Frequently Asked Questions 
Minibond Notes
Version 19 – 03.02.10

These FAQs have been compiled by HSBC Institutional Trust Services (Singapore) Limited ("the Trustee") for the information of holders of notes issued in Singapore under the secured note programme established by Minibond Limited. The Trustee’s sole role with regard to the note programme is that of note trustee. In this role, the Trustee 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. The Trustee 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 :

Since reaching 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, the Receivers have liquidated the underlying collateral securing Series 1~3 and 5~10. They 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 )
21.5
Series 01 Tranche B (USD Notes)
24.0
Series 02 Tranche A (SGD Notes)
62.4
Series 02 Tranche B (USD Notes)
70.8
Series 03 Tranche A (SGD Notes)
55.9
Series 03 Tranche B (USD Notes)
64.0
Series 03 Tranche C (AUD Notes)
47.3
Series 05 (SGD Notes)
29.8
Series 06 (SGD Notes)
40.0
Series 07 (SGD Notes)
59.5
Series 08 (USD Notes)
63.1
Series 09 (SGD Notes)
57.7
Series 10 (USD Notes)
62.4
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.

FAQs in relation to this are found in Part 10 below. Further information on the payout can also be assessed at the `Receivers' website -: www.sgnoteholders.com.

Action Taken, 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 were served on LBSF to terminate the credit default swaps entered with the synthetic portfolio notes issuers, Zircon Finance Limited (“Zircon”) / Beryl Finance Limited (“Beryl”) for Series 1-3 and 5-8?

Yes, termination notices in relation to the credit default swaps entered into by Zircon / Beryl and LBSF (“the Underlying Swaps”) were served in November 2008. Formal notification of this has been issued to noteholders of the relevant series.
2. Why were the Underlying Swaps terminated for the underlying synthetic portfolio notes for Series 1-3 and 5-8?

The Underlying 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 market conditions at the material time, 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 LBSF.
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, LBSF, in relation to the underlying synthetic portfolio notes?

The Underlying Swaps were terminated at a time when there was a high risk of credit default by the reference entities.

Based on the assessment made by professional advisers engaged by the Receivers on the valuation of the swaps, LBSF is the party which is in the money in respect of the Underlying Swaps, i.e. an amount is payable to LBSF in respect of such swaps upon their termination.
5. What will happen to the underlying collateral following the termination of the underlying swaps?

As set out at the beginning of these FAQs, the underlying collateral has been liquidated by the Receivers in respect of Series 1~3 and 5~8. Further information on the Receivers’ considerations prior to settlement with LBSF, which was a necessary precursor to the liquidation of the underlying collateral, can be found at Section 10 of these FAQs below.
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 were served by the Receivers for Series 1~3 and 5~10 to LBSF to terminate the credit default swaps entered with Minibond Limited for those series?

Yes, the Receivers had served termination notices in respect of the swaps between Minibond Limited and LBSF (“the Minibond Swaps”) with respect to these defaulted series in November 2008.
8. Why were these swaps terminated?

The swap arrangements entered into by Minibond Limited with LBSF for all Minibond series contain what is known as a “first to default” swap. Under the terms of the Minibond Swaps, if there is a default or other “credit event” on any one of a 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 Minibond Swaps than it would have done if it had simply held the underlying securities and did not enter into the Minibond Swaps, and this was what generated the higher interest payments on the notes.

Since LBSF had stopped making payments under the Minibond Swaps due to its Chapter 11 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 Minibond 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
9. Is there any payment required to be made to the swap counterparty, LBSF, in relation to the Minibond notes?

Based on the assessments made at the material time by professional advisers engaged by the Receivers on the valuation of the Minibond Swaps, LBSF is the party which is in the money in respect of the Minibond Swaps, i.e. an amount was payable to LBSF by Minibond Limited in respect of the Minibond Swaps upon their termination. This payment has been addressed and resolved in the settlement reached in September 2009 with LBSF.
Part 3 - Potential Restructuring of the Notes
10. Can you confirm the reports stating that any restructuring of the notes is not feasible for the time being?

The Receivers have, after careful consideration, advised us that they have ruled out any restructuring due to the legal complexities which are likely to be encountered in unwinding the notes (which have already defaulted) and in seeking to obtain control of the ultimate underlying assets. Please refer to the response to question 44 for further elaboration on the legal complexities involved in unwinding the notes.

For the reasons set out in question 45, we have been advised that a settlement with LBSF is the optimal option available under the circumstances.
11. Does the appointment of Receivers rule out a restructuring in relation to all series which have now defaulted?

While the possibility of restructuring is not something which would be precluded by the appointment of Receivers, the Receivers have concluded that this is not a viable option.

