8, according to a notice issued Wednesday.

LBHI is currently set to recover a far smaller payout on its subordinated debts, but could seek to challenge the decision at the UK Court of Appeal.

Whether there will be enough money to pay out on the entire claim will depend on how much more administrators at PwC are able to recover from the UK insolvency. In the judgment, Hildyard referred to estimates by administrators of between £233 million and £490 million for surplus left to be distributed to creditors.

Lehman’s European arm lost a case over a longstanding litigation relating to crisis-era credit default swaps last year, but a report from administrators at PwC in April said that it was likely that decision would be appealed. Success in that case could increase payouts for creditors like Deutsche Bank and LBHI.

(Updates with details of interim payment and note holders.)