LONDON Hedge fund manager Man Group has sold claims to the estate of defunct U.S. investment bank Lehman Brothers in a $456 million deal that will boost its cash position and see it book a tidy gain.
Hutchinson Investors, managed by hedge fund firm Baupost Group, is buying the portfolio at a 32 percent premium to its June 30 valuation, Man said on Friday.
Man acquired the claims for $355 million in July 2011 from funds managed by its GLG Partners subsidiary. It has never disclosed the size of the original claims. GLG was one of hundreds of hedge fund and asset managers which had outstanding trades with Lehman that collapsed along with the bank in 2008.
Besides sparing GLG's investors uncertainty and possible losses while lawyers pursued compensation, Man spotted an opportunity to profit from a burgeoning secondary market in the legal exposures as investors took out bets on the likelihood claims would be paid out, and by how much.
PricewaterhouseCoopers, the administrator in charge of unwinding the estate of Lehman Brother's British arm said last week a first tranche of payouts totalling 1.76 billion pounds would be made to unsecured creditors this month.
While these payouts reflect settlements of 25.2 pence in the pound, speculators and specialist distressed asset funds are betting the typical payout level may rise as more of Lehman's multi-billion dollar estate is settled.
The payments may rise or fall depending on settlements achieved in other parts of the Lehman business and how well administrators market and offload the bank's assets, a process which could be affected by economic stress and market movements.
In June 2011, Lehman proposed a plan it touted as a "global compromise," estimating about $65 billion in total payback and giving many creditors recoveries of 20-30 cents on the dollar.
Creditors of Lehman's parent have been projected to recover about 21 cents on the dollar, while derivatives creditors, such as Goldman Sachs, will get about 28 cents.
Man may receive a further $5 million from Hutchinson Investors if future recoveries from the claims exceed certain thresholds. Boston-based Baupost is run by Seth Klarman, widely followed in the investment community as a deep-value investor known for the originality of his securities selection.
The sale generates around $100 million post-tax profit for Man and frees up regulatory capital that had been posted against the group's liabilities. As a result, Man's regulatory capital surplus has grown by $140 million.
It follows a challenging period for Man Group which suffered a fifth straight month of client exits in October after poor returns from its flagship AHL fund.
In an effort to reverse its fortunes, the company has made a raft of changes: slashing costs, revamping its dividend policy, launching new funds and naming Jonathan Sorrell, son of WPP chief executive Martin Sorrell, as finance director.