Minibond Notes Announcement and Frequently Asked Questions

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Minibond Notes- Announcement and Frequently Asked Questions

Update (24 February 2010):

1.	What is the authority on which the Trustee acted to liquidate the above Notes? The Trustee has wide powers of enforcement of the collateral underlying the Minibond Notes. These powers are set out in the Trust Deed which, insofar as it relates to them, binds noteholders as well. The Trust Deed also provides that only the Trustee may pursue the remedies available under the Trust Deed to enforce the rights of noteholders. In particular, the Trustee may at its discretion sell, call in, collect and convert the security into money in such manner as it thinks fit. The Trustee may also appoint receivers to manage the enforcement process. Such discretionary powers accorded to the Trustee under the Trust Deed entitled the Trustee to enter into a negotiated settlement with LBSF (to whom payments had to be made) in order to gain access over the security to be liquidated for noteholders’ benefit. In exercising its powers, the Trustee has at all times acted in the interest of the noteholders. The Receivers (appointed by the Trustee to manage the enforcement process) had, after due consideration to the relevant factors, recommended that a settlement with the swap counterparty was in the best interests of noteholders. The Trustee is satisfied that the Receivers had considered the alternatives to a settlement and that the Receivers’ recommendation to accept the settlement with LBSF is the optimal option available under the circumstances and in the best interest of noteholders. Please also see our response to question 43 of our full FAQs for further elaboration on the role of the Trustee in the settlement process.
2.	Why did the Trustee not call for a meeting of the Noteholders to discuss the above action? As with most settlement negotiations, confidentiality is of utmost importance. Given this, it was not practicable for Noteholders to be consulted on the settlement and indeed, to do so could have prejudiced noteholders' interest given the sensitivity of the negotiations. Please also see our response to questions 39 and 40 of our full FAQs which are important factors to note in relation to the settlement with LBSF.
3a.	Who decided on the fee to be paid to LBSF? The payment to LBSF was not a “fee” but represented the payment to which LBSF was entitled arising from the termination of the “first to default” swaps in the Minibond notes. The Minibond notes contained “first to default” swaps. If there is a default or other “credit event” on any one of the list of 6 or 7 reference names (the exact number and the names differs from one series to another), Minibond noteholders will stand to lose some or all of their principal. At the time the notes of each series defaulted (between mid-September to mid-December 2008), there was high market volatility and uncertainty with regard to the viability of the reference entities as a consequence of the global financial crisis. Furthermore, as LBSF had filed for bankruptcy, noteholders had stopped receiving payments from LBSF and were thus not being compensated for assuming the risk of a credit event. Given the heightened market volatility, the Receivers took action to terminate the swaps between Minibond Ltd and LBSF so as to minimise existing risks for the noteholders and to safeguard the interests of noteholders. LBSF was contractually entitled to a payment on the “first to default” swaps as they were “in the money” at relevant time of termination of the swaps. Under the programme documents, this payment would have had to be made in any event whether there was a settlement or not. The settlement sum was the subject of negotiation between the Receivers and LBSF whereby the swap payment quantum was fixed. Several factors influenced the swap settlement amount paid to LBSF pursuant to the negotiated settlement including, among other things, the maturity profiles, reference entities of each Minibond note series / tranche, and the point in time at which the swaps were terminated. Typically, the longer the maturity profile, the greater the market volatility of the reference entities at the point of termination, the higher the swap settlement amount payable.
3b.	How is the payment of this fee in the interest of the Noteholders? This is addressed in our response to questions 39 and 40 of our full FAQs which are important factors to note in relation to the settlement with LBSF. Please also see our explanation of the structure of the Minibond note programme at part 5i of our full FAQs which would be helpful in understanding the following paragraphs of this answer. It is important to note that as the “first to default” swaps were in the money for LBSF at the time of termination, LBSF was contractually entitled to receive a payment. This is pursuant to the programme documentation following the termination of the swap and is an inherent feature of the Minibond notes. Regardless of whether a negotiated settlement had been entered into with LBSF, LBSF would have been contractually entitled to the payment. As explained at question 40 of our full FAQs, we needed to gain access to the underlying collateral in order to recover any value for noteholders on their notes. Without a negotiated settlement under which LBSF waived its rights to challenge the unwinding of the Minibond Notes, the Receivers would have had to overcome numerous challenges involving various jurisdictions in order to gain access to the underlying collateral and there was no certainty as to when such process could be completed. In addition, any steps taken by the Receivers to unwind the Minibond Notes would have been open to the risk of legal challenge from LBSF. In the event of such a legal challenge, the unwinding process would have had to come to a standstill pending the resolution of the legal issues. Moreover, the litigation process would be lengthy and more costly compared to a settlement and carries with it the risk of an adverse outcome for Noteholders. If LBSF succeeds in their action, it is likely that Noteholders would not recover any value on their notes. Even if the Receivers were to succeed in the legal action against Lehman Brothers, there was no certainty that a better or significantly better recovery could be achieved compared with a negotiated settlement. The litigation costs and the accrual of interest on any funds payable to LBSF would have eroded any recovery payment obtained for Noteholders. The negotiated settlement with LBSF was judged by the Receivers and the Trustee to be in the best interest of the noteholders as it enabled the Receivers to gain access to the underlying collateral and return the recovery value of the notes to the noteholders. It should be noted that in a very recent development in the US, the US Bankruptcy Court has, with respect to an action involving LBSF in another structured notes programme, ruled in favour of LBSF.
4.	As a Noteholder, am I legally bound to accept the action that you have taken to liquidate the Notes without my approval? As explained above, the Trustee has wide powers of enforcement of the collateral underlying the Minibond Notes. These powers are set out in the Trust Deed which, insofar as it relates to them, binds noteholders as well. The Trust Deed also provides that only the Trustee may pursue the remedies available under the Trust Deed to enforce the rights of noteholders. In particular, the Trustee may at its discretion sell, call in, collect and convert the security into money in such manner as it thinks fit. The Trustee may also appoint receivers to manage the enforcement process. Such discretionary powers accorded to the Trustee under the Trust Deed entitled the Trustee to enter into a negotiated settlement with LBSF (to whom payments had to be made) in order to gain access over the security to be liquidated for noteholders’ benefit. As with most settlement negotiations, confidentiality is of utmost importance. Given this, it was not practicable for Noteholders to be consulted on the settlement and indeed, to do so could have prejudiced noteholders' interest given the sensitivity of the negotiations. In exercising its powers, the Trustee has at all times acted in the interest of the noteholders.

