Minibond Notes Frequently Asked Questions

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Frequently Asked Questions
Minibond Notes
Version 16 – 12.05.09

These FAQs have been compiled by HSBC Institutional Trust Services (Singapore) Limited (“HTSG”) for the information of holders of notes issued in Singapore under the secured note programme established by Minibond Limited. HTSG’s sole role with regard to the note programme is that of note trustee. In this role, HTSG is responsible for enforcing the rights of the noteholders under the programme in relation to any series of notes in respect of which an event of default occurs subject to and in accordance with the terms of the programme documentation. Whilst every endeavour has been made to ensure that the responses to these FAQs are reliable as at the date they are issued, no representations or warranties can be given regarding their accuracy or completeness. HTSG cannot and does not offer any form of financial or legal advice to noteholders and nothing herein should be construed as such. Noteholders may wish to seek independent professional advice with respect to their own positions.

Current Status :

- To manage the risks associated with the credit default protection provided by Minibond Limited to Lehman Brothers Special Financing Inc. (“LBSF”) under the credit default swaps, the swaps entered into by Minibond Limited with LBSF were terminated for all series. Similarly, for those series which are secured by underlying synthetic portfolio notes (series 1~3 and 5~8), the swaps entered into by the issuers of the underlying notes with LBSF were also terminated. Please refer to question 2 for further elaboration on the termination of the swaps. Receivers have been appointed for all series and are exploring the options available to them in seeking to unwind the notes. As noted in questions 13, 18 and 28, there are complex legal issues associated with this process arising from Lehman’s bankruptcy which means that the unwinding process could take considerable time. . Further updates will be provided at appropriate junctures.

- In the meantime, no coupons will be paid to noteholders of any series of Minibond notes. While there could be monies received periodically from the underlying securities for a minority of the series, as enforcement action has been taken, these sums will be retained by the Receivers and applied in accordance with the priority provisions in the programme documents including, to the extent necessary, funding the ongoing costs and expenses of the enforcement process in respect of the series to which they relate.

- We are unable to provide an update to noteholders on the progress made in the enforcement process at this time as our discussions with various parties are the subject of legal privilege and must be kept confidential for the time being.

- We will of course provide an update to noteholders as soon as we are able to.

Additional FAQs have been added in relation to the structure of notes, compensation scheme from the distributing banks as well as the filing of claims against Lehman Brothers Inc. Please refer to Part 5, 7 and 8.

Action Taken To Date, Notes Structure and Other Information

	Part 1 – Termination of swap arrangements at the underlying level for series 1 to 3 and 5 to 8
1.	Can you please confirm the reports that notices have been served to Lehman Brothers Special Financing Inc to terminate the credit default swaps entered with the synthetic portfolio notes issuers, Zircon Finance Limited / Beryl Finance Limited for series 1-3 and 5-8? Yes, termination notices have been served. Formal notification of this has been issued to noteholders of the relevant series.
2.	Why were the credit default swaps terminated for the underlying synthetic portfolio notes for series 1-3 and 5-8 The credit default swaps involved Minibond Limited (as noteholder at the underlying level) taking the credit risk of 135~150 reference entities under the relevant synthetic portfolio notes. Pursuant to the terms of each series of underlying notes, depending on the number of credit events which might occur under the related swaps, the principal amount of the underlying synthetic portfolio notes due to Minibond Limited could be eroded. In essence this would reduce the value of the collateral held by Minibond Limited for the relevant series of Minibond notes and as such the realisable value of the Minibond notes. Some of the reference entities had already been placed into receivership or had filed for bankruptcy. Given the current market conditions, and based on professional advice obtained by the trustee, it was felt that there was significant risk that the principal amount of the underlying synthetic portfolio notes could be eroded. Appropriate action was therefore taken by the trustee, in conjunction where necessary with other relevant parties, to arrange for termination notices to be served on the swap counterparty.
3.	Why were noteholders not consulted beforehand? The terms and conditions of the Minibond notes provide that at least 21 days' notice have to be given to noteholders in order to convene a noteholders' meeting. This would have subjected noteholders to a longer period of risk with possible principal erosion at the underlying level. The professional advice taken by the trustee recommended that steps be taken where practicable to eliminate this risk as soon as possible.
