Lehman: bank unit deals to preserve $1.42 billion investment OK'd

By Lisa Kerner

Charlotte, N.C., Sept. 23 - Lehman Brothers Holdings Inc. was granted court approval of settlements with indirect wholly owned non-debtor subsidiaries Aurora Bank FSB and Woodlands Commercial Bank designed to allow Lehman to preserve the $1.42 billion combined value of its equity interests in the banks, according to a pair of Thursday filings with the U.S. Bankruptcy Court for the Southern District of New York.

As previously reported, the Office of Thrift Supervision (OTS) issued a directive imposing serious restrictions on Aurora's operations in February 2009 in response to the bank's diminished capital.

The restrictions included limitations on Aurora's sources of funding and origination of new loans.

At the same time, Woodlands consented to the entry of a cease-and-desist order issued by the Federal Deposit Insurance Corp., which also imposes substantial restrictions on Woodlands' operations.

Lehman said as a result of these regulatory actions it was faced as the holding company with a choice to either not support the banks' capital, allow them to fail and litigate potential claims or support the banks' capital and preserve the opportunity to recover the banks' significant value for the benefit of Lehman creditors.

Based on their June 30 regulatory reports, the values of Lehman's equity interest in Aurora and Woodlands were at $677.6 million and $741.6 million, respectively, for a combined value of $1.42 billion.

Aurora settlement

Under the terms of the Aurora settlement:

• Aurora will return assets posted as collateral under a master forward agreement, which Aurora valued at $293.7 million as of June 30;

• A total of $577 million of cash and $409.3 million in other assets will be transferred to Aurora; and

• Substantially all pending intercompany accounts through March 31 and various claims arising out of intercompany transactions will be resolved in consideration of the capital transfers, plus an additional cash payment by Lehman of $14.4 million and of up to additional $10.6 million, with the exact amount to be determined after considering future events relating to contingent claims.

Woodlands settlement

Under the Woodlands settlement:

• Lehman will deliver $75 million of cash to Woodlands and cancel its participation rights;

• Woodlands' security interest in assets posted as collateral under a Luxco security agreement will be released;

• The cease-and-desist order will be terminated; and

• Woodlands will be able to implement its strategic plan to reposition its portfolio and pay off its brokered and other certificates of deposit over time.

New York-based Lehman Brothers Holdings Inc. 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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