Update (18 February 2010): The Receivers have added a Question 7 to their FAQs in providing further information to noteholders on the swap termination and valuation and related issues which would be of interest to noteholders. This additional information can be accessed at the Receivers’ website at www.sgnoteholders.com.

On 1 October 2009, the Trustee had informed noteholders that it had reached a settlement with Lehman Brothers Special Financing Inc., (“LBSF”) on the amounts payable to LBSF under the swap transactions entered into between Minibond Limited and LBSF (for each series) pursuant to the Minibond Programme in September 2009.

We are pleased to inform noteholders we are in a position to make a final distribution of the recovery amounts to noteholders. Since October 2009, the Receivers have liquidated the underlying collateral securing Series 1~3 and 5~10 and have calculated the amount due to noteholders after having made the requisite payments to LBSF and deductions in relation to costs and expenses incurred at both the underlying level and at the Minibond level.

Holders of the relevant series of Minibond notes will receive a final payout based on the recovery rate stated in the following table. The level of payout depends on the liquidity and value of the underlying collateral and the maturity profile, currency denomination and reference entities of each particular Series/Tranche held. Holders of the relevant Series/Tranche will be provided with more information on the payout relevant to the series notes they hold by post.

Recovery Rates Table

Series	*Percentage Recovery (%)**
Series 01 Tranche A (SGD Notes )	21.5497216
Series 01 Tranche B (USD Notes)	23.9958356
Series 02 Tranche A (SGD Notes)	62.3641773
Series 02 Tranche B (USD Notes)	70.7894711
Series 03 Tranche A (SGD Notes)	55.8674715
Series 03 Tranche B (USD Notes)	63.9643854
Series 03 Tranche C (AUD Notes)	47.3194817
Series 05 (SGD Notes)	29.8492109
Series 06 (SGD Notes)	39.9802810
Series 07 (SGD Notes)	59.4824264
Series 08 (USD Notes)	63.0772345
Series 09 (SGD Notes)	57.6942681
Series 10 (USD Notes)	62.4341883

The Trustee has informed The Central Depository (Pte) Limited ("CDP") to make payments to the noteholders on 12 February 2010. The actual date that you receive your payment will depend on whether you hold a direct account with CDP or whether you hold the Notes through a nominee account. Payment will be made to noteholders whose names are registered in the records of CDP as of 5 February 2010.