For the reasons set out in question 40, we have been advised that a settlement with LBSF is the optimal option available under the circumstances.
Part 4 – Default Status of the Notes and Enforcement Action
12. 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 2008, for Series 7 and 8 on Friday 10 October 2008, for Series 1 on 17 November 2008, for Series 2 on 1 December 2008 and for Series 3 on 2 December 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 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 then to make a partial interest payment for Series 9 and 10 because the underlying securities are Wachovia bonds which had continued 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.
13. 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.

For the latest developments in the enforcement process, please refer to Part 10 of these FAQs.
Part 5(i) – Structure of the Notes

(a) Overall Structure of Notes for all Series at Minibond Level

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. ("LBI")
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., (LBSF) 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 Minibond Swaps, Minibond Limited would have agreed to pay to LBSF amounts received from the underlying securities acquired with the proceeds of the notes in return for payments from LBSF of amounts necessary to generate the returns on the notes.

Under the 'first-to-default' component of the Minibond Swaps, Minibond Limited would have provided LBSF with credit default protection in respect of the reference entities for the relevant notes.

(iii) Swap Guarantor
Lehman Brothers Holding Inc. ("LBHI") is the guarantor for the swap transactions in relation all Minibond series. It is supposed to guarantee any payment obligations owed by LBSF 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
Overall structure of Notes at Underlying level for series v


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 and Zircon, 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 Beryl and Zircon with LBSF (i.e., the Underlying Swaps) and these swaps involved around 135 to 150 reference entities and are more complex than the Minibond Swaps. As with the Minibond structure, LBHI is the swap guarantor in respect of the Underlying 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 LBHI and LBSF affect the notes?

Under the terms of each swap, the fact that LBHI (as swap guarantor) and LBSF (as swap counterparty) have filed for bankruptcy protection in the United States Bankruptcy Court 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 Underlying Swaps for all series with underlying synthetic portfolio notes and the Minibond Swaps.

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 12 above for details.
17. 17. I received notice that Lehman Brothers entities had filed a motion in the United States courts regarding their derivative contracts. What does this mean?

On 13 November 2008, LBHI and its affiliated debtors in Chapter 11 proceedings in New York (which includes LBSF) 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.

The United States courts granted an order pursuant to the above motion on 16 December 2008. Accordingly, LBSF was allowed, as a matter of United States law, to transfer any open swaps to third parties who wished 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 Minibond Swaps are governed by Singapore law and are subject to the exclusive jurisdiction of the Singapore courts. The Trustee was advised that it is highly unlikely that the unilateral transfer of the Minibond Swaps (under any order made pursuant to the motion referred to above) by LBSF 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 Trustee has received a notice from the lawyers of Lehman Brothers? What does it say and what are the implications?

Yes, we had received a communication from Lehman’s lawyers in the US which indicated, as a result of the Lehman bankruptcy, that 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 synthetic notes at the underlying level as well.

This raised the possibility of prolonged litigation as part of the process which potentially had to be taken by the Receivers to unwind the notes since any step taken by the Receivers to unwind the notes would be open to the risk of legal challenge from LBSF. However, the significance of the settlement which the Receivers have reached with LBSF is that LBSF has waived its rights to challenge the unwinding of the Minibond notes.

Please refer to Part 10 for further elaboration on the settlement reached with LBSF.
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 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?

As 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 enforcement and realisation process. Their role and duty include providing an independent and objective assessment of all viable options. The Receivers have sought the views of the Trustee regularly during the enforcement process.
24. 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
25. Can I redeem or sell the notes now?

The notes will be cancelled once noteholders are credited the final payout amounts due to them. You should contact the distributor from whom you purchased the notes for advice on this.
26. 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 should obtain independent professional advice in this regard.
Part 7 - Compensation to noteholders by the distributing banks
27. Is the Trustee involved in the compensation scheme? Can the Trustee review or influence the decision on the amount of compensation to be received by individual noteholder?

The Trustee was not involved in the distribution or sale of the notes. Our sole role in this transaction is that of a trustee of the mortgaged property for 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 entities
Lehman Brothers Inc.
28. 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.
29. What is this filing requirement in relation to LBI?

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.
30. Is the Trustee filing any claims on behalf of noteholders against LBI?

The Trustee will not be filing any proof of claims in relation to the LBI bankruptcy proceedings. This is because we are advised 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 in relation to the notes has occurred, to enforce rights over the mortgaged property securing the Notes in obtaining 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 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 not in a position to make a claim against LBI.
31. 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.
32. Where can noteholders find more information on the claim process relating to LBI?

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.
Lehman Brothers Holding Inc. and Lehman Brothers Special Financing Inc.
33. What is this filing requirement in relation to LBHI?

