Den of The Lion Investor

Following the legal dispute which were raised by US lawyers on the unwinding of the Minibond, it appears that plans to restructure the Minibond has been derailed as well. 

HSBC Trust has updated their FAQ to address this:

Can you confirm the reports stating that any restructuring of the notes is not feasible for the time being?

Yes, although draft proposals have been made by interested parties the Receivers, in consultation with the independent advisers appointed by MAS in relation to the restructuring proposals, have ruled out any restructuring for the time being due to the legal complexities which are likely to be encountered in unwinding the notes and seeking to obtain control of the ultimate underlying assets. See answers to questions 14 and 19 for further details.

Can you confirm that the note trustee has received a notice from the lawyers of Lehman Brothers? What does it say and what are the implications? 

Yes, we have received a communication from Lehmans’ lawyers in the US which indicates, as a result of the Lehman bankruptcy, there could be legal challenges on behalf of Lehman relating to the documentation and the actions which need to be taken to unwind the notes both at the Minibond level and for those series in respect of which the underlying securities are underlying synthetic notes at the underlying level as well. This raises the possibility of prolonged litigation as part of the process which has to be taken by the Receivers to unwind the notes. We cannot comment further at this stage other than to say that the contingent litigation risk as referred to in the answer to paragraph 14 makes it impossible for the Receivers to make any kind of estimate of what value may ultimately be realised for noteholders and means that the overall process could take a considerable time.

Series 9 and 10 will face a less complicated process compared to the other series, as the underlying securities for these notes are corporate bonds and have no swaps. This means the ultimate collateral is more readily accessible to the Receivers and there are fewer aspects of the unwinding process which might be subject to being challenged by Lehman. Accordingly, the process may be somewhat shorter than for the other series.

Update from MAS

Fresh Woes for Minibond Holders (Today)

No Swift Solution for Lehman Minibond Holders (Channel News Asia)

Restructuring of Minibond on Hold (Business Times)

Expect 2 year Refund Delay (Straits Time)

It appears that the Hong Kong plan to buy back the Minibond has run into some obstacles. Apparently, HSBC Hong Kong has received a stop order a few days ago from Weil, Gotshal & Manges, Lehman’s bankruptcy counsel.

Complex issues of US bankruptcy law have been raised.

Article in Hong Kong on this issue

HSBC Institutional Trust Services (Singapore), the trustee for minibonds sold in Singapore, also received legal notice from Lehman Brothers attorneys on Wednesday that any termination of swap agreements underlying the Singapore minibonds would be deemed illegal.

Version 9 of the HSBC FAQ (dated 25 Nov) makes no mention of this yet. Paragraph 18 takes about the legal implications of transfering swaps, but is not exactly the same issue of swap termination.

On 13 November 2008, Lehman Brothers Holdings Inc. and its affiliated debtors in chapter 11 proceedings in New York filed a motion seeking an order that would (a) allow them to assume, sell and assign executory, derivative contracts that have not yet been terminated and (b) permit them to enter into settlement agreements with counterparties under terminated derivative contracts without further approval from the United States courts.

For each series of the Minibond notes, Minibond Limited entered into swap agreements with Lehman Brothers Special Financing Inc.

If a United States court order is granted in connection with the motion above, Lehman Brothers Special Financing Inc. will be allowed, as a matter of United States law, to transfer any open swaps to third parties who wish to acquire them without the need to seek the consent of the swap counterparty.

The swap agreements entered into in connection with the Minibond notes are governed by Singapore law and are subject to the exclusive jurisdiction of the Singapore courts. The trustee understands from its legal advisers that it is highly unlikely that the unilateral transfer of swaps (under any order made pursuant to the motion referred to above) by Lehman Brothers Special Financing Inc without consent from Minibond Limited, would be recognised and enforced as a matter of Singapore law. If this is correct, even if the order was made, noteholders would still have the opportunity to reject any transfer purported to be made under it as and when the transferee sought to assert any rights in relation to the swaps under Singapore law. It is however emphasised that the trustee cannot give legal or other professional advice to the noteholders on this or any other issue and noteholders cannot rely on advice obtained by the trustee. Noteholders may therefore wish to seek independent professional advice with respect to their own positions.

We will have to wait and see how all these unfolds.

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There was an Indian cultural event that took place at Hong Lim Park over the weekend, thus the talk by Tan Kian Lian for structured notes investors was scaled down. Transcripts of his talk can be found at this link. Video recordings can be found below.

Tan Kian Lian (Part 1)

Tan Kian Lian (Part 2)

Tan Kian Lian (Mandarin Transalation Part 1)

As usual, there will be a gathering for structured notes investors organised by Tan Kin Lian at Speaker’s Corner tomorrow (Sat 29 Nov) at 5pm.

Meeting Agenda

1. See your MP
2. Misrepresentation in prospectus
3. Ask for information in writing
4. Experience with FIDREC
5. Mental health concerns
6. Class action
7. Special meeting on Sat 6 December 08

Last week, I wrote an introduction to credit default swaps.

An extension to a single CDS is a credit linked note (CLN) that has a basket of entities as the reference entities. In this case, a default will occur when the first entity in the basket defaults.

The noteholder becomes the insurer while the CLN issuer takes on the role of the insurance buyer. Retail investors have to put up the principal in case there are credit events.

The principal is then used to buy some underlying securities. In the good old days, the underlying securities could be government bonds.

This first-to-default structure means that the more entities there are in the basket, the higher the probability that a default will occur. This makes it more risky for the noteholder.

But wait, shouldn’t more entities mean more diversification? Let us look at the difference between holding normal bonds and a CLN setup.

Portfolio of Bonds

$5 million in capital is used to buy $1 million bonds from five different companies. Should there be a default, $1 million could be lost. Having more companies in the portfolio of bonds diversifies the risk. 

Credit Linked Note

$5 million is provided by the note buyer. A CDS of $5 million each is written on five different companies. Total insurance written is therefore $25 million. In the event of a default by one company, up to $5 million would have to be paid out to the swap counter party. In addition, all the other 4 CDS positions will also have to be unwound.

Therefore, the more companies there are in the portfolio, the riskier the note is.

If the CLN has been structured with $1 million CDS each written on five companies (total insurance of $5 million), then it would have been similiar to the normal bond portfolio. But then, the profit to the note issuer would be much lower.

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