Morgan Stanley sells Lehman claim

Morgan Stanley has sold a $1.2bn claim in the liquidation of the Lehman Brothers estate this week, in a move highlighting the booming market for trading claims and bonds linked to the hundreds of different Lehman entities.

The Morgan Stanley claim was linked to about 10,000 derivatives transactions to which Lehman was a counterparty. It was sold on to about 10 different investors, according to people with knowledge of the trade, at a price of 38.5 per cent of face value, or $462m. Morgan Stanley declined to comment.

When Lehman filed for Chapter 11 as the largest default in history, it created a market for potential claims against the estate for losses caused by breaking billions of dollars of derivative transactions.

Under the derivative documents, if a swap counterparty to a derivative transaction defaults, the trade is void and investors need to purchase a replacement trade. But because of the market turmoil after the Lehman collapse, some counterparties suffered losses that they are now looking to claim. Specialist investors who believe they will recover more on the claims than the seller expects are keen buyers.

One banker estimated $7bn in liquidation claims had already traded, with other banks set to sell hundreds of millions of euros of claims in the coming days.

In early June, Deutsche Bank traded one of the first big blocks of claims – more than €500m – in the liquidation of Lehman’s European operating company, Lehman Brothers International Europe.

The recent market rally has fuelled trading in these claims, which have doubled in value over the past six months. “It’s a perfect moment to sell,” said one distressed debt trader.

He said claims against Lehman Brothers Special Financing Inc, which was counterparty to the derivative transactions, were valued at 40 per cent of face value; claims against its main European operating company, Lehman Brothers International Europe, at
26 per cent; and claims against the US entity, Lehman Brothers Holdings Inc, at 12 per cent of value.