4.	Is there any payment required to be made to the swap counterparty, Lehman Brothers Special Financing Inc, in relation to the underlying synthetic portfolio notes? The close out values will take sometime to be determined. Payment of any resulting liabilities amounts should be subject to the terms of the underlying notes. This said, due in part to litigation risk at both the underlying and the Minibond level (please see question 18) it is not possible to say for the moment to what extent Lehman might seek to establish claims over any proceeds which can be realised from the structure.
5.	What will happen to the underlying collateral following the termination of the swaps? We have appointed three partners from PricewaterhouseCoopers LLP (PwC) as Receivers of Minibond Limited in respect of series 1~3 and 5~10 which are in default and they will determine the next course of action for those series of notes (that have defaulted) in relation to the underlying securities. This will depend on their overall assessment of the current position of the notes and could be influenced by factors beyond their control including considerations relating to gaining possession of the underlying collateral in question. It should be noted that for series 7 and 8, Minibond Limited is not the sole holder and in fact holds a minority of the underlying synthetic notes issued by the underlying note issuer. As Minibond Limited is a minority noteholder, the Receivers may not have any standing on their own to instruct the trustee of the underlying notes to commence enforcement actions at the underlying level. In any event, for all those series with underlying synthetic portfolio notes, enforcement action may be dependent on factors outside the control of the Receivers or the note trustee.
6.	Why have you taken actions to close out underlying swaps only for series 1- 3 and 5-8? What about series 9 and 10? Series 9 and 10 were not similarly exposed to the risk of erosion of principal at the underlying level due to credit events because they have no underlying swaps.
	Part 2 – Termination of swap arrangements at the Minibond level
7.	Can you please confirm the reports that notices have been served by the Receivers for series 1~3 and 5~10 to Lehman Brothers Special Financing Inc to terminate the credit default swaps entered with Minibond Limited for those series Yes, we are informed by the Receivers that they have served termination notices in respect of the swaps between Minibond Limited and Lehman Brothers Special Financing Inc with respect to theses defaulted series.
8.	Why were these swaps terminated? The swap arrangements entered into by Minibond Limited with Lehman Brothers Special Financing Inc for all Minibond series contain what is known as a “first to default” swap. Under the terms of this swap, if there is a default or other “credit event” on any one of the list of 6 or 7 reference names (again, the exact number and the names differs from one series to another), noteholders will lose some or all of their principal. In return, Minibond Limited received a higher return under the swap than it would have done if it had simply held the underlying securities and did not enter into the swap, and this was what generated the higher interest payments on the notes. Since Lehman Brothers Special Financing Inc had stopped making payments under the swaps due to the bankruptcy filing in the US this return was no longer being paid. In view of the market volatility with regard to the reference entities, the Receivers advised the trustee that there was a high risk of a credit event occurring and took action to control the risks for noteholders by terminating the top swaps. Further information on the termination of the swaps at the Minibond level and other issues concerning the Receivers can be accessed at www.sgnoteholders.com
	Part 3 - Potential Restructuring of the Notes
9.	Can you confirm the reports stating that any restructuring of the notes is not feasible for the time being? Yes, although draft proposals have been made by interested parties the Receivers, in consultation with the independent advisers appointed by MAS in relation to the restructuring proposals, have ruled out any restructuring for the time being due to the legal complexities which are likely to be encountered in unwinding the notes and seeking to obtain control of the ultimate underlying assets. See answers to questions 13 and 18 for further details.
10.	Does the appointment of Receivers rule out a restructuring in relation to all series which have now defaulted? The trustee has been advised that the possibility of a restructuring is not something which would be precluded by the appointment of Receivers. This said, as noted above, for the time being any restructuring has been ruled out.
