Lehman debtors agree to fund residential project to maximize value

By Caroline Salls

Pittsburgh, July 28 - Lehman Brothers Holdings Inc. and debtor Lehman Commercial Paper Inc. requested court approval to acquire project loans through a joint venture and provide gap funding through a term loan, revolving credit facility and preferred equity investment, according to a Tuesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

Lehman said it received court approval in January 2010 of an agreement to buy Lehman Brothers Bankhaus AG's interest in specified loans, including two real estate loans that comprise the senior debt in a residential unit project located in France.

The company said it owns an 8.9% equity interest in the project. LBREP III Europe Sarl SICAR owns an 86.1% interest in the project.

The Lehman debtors said maximizing the value of the project depends on the refurbishment of its underlying assets, "which due to neglect, are now in a state of disrepair that is not aligned with the Sun and Moon project's overall business plan."

As a result, the Lehman debtors said they decided that their investment in the project would be maximized if additional funding could be provided in the form of debt from Lehman Commercial Paper and a preferred equity investment from Lehman Brothers and LBREP.

Loan acquisition

Under an agreement with Bankhaus, Lehman Commercial Paper agreed to purchase the outstanding balance of Bankhaus' 88.2% interest in the project loans. Lehman said this purchase will take place through Acquisition Co., which will be owned 37.5% by Lehman Commercial Paper and 62.5% by LBREP.

LBREP will manage the administration of Acquisition Co. for a €17,500 fee.

The drawn principal balance of the acquisition facility will be acquired from Bankhaus. The purchase price will be funded by LBREP and Lehman Commercial Paper through capital contributions to Acquisition Co.

In addition, a capex facility will be funded by Acquisition Co. using revolver proceeds.

A portion of the €102.4 million project funding gap will be satisfied through capital expenditure draws from an existing facility.

Funding terms

According to the motion, Acquisition Co. will require two loans from Lehman Commercial Paper in order both to continue funding the project loans and to provide the original borrowers with funds to satisfy a termination payment.

To fund the termination payment, Lehman Commercial Paper will fund an €8 million loan, which will mature on March 3, 2012 and earn a 7.5% annual coupon and a 25 basis points arrangement fee.

Lehman Commercial Paper will also provide an up to €17.5 million revolver to fund draw downs from capital expenditures under the original loan documents. The maturity and coupon are the same as the term loan.

The remainder of the funding gap will be satisfied in the form of €40.6 million in preferred equity, split 62.5% to LBREP and 37.5% to Lehman Brothers Holdings, with a 25% accruing return.

A hearing is scheduled for Aug. 18.

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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