LBHI is the swap guarantor for the Minibond Swaps in relation to the notes issued under Series 1~3 and 5~10 of the Minibond notes. LBSF has also filed for bankruptcy petition pursuant to Chapter 11 of the US Bankruptcy Code.

The United States Bankruptcy Court for the Southern District of New York established 22 September 2009 at 5:00 p.m. (prevailing Eastern Time) as the deadline by which claims against LBHI and any of its affiliated debtors (collectively, the “Debtors” which term includes LBSF) must be filed (the “Bar Date”). This Bar Date relates only to LBHI and the other entities that are Debtors in the United States Chapter 11 cases. The order establishing the Bar Date also provided for certain procedures regarding the filing of certain claims, including claims based on derivatives contracts, on guarantees and on guarantees of derivatives contracts.

Any claimant filing a claim against a Debtor based on amounts owed pursuant to any derivative contract, in addition to filing a timely proof of claim, must file a separate questionnaire on or before 22 October at 5:00 p.m. (prevailing Eastern Time) and any claimant filing a claim against a Debtor based on a guarantee, including a guarantee of the obligations of a non-debtor entity under a derivative contract, in addition to filing a timely proof of claim, must file a separate guarantee questionnaire on or before the stated deadline.
34. Is the Trustee filing any claims on behalf of noteholders against LBHI?

The Trustee will also not be filing any proof of claims in relation to the LBHI bankruptcy proceedings. Assessments made by professional advisers have revealed that the Minibond Swaps are in the money for LBSF, i.e., an amount is payable to LBSF by Minibond Limited in respect of the Minibond Swaps upon their termination. LBHI as swap guarantor would also not be subject to any claims under the Minibond Swap. There is thus no contractual basis upon which we, as note trustee, could file any claim against LBHI or LBSF.
35. Can and should noteholders file any claims against LBHI?

We are not licensed to provide legal or any other advice. Noteholders may wish to obtain legal advice about the possible courses of action.
36. Where can noteholders find more information on the claim process relating to LBHI?

A copy of the Bar Date order as well as other up-to-date information with regard to court activity of the Debtors can be found at www.lehman-docket.com.
Part 9 - Communications from the Note Trustee and Information
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.
Part 10 - Settlement with Lehman Brothers Financing Inc (LBSF)
Further information in relation to the settlement can be found at the Receivers’ website at www.sgnoteholders.com.
39. What does the settlement with LBSF involve and what does it mean to noteholders?
As Trustee, our role is to enforce the rights of the noteholders in relation to the mortgaged property in order to realise the residual value of the defaulted Minibond notes. In order to do this, the underlying collateral which secures the notes had to be liquidated.

The Receivers had not been able to gain access to the underlying collateral in order to commence the liquidation process prior to the settlement with LBSF in September 2009 due to the risk of a legal challenge posed by LBSF referred to at question 18 above. With the settlement however, the Receivers have reached a resolution with LBSF in respect of the amounts owed by Minibond Limited to LBSF. LBSF has in turn waived its right to challenge the unwinding of the Minibond notes and of the synthetic portfolio notes underlying the relevant Minibond series.

As such, after the settlement with LBSF, the Receivers were able to proceed to arrange for the liquidation of the underlying collateral. The negotiated settlement amount was paid out of the liquidation proceeds to LBSF in full and final settlement of all matters under the Minibond Programme. As stated in question 44, deductions for the relevant costs and expenses (in line with the documentation governing the Minibond Programme and the synthetic portfolio notes underlying the relevant Minibond note Series) have also been made from the liquidation proceeds. The balance amount after such deductions is in the course of being distributed to Noteholders.
40. Why do we need to settle with LBSF?

We were advised by the Receivers that based on the assessment made by professional advisers engaged by the Receivers on the valuation of the Underlying Swaps and the Minibond Swaps, LBSF is the party which is in the money in respect of the Underlying Swaps and the Minibond Swaps, i.e. an amount would have to be paid to LBSF in respect of the Underlying Swaps and the Minibond Swaps upon their termination.

At the underlying level, the programme documentation states that if a default is caused by LBSF or LBHI, LBSF’s priority claim to the underlying collateral will be switched in favour of the holders of the underlying synthetic portfolio notes (which include Minibond Limited) (“Noteholder Priority”). This would have meant that Minibond Limited would be entitled to claim against the proceeds from the liquidation of the underlying collateral ahead of LBSF’s claim in relation to the swaps at the underlying level. However, LBSF has, in the Chapter 11 proceedings in the US and in the English courts, challenged the validity of the clause allowing for Noteholder Priority, an issue which still remains unsettled. Further, as notified to noteholders previously, LBSF’s lawyers had issued a notice to the Trustee asserting that LBSF (at the relevant time prior to the settlement) reserved the right to challenge all aspects of the unwinding process.

