Lehman opts to settle over Dante flip-clause transactions

Trustees relieved as settlement looks imminent

The Lehman Brothers Holding Inc (LBHI) administration has decided to reach an out-of-court settlement with Australian investment services group Perpetual Trustee over disputed collateral in a series of credit-linked notes issued by Saphir Finance - a special-purpose vehicle (SPV) established by Lehman Brothers International (Europe) in 2002.

A joint motion, filed on November 17 in the US Bankruptcy Court for the Southern District of New York by Lehman Brothers Special Financing (LBSF) - the swap counterparty to the Saphir notes - and the Official Committee of Unsecured Creditors of LBHI, states: "[We] respectfully move this Court to promptly stay this appeal for 90 days pending the closing of a settlement of this dispute between the only two stakeholders here, LBSF and Perpetual... the sole Noteholder."

It is unclear at this point what the settlement will entail, but it will come as a relief to BNY Corporate Trustee Services - a subsidiary of Bank of New York Mellon - which served as trustee for the Saphir transactions. BNY has been caught in the crossfire between the LBHI administration - the parent company for LBSF - and Perpetual over which party has first claim on collateral in the Saphir notes.

The dispute centred on certain contractual provisions - known as flip clauses - which LBHI argued were invalid ipso facto clauses. Flip-clauses are common in structured finance deals and are meant to de-link the credit risk of the swap counterparty - in this case LBSF - from the SPV. In general, the swap counterparty would be senior to note-holders in the priority of payments following an event of default, but the flip clause is designed to reverse the payment priority if the swap provider is the party that defaults, allowing note-holders first call on collateral.

The battle for collateral in the Saphir notes - which formed part of a multi-issuer secured obligation programme called Dante - has been drawn out. As the contract documentation was subject to English law, the Royal Courts of Justice first ruled in July 2009 that the flip-clauses were valid and that noteholders should have first call on collateral. However, LBHI also filed a case against BNY in the US Bankruptcy Court, which in January 2010 reversed the decision of the English courts and ruled the clauses were void, putting the US and English courts at loggerheads.

Noteholders and the trustees will be buoyed by the news of a settlement. However, it is too early to say whether this will provide a precedent for other disputes over flip-clauses undertaken by the LBHI estate.

"It would be premature for me to comment on whether this will set a precedent for other flip-clause disputes," says a source close to the matter.