Paulson & Co, the hedge fund that made billions from betting on a collapse in mortgage-backed securities during the financial crisis, has made more than $550m from a recovery in the value of bonds it bought in failed investment bank Lehman Brothers.
The world’s third-largest hedge fund has made a profit of $554m before legal fees, on more than 2,000 trades in Lehman bonds that started the day the investment bank filed for bankruptcy in 2008, according to an analysis of court documents by the Financial Times.
The profit will be realised by a settlement between warring creditors to the largest corporate failure in history, a deal partly driven by hard bargaining by Paulson & Co and allies.
It is a much-needed boost for the $38bn hedge fund, headed by John Paulson, that has struggled with poor performance and high-profile blunders in recent months.
Under the final agreement, owners of Lehman holding company bonds will receive 21.1 cents for each dollar in face value, versus the 17.4 cents proposed initially by the Lehman estate. Mr Paulson’s funds hold the bonds at an average of 7.3 cents on the dollar, meaning they own bonds with a face value of $4bn for which they paid about $290m, net of sales, to acquire.
While Paulson & Co bought Lehman bonds on September 15 2008, at 35 cents on the dollar, prices then dropped as the fund spent $890m to accumulate debt with a face value of $6.8bn over two-and-a-half years. Profitable sales from late 2009 onwards further improved the position.
By comparison, hedge fund Fir Tree paid a net $340m, or 22.7 cents per dollar, for a notional $1.5bn of Lehman bonds. Peer Taconic paid 21 cents for the $2bn of face value debt it owns.
The market price for the bonds on Friday stood at 26 cents, reflecting an expectation that recoveries for all bondholders may improve if Lehman recognises fewer claims, or if the value of remaining assets rises substantially. If it can sell its bonds at that price, Paulson & Co’s profit on Lehman would rise to $780m.
This would contrast with recent high-profile reversals including a C$562m ($585m) loss on Sino Forest, a Chinese forestry company fighting accusations of accounting irregularities. (Sino Forest shares rose 28.1 per cent in Toronto trading on Monday after Wellington Management disclosed it had built up an 11.5 per cent stake in the company.)
Premier Foods, a UK food manufacturer in which Paulson & Co had reported a 12 per cent stake in October, has dropped more than 20 per cent since a profit warning on Thursday.
Paulson & Co was a member of a group of Lehman bondholders that filed their own bankruptcy plan for the bank and argued against rival pay-out plans that would have paid bondholders as little as 16 cents on the dollar. The final settlement, at 21.1 cents for the bondholders, was closer to bondholders’ own proposal of more than 24 cents.
The group had pushed back aggressively against the Lehman estate and other creditors, including big banks such as Goldman Sachs and Deutsche Bank, to win a larger share of Lehman’s pay-outs.