The New Lehman Trade: Selling the Bankruptcy Claims (BAC, MS, CS)

There have been many ways which companies exit bankruptcy court.  Historically, many companies have used tax loss carryforward strategies as well.  But selling a claim against assets for recovery in bankruptcy is a strategy that is less well known by the public.  If the Bloomberg reports are correct, then Bank of America Corporation (NYSE: BAC) may be selling claims against the Lehman bankruptcy.  Based on what we saw last month, this would be at least the third firm to be selling Lehman claims.

We read in the FT last month that Morgan Stanley (NYSE: MS) had sold a $1.2 billion face value claim where Lehman was a counterparty to thousands of derivative transactions.  That number in the Morgan Stanley sale was listed today by the Bloomberg report as being $1.3 billion, so there are some apparent discrepancies out there.  And this would follow another sale of a $1 billion Lehman bankruptcy claim last month from Credit Suisse Group (NYSE: CS).  The report from Bloomberg today noted that B of A is selling a claim against with an $800 million face value.

What is interesting is that there is at least some value here, even if the terms are listed as being in the $0.30’s per $1.00.  In the past we have seen some use bankruptcy claim sales for far higher and some for far lower prices.  These sales took place during the Enron bankruptcy and in the Dana bankruptcy, as well as in many others.  These are often purchased by hedge funds, but sometimes they are bought by more senior or more junior creditors to getting more leverage in a bankruptcy proceeding.  This gets around waiting for the approval of a bankruptcy plan and in theory can add immediate value to the books upon the closing of the sale.

Jon C. Ogg
October 8, 2009