Claim amounts uncertain for Lehman products; some see opportunities, but fear unreported exposure

By Kenneth Lim

Boston, Sept. 16 - The structured products market continued to digest the collapse of Lehman Brothers Holdings Inc. on Tuesday, as noteholders tried to figure out how much they could claim and others looked for investment opportunities.

An investment advisor who had "a little exposure" to Lehman's structured products said the market is awaiting more information in terms of how much holders can expect to get back from the investment bank, which is filing for bankruptcy protection.

"I have lawyers looking at it, but my initial understanding is that we can claim based on how much should be due if the product matured, not based on the principal," the advisor said. "But I'm not a lawyer...It could work out either way. If your product is in the money, then it's better for you, but if your product isn't in the money, then it's even worse. But even if you're in the money, it's like getting shot with a smaller bullet. You might get a bit more, but you still won't get back everything."

There is approximately $6.5 billion par amount of outstanding structured products issued by Lehman and maturing Sept. 13, 2008 and later, according to data compiled by Prospect News.

The advisor said the market's exposure may not be as significant as the numbers suggested.

"My exposure's from way back," the advisor said. "It's stuff that we got before it got really bad. But we, and I think most people have been doing the same, we haven't been getting Lehman stuff for months simply because their credit had become so problematic."

Pricing levels on Lehman-issued structured products remained difficult to pin down, with market sources saying they had not heard anything in the secondary markets.

Some seek bargains

Not all the market's attention was focused on recovery. At Proctor Financial, president Tony J. Proctor said he was looking for opportunities.

"I'm actually thinking of ways to take advantage of this," he said. "You just have to look at what's changed. Volatility's up, so look for ways to take advantage of volatility. U.S., in fact, world indexes are down, let's take advantage of that. Perhaps, if on a neutral basis, you would think the market has just as good a chance of going up as going down, from Friday to today, you're 500 points in your favor at this time, so it has to be an opportunity, or at least you have to look at the opportunity.

"You might not want to follow them, but as an investment professional you owe it to your clients to look at these opportunities."

Proctor said his firm and clients did not have any exposure to Lehman because of the firm's strict credit quality criteria.

"Our threshold is Aa or better, and a CDS of 100 [bps] or better, so both of those things have to exist, which I think is what really kept us out of potential trouble," he said. "Sometimes the ratings are behind, but the credit default swap rates I find are usually spot on."

Structured products remain an attractive option for Proctor, he said.

"It just goes comes down to risk and managing your exposure to it," Proctor said. "Just like I wouldn't put 50% of a portfolio into one company stock, you just manage your risk. Not only there are opportunities, I think it makes the case even stronger for them. Assuming you weren't dealing with Lehman, the principal protection that structured notes can offer are extremely relevant in this type of market."

Concerns on banks' exposure

Proctor thinks that other the major investment banks are out of the fire for now.

"As far as investment banks, now that Merrill Lynch [& Co. Inc] is being bought out by Bank of America [Corp.], I think we're fairly healthy for the time being," he said. "The only thing I'm concerned about is what actions were taken to prop up Lehman in the last week or two, and what type of exposure any of the banks might have because of that. Those things may not have been disclosed yet, and hopefully no one bank took an exorbitant amount of risk to prop up Lehman...I hope they have a little more prudence."

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