Specific FAQs in relation to the final distribution are found below. Our full FAQs in relation to the Programme can be accessed here. Further information on the payout can also be accessed at the Receivers’ website: www.sgnoteholders.com

1.	How much and when would noteholders be receiving the recovery amounts? Noteholders will receive information which explains the level of recovery for each Series and Tranche and on the payments made prior to the payout to them. This information, which differs from series to series, will be sent by post to individual noteholders. The amount which you will receive constitutes a final distribution of the proceeds which we, in our capacity as Trustee, have received from the Receivers pursuant to the enforcement process and accordingly, this constitutes a final payout in respect of the Minibond notes held by you. The Minibond notes will be cancelled upon the crediting of the Distribution Proceeds and the Minibond Programme in Singapore will thereafter be wound up. Details on this as well as further questions in relation to the payment to noteholders can be found at the Receivers’ website at www.sgnoteholders.com.
2.	How can noteholders be assured that the sale of the underlying assets was at a reasonable price favourable to noteholders? The Receivers had management of the enforcement and realisation process and had, where practicable, taken into consideration a variety of factors, including the prevailing market conditions in relation to the underlying collateral. It is important to note that the disposal proceeds differ for each Series/Tranche of the Minibond notes as the nature, liquidity and value of the underlying collateral as well as the maturity profile, currency denomination and reference entities are different for each Series/Tranche. The collateral in the different series vary in marketability and are affected in varying degrees by the financial crisis. The value of the collateral for each series at the point of disposal depends very much on the corporate performance of the collateral issuer and the market condition then. Each series is distinct from other series and for the foregoing reasons, the recovery for each series is different from other series. The differing maturity profile for each series is a factor in determining the amount recoverable for each series. These factors influence the market value of the underlying collateral at the time of disposal over which the Receivers have no control. The Receivers have been monitoring the price movements of the underlying collateral from publicly available sources and as stated on the Receivers’ website, the underlying collateral was liquidated at acceptable prices within reasonable range of prices obtained from publicly available sources. The Trustee is satisfied that all necessary due diligence has been performed and actions taken to secure the best outcome for investors under the circumstances. Noteholders of the relevant series / Tranche will receive more information on the proceeds arising from the sale of the underlying collateral by post.
3.	Will receiving the recovery amounts affect legal actions taken by noteholders? We are unable to provide legal advice and noteholders are advised to seek appropriate legal advice on these matters.
4.	You have mentioned that certain costs and expenses have been deducted from the liquidation proceeds. What are these? Other claims which take priority over noteholders’ claims in line with the legal documents governing the Minibond Programme and the synthetic portfolio notes underlying the relevant Minibond series, include fees of various service providers, expenses incurred in the liquidation process by the Receivers and the Trustee and expenses incurred by the trustee of the underlying securities, BNY Corporate Trustee Services Limited. The costs and expenses have also been paid and the Receivers have informed us of the net payout due to noteholders. Individual noteholders will be receiving information on these payments and the quantum of the payout by a letter from the Trustee.The Trustee is satisfied that the costs and expenses have been properly incurred.
5.	Why has the enforcement process taken just over a year since Lehman filed for Chapter 11 bankruptcy protection? Action could only be taken by us to enforce following a payment default which continues for 15 days or more or the occurrence of some other event of default. After a grace period of 15 days had passed since the payment default in respect of Series 1~3 and 5~10, we had appointed Receivers for all these series to manage the enforcement process. Apart from taking advice on the many issues which have been thrown up by the extraordinary event behind the default of the Minibond notes and analyzing the options available in the enforcement process, the Receivers were also engaged in negotiations with LBSF. An agreement was reached in September 2009. Thereafter, the Receivers had to ensure that the liquidation process in relation to the underlying collateral was done smoothly and at a speed where the price of the collateral being sold would not have been impaired. This has been done and the Receivers have made payment of the amounts due to LBSF. In connection with the time taken, it should be noted that without a settlement with LBSF, the next alternative open to noteholders was litigation involving LBSF in various jurisdictions which would have taken certainly more time as well as incur substantial costs, and a risk of erosion of recovery amounts due to accruing interest on the amount due to LBSF. Even if the Receivers were to succeed in the legal action against Lehman Brothers, there was no certainty that a better or significantly better recovery could be achieved compared with a negotiated settlement. The litigation costs and the accrual of interest on any funds payable to LBSF would have eroded any recovery payment obtained for Noteholders. Click here for the complete version of Minibond Notes Frequently Asked Questions.