	Part 4 – Default Status of the Notes and Enforcement Action
11.	Have any of the notes defaulted and, if so, which? Under the terms of each series of notes, there is a prescribed 15 day period for Minibond Limited to remedy any payment default which occurs. Payment default under a series of notes will therefore only become an event of default, entitling the trustee to take enforcement action on the relevant series if it continues for a period of 15 days or more. There was an interest payment due for series 5 and 6 on Monday 22 September, for series 7 and 8 on Friday 10 October 2008, for series 1 on 17 November 2008, for series 2 on 1 Dec 2008 and for series 3 on 2 Dec 2008. These were not paid. The grace periods have expired for these payments and they remain outstanding so an event of default has occurred in relation to series 1, 2, 3, 5, 6, 7 and 8 which allows the note trustee to take enforcement action on those series and in this regard it has appointed Receivers. For series 9 and 10, there was an interest payment due on 14 November 2008. This was not paid but a coupon payment was received from the underlying securities which were sufficient to make a partial interest payment and this has been paid to noteholders. As the payment only constituted part of the interest which was due and payable under the notes, there was still a payment default. The 15 day grace period for remedying this payment default has now expired and hence an event of default has now occurred for series 9 and 10. It was possible to make a partial interest payment for series 9 and 10 because the underlying securities are Wachovia bonds which are continuing to pay coupons. For series 1, 2, 3, 5, 6, 7 and 8 the underlying securities are Lehman arranged synthetic portfolio notes which have themselves gone into default. No coupons have therefore been paid up to Minibond Limited under them so no funds have been available to make any kind of interest payment.
12.	Has there been any payment default on the synthetic notes which underlie series 1, 2, 3, 5, 6, 7 and 8 of the Minibond notes? We understand payment events of default have occurred on the synthetic notes for all the series stated.
13.	How quickly will the note trustee take enforcement action? Once Receivers are appointed how long will the enforcement process take? As noted in the answer to question 11 above, action can 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. 15 days have passed since the payment default in respect of series 1~3 and 5~10 and we have now appointed Receivers for all these series to manage the enforcement process. It has become apparent that the process of unwinding the notes is going to be a difficult one for the Receivers. The legal documentation underpinning the notes consists of documents which are subject to the laws of various jurisdictions. The documentation at the Minibond level is governed by Singapore law but for those series with underlying synthetic portfolio notes (all series other than 9 and 10) the underlying documentation is governed by English law. In addition, Lehman Brothers Special Financing Inc (the swap counterparty at both levels) is facing bankruptcy proceedings in the US and Minibond Limited is a Cayman Islands company, so the Receivers potentially have four different legal jurisdictions in Singapore, England, the US and Cayman Islands to deal with, each with its own laws. Additionally it has now become clear that there is the real possibility of challenges being made by Lehman to the documentation and the steps which are necessary to unwind the notes which could result in prolonged litigation. See answer to question 18 for more information. All of this means the enforcement process is likely to take considerable time.
	Part 5(i) – Structure of the Notes (a) Overall Structure of Notes for all Series at Minibond Level
	Roles played by various Lehman entities at Minibond level (i) Arranger: Arranger for Series 1, 2, 3, 5, 6 - Lehman Brothers Inc Arranger for Series 7, 8, 9, 10 - Lehman Brothers Singapore Pte Ltd The role of the arranger involves, amongst others, structuring the note programme, coordinating with various parties in relation to the establishment of the programme and preparing the pricing statement and Base Prospectus. In this case, neither of the Lehman entities mentioned above is a contracting party in the swap transactions that Minibond Limited had entered into. (ii) Swap Counterparty Lehman Brothers Special Financing Inc is the swap counterparty in relation to all Minibond series. Depending on the series and tranches, there are currency and interest rates swaps as well as credit default swaps involved. Under the interest rate and currency leg of the swaps, Minibond Limited would have agreed to pay to Lehman Brothers Special Financing Inc. amounts received from the underlying securities acquired with the proceeds of the notes in return for payments from Lehman Special Financing Inc. of amounts necessary to generate the returns on the notes. Under the credit default swaps, Minibond Limited would have provided Lehman Brothers Special Financing Inc with credit default protection in respect of the reference entities for the relevant notes. (iii) Swap Guarantor Lehman Brothers Holding Inc is the guarantor for the swap transactions in relation all Minibond series. It is supposed to guarantee any payment obligations owed by Lehman Brothers Special Financing Inc to Minibond Limited under the swap transactions. The guarantee provided by Lehman Brothers Holdings Inc. is only in respect of the Swap Counterparty’s payments due under the swap transactions and not in respect of the Notes. (iv) Market Agent As market agent, Lehman Brothers International (Europe) was able to make a secondary market in the notes to allow investors to buy and sell the notes although they would not have been under any obligation to do this. (v) Calculation Agent As calculation agent, Lehman Brothers Asia Limited is supposed to determine and provide the calculation of amounts payable under the notes.