Accordingly, without a negotiated settlement under which LBSF is prepared to waive its rights to challenge the unwinding of the Minibond notes, the Receivers would have had to overcome numerous challenges spanning across four jurisdictions (Singapore, the US, the UK and the Cayman Islands) in order to gain access to the underlying collateral and there would have been no certainty as to when such process could be completed. In addition, any step taken by the Receivers to unwind the Minibond notes would be open to the risk of legal challenge from LBSF in respect of the issue on the Noteholder Priority. In the circumstances, the unwinding process would have to come to a standstill pending the resolution of the legal issues.

It should be borne in mind that even if the legal action involving LBSF in respect of the issue on Noteholder Priority is successful, LBSF would still have a contractual claim on the amounts owing to it in respect of the Minibond Swaps. Furthermore, we received advice from the Receivers that there is no certainty that a better or significantly better recovery could be achieved compared to a negotiated settlement even if the legal action involving LBSF in respect of the issue on Noteholder Priority is successful. The litigation process would be lengthy and more costly compared to a settlement and such costs accumulated over time could erode the eventual recovery to noteholders. The interest accrued on the amounts owing to LBSF over a prolonged period would further erode any available recovery amounts to noteholders.

Given the risk of legal challenges from LBSF, the uncertainty of success in a litigation action involving LBSF, as well as the length of time and costs involved, the Receivers and the Trustee’s advisers recommended that the settlement presented the optimal option available under the circumstances. The Receivers had also considered a number of other matters in arriving at their recommendation including the lack of funding, the cost involved in relation to any litigation and the continuing accrual of interest on the amount payable to LBSF.
41. Are Series 9 and 10 part of the settlement with LBSF? If so, why do they need to be part of the settlement since they do not have similar underlying synthetic portfolio notes structure?

The settlement with LBSF includes Series 9 and 10. This is because the settlement is a package deal, i.e., either there is a settlement in relation to the Minibond Programme as a whole or there is no settlement at all.

However, the settlement amount arrived at with LBSF in relation to the Minibond Swaps entered into for Series 9 and 10 has taken into account the fact that there is no underlying synthetic portfolio notes structure for these series.
42. Is the settlement with LBSF binding on all noteholders?

Yes, the settlement is binding on all noteholders. As mentioned in question 41, the settlement was negotiated on the basis that it would be applicable to the notes in all Minibond series and not to selected series only.
43. What is the Trustee’s role in the settlement process?

Whilst the Receivers have the expertise and authority accorded to them under the Trust Deed to manage the enforcement process and the negotiation with the various parties, they have consulted the Trustee regularly.

The Receivers have assessed all options available in relation to the enforcement process and recommended that the settlement is the optimal option available under the circumstances. The Trustee is satisfied that the Receivers had considered the alternatives including the litigation routes, restructuring of the notes and novation of the swaps entered into between LBSF and Minibond Limited and that the Receivers’ recommendation to accept the settlement with LBSF is in the best interest of the noteholders. The trusteeTrustee is satisfied that all necessary due diligence has been performed and actions taken to secure the best outcome for investors under the circumstances.
44. Why has the enforcement process taken just over a year since Lehman filed for Chapter 11 bankruptcy protection?

As noted in the answer to question 12 above, 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.

It became apparent at the outset that the process of unwinding the notes would be a difficult one for the Receivers. As discussed at question 40, the legal documentation underpinning the notes consists of documents which are subject to the laws of various jurisdictions. The Receivers had potentially four different legal jurisdictions in Singapore, England, the US and Cayman Islands to deal with, each with its own laws.

Apart from taking advice 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.

Apart from this payment, 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 cost 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.

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. See answer to question 40 for more information.
45. Are the steps taken by the Trustee in terminating the swaps and entering into the settlement agreement standard steps a trustee would take in such a situation and how does this compare with the steps taken by the trustee in a similar programme in Hong Kong?

Each scenario faced by a note trustee will of course be different and there will be different considerations and practical constraints. However, in every scenario, a trustee is to act in the best interest of noteholders. It is no different in the current situation.

While we are faced with an unprecedented situation where the financial crisis affects a large group of retail investors, the Trustee has considered what actions have been necessary to protect Singapore noteholders’ investment and to minimize losses. This led to our decision to terminate the swaps at the appropriate time, our immediate appointment of the Receivers and accepting the ’Receivers’ recommendation to settle with LBSF.

The Trustee is not in a position to comment on the steps taken by the trustee in the programme in Hong Kong. As stated above, each scenario faced by a note trustee comes with differing issues and constraints.
46. 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 profiles 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.
47. 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.
48. 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.

© Copyright. The Hongkong and Shanghai Banking Corporation Limited 2010