A New York bankruptcy judge has chosen a company to help sell off billions of dollars' worth of commercial loans held by the estate of failed investment bank Lehman Brothers.
WCAS Sullivan International Investment Management said Wednesday that it plans to create and sell exotic bonds _ similar to the ones that toppled the storied Wall Street firm _ that will be backed by the loans, and it will give the proceeds to Lehman's creditors.
Lehman's was the biggest bankruptcy filing in U.S. history; the firm had more than $600 billion in assets on its books before it filed for bankruptcy court protection.
WCAS said it will take over the $5.3 billion commercial loan portfolio under a deal with the court overseeing Lehman's bankruptcy. The portfolio includes $3.8 billion in commercial loans and $1.5 billion in promised loans that were not funded, WCAS said.
The agreement is part of the court's campaign to sell off Lehman's assets and return the proceeds to those who were owed money when the bank failed.
Seeking to maximize those proceeds, WCAS plans to pool the loans into complex bonds known as collateralized loan obligations. It will sell investors slices of those bonds and give the proceeds to Lehman's estate and its creditors. Over time, income from loan payments will be distributed among buyers of the bonds.
WCAS said it plans to bundle loans worth at least $1 billion during the next year and eventually generate income from $2 billion of the loans in the portfolio.
The returns to Lehman's creditors will likely be smaller. That's because some of the loans will not be repaid, and the investors who buy them will offer less than the loans' face value because they are assuming that risk.
WCAS is a global asset manager specializing in high-risk, high-return bonds, also called junk bonds. The company has $7.8 billion in assets under management.
The 2008 financial crisis started in the market for investments such as CLOs and other loan-backed bonds. Banks held trillions of the investments on their books, mainly backed by shoddy home mortgage loans.
The mortgage bonds became toxic in 2008 after home prices declined and homeowners started to default. As the bonds lost value, banks and traders realized that many of them would never pay off and many abandoned Lehman, fearing its losses would be too great.
In contrast, the bonds created by WCAS will contain business loans that are seen as a safer bet. WCAS also will manage parts of the portfolio that can't be bundled, such as the unfunded promises and commercial loans that might already have soured.
Lehman's bankruptcy caused the global credit markets to freeze up almost overnight. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers were unable to get loans.
The restructuring firm overseeing Lehman's liquidation hailed the deal with WCAS as "a great outcome for the estate and for our creditors." Doug Lambert, managing director of Alvarez & Marsal, said it will maximize income from the loans over the long term. He noted that WCAS will hire ten people who already manage the loans, "ensuring continuity of management" by people focused on maximizing returns for Lehman's creditors.