Hedge funds which gambled on how much money would be recovered from the bankrupt carcass of Lehman Brothers are set to make hundreds of millions of pounds from a full payout to creditors of the European arm.
Five years on from the collapse, payouts to Lehman's creditors in Europe are on course to top 100 percent some time next year, following a recovery of assets by administrators and legal victories over other parts of the ex-U.S. investment bank.
"We were reasonably confident there would be some significant funds, but never in our wildest dreams would we have thought it would be 100 pence in the pound," said Tony Lomas, joint administrator for Lehman Brothers International Europe (LBIE) and partner at PricewaterhouseCoopers.
The collapse of Lehman Brothers on Sept. 15, 2008, plunged the global financial system into chaos. Its European arm, headquartered in London, was the largest and most complex part of the group because it was a hub for trading and investments, spanning asset classes and dozens of countries.
Closing down the business and trying to recover assets for creditors has involved unwinding thousands of derivatives contracts and share trades and figuring out who owns what, making it the most complex bankruptcy of a single entity ever.
Creditors' claims now trade between 120 and 135 percent in a secondary or "grey" market for their value, compared to as low as 10 percent in the weeks after the collapse, reflecting an expectation that a premium will be paid.
After creditors are fully paid, LBIE should also have cash left over to pay interest to unsecured creditors - who can get 8 percent a year under UK law - or subordinated bondholders.
Original creditors, including hedge funds which had Lehman as their prime broker, banks, and trade suppliers such as a photocopying or legal firms, may not all be winners, however.
"A lot (of original creditors) have sold their claims, particularly as pricing improved and got towards 100 percent,"
said Alyson Lockett, partner at UK law firm Simmons and Simmons, who has advised over 100 original creditors and also worked for distressed debt investors trading the claims.
The list of hedge funds which bought Lehman paper after the bank's demise reads like a Who's Who of so-called "distressed debt" funds, and includes Baupost Group, Elliott Management, King Street Capital and Paulson & Co, industry sources said.
The sources said it was hard to quantify how many of the claims were held by distressed debt specialists, but it could be half or more.
"A significant proportion of these claims is now in the hands of a small collection of distressed debt investors," Lomas said.
The bankruptcy has turned into one of most lucrative trades since the financial crisis for these largely New York-based funds which pride themselves on snapping up debt when panicked sellers have rushed for the exit.
Paulson, which led an investor group pushing for a better payout for creditors, started buying Lehman bonds the day it filed for bankruptcy, paying as little as 7.5 cents on the dollar in late 2008, according to news reports citing U.S. court papers.
Others got in later and the trade became the largest position on some funds' books, topping 10 percent of their assets.
"It was a big bankruptcy and if you had the patience and did the work, it was a great trade," said one fund executive.
All the named funds declined to comment or could not immediately be reached.
PwC expects about 40 billion pounds ($63.3 billion) to be returned to LBIE's creditors, including near 23 billion pounds for trust claimants and about 16 billion pounds for up to 3,400 unsecured creditors.
Two dividends worth a combined 68.5 percent of claims have already been paid to unsecured creditors and another dividend in November should take the tally towards 100 percent, Lomas said.
Legal wins against other defunct Lehman units and past settlements with the bank's trading counterparties has freed up cash for distribution. More payouts will be made, but the final dividend may take more than a decade because of legal wrangling.
"It's not inconceivable that it could be 10 or 20 years," said Lockett.
LBIE has had about 500 staff working on the wind-down, complemented by 200 PwC staff, all under Lomas in a Canary Wharf tower that has sight of the former Lehman European headquarters. More than 350 staff are former Lehman employees.
Costs including wages, rent, systems and legal advice, are running at about 300 million pounds a year, and PwC's fees had reached about 600 million pounds by March.
Lomas, 56, who has previously worked on the bankruptcies of MG Rover and the European arm of Enron, said LBIE was likely to keep him busy until he retires in four years.
"It's 20 times as complex and big as Enron. It's unparalleled," he said.
For other stories on Lehman Brothers:
Five years after Lehman, risk moves into the shadows
In post-Lehman clean-up, top banker prosecutions stumble
"You work for Lehman? I thought that went bust"