Deutsche Bank and other creditors holding obscure notes issued by Lehman Brothers before its collapse have been handed a big win by a London court.
The Enhanced Capital Advantaged Preferred Securities (ECAPS), once regarded as worthless and sold for next-to-nothing, could payout more than £390 million ($495 million), according to a ruling Wednesday from the U.K.'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 from Lehman's U.K. 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 installment 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 U.S. 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.
In a trial last year, a clutch of distressed investors led by Deutsche Bank scored a win as the ECAPS claim was found to rank ahead of Lehman Brothers Holdings (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 U.K. 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.
LBHI is currently set to recover a far smaller payout on its subordinated debts, but could seek to challenge the decision at the U.K. 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 U.K. 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.
