Lehman Brothers Bankruptcy Plan Released

Lehman Brothers filed its first reorganization plan in its bankruptcy yesterday.

A total of $830 billion in claims have been filed, but many involve multiple claims for the same debt because different entities guaranteed debts from affiliated entities. The total debt of the holding Company and its 22 affiliates is significantly less than $715 billion.

The value of the company's assets at the time that it filed for bankruptcy was $639 billion, but has probably gone up and down over time. The value of the assets available to creditors is also greatly impacted by a $250 million sale of many Lehman assets to Barclay's bank in what turned out to be a sweetheart deal.

I blogged the bankruptcy petition here. I reasoned at that time the the bulk of any losses were likely to be suffered by equity and subordinated debt.

News reports leave unclear what percentage of claims will get what payment, although many will clearly get paid later than agreed. There is now a blog devoted almost entirely to covering the case. The reorganization plan is available here.

Basically, the plan makes the payment of other debts contingent upon assets realized from the company which are not set forth in the plan. Assets would be sold over a long period of time by a company created to dispose of the Lehman assets in an economically sensible way.

Priority claims, secured claims to the extent of their security, and senior unsecured claims are likely to be paid in full. Entities are respected, so a flush affiliate may have its debts paid in full, while another that made bad investments may have its debts only partially paid. Equity for an entity covered by the plan is paid at all only if all debts of the entity in which equity is held are paid in full.

But, intercompany guarantees complicate this picture. At first glance, it appears that all or most of the affiliated are solvent on a fair market value balance sheet basis, but for their guarantee obligations to the parent company, but will have to make payments to the parent company towards its debts which will essentially wipe out their equity across the board.

All of the subordinated debt is at the holding company level and realistically, the holding company level equity will get nothing and the subordinate debt at the holding company level will not be paid in full and may not be paid at all.

In theory, general unsecured claims may be paid in full in some entities, and not in others. It depends upon how much is realized for the assets sold and who owes whom what on their guarantees. Without up to date valuations of assets broken down by entity, it is hard to tell what percentages of each class of claim will be paid.

One plausible scenario, which is being suggested as an alternative reorganization plan, is that the equity in all of the entities and the subordinate debt of the holding company would get nothing, and that the unsecured general creditors of all classes will be paid almost all, but not 100% of their claims.

Each guarantee obligation, however, is capped at a sum certain. Determining how guarantee obligations involving related entities are worked out is the primary legal problem in the complex bankruptcy filing. Normally, in a bankruptcy, all claims are paid as if they were not guaranteed, and then non-bankrupt guarantors make up the difference.