SHKF buys back clients' minibonds

Hong Kong-based Sun Hung Kai Financial (SHKF) has agreed to buy back all the Lehman Brothers credit-linked minibonds it sold to retail investors. The decision follows an investigation by the territory's Securities and Futures Commission into possible mis-selling of the structured credit instruments.

"After exploring various alternatives over several months with the primary objective of assisting our 310 affected customers with Lehman Brothers' minibond issues, Sun Hung Kai Financial decided voluntarily to repurchase up to approximately HK$85 million ($11 million) in Lehman Brothers minibonds from our eligible primary market retail customers, without admission by SHKF of any liability or wrongdoing," SHKF said in a statement. SHKF has been selling Lehman Brothers minibonds since 2002.

The company will purchase all outstanding Lehman Brothers minibonds bought by eligible SHKF clients at a price equal to the principal amount invested.

"The Lehman Brothers minibond series of credit-linked notes was a Lehman Brothers-developed product," the company said. "SHKF was approached by Lehman Brothers to act as a co-ordinating distributor through Sun Hung Kai Investment Services, liaising between Lehman Brothers and more than 20 retail distributors," it said. "These notes were distributed through a broad network of distributors in Hong Kong and Macau, including to a relatively small number of SHKF retail account holders. The product structuring, documentation and risk management were handled by Lehman Brothers."

The repurchase scheme is part of the resolution of disciplinary proceedings between the SFC and SHKF, also announced by the commission on January 22. The SFC took into account the 'voluntary' repurchase scheme in deciding the enforcement outcome. "The SFC acknowledges Sun Hung Kai co-operated fully with the SFC's investigation," the SFC said in a statement yesterday. "Sun Hung Kai has already commenced its own review of internal systems and controls. The SFC's investigation into Sun Hung Kai's sales of Lehman Brothers minibonds has now concluded."

A number of investors in Lehman Brothers' minibond programmes will be better off than investors of minibonds issued by other dealers such as DBS, Merrill Lynch or Morgan Stanley - buyers of Lehman Brothers minibonds could potentially recover 30-80% of their principal investment, while investors in other dealers' minibonds - some of which reference Lehman Brothers credit default swaps (CDSs) - can expect to get nothing.

This is the result of a restriction that prevented Lehman Brothers as an arranger from referencing its own name in the credit-linked note (CLN) basket, which included mainly CDSs referencing investment-grade financial institutions and corporates. This was not the case for first-to-default CLNs issued by other dealers, such as DBS and Morgan Stanley, which included Lehman Brothers CDSs in the CLN baskets in some of their products.

In Hong Kong, for example, the total outstanding value of CLNs referencing Lehman Brothers is HK$2.91 billion ($375 million) and the outstanding value of notes in which Lehman Brothers was the swap guarantor (including minibond CLNs, fund-linked notes and equity-linked notes) is HK$12.73 billion.

Resolution of the cases involving the other 23 banks and brokers in Hong Kong are still to come.

See also: HSBC terminates swaps in Lehman Bros minibonds
Hong Kong's SFC puts structured product approvals on ice
Minibond blow-ups place scrutiny on derivatives dealers