	(b) Overall Structure of Notes at Underlying Level for series 1,2,3,5,6,7 and 8 For Series 1, 2, 3, 5, 6, 7 and 8, the underlying synthetic portfolio notes purchased by Minibond Limited have a similar structure with that at the Minibond level. Beryl Finance Limited and Zircon Finance Limited, which are the issuers of the underlying synthetic portfolio notes purchased by Minibond Limited, are special purpose companies established to issue notes out of a multi-issuer notes programme arranged by Lehman Brothers International (Europe). Credit Default Swaps were entered into by the issuers of the underlying synthetic portfolio notes with Lehman Brothers Special Financing Inc and these swaps involved around 135 to 150 reference entities and are more complex than the swaps entered into at the Minibond level. As with the Minibond structure, Lehman Brothers Holdings Inc is the guarantor in respect of these swaps. For series 9 and 10, the collaterals purchased by Minibond Limited are notes issued by Wachovia Corporation. As mentioned under Question 6, there are no underlying swaps with respect to series 9 and 10.
	Part 5(ii) – Impact of Lehman Bankruptcy
14.	Who is liable for payments on the notes? The notes are issued by a company called Minibond Limited and it is this company that is liable for making payments on the notes. Minibond Limited is a special purpose company incorporated in the Cayman Islands with limited liability. The shares of Minibond Limited are held under a charitable trust.
15.	What is Lehman’s involvement in the notes? Various Lehman entities are involved in a number of capacities in relation to the notes including as arranger, swap counterparty, swap guarantor and market agent. Please refer to Part 5 for an elaboration on the roles played by the Lehman entities.
16.	How does the bankruptcy of Lehman Brothers Holdings Inc and Lehman Brothers Special Financing Inc affect the notes? Under the terms of each swap, the fact that Lehman Brothers Holdings Inc (as guarantor of the swap) and Lehman Brothers Special Financing Inc (as swap counterparty) have filed for bankruptcy in the United States gives Minibond Limited the right to elect to terminate the swap transactions at the Minibond level. Likewise for those series with underlying synthetic portfolio notes (series 1-3 and 5-8) it gives the issuer of those notes the right to terminate the swaps entered into in relation to them. As referred to in Parts 1 and 2, steps have been taken to terminate the swaps at the underlying level for all series with underlying synthetic portfolio notes and the swaps at the Minibond level for series 1~3 and 5~10. The bankruptcy proceedings have also led to events of default occurring on the Minibond notes themselves due to the fact payments from the swap counterparty under the swaps have been stopped. This has happened for all series. See answer to question 11 above for more detail.
17.	I received notice that Lehman had filed a motion in the United States courts regarding their derivative contracts, what does this mean? On 13 November 2008, Lehman Brothers Holdings Inc. and its affiliated debtors in chapter 11 proceedings in New York filed a motion seeking an order that would (a) allow them to assume, sell and assign executory, derivative contracts that have not yet been terminated and (b) permit them to enter into settlement agreements with counterparties under terminated derivative contracts without further approval from the United States courts. For each series of the Minibond notes, Minibond Limited entered into swap agreements with Lehman Brothers Special Financing Inc. For those series with underlying synthetic portfolio notes, swap agreements were also entered into by the issuer of the underlying notes with Lehman Brothers Special Financing Inc. The United States courts granted an order pursuant to the above motion on 16 December 2008. Accordingly Lehman Brothers Special Financing Inc. will now be allowed, as a matter of United States law, to transfer any open swaps to third parties who wish to acquire them without the need to seek the consent of the swap counterparty and settle close out amounts for all swaps which have been terminated where they disagree with the amounts calculated by the counterparty. The swap agreements entered into in connection with the Minibond notes are governed by Singapore law and are subject to the exclusive jurisdiction of the Singapore courts. The trustee understands from its legal advisers that it is highly unlikely that the unilateral transfer of swaps (under any order made pursuant to the motion referred to above) by Lehman Brothers Special Financing Inc without consent from Minibond Limited, would be recognised and enforced as a matter of Singapore law. In any event, as referred to in Parts 1 and 2 above, notices have been served to terminate the swaps at both the underlying level and the Minibond level. The order is therefore of limited relevance to the Minibond notes.
