Large fee paid to swap counter-party

Dear Mr Tan,
I received the letter from HSBC on the recovery value of my Minibond Series 5. I am shocked by the huge fee paid to Lehmen LBSF for the settlement fee. The letter has these figures:

Series 5
Proceeds from liquidation – 82.30% (100% = principal amount)
Cost at underlying level – 0.47%
Swap payment to LBSF – 50.81%
Receivers fees – 0.38%
Legal fees – 0.48%
Other costs – 0.31%
Net proceeds to noteholders – 29.85%
A whopping 50.81% or $35 million is paid to LBSF.


Another friend, who has Series 10 has a liquidation value pf 104% but reduced by 41% fee to LBSF:
Series 10
Proceeds from liquidation – 104.04% (100% = principal amount)
Swap payment to LBSF – 40.60%
Receivers fees – 0.42%
Legal fees – 0.26%
Other costs – 0.33%
Net proceeds to noteholders – 62.43%

It is not true as reported in papers that some series has low recovery value due to nature of underlying assets or long maturity. The fact is huge fee has been paid to LBSF. Is this why Australia’s Lehman notes have been able to recover 85-95% instead (recently reported in your blog)? I feel HSBC and Receivers have failed the noteholders - a total of $200+ million has probably been paid to LBSF for this unfair settlement.

Mr Tan, do you think the large settlement fees to LBSF is fair? Thank you.

REPLY
I cannot understand why a large payment has to be given to the swap counterparty. I suggest that, as an investor, you ask the trustee on why the payment to the swap counterparty is so large. Maybe, you can get a few investors to join you in making a joint request.

FURTHER COMMENT
The swap is to take over the risk of default of the reference entities during the remainder of the contract. I believe that most of the reference entities are now quite secure, after the recovery of the global economy and markets. I am therefore surprised to find a large payment to take off the swap.

I think that the investors should ask the trustees to account fOR their decision to make this large payment, and ensure that it is in the commercial interest of the investors to accept this transaction.

I thought that the Monetary Authority of Singapore is monitoring this transaction, so they may have some information that may be helpful. We have to see if they make any statement on this matter.

I wish that we have a more active Parliament, similar to Hong Kong, where the legislators can ask questions, so that a clear explanation can be given to the public.