9/22/08 Update:  Here’s the final complete Asset Purchase Agreement (including First Amendment and Clarification Letter).  Also, this notice of appeal was filed by Bay Harbour Management and others.  Here and here are the best news reports I’ve seen describing the surreal hearing.

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Just after midnight early today, Judge Peck entered this order approving the sale of Lehman’s broker-dealer subsidiary (LBI) to Barclays and overruling all objections to the sale (identified here).  Note the reference in the order to a first amendment to the asset purchase agreement and to a subsequent letter agreement modifying the original asset purchase agreement.  Neither of these amendments have yet been posted, but the net effect of them appears to have resulted in a $400 million reduction in the purchase price, according to this news report. 

The "Purchased Assets" were sold free and clear of "Interests," including "those that purport to give any party a right or option to effect any forfeiture, modification or termination of the Debtors’ interests in the Purchased Assets."  Interests also presumably include the Lehman Europe Joint Administrators’ demand (described here) for a return of the $8 billion in overnight funds swept by the Debtor in advance of the filing (though it’s doubtful that any of those funds actually went into LBI and thus would be implicated by the sale).

The order also expressly released Barclays from any potential successor liability claims, including taxes, which means that the Debtors will be stuck paying the transfer taxes (to the glee of New York State, per this recent Supreme Court case).  Counterparties to contracts being assumed will have until 10/3/08 to file an objection to the proposed cure amount. 

The sweeping change in the economic and political landscape after the announcement of the government’s bailout prompted Debtor’s counsel to say in Court that "[t]his is a tragedy – maybe we missed the RTC by a week," to which Judge Peck responded, "[t]hat occurred to me, as well; Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."  But, as Rod Stewart sang, no one’s gonna help "a victim of a shotgun wedding."

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The inset cartoon is from the Business Cartoon Collection of Shannon Burns, to whom special thanks is owed for granting me permission to post it here.

© Steve Jakubowski 2008

Lehman Brothers, Inc.’s sale to Barclays is a foregone certainty, but–as Judge Easterbrook reminds us here–the "devil is in the details" (origins of phrase here).  Scores of objections (like this one filed by Goldman Sachs) were filed by parties objecting to the posted cure amounts of contracts and unexpired leases to be assumed and assigned at closing.  Making such an objection was critical to those who disputed or were unsure of the cure amounts since the sale notice advises that failure of any contracting party to object to the assumption and assignment or to the posted cure amounts will be barred from later objecting to the assumption and assignment or to the cure amounts.  Other contracting parties (like the Chicago Board of Options Exchange) additionally objected on the basis that generic references to contracts to be assumed didn’t adequately specify the contracts subject to assumption, assignment, and cure.  Otherwise, however, none of these parties had any conceptual objections to the proposed sale.

Other more interesting insights into the case are found in objections filed by parties concerned that non-debtor assets of various subsidiaries of the Debtor are included or implicated in the sale.  One significant focus (as here and here) was Section 2.1 of the Asset Purchase Agreement, which broadly defined the "Purchased Assets" to include "all of the assets of [the Debtor] and its subsidiaries used in connection with the business.  Several subsidiary creditors filed objections to the sale of assets that were in nondebtor subsidiaries and thus not "property of the debtor" that could be sold free and clear. 

Mickey Mouse’s objection, filed by Marty Bienenstock, is the most elegant and comprehensive of all from a bankruptcy perspective.  It raises the same concerns about selling nondebtor assets, and adds a range of related intercompany issues, most significant of which is the concern that entry of the sale order will extinguish the rights in third parties to recover assets of nondebtor subsidiaries that shouldn’t have been included in the sale.  The relief requested thus "would be an illegal, sub rosa substantive consolidation," Mickey complains.

Finally, there’s this lengthy and well-documented objection from the Joint Administrators of the Lehman European Group Administration Companies, who were appointed on the day of the bankruptcy filing by the English High Court of Justice pursuant to the English Insolvency Act of 1986.  The Joint Administrators have hired a team of 200 PWC accountants and consultants, supported by a team of 100 lawyers, to manage these European related entities.  The Joint Administrators say they support the sale, but have concerns about its impact on shared IT and administrative systems, books and records, confidentiality requirements.  And then, of course, there is that matter of the Debtor’s having swept $8 billion in funds last weekend from Lehman Europe and not returning the funds as the Debtor typically did every Monday morning, but couldn’t this past Monday because of the intervening bankruptcy filing.  Respectfully, the Joint Administrators ask, that money (and possibly more) should be returned to its rightful owner.

Have a good weekend all, and thanks for reading!

