Talks on US legal obstacle to buy-back of minibonds
The taskforce that intends to buy back Lehman Brothers minibonds in two weeks met yesterday to discuss whether US bankruptcy laws would prevent them from doing so.
The group, formed under the Hong Kong Association of Banks to handle derivative products related to the bankrupt firm, was seeking legal advice from law firm Mallesons, Stephen & Jaques, a taskforce spokeswoman said. Although it was likely the laws would effectively halt a buy-back, the spokeswoman said the taskforce did not know when it would determine that.
'Meanwhile, we are still continuing our preparation work for the buy-back,' she said.
The taskforce agreed to a government proposal for banks to buy back the minibonds after valuing them, and had planned to announce the values and issue buy-back offer documents in the next two weeks.
Tens of thousands of people purchased minibonds in Hong Kong. Minibonds are not corporate bonds, but consist of high-risk, credit-linked derivatives that were marketed as proxy investments in well-known companies.
HSBC Hong Kong received a cease-and-desist order a few days ago from Weil, Gotshal & Manges, Lehman's bankruptcy counsel. With this notice, no one may liquidate the minibonds, which is necessary in order to proceed with the buy-back.
The taskforce spokeswoman explained why it had not spoken publicly about the problem earlier.
'Our legal advisers told us that it was a risk. At that time, this was a potential risk. But when Lehman's liquidators sent a letter to the trustees, HSBC, this became a real issue,' she said.
HSBC Hong Kong spokesman Gareth Hewett said: 'We are aware of the challenges made by Lehmans to the steps that have so far been taken to preserve the value of the underlying collateral and to release the value in certain notes supporting the minibonds so as to facilitate the buy-back of the Lehman Brothers-linked minibonds by the distributor banks.
'Complex issues of US bankruptcy law have been raised. We are seeking legal advice from our US lawyers.'
Financial Secretary John Tsang Chun-wah said last night the government still believed the buy-back scheme was the best option.
'We hope the investors can get back their capital as soon as possible,' he said. 'There should not be any conditions.'
He declined to speculate if the value of the minibonds would drop but said: 'It is difficult to say but in general the market is falling, and it should be better to take up the buy-back sooner. That is also the government's wish.'
Democratic Party chairman Albert Ho Chun-yan, who has been assisting minibond holders, said if there was a problem with buying them back under the legal procedures, banks should buy them back. The banks, he said, could redeem the value on the notes once a legal buy-back could proceed.
Peter Chan Kwong-yue, chairman of investors action group Allied Victims of Lehman Products, criticised government officials, the banks and the association for going back on their promises.
The investors expected the association to announce buy-back values at the beginning of next month.
'If you're handling the buy-back, you should have known that there were legal problems earlier,' he said. 'They should have checked.'
