Lehman inks deals with bank units to preserve $1.42 billion investment

By Caroline Salls

Pittsburgh, Sept. 2 - Lehman Brothers Holdings Inc. requested court approval of settlements with indirect wholly owned non-debtor subsidiaries Aurora Bank FSB and Woodlands Commercial Bank designed to allow Lehman to preserve the $1.42 billion combined value of its equity interests in the banks, according to Wednesday filings with the U.S. Bankruptcy Court for the Southern District of New York.

The company said the Aurora settlement will result in a substantial recapitalization of Aurora, allow Aurora to expand its operations and ultimately allow Lehman to sell the bank as a going concern in about 18 months.

Lehman said the settlement will position Aurora to have many of the regulatory restrictions on its operations lifted.

According to the motions, the Office of Thrift Supervision (OTS) issued a directive imposing serious restrictions on Aurora's operations in February 2009 in response to the bank's diminished capital.

The restrictions included limitations on Aurora's sources of funding and origination of new loans.

At the same time, Woodlands consented to the entry of a cease-and-desist order issued by the Federal Deposit Insurance Corp., which also imposes substantial restrictions on Woodlands' operations.

As a result of these regulatory actions, Lehman said it was faced as the holding company with a choice to either not support the banks' capital, allow them to fail and litigate potential claims or support the banks' capital and preserve the opportunity to recover the banks' significant value for the benefit of Lehman creditors.

If they were left to be placed in receivership, Lehman said the banks' assets would mostly likely be subjected to fire sale liquidations.

Based on their June 30 regulatory reports, the values of Lehman's equity interest in Aurora and Woodlands were at $677.6 million and $741.6 million, respectively, for a combined value of $1.42 billion.

Aurora settlement

Lehman said the Aurora settlement addresses outstanding OTS concerns and allows for lifting of many of the restrictions under which Aurora currently operates.

This change will allow Aurora to originate mortgage loans and, subject to some limitations, issue brokered certificates of deposit to refund maturing deposits.

The terms of the Aurora settlement include:

• Aurora will return assets posted as collateral under a master forward agreement, which Aurora valued at $293.7 million as of June 30;

• A total of $577 million of cash and $409.3 million in other assets will be transferred to Aurora; and

• Substantially all pending intercompany accounts through March 31 and various claims arising out of intercompany transactions will be resolved in consideration of the capital transfers, plus an additional cash payment by Lehman of $14.4 million and of up to additional $10.6 million, with the exact amount to be determined after considering future events relating to contingent claims.

Sale agreement

Lehman said it has agreed to try to sell Aurora and Woodlands within 18 months. However, if after 15 months, the OTS concludes that it is unlikely that a sale will be completed by the end of 18 months, Aurora will prepare a plan for dissolution.

The dissolution plan will require Lehman to purchase all non-cash assets of Aurora.

If Woodlands cannot be sold within 18 months, Lehman will be required to buy its non-cash assets, and Woodlands will pay off its remaining deposit liabilities and return its charter to the state of Utah.

To ensure that the settlement agreements are approved, Lehman has also agreed to enter into a capital maintenance agreement under which it will make capital contributions when needed to maintain Aurora and Woodlands' capital at the 11% or 15% level throughout its ownership of the banks.

In addition to the portfolios of mortgage loan servicing rights to be transferred to Aurora under the settlement, Lehman is also seeking court approval to contribute a portfolio of its servicing rights on 33,000 residential mortgages to Aurora.

Lehman said it is also considering contributing up to $25 million in additional servicing rights to Aurora's capital.

Woodlands settlement

Additionally, Lehman has negotiated a separate settlement of virtually all its open issues with Woodlands, which will result in the infusion of additional capital into Woodlands and position it for a lifting of substantially all the regulatory restrictions imposed on its operations.

Lehman said this will allow Woodlands to realize on its assets over an 18-month period, after which it is expected to dispose of its banking license and distribute its remaining assets to Lehman.

Under the Woodlands settlement:

• Lehman will deliver $75 million of cash to Woodlands and cancel its participation rights;

• Woodlands' security interest in assets posted as collateral under a Luxco security agreement will be released;

• The cease-and-desist order will be terminated; and

• Woodlands will be able to implement its strategic plan to reposition its portfolio and pay off its brokered and other certificates of deposit over time.

The settlement hearings are scheduled for Sept. 22.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008. Its Chapter 11 case number is 08-13555.

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