Lawyers Resolve 65 of 101 Objections to Lehman Swap Plans

Lawyers for Lehman Brothers Holdings Inc. yesterday said they had resolved at least 65 of the 101 objections filed relating to how the approximately 930,000 derivatives contracts Lehman's subsidiaries had with counterparties, including municipal issuers, will be treated as the company continues its bankruptcy proceedings.

An order proposed and approved yesterday included changes first filed by Lehman Monday to address some of the biggest concerns counterparties had raised. In the new order, Lehman agreed to provide more information about potential third parties to which it might assign the swaps and to give the original counterparties more time to object to the third parties or to ask for more information about them.

Judge James Peck of the Southern District of New York bankruptcy court said the proposed order showed "significant and positive work has been done to create a framework" to resolve an "unprecedented" issue. He approved a finalized version of the order yesterday.

The approved order will allow Lehman to start resolving the derivatives contracts outstanding, although it exempts a number of remaining objectors from the order. The unresolved objections have been adjourned to a later hearing.

Under the proposed order, Lehman would have to give counterparties either 10 or 20 business days notice - depending on the number of transactions in the contract - of plans to assign an outstanding derivatives contract to a third party. The original order required Lehman send notification just five days prior, a timeframe which one objector called "patently unreasonable."

Lehman also agreed to provide more information about the potential third parties to which it might assign the derivatives contracts. Lehman must now provide counterparties with a list of as many as 12 potential assignees and information regarding the third party's "ability to perform under an assigned derivative contract."

The original order only required that Lehman provide a statement certifying the third party or its credit support provider had a credit rating of A2 or better from Moody's Investors Service and A-minus or better from Standard & Poor's and Fitch Ratings. Lehman, in the original order, agreed only to identify the third party and its credit support provider if neither met those standards.

Lehman sought for the court to establish protocols that would streamline the process of resolving both terminated and outstanding swaps. About 30,000 of 930,000 derivatives have not been terminated, Lehman's lawyers said at court yesterday. In November, when Lehman's lawyers filed the original proposed order, it said about 200,000 swaps were outstanding.

Lehman says it is in the money on many outstanding swaps and wants to monetize the positions by assigning them to third parties. It also said court approval of the process would give counterparties and assignees greater assurance about the plans for doing so.

On already-terminated swaps, Lehman said a streamlined process could preserve debtor and court resources by creating an efficient way to set termination payments.

Although ISDA documentation gives the non-defaulting party the right to control the replacement of counterparties and the process of determining termination fees, bankruptcy law gives Lehman broader powers to asset control over its assets.

Peter Shapiro of Swap Financial Group said the proposed order is a "substantial improvement over the original procedures, but still has the fundamental flaw of taking authority away from the municipal counterparties to handle the termination of the swaps when Lehman defaulted." He said the derivatives contracts "clearly" gave the counterparties this right.

"While the order does go much further toward being reasonable - allowing for objections by the municipalities and other counterparties - it really has it upside down, it should be that the municipalities implement the termination and Lehman has the right to object," Shapiro said.

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