The Standard:New deal to settle minibond buyback

3 Juyl 2009

Sixteen banks which sold Lehman Brothers minibonds will pay most investors 60 percent of the principal as settlement - and no more.

Investors aged 65 and above will receive about 70 percent of their investment. In a formal proposal made to the Securities and Futures Commission yesterday, the banks said they will cap the total payable sum at 60 percent and will not repay the difference if collaterals are sold at a higher price in the future.

The move, which came a day after the July 1 protest, was a follow-up to the "touch base" meeting that representatives of the banks had with the SFC on Monday, in which no specific settlement plan was tabled.

It also came ahead of SFC chief Martin Wheatley's scheduled third meeting with a Legco panel today.

Explaining the cap, a source told The Standard that the banks will now lose as much as HK$1.5 billion rather than the HK$800 million as reported earlier by local media.

Some Lehman minibonds have lost all their value and a few are worth at most 20 percent of their original value.

Reports that the receiver of Lehman Brothers assets in Singapore will soon sign a deal offering the local liquidator an extra 20 percent to 30 percent of the collateral values of minibonds does not bode well for local investors, a banking source said.

"Investors may only get back less than 40 percent of their invested sum [rather] than the 53 percent Ernst & Young originally offered," the source said.

Possible litigation in the United States may also affect what Hong Kong investors retrieve.

The liquidator of Lehman assets has claimed that it has the right to own the collateral of all Lehman-related products globally.

This may compel distributor banks to go to court in the United States, where Lehman Brothers was based, and reduce any settlement with local investors.

Another source noted that the local investors' group - Allied Victims of Lehman Products - is avoiding the fact that few lenders have settled cases with a payback ratio higher than 60 percent to 70 percent and those payments were not retrospective.

The banking industry could lose up to HK$4.2 billion if the Lehman products' valuation drops to 26 percent of the original price, and up to HK$7.5 billion if they are worth nothing.

Lehman-related products worth HK$12 billion were sold in Hong Kong by 19 banks, according to the Hong Kong Monetary Authority.

Eleven of the banks were found to be involved in misconduct in the sale of those products, the SFC told lawmakers last week.

An SFC spokesman declined to comment on the banks' proposal.

But at last Friday's meeting at the Legislative Council, Wheatley said the SFC welcomed all proposals as long as they deterred misselling practices.

Meanwhile, the SFC said brokerage firms Sun Hung Kai Investment and KGI Asia have both completed their voluntary repurchase of Lehman Brothers minibonds, according to agreements they had with the regulator.

SHKI and KGI separately undertook to repurchase all outstanding Lehman Brothers minibonds subscribed, at a price equal to the principal amount, from eligible clients following the SFC's investigation into their sale of Lehman Brothers minibonds.

These agreements helped 329 clients recover their initial investments in full.

Last month, BOC Hong Kong (2388) - the largest vendor of Lehman minibonds - offered a similar payback ratio of 60 percent to 70 percent to investors plus a top-up for future collateral sales.