HK banks agree extra minibond payouts

PUBLISHED : Monday, 28 March, 2011, 12:00am
UPDATED : Monday, 28 March, 2011, 12:00am

Sixteen Hong Kong banks have agreed on a joint proposal that could see investors in Lehman Brothers minibonds recover most of their original investments.

As a final settlement, the banks yesterday offered to pay back up to 96.5 per cent of the defunct investments - up from 60 per cent in 2009. But this will only go ahead if at least 75 per cent of an estimated 31,000 investors agree to it.

The retail investors bought 24 tranches of minibond products - a type of derivatives rather than real bonds - through the local banks before the Western financial crisis brought down Lehman, one of Wall Street's most prominent investment banks, in September 2008.

Investors can also receive an 'ex-gratia' payment - which the banks have no legal obligation to pay - if they agree not to pursue their cases any further.

'The banks have shown their best sincerity in resolving the issue. We believe investors will support [the proposal],' said He Guangbei, chairman of the Hong Kong Association of Banks and chief executive of Bank of China (Hong Kong).

By initial estimates, roughly two-thirds of the investors could recover about 80 per cent to 90 per cent of their principal investment, while 31 per cent could get back about 70 per cent to 80 per cent. But with the ex-gratia payment, many may get back as much as 96.5 per cent of their initial investment, He said.

Investors who had previously settled claims would also be eligible.

The latest decision follows the banks' 2009 offer of a repurchase scheme in which those who accepted the terms could recoup at least 60 per cent of their initial investment.

At that time, the 16 distributing banks reached an agreement with the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority to expedite the return of the collateral.

Then in December 2009 two banks offered to pay back 80 per cent. The offer from Dah Sing Bank and Mevas Bank was seen as paving the way for all affected customers to receive the same payout.

Investors reportedly lost about US$2.5 billion on minibonds offered by Lehman Brothers.

Many accused banks of misleading them to invest in the products without fully informing them of the risks. Some still stage daily protests outside large branches. An investigation by the legislature into possible sale malpractice is still under way.

Approval is required by at least 75 per cent of the minibond holders for every tranche. They will cast votes at meetings expected to be held in May.

It is also subject to Lehman Brothers obtaining US Bankruptcy Court confirmation that the derivatives procedures order made in December 2008 applied to the Hong Kong minibond programme, although this is considered procedural.

If everything goes smoothly, distribution to investors by the 16 banks, including Bank of China (Hong Kong), Bank of East Asia, Dah Sing Bank, Industrial and Commercial Bank of China (Asia), is set for June.

BOCHK acting deputy chief executive Jason Yueng Chi-wai, speaking for the 16 distributing banks yesterday, warned that if the proposal could not get passed in any one of the May meetings, the entire package would fall through.

Eddy Chan Ho-wai, chairman of the Allied Victims of Lehman Products, said his group would study the proposal. 'We have been demanding 100 per cent recovery of our investments if the banks are found to have handled the sales in breach of regulations,' he said.

Democratic Party lawmaker Kam Nai-wai, who supports the investors, believed those who choose not to take the ex-gratia payment would continue to make claims against the banks. He said the amount of the ex-gratia payment was insufficient to 'reflect the banks' responsibility'.

Dr Raymond So Wai-man, dean of Hang Seng Management College's school of business, said he believed the latest arrangement was a compromise by the banks.

'The new offer covers the majority of the investors' principal. Their real loss now would be the interest forgone due to the holding up of their money,' So said.

The HKMA, SFC and the government said they were pleased with the development. Arthur Yuen, HKMA deputy chief executive, said it would allow investors to avoid lengthy litigation and their high costs. SFC chief executive officer Martin Wheatley said he was pleased by the outcome.

A government spokesman praised the high rate of recovery in the value of the minibond collateral. 'We welcome the final resolution for the vast majority of the minibond noteholders and the ex-gratia payment as a gesture of goodwill by the distributing banks,' he said.

In a related development, Standard Chartered agreed this month to buy back HK$1.48 billion worth of outstanding Lehman Brothers derivative products it sold. The repurchase scheme covers 95 per cent of the outstanding transactions in Lehman-issued equity-linked notes held by the bank's customers.

The bank said the buyback offer was made in the interest of customers and the city's financial system.

ELNs are debt instruments that base their performance on the return of the underlying equity. They are not minibonds but a similar type of credit derivative.

Settling up

The offer from the 16 banks will only go ahead if this proportion of an estimated 31,000 investors agree to it: 75%