UPDATE 1-MF Global creditors propose liquidation plan

Thu Jan 10, 2013 9:03pm EST

* Plan would pay customers in full

* Bondholders would recover up to 42 pct of claims; lenders up to 80 pct

* Plan's sponsors own 65 pct of unsecured claims

By Nick Brown

NEW YORK, Jan 10 (Reuters) - Unsecured creditors of MF Global Holdings Ltd on Thursday proposed a liquidation plan that could pay the brokerage's former customers in full.

The ad hoc group, led by distressed debt investors Silver Point Capital, Knighthead Capital and Cyrus Capital Partners, filed the proposal in U.S. Bankruptcy Court in Manhattan, saying former traders who held accounts at the commodities broker could receive full payback, while some unsecured bondholders of the MF parent could recover as much as 42 percent of their claims.

MF Global declared bankruptcy in October 2011 after its exposure to risky European sovereign debt spooked investors. The case became a political fire storm after federal investigators discovered that money in customer trading funds had gone missing in the collapse.

The proposed liquidation plan comes weeks after the MF parent and two key affiliates settled billions of dollars in intercompany claims, providing a clearer picture of what each unit will have at its disposal to pay back creditors.

$1.6 BILLION GAP

MF Global was led by Jon Corzine, the former Democratic governor and senator from New Jersey, and the former chief of Goldman Sachs Group Inc.

Investigators in Congress and elsewhere have tried to identify the source of an estimated $1.6 billion hole that was discovered in customer trading accounts shortly after the company filed for Chapter 11. Corzine's role in the matter has been unclear, though he has denied any wrongdoing.

James Giddens, the trustee in charge of liquidating MF's broker-dealer unit and recovering as much money as possible for customers, said in a June report that Corzine failed to address growing liquidity needs and used customer funds to cover liquidity gaps as the firm teetered on the brink.

Customers have so far been repaid about 80 percent of the money in their accounts.

While it is uncommon for creditors of bankrupt firms to propose liquidation or restructuring plans before the debtor, MF's bondholders could be looking to curb mounting legal and other professional fees.

The group noted in its plan outline that professionals working to liquidate MF's parent, broker-dealer and UK units have billed roughly $200 million in fees so far.

Both a lawyer and a spokesman for Louis Freeh, the trustee liquidating the MF Global parent, declined to comment on Thursday.

A spokesman for Giddens did not respond to a request for comment.

Customer advocate James Koutoulas, who runs the grassroots Commodity Customer Coalition, said on Thursday he was pleased to see hedge funds moving for a quick liquidation that could minimize legal costs.

The coalition, which represents the interests of former customers, has consistently complained of high fees in the case.

Under the creditors' proposed plan, holders of about $1 billion in unsecured bonds would receive between 12 and 42 percent in recoveries. Lenders under a $1.2 billion revolver, led by JPMorgan Chase & Co, would recover between 27 and 80 percent of their claims. The group said in court papers those estimates are conservative.

The ad hoc group believes customers would be paid in full within three to six months, while other creditors would receive payouts within one year, according to a source close to the matter.

The outline of the plan is slated to go before Judge Martin Glenn on Feb. 14. If approved, the plan would go to creditors for a vote.

The group that proposed the plan owns about 65 percent of the roughly $2.2 billion in unsecured claims, so the plan already has widespread support.

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