© Steve Jakubowski 2008

In my last post, I reviewed the structure of Barclays’ $5.7 billion offer to purchase Lehman’s broker-dealer subsidiary.  The press has universally misquoted the purchase price as being only $1.7 billion, but–according to the motion filed with Bankruptcy Court–this only represents the pure cash component of the deal and excludes the $1.5 billion in "cure" costs and $2.5 billion in estimated employee retention costs.  Adding in these real costs brings the total consideration paid by Barclays to $5.7 billion.

Barclays’ offer was conditioned upon the deal’s closing no later than Tuesday, September 23.  If you’re planning this year’s National Conference of Bankruptcy Judges, Barclays drop dead date couldn’t have been timed better since the conference begins the next day and, coincidentally, Judge Peck is the featured speaker on two panels: one entitled, "Exit Strategies for the Subprime Mortgage Crisis"; the other entitled, "The Impact of the Subprime Meltdown: From a Ripple to a Tsunami."  Those panels alone are worth the price of admission.

As for the sale dynamics, after an extended hearing into the evening yesterday, Judge Peck entered this order approving Lehman’s motion to set bid procedures and set the hearing to approve the sale for tomorrow, September 19, at 4:00 p.m.  "Qualified bidders" will have until the hearing to submit a bid that must, at a minimum, provide for:

• a $450 million DIP facility (comparable to this one [Order / Agreement] just approved on an interim basis, subject to a final hearing on October 2); and

• the replacement by no later than the opening of business on 9/22/08 of all bridge financing advanced to Lehman by the Federal Reserve Bank of New York (and, p.s., good luck finding about $50 billion owed to the Federal Reserve on two days’ notice).

The approved sale procedures attached as an Exhibit to the Order further cement the deal in that they include a highly unusual "no-shop" / "no solicitation" provision, which most practitioners and judges would agree are generally forbidden in bankruptcy.  The procedures also place Lehman in the impossible position of having to provide 48 hours notice of its intent to enter into a competing transaction, though there’s less than 48 hours left until the sale hearing (not that it matters, since no one else is stepping forward).

Finally, the sale order provides that the hearing shall not be adjourned or canceled without the prior consent of the SEC, the CFTC, and the Federal Reserve Bank of NY.  If nothing else, this provision at least guarantees that senior officials from these agencies won’t be working non-stop for their 5th consecutive weekend.

So as Barclays enters the "major leagues," accompanied by England’s national anthem "blaring over the loudspeakers," let us pay tribute to the hard working–soon jobless–people who made Lehman great and to the ordinary people who plowed their hard-earned savings into Lehman securities only to be left "holding the bag."  May G-d bless them, and may G-d bless America.

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Rumor had it that former Weil Gotshal partner Marty Bienenstock (now with Dewey & LeBoeuf, NY) would be declared the winner of the Committee beauty pageant (described here), but lo and behold, as reported here, the prize went to Milbank, Tweed, Hadley & McCloy, which also represented the Creditors’ Committee in Enron and Refco.  Congratulations!

© Steve Jakubowski 2008

Meanwhile, back at the ranch, Lehman has just filed this motion to approve postpetition financing and this motion to approve bid procedures for "the sale of the Purchased Assets" (i.e., the Lehman Brothers, Inc. broker-dealer assets) to Barclays.  Both motions will be presented at today’s 11:00 a.m. scheduled hearing.  Here’s the hearing agenda.  It’s the first opportunity for counsel to explain the case to Judge Peck and a standing room only crowd.  [Noon Update: The hearing was continued until 4 pm today, probably to allow the Committee to select counsel (and the Judge to digest the pleadings).]

According to the DIP financing motion, Barclays is offering to lend up to $450 million on a senior secured basis, collateralized by a first priority lien on Lehman’s equity interests in Neuberger Berman Holdings LLC. This loan appears to be a bridge to a sale of Lehman Brothers, Inc. (LBI), Lehman’s primary broker-dealer subsidiary, to Barclays for $1.7 billion cash and assumption of certain liabilities and contracts (the cure costs of which will add an additional approximately $1.5 billion to the purchase price).  The $1.7 billion cash consideration is based on a payment of $250 million cash plus the appraised values of Lehman’s NY headquarters at 745 Seventh Ave. and the Cranford and Piscataway NJ Data Centers, which will presumably bear the Barclays logo after closing.

Barclays also has agreed to offer employment to about 10,000 North American-based employees of LBI (or about 70% of the North American workforce) for 90 days, to pay their Christmas annual bonus, and to provide normal severance benefits for any worker terminated based on "reductions in force" or "job eliminations" (all at a projected cost of about $2.5 billion).  Section 3.3 of the Agreement provides for a purchase price adjustment (which could favor either Lehman or Barclays depending on market results) of up to $500 million on the one-year anniversary of closing based on profits or losses realized in various assumed long or short "Positions" (the "Long Positions" alone have a book value today of about $70 billion).  Lehman Commercial Paper, Inc., a more toxic division, is excluded from the deal. 

