How much money Paulson has made in Lehman... (LBHI)

In the past, we have discussed Rule 2019 in the bankruptcy of Accuride. To recap, Rule 2019 is summarized as thus:

"Rule 2019(a) requires that unofficial committees or ad hoc groups disclose, inter alia, (1) the nature and amount of their claims or interests; (2) the date of acquisitions of their claims or interests acquired in the year prior to the filing of the bankruptcy case; (3) the amount paid; and (4) any subsequent sales of claims or interests."
On April 26, the Supreme Court's Chief Justice, the Honorable John Roberts, sent a letter to John Boehner, the Speaker of the House of Representatives, and Joe Biden, VP and President of the Senate detailing amendments to the bankruptcy code; specifically: Bankruptcy Rules 2003, 2019, 3001,4004, and 6003, and new Rules 1004.2 and 3002.1. It is expected these measures will not be held up in Congress and the new rules will go in effect in December.

For our intents and purposes, we will focus on the changes to Rule 2019. For those that are interested, I have embedded the document sent by the Chief Justice detailing each of the rule changes:

Breaking the new rule down, in essence, any "group or committee that consists of or represents, and every entity that represents, multiple creditors or equity security holders that are (A) acting in concert to advance their common interests, and (B) not composed entirely of affiliates or insiders of one another" OTHER than appointed committees under 1102 or 1114 (i.e. Official Creditor Committees) must disclose:
  • The name and address of each forming entities and for who the group is acting on behalf
  • Name and amount of claims against / equity ownership in the debtor
  • The date (by quarter and year) of purchase (unless acquired a year before Chapter 11 petition)
Why is this important? In past situations, funds have argued that this transaction detail is proprietary and could hurt their business. Litigation and objections arose, which are costly, and less focus was put on rehabilitating the debtor. By shifting the "date" to a quarterly basis, super secretive techniques of distressed funds (i.e. asking Joe Beggans at JPM or any other distressed trader at dealers on the Street to make you a market) will stay under lock & key.

With that said, a debtor trying to expose a distressed debt fund's purchase of claims at a massive discount from the original holder is really a strong arming negotiation tactic to exhibit to the Court the misaligned incentives of creditors and emerging debtors.

The most recent example of a Rule 2019 disclosure came in the Lehman Brothers case. In the annex below, you will find the holdings and trades (buys and sells) made by the Ad Hoc Group which consists of Calpers, Canyon Capital, Fir Tree, Gruss, Owl Creek, PIMCO, Paulson, Perry, Taconic and a few other creditors (Elliot and King Street are no longer members).

Let's take a look at Paulson's disclosures. We are sticking to LBHI now:
  1. Total Senior Unsecured Claims held as of April 13, 2011 = $4,006,220,219. This number nets buys and sells throughout the transaction history.
  2. Total Purchased Claims ~ $7,006,727,733. Sold claims ~ $3,000,507,555
  3. Capital Spent for Purchases ~ $928,475,080. Average Price Paid ~ 13.2 cents on the dollar
  4. Capital Raised on Sales ~ $637,112,472. Average Sale Price ~ 21.2 cents on the dollar
  • Current Position = Claims * Market Price = $4,006,220,219 * 26 cents on the dollar ~ $1,041,617,257
  • Capital Raised (see above) = $637,112,472
  • Capital Spent (see above) = $928,475,080
  • Current Position + Proceeds from Sales ~ $1,678,729,729
In other words, according to my calculations, Paulson has made
approximately $750,000,000 on the Lehman Bankruptcy (LBHI alone).

Distressed Debt Investing for the win? I think so. It is going to be interesting to see what, if any, effect this new ruling has on ad hoc and unofficially credit committees. One thing I am interested to hear is whether this will apply to steering committees in bank facilities.

One final note: You will notice a new addition to our right side rail: "Distressed Investing Resources" and our first static page: "Bankruptcy Dockets" On that page (after I add all the active dockets this weekend), you will find an easy resource to go to most of the major bankruptcy's dockets (and won't have to pay PACER as you will be going through the claims agent's site which I find easier to navigate anyways). Enjoy!



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.