The structured products industry’s newfound emphasis on the credit quality of the issuer has come too late for some.
As investors, advisers and third party issuers begin to digest the impact of today’s Chapter 11 bankruptcy protection filing by Lehman Brothers’ in the US Bankruptcy Court.After last night’s frantic rescue talks ended in failure, the market opened today to see trade suspended in Lehman’s structured products and a halt on coupons immediately due for payment as a consequence of the filing, which provides the bank with legal protection from debtors in order to reorganise its businesses.
SRP data suggests there are 315 Lehman Brothers products registered in Europe with an estimated volume of €2.9bn (most of them still live), which were either distributed directly or via a domestic distributor. In the US, Lehmans appears in 251 products as either issuer or third party with an estimated sales volume of $0.9bn. Indeed, the majority of the 1,081 Lehmans group-issued products are US domiciled (721, mostly registered unlisted notes), followed by Switzerland (126), Germany (95) and Hong Kong (58).
According to the bankruptcy filing, as of 31 May Lehman had total assets of $639bn and debt securities of $613bn.
The consequences of the historic collapse have yet to become clear. "This is the most significant failure of a financial institution in 18 years and Lehman was so intertwined in the global financial markets that it is impossible to predict how this will play out at this point,” said Keith Styrcula, chairman of the US Structured Products Association. “The ripple effect on the structured products industry will be vast and profound."
At the structured products level, medium term note-based products will appear as senior debt and appear high on the priority list, though it is not yet clear how many cents senior bondholders will get on the dollar if the company is forced into liquidation. Clarity is unlikely to emerge for some time. There is, inevitably, a measure of frustration in the adviser market. One UK market analyst and structured products provider, who did not want to be named, said, “We have taken some calls from some brokers [advisers] this morning who are struggling to get robust answers, and sensible working knowledge of this matter.”
Lehmans also has a structured asset management business, the global head of which, Stephane Rougier, was unable to answer calls as SRP went to press. The assets of any funds it has issued would, however, be ring fenced.
As well as Lehmans’ own products, and those for which it provided assets, year-to-date there have been 19 notes with Lehman as the underlying in the US alone, for a total volume of $49.6m. Seven are still active, and two of the highest-selling notes were UBS reverse convertibles with 50% soft protection.