Time is of the essence for the sale, the motion states (and so does Milbank’s Luc Despins), and the proposed Purchase Agreement contemplates that prior to the sale hearing, LBI will consent to commencement of a case under the Securities Investor Protection Act of 1970 and appointment of a SIPA trustee, which itself will have to ask the consent of the SIPA Court for the sale. 

The break-up fee is $100 million plus $25 million in reimbursable expenses.  In addition, the motion proposes a "KERP" retention plan for about 208 employees, of whom 200 are designated as "key to the success of the business" and 8 as "critical to the success of the business."  Though the motion doesn’t identify who these employees are, my guess is that Dick Fuld (see Congressional invitation here) is not on that list.

The closing date for the sale is September 23, which is like a nanosecond given the size of the deal, but it’s probably just slightly less time than Barclays had to consider the deal.  We’ll see if the Judge authorizes such a short a window, and much will depend on the marketing process that occurred in advance of the filing and the expressions of interest generated.  $5.7 billion is a big nut, and in today’s environment when cash is king and flowing like molasses as the market loses about 5% in value a day, it’ll be a tough number to beat.

Evidencing the furious pace of negotiations is the fact that the executed draft of the Asset Purchase Agreement attached to the sale motion is a marked-up "confidential" draft that was re-marked as the "Execution Copy."  The documents is remarkably loaded with substantive handwritten interlineations and cross-outs on virtually every page.  Rarely does one get this kind of insight into final, last-minute negotiations.  The draft line on the bottom of the page says it’s "v.2," suggesting that the execution copy was the third and final run.

Those interested in seeing who’s on the "A" list of people getting notice of the proceedings will find the current service list here.

My previous Lehman posts are here (Lehman’s Free Fall), here (Bankruptcy Update), and here (Committee Formed).

Thanks for reading, and thanks to those who have called or written with comments, kudos, and suggestions!

© Steve Jakubowski 2008

(9/16/08 Update Here)

In most endeavors, it’s important to start off on the right foot.  I don’t think you’d call the Lehman bankruptcy filing today one such start.  A well-planned bankruptcy case is orchestrated so that the early days of the case represent a seamless flow between the pre- and post-bankruptcy world.   Calpine’s "first-day pleadings" (discussed at length here) reflected the kind of significant planning that would avoid a financial meltdown of the firm.

By contrast, Lehman Brothers Holdings, Inc.’s chapter 11 filing early this morning (docket here / petition here) shows that Lehman’s executives must have hired Weil Gotshal as late as possible to avoid any hint to its employees or the market that bankruptcy was possible.  It played chicken, and lost.  Lehman filed only three motions to open the case, and none are substantive: 

• this motion asks the Court to enforce the automatic stay provisions of Code Section 362 (and is in itself a curious motion since the law in the 2nd Circuit is that all actions in violation of the automatic stay are void, not voidable);

• this motion asks the Court to extend the time to file required lists and schedules; and

• this motion asks the Court to waive the requirement that a filing include a list of creditors. 

Like Drexel before it, only the holding company filed, so it will be "business as usual" for all of Lehman Holdings’ subsidiaries, none of whose activities are directly subject to the protections of the automatic stay or the Bankruptcy Code and Court generally (SIPC confirmation here).

Maybe, in the end, preparation of a well-executed contingency plan wouldn’t have mattered much since, in BAPCPA, Congress (as discussed at length here) amended or added various provisions to the Bankruptcy Code that enabled a nondebtor party–without limitation–to terminate, liquidate or accelerate its securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements with the debtor.  As noted in my previous post on BAPCPA’s effectively excluding Wall Street’s financial firms from the benefits of bankruptcy, Columbia Law professor Edward Morrison, with Columbia GSB economics legend Franklin Edwards, argued in a Winter 2005 article entitled Derivatives and the Bankruptcy Code: Why the Special Treatment? that BAPCPA’s extension of the Code’s protections for the financial services industry "to include a broader array of financial contracts, all in the name of reducing systemic risk … is a mistake."  They argued that "[a] better, efficiency-based reason for treating derivatives contracts differently arises naturally from the economic theory underlying the automatic stay [i.e., derivative contracts are rarely needed to preserve a firm’s going-concern surplus]."  Still, they warn (at pp.1, 4-5):

Continue Reading Free Fall: Lehman Enters Chapter 11