The minibond series by Lehman Brothers had been sold in Singapore for the last couple of years and some retail investors have purchased them. In the recent uncertainty facing Lehman Brothers, many of these investors are now wondering what will happen to their Lehman Minibonds investment.
First of all, recall that the Lehman Minibonds is not a normal bond in the normal sense of the word. It’s a structured note which exposes you to the default of the reference entitles and has assets backed by the underlying securities (which are different from the reference entities).
The money you gave to Lehman Brothers is used by them to purchase the underlying securities and enter into contracts for interest rate and/or currency swap. They also sell credit default swap on the reference entities.
The swap counterparty is Lehman Brothers Special Financing, Inc.
A few months ago, I was particularly concerned what the underlying securities of my Lehman Minibonds were. I wanted to know the extent they were affected by the current credit crisis and whether my principal would be affected. At that time, the worst case scenario I thought possible was that the underlying securities had enough credit default events which would result in a significant loss of capital (This is different from the default of the reference entities which was the one heavily marketed).
Well, I certainly didn’t factor the collapse of Lehman Brothers as one of the scenarios.
So, what will happen to the Lehman Minibonds if something happens to Lehman Brothers? There are a few possible scenarios.
1) There is no bailout and Lehman Brothers goes under
According to the pricing statement of the Minibonds, the notes might be redeemed early if the swap arrangements for the notes are terminated for any reason. This is likely to happen if Lehman Brother collapses.
The swap will terminate and the notes will redeemed early in an amount equal to the liquidation value of the underlying securities plus/minus the swap termination value. Lehman will have a claim for any swap termination value owing to it. The creditors of Lehman will have no direct claim to the assets of Minibond.
The liquidation value is an unknown but when I checked the market valuation of my Minibonds a few months ago, it had a face value of around 80% of the purchase price.
2) Lehman gets taken over by another party which assumes their Minibond Obligations
In a takeover, it is likely that the acquirer will have to assume all of Lehman’s obligations. They will then take over the swap counterparty role of the Minibonds. In this scenario, nothing would have changed for the Minibond holders.
3) Lehman gets taken over by another party which does not assume their Minibond Obligations
In the unlikely event that the acquirer does not take over the obligations of the Minibonds, the notes will be redeemed in a way similar that described in 1) above.
It will take some time for any takeover of Lehman Brothers to be completed as you can imagine the acquirer will have to look into all the obligations of Lehman Brothers, with the Minibonds just one very small component of it.
Added: You can contact the HSBC Institutional Trust Services for updates. The hotline is 62167449.
Added more updates: Minibonds Update