Lehman unit to sell back GTH membership interests for $17 million

By Caroline Salls

Pittsburgh, April 23 - Lehman Brothers Holdings, Inc. requested court approval of a settlement agreement under which mortgage loan servicer GTH LLC has agreed to buy back $35 million of membership interests held by Lehman non-debtor subsidiary GT Investment Co. I, LLC for $17 million, according to a Wednesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the motion, GT Investment was established by Lehman to hold membership interests in GTH, and GT Investment's only assets are its membership interests in GTH.

Lehman said GT Investment originally purchased a membership interest in GTH in October 2007 and subsequently increased its interests through three additional investments.

According to the release, GT Investment has invested a total of $35 million and currently holds 3,429.71 class A-1 units, or 20% of the equity of GTH.

In October, GTH raised an additional $70 million in capital by issuing five-year convertible notes. Lehman said GT declined to invest in the notes at that time based on concerns about GTH's long-term viability.

In addition, GT Investment exercised a right under its limited liability company agreement with GTH, and notified the latter that it did not consent to the issuance of the notes.

Because of challenging market conditions for loan servicers, Lehman said GTH will need more than $100 million in additional capital soon to replace expiring debt facilities, to replace a line of credit to cover margin calls on interest rate swaps and to acquire master servicing rights to grow its business.

Since a full ratchet anti-dilution provision is included under the terms of the convertibles, Lehman said it would be forced to participate in the notes issuance and provide additional funding to avoid having GT Investment's ownership interest in GTH significantly diluted.

As a result, Lehman said it decided to seek a buyer for the GTH membership interests. However, the interests are subject to transfer restrictions under the LLC agreement.

In an attempt to avoid the delay and expense associated with challenging the transfer restrictions, Lehman said it asked GTH to repurchase the membership interests.

Under the settlement agreement, GT Investment has agreed to sell the membership interests to GTH for $17 million and withdraw as a member of GTH.

GTH, in turn, has agreed to immediately cancel the membership interests in question, extinguishing any interests and obligations that GT Investment may have had in GTH.

As a result, Lehman said all rights granted to it under the LLC agreement will be terminated.

A hearing is scheduled for May 13.

New York-based Lehman Brothers Holdings was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008. Its Chapter 11 case number is 08-13555.

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