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A group of investors including hedge-fund manager Paulson & Co. might file a competing reorganization plan for Lehman Brothers Holdings Inc. (LEHMQ) that would provide a better recovery to creditors of the original Lehman parent company while offering a smaller payout to some creditors of Lehman subsidiaries, according to a person familiar with the investors' thinking.
The plan could be filed as early as this week in the U.S. Bankruptcy Court in Manhattan, the person said, although it is possible the filing could come later or never be made at all.
The group, which calls itself the ad hoc group of Lehman Brothers creditors, counts among its members bondholders like hedge-fund managers Paulson and Perry Capital, as well as pension funds including the California Public Employees' Retirement System.
Together, the group of 10 members is owed some $9.5 billion from Lehman's holding company, plus $3 billion from other Lehman entities, according to the person familiar with the matter. Lehman is distributing about $57.5 billion in assets in its plan's current iteration.
Lehman's plan calls for senior bondholders to get about 17.4 cents on the dollar for their claims, while the creditors' plan would fetch them more.
Foreign creditors and others would see a drop in their recoveries. The person familiar with the competing plan said this is a "fairer" plan that would treat creditors more equally. A Paulson spokesman wouldn't comment. News of a possible competing plan was reported earlier by Bloomberg News.
The ad-hoc group back in June said in a bankruptcy-court filing that Lehman's plan to establish a "pot of assets" to pay back creditors was "seriously flawed," particularly in the way it handles intercompany claims between various Lehman businesses. That plan, they said, could allow for double recovery, or a "double-dip," for certain Lehman creditors.
In April, Lehman unveiled details of its plan to pay back creditors some of the estimated $1 trillion in claims filed against the investment bank in the largest bankruptcy case in U.S. history. Lehman Chief Executive Bryan Marsal, head of restructuring firm Alvarez & Marsal, said in September the company hopes to file an updated plan by the end of the year.
Marsal told Dow Jones in a statement e-mailed Tuesday, "We try to be thoughtful and listen to the position or concerns of each creditor constituency. In order to reduce the amount of in-court fighting among creditors and maximize our prospects for final plan approval, we have chosen to give the various parties a chance to plead their position."
He added, "Significant progress has been made on getting creditor consensus."
Marsal said in September that the argument for both breaking Lehman up and substantively consolidating it each had their "merits." While the argument that Lehman operated as one company is true, Marsal added that Lehman had many subsidiaries and 30 different comptrollers.
The original Lehman plan includes a number of intercompany settlements and actually constitutes 23 distinct Chapter 11 plans applying to each of the Lehman units in bankruptcy.
Allowed claims against a particular debtor will be paid from the assets of that debtor, with recoveries for unsecured creditors ranging from about 10 cents on the dollar to 44 cents.
That's a problem, according to the bondholder group, which says creditors of the parent company stand to fare better if the various Lehman units are treated as a single company, or substantively consolidated, for purposes of the Chapter 11 distribution. Many of the creditors of the subsidiary companies are big banks, which would see lower recoveries under the ad-hoc plan.
A person familiar with the group said back in June that Lehman's current plan doesn't offer enough of a compromise, and the plan works "at the expense of the bondholders of the parent."
Under the proposed Lehman plan, general unsecured creditors of its holding company can expect recoveries on their claims of 10.4% to 14.7%. Unsecured creditors of other Lehman units will do better. General unsecured creditors of the company's commercial paper unit can expect to recover between 29 cents and 44 cents on the dollar for their claims.
Unsecured creditors of Lehman's special finance unit, the heart of much of its derivatives business, can expect to recover somewhere between 22 cents to 24 cents on the dollar.
In June, after Lehman's exclusive right to file a plan has ended, the ad hoc group started considering filing a competing reorganization plan, said two people familiar with the group's thinking at that time.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Joseph Checkler, Dow Jones Newswires; 212-416-2152; firstname.lastname@example.org