Lehman Settlement Averts Virginia Tobacco Bond Reserve Dip

BRADENTON, Fla. - The Virginia Tobacco Settlement Financing Corp. won't have to dip into reserves this year thanks to a settlement with bankrupt Lehman Brothers.

The VTSFC also plans to use a portion of the settlement to make early principal redemptions, said debt management director Evelyn Whitley. The corporation has $1.16 billion in outstanding bonds issued in 2007.

On Oct. 3, the corporation received $13.6 million as its first distribution from two negotiated settlements of unsecured claims totaling $26.5 million from Lehman Brothers Special Financing Inc.

VTSFC had planned to dip into senior liquidity reserves for $2.8 million to make the Dec. 1 interest payment, and gave early notice of the pending draw to bondholders in May.

That reserve draw will not occur now due to receipt of the Lehman settlement funds, Whitley said.

"We'll be calling some principal with the extra amount," she added.

While the corporation received a portion of the $26.5 million settlement with Lehman, Whitley also said it is unclear whether the full amount will eventually be received because there are other outstanding unsecured creditors waiting for payments or that have not reached final settlements.

VTSFC's claims are related to guaranteed investment contracts it had with Lehman Brothers Special Financing Inc. for tobacco settlement bonds that were issued in 2005 and 2007. The 2005 bonds were redeemed when the corporation sold new debt in 2007, and the GICs for both series were combined, requiring two separate claims to be filed with Lehman.

Lehman Brothers Holdings Inc., filed for Chapter 11 reorganization on Sept. 15, 2008. It was the parent company of Lehman Brothers Special Financing Inc., which filed for bankruptcy on Oct. 3, 2008.

Lehman's financing company defaulted on the GICs in December 2008. The corporation terminated the agreements on March 19, 2009, and filed unsecured claims for $14.47 million on the 2005 bonds and $35.9 million on the 2007 bonds.

The combined claim for $50.4 million was disputed by Lehman, and a settlement of $26.5 million was reached this July.

"We will be paid in accordance with the [bankruptcy] plan as payments are made to other unsecured creditors," said Whitley, who added that there is uncertainty about whether full payment will be received. "We will get something totaling between $13.6 million and $26.5 million."

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