18.	Can you confirm that the note trustee has received a notice from the lawyers of Lehman Brothers? What does it say and what are the implications? Yes, we have received a communication from Lehman's' lawyers in the US which indicates, as a result of the Lehman bankruptcy, there could be legal challenges on behalf of Lehman relating to the documentation and the actions which need to be taken to unwind the notes both at the Minibond level and for those series in respect of which the underlying securities are underlying synthetic notes at the underlying level as well. This raises the possibility of prolonged litigation as part of the process which has to be taken by the Receivers to unwind the notes. We cannot comment further at this stage other than to say that the contingent litigation risk makes it impossible for the Receivers to give any kind of estimate of what value may ultimately be realised for noteholders and means that the overall process could take a considerable time. Series 9 and 10 will face a less complicated process compared to the other series, as the underlying securities for these notes are corporate bonds and have no swaps. This means the ultimate collateral is more readily accessible to the Receivers and there are fewer aspects of the unwinding process which might be subject to being challenged by Lehman. Accordingly, the process may be somewhat shorter than for the other series.
19.	Are the notes principal protected and, if not, what is the recourse of the noteholders? The notes are not principal protected. The claims of the noteholders against Minibond Limited are restricted in all circumstances to the value which can be realised from the underlying securities. Under the terms of each series of notes any costs incurred by Minibond Limited in unwinding the swaps, including amounts owed to the swap counterparty (Lehman Brothers Special Financing Inc.) under the swaps, will take priority to noteholders’ claims against such proceeds as will all the costs of enforcement.
20.	What are the underlying securities for each series of notes? For series 1, 2, 3, 7 and 8 the underlying securities are Lehman arranged synthetic portfolio notes issued by Beryl Finance Limited. For series 5 and 6 the underlying securities are Lehman arranged synthetic portfolio notes issued by Zircon Finance Limited. For series 9 and 10 the underlying securities are floating rate notes issued by Wachovia Corporation. .
21.	For those notes in relation to which the underlying securities comprise synthetic notes, do you have any information on the assets underlying those notes? As referred to in part 1, the swaps associated with these synthetic notes have been terminated. Information on the assets underlying those notes has been provided to noteholders of each respective series in our notice of 13 January 2009
22.	What is the trustee’s role in the receivership process? Where the trustee has appointed Receivers, the enforcement process will be managed by the Receivers.
23.	What is the role of the Receivers? The Receivers have full power to manage the realisation process. Their role and duty is to safeguard the interests of noteholders throughout the process and to providean independent and objective assessment of all viable options. They will consult closely with the trustee and both parties will have due regard to the interests of the noteholders at all times.
24.	How can noteholders be assured that any eventual sale of the underlying assets will be at a reasonable price favourable to noteholders? The Receivers will be managing the enforcement process and will take into consideration a variety of factors, including the prevailing market conditions in relation to the underlying securities and collateral.
25.	Is there any further information available in relation to the Receivers? Further information on the termination of the swaps at the Minibond level and other issues concerning the Receivers can be accessed at www.sgnoteholders.com
	Part 6 - Possibility of Redemptions and Sales and Value of the Notes
26.	Can I redeem or sell the notes now? The notes do not include terms which provide the noteholders with an option to redeem early. You may also have difficulties selling the notes as there may not currently be a liquid trading market. You will need to contact the distributor from whom you purchased the notes for advice on this.
27.	If I am offered a price for my notes should I sell at a discount? As trustee of the notes we cannot provide financial or investment advice to noteholders. Valuing the securities underlying the notes and any costs associated with unwinding the swap transactions would be a complex task in ordinary circumstances and for the reasons outlined in the answer to question 18 it is presently impossible to do so. If you are considering trying to dispose of your notes as an option we strongly suggest you seek advice from a financial adviser.
28.	Since the swap structures have been or are likely to be unwound, does it mean the noteholders will be getting some of their investments back? If so what recovery amounts are expected and when will it be given to the noteholders? We are informed by the Receivers that the extent to which the noteholders’ investments can and will be recovered cannot yet be established. The ability of the Receivers to realise any value for the noteholders could be influenced by a multitude of factors beyond their control including the possibility of legal challenges being made by Lehman in relation to the actions which need to be taken to unwind the notes. For these reasons the Receivers cannot put a value on the notes for the time being and it could be some significant time before they are able to do so. In the meantime noteholders should not conclude that the notes are worthless nor should they assume that any value which does exist in the ultimate collateral can automatically be realised and the proceeds made available to noteholders. The trustee and the Receivers are working closely with their legal advisers to safeguard the interests of the noteholders.
