The 16 distributing banks of "Lehman Brothers minibonds" proposed the "final" reimbursement scheme to over 30,000 minibond holders of 24 tranches of minibonds. The affected investors have the chance to recover over 85 to 96 per cent of their original investments. Whether the proposal can be realized will depend on whether it has received enough supporting votes from the customers.

In the 2009 minibond repurchase settlement plan, whether the customers accepted it or not, it was something between the banks and individuals. It would not affect other customers. This time, they are bundled with the risk of having the whole reimbursement scheme toppled by a small number of firmly opposing customers.

The current scheme came with the support of the Securities and Futures Commission and Monetary Authority. There are still two more hurdles determining whether it will finally be passed.

Scheme may fail because of a small group

One of the hurdles is the United States bankruptcy court. The financial tsunami made minibond holders worry that their money would be lost down the drain.

With the revival of the American economy, asset prices rose. The collaterals for minibonds rose accordingly from as much as 70 to 93 per cent of the capital depending on the tranches they belonged to. Originally, there was dispute over whether it was the US Lehman liquidator or Hong Kong who owned the priority rights to reimbursement from the collaterals. Now the liquidator has agreed to give up its priority and will be applying to the American bankruptcy court for approval on Tuesday. If approved by the court, the collaterals can be sold and turned into cash to reimburse minibond holders.

This is the money that the minibond holders should receive as "creditors". Local distributing banks, on this basis, offered an additional ex-gratia payment to share the amount short of their original investments. In other words, if the minibond holders get back 70 per cent of their initial investments from the collaterals, the banks will "pad it up" with an ex-gratia payment of 15 per cent. The loss taken by the minibond holders will be reduced to 15 per cent. The more valuable the collaterals, the less they will lose.

For two groups of minibonds in one of the tranches, the minibond holders can reduce their losses to 3.5 per cent of their capitals.

Currently, 96 per cent of the minibond holders have already settled with the banks. Only a small group is left asking for full reimbursement. This is the other hurdle determining the implementation of the scheme. That is, holders of all tranches of minibonds will have a meeting and there must be support from three-fourths of those present in each tranche for the proposal to pass. Under this mechanism of bundling up, if only one tranche cannot get enough support, the whole plan will fail.

Toppling scheme and starting over costly in time and money

If the scheme is toppled and started over, the reimbursement that should be in hand by June at the earliest will be postponed to some unknown date. And it will cost the receiver in the case a lot of money. The banks, after using nearly $300 million commission that came from minibond sales in paying back, are now using over $600 million extra. The receiver may in future deduct their charges from the revenues from collaterals.

As for lawsuits, it will involve a large amount of money, energy and time. And there is no guarantee of winning.

After weighing the attractions of the proposal and the cost of toppling it and starting over, it seems on the surface that the chance of the scheme being vetoed is lower. But because some minibond holders who wish to stay out had already accepted settlement and would not vote, the vote result could be affected. This is the reason why the banks and supporters of the proposal dare not take it lightly.

They want to avoid causing a major setback as a result of negligence.

In the two or so years after the Lehman's "burst", the investors, banks and regulatory bodies all have had a deep and painful lesson from the turmoil brought about by minibonds in Hong Kong. Some of those affected had already accepted settlement and recovered part of their investment money. The current proposal has a larger effect, seemingly between the banks and the investors who have not yet accepted settlement. No one would like to have any losses in their investments.

Now a chance to have the incident ended earlier has emerged. The vote on whether to accept it should be done with calm and thought.

Published in the SingTaoDaily

on March 28

Vocabulary

bundle (v) ———捆綁

topple (v) ———推翻

hurdle (n) ———障礙

revival (n) ———復甦

collateral (n) ———抵押品

liquidator (n) ———清盤人

mechanism (n) ———機制

receiver (n) ———接管人