MF Global Holdings Ltd. (MFGLQ) bankruptcy trustee Louis Freeh struck a deal with J.P. Morgan Chase & Co. (JPM) in their dispute over more than $900 million in intercompany claims, removing one of the key roadblocks to the holding company's Chapter 11 liquidation plan.
Under the settlement, some $275 million of the more than $1.8 billion that MF Global's holding company says a company finance subsidiary owes it will be subordinated, that is ranked below the $1.2 billion owed to a lending group led by J.P. Morgan.
"The settlement is in the best interest of creditors (as) it removes a major hurdle to confirmation of the plan," said Mr. Freeh in a statement Tuesday.
The bank had opposed MF Global's Chapter 11 plan, saying it improperly characterized $928 million the holding company loaned to a subsidiary--the financing arm of the brokerage called MF Global Finance USA Inc.--in the days before the bankruptcy.
A group of hedge funds that own about two-thirds of MF Global's unsecured debt have put forward a Chapter 11 plan that's backed by Mr. Freeh. Under that plan, general unsecured creditors of the holding company were to recover 13 cents to 39 cent on the dollar for the claims.
Unsecured creditors of the finance subsidiary were to recover between 14 cents and 34 cents on the dollar under the plan.
Whether the deal will boost the recoveries for unsecured creditors of the financing arm subsidiary remains to be seen. Mr. Freeh's team said the settlement will result in "a slightly modified distribution range" for unsecured creditors of the holding company.
A representative for Mr. Freeh couldn't be reached for comment. A J.P. Morgan spokeswoman wasn't available for comment.
The plan filed by the hedge funds proposes to pay back creditors of MF Global's general estate within a year and could restore the accounts of brokerage customers to 100% within months.
Unlike the brokerage's customers, the holding company's creditors aren't expected to recover every cent of their money.
Mr. Freeh, a former director of the Federal Bureau of Investigation who is overseeing the holding company's Chapter 11 case, joined the hedge funds last month in calling for approval of the liquidation plan.
Judge Martin Glenn is set to consider approval of the plan at an April 5 confirmation hearing in U.S. Bankruptcy Court in Manhattan.
The holding company's bankruptcy is being administered separately from the liquidation of MF Global's main broker-dealer business. That estate is being wound down by James W. Giddens under the Securities Investor Protection Act, which governs the liquidation of failed brokerage firms.
Late last year, Mr. Freeh, Mr. Giddens and a third official liquidating MF Global's U.K. arm struck a wide-ranging deal designed to get customers their money back more quickly and settle disputes among themselves.
Individual customers of MF Global's broker-dealer have received most of their money back through a series of bulk transfers initiated by Mr. Giddens and approved by the court.
MF Global was led by Jon Corzine, a former co-chairman of Goldman Sachs who later became a U.S. senator and then governor of New Jersey. The firm collapsed in October 2011 when customers panicked over the New York firm's large bets on European debt. Its collapse into bankruptcy exposed a $1.6 billion shortfall in U.S. customer accounts.
MF Global "s top executives, including Mr. Corzine, have denied any wrongdoing in connection with that shortfall. While investors have filed a number of civil suits against the firm's top brass, no one has been charged with criminal wrongdoing.
Write to Patrick Fitzgerald at [email protected] Follow him on Twitter @WSJBankruptcy
Subscribe to WSJ: http://online.wsj.com?mod=djnwires