29.	What should I do now with regard to my notes? As trustee of the notes we are not in a position to provide financial or investment advice to noteholders. Noteholders would need to obtain independent professional advice in this regard.
	Part 7 – Compensation to noteholders by the distributing banks
30.	Is HTSG involved in the compensation scheme? Can HTSG review or influence the decision on the amount of compensation to be received by individual noteholder? HTSG was not involved in the distribution or sale of the notes. Our sole role in this transaction is that of a trustee to the noteholders. As such, we are not in a position to review or decide on issues of reimbursement or compensation. You should approach your distributing bank on this matter and present your case to them. Please also see the MAS’s 3-step guide which can be accessed at: http://www.mas.gov.sg/consumer/structured_products/fidrec_3_step_process.html.
	Part 8 – Filing of claims against Lehman Brothers Inc ("LBI")
31.	What is LBI’s involvement in the Minibond notes? LBI is the arranger for Minibond Series 1,2,3,5 and 6. As arranger, LBI would have been responsible for, among others, structuring these series and preparing the pricing statements for them. Please refer to Part 5 for information on the role played by arrangers. As far as we are aware, LBI does not play any role in the Minibond Programme other than as arranger with respect to Minibond Series 1, 2, 3, 5 and 6 only.
32.	What is this filing requirement? The United States Bankruptcy Court for the Southern District of New York had established a deadline of 1 June 2009 for creditors to file claims against LBI. According to LBI’s trustee in bankruptcy appointed by the U.S. Bankruptcy Court under the Securities Investor Protection Act of 1970, as amended ("SIPA"), creditors who do not file a claim by this date will generally be unable to share in any distribution made by LBI’s court appointed trustee and will be barred from taking any legal action against LBI. From the website, www.lehmantrustee.com, LBI is the only Lehman entity that is involved in this SIPA liquidation proceeding.
33.	Is HTSG filing any claims on behalf of noteholders? HTSG will not be filing any proof of claims in relation to the LBI bankruptcy proceedings as we have received legal advice that there is no contractual basis upon which we, as note trustee, could file any claim against LBI. Our role as Note Trustee is, after an event of default has occured, to enforce rights over the mortgaged property to obtain payment due to noteholders by the issuer of the Notes, Minibond Limited. Our role is therefore to realise the residual value of the Notes. The rights and powers of the Note Trustee are spelled out in the various legal documents entered between us and Minibond Limited as well as by the terms and conditions of the Minibond Notes. These do not include taking action against LBI, who is not a party to these legal documents and does not owe any obligations to us. We are therefore unable to take any action against LBI. The receivers have been actively working with us in assessing and dealing with the various issues involved in unwinding the structures. As previously notified to noteholders, this process involves a number of complex legal issues across various jurisdictions and may take a considerable amount of time.
34.	Can and should noteholders file any claims with LBI? We are not licensed to provide legal or any other advice. Noteholders may wish to obtain legal advice about the possible courses of action.
35.	Where can noteholders find more information? We understand from LBI's court-appointed trustee that further information on the claims process can be found at www.lehmantrustee.com. The forms for filing the claims are also available at the same website. Alternatively, electronic filing of the claims can be done via the same website. It is also mentioned on the above website that enquiries relating to the claims proceedings can be directed to the following numbers: US: (866) 841-7868 Non-US: (503) 597-7690 Noteholders may also visit the website of the Securities Investors Association (Singapore) at www.sias.org.sg for more information.
	Part 9 – Communications from the Note Trustee and Information
36.	When will the note trustee communicate with noteholders again? We will inform relevant noteholders as and when there is any material information to communicate in relation to any enforcement action. We will also update these FAQs to the extent practicable following any further material developments.
37.	Where can I obtain copies of the base prospectus and pricing statements for the notes? Please refer to the distributor from whom you acquired the notes.
38.	Who can I contact if I need to find out more about these notes? We have provided a helpline no. +65 6216 7449, from 9.00am to 5.00pm on weekdays.