Lehman Brothers eyes exit from bankruptcy in 18-24 months: status report

By Rebecca Melvin

New York, Jan. 14 - Lehman Brothers Holdings Inc. is positioning itself to exit bankruptcy within a swift 18-month to 24-month timeframe, according to a status report presented to the U.S. Bankruptcy Court for the Southern District of New York on Wednesday.

Given the progress toward stability and control of assets to date, legacy Lehman's understanding of the issues that have to be addressed, and the conceptual framework for a plan of distribution to creditors, the debtors are positioning themselves for an exit in that timeframe, the status report stated.

Lehman chief executive Bryan Marsal told the court that in contrast to suggestions that the case, given its scale, may take five to 10 years, "my team and I have no interest in working on this case for six years, and we are going to work at a pace that is sensible, but see no reason why it should take more than the 18-24 months."

Marsal noted, however, that the appointment and scope of an examiner in the case will affect the timelines of exit. On Wednesday, the court approved the appointment of an examiner in the Lehman cases.

The 18- to 24-month exit timeframe met with words of caution from bankruptcy judge James Peck, who said that while the quick timetable is desirable, it might not be attainable given the current lack of cross-border protocols in the case.

"I have broad concerns that this is a multi-lateral problem, involving multiple liquidation regimes around the world ... where there is something like 15 countries, and 76 pending cases, and that creates an enormous coordination problem," Peck said.

"Absent some ability to tie together all of these estates, we run the risk of the mouse that roared, where some estate, in some jurisdictions, may control the timing in the exit of this case," he said.

State of the estate

The Lehman report, called the State of the Estate, went a long way toward soothing creditors starved for information. Later in the hearing when Lehman was seeking a 60-day extension to file schedules and financial statements, the creditors committee and Harbinger Funds were willing to withdraw objections to the extension due to the good faith Lehman showed in promoting transparency through the status report.

In the report, Lehman's U.S. operations were shown to have a total cash balance of $4.7 billion excluding setoffs by JPMorgan and Bank of America, and $6.96 billion including the setoffs as of Jan. 2, compared to a total cash balance of $3.3 billion as of Sept. 14, the day before Lehman's bankruptcy filing.

From the filing date to Jan. 2, current cash flow included receipts of $1.92 billion, mostly from asset sales, less operating disbursements of $293 million and disbursements for fees, including professional fees, of $23 million.

The report also outlined six asset recovery teams that have been established to maximize asset recovery. The teams include: bank book, covering the commercial loan business book; principal investments/private equity, which includes limited or general partners and propriety investments; real estate assets, which total $42.9 billion in commercial and residential mortgages; derivatives book, which has a global value of about $38 billion; Neuberger Berman, the asset management business in which Lehman retains a 49% stake; and other miscellaneous assets like aircraft and artwork.

The goal is to "skinny the plan" to get $150 million of EBITDA, Marsal said.

Lehman was managed as a trading house, and not as a bank, Marsal pointed out at one point. And the bank book was managed as a trading floor, with no grading of the loans, for example.

"One of the first things we did was take the loans and grade them. And the quality is pretty decent. The market is terrible in terms of liquidity. But if you take it to maturity, it's a pretty good portfolio," Marsal said.

Extension granted to file financials

Lehman's request to extend the deadline for filing schedules and financial statements by 60 days was approved by the court after the creditors committee and Harbinger said they saw the fruit of their goal - namely publicly available financial information in the status report.

Peck granted the extension with the expectation that a further extension would not be requested, he said.

He noted that many of the numbers set forth in the status report are subject to adjustment, as Marsal pointed out, and that they are top line-type numbers compared to detailed disclosure that would be forthcoming in the financial filings.

The sooner the schedules and statement of financial affairs are done and available for examination, the more realistic Lehman's ambitious timetable for exit will be close to realistic, Peck said.

New York-based Lehman Brothers Holdings is the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15. Its Chapter 11 case number is 08-13555.

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