(Bloomberg) -- Credit Suisse AG is closing in on an agreement to settle a $1.2 billion derivatives demand against bankrupt Lehman Brothers Holdings Inc., reducing the claim to $385 million, according to a person with knowledge of the matter.
The settlement would end a 10-year fight over costs the Swiss lender said it incurred to replace tens of thousands of derivatives trades it had entered with Lehman before its collapse in 2008. Lehman had accused Credit Suisse of inflating its claim by over $1 billion.
The dispute has been a thorny one for Credit Suisse because it sold off most of the claim to hedge funds several years ago, leaving it at risk of having to pay back the funds with interest if the claim wasn’t allowed, or was only allowed in part, people with knowledge of the matter said last year. The percentage Credit Suisse actually recovers on the claim would be complicated by the transactions, known as claim participation agreements. Each agreement was unique, and at least some were said to trade at 37 cents on the dollar.
“Credit Suisse fully expects to resolve the Lehman matter without a material financial impact to the bank,” a representative for the Zurich-based lender said in a statement Tuesday morning in New York. It has already disclosed the matter to the market, and the hypothetical amount doesn’t change its existing 2018 guidance, the representative said, while declining to comment on any potential deal.
A representative for Lehman declined to comment.
Credit Suisse is the last holdout among Lehman’s big derivatives counterparties that claimed the failed bank owed them money. Most of them settled long ago, and the only bank that took its case to trial, Citigroup Inc., ended up settling for a fraction of what it sought. A trial over Credit Suisse’s claim has been expected in the fall.
Credit Suisse and Lehman have yet to finalize a deal and the potential settlement could still fall apart, the person said, asking not to be identified because the discussions are private.
Around 2011, Credit Suisse began selling off chunks of the claim to hedge funds. The transactions gave the bank cash during a difficult period, while letting it forge ahead with a legal battle for the full amount it said it was owed. At the time, Credit Suisse was under pressure from regulators to shore up capital.
But the trade also gave Credit Suisse certain responsibilities. While terms of each trade varied, some of them meant that if the claim is only partially allowed, investors get back what they paid upfront, plus interest, on the portion that is not allowed, and get distributions from the estate on the rest.
Assuming a claim of $385 million is allowed, the impact to Credit Suisse would be a loss of $70 million or less, according to another person familiar with the situation, who also spoke on condition of anonymity.
Since the claims were sold, Lehman and Credit Suisse have been locked in disputes. In a 2013 lawsuit, Lehman sued Credit Suisse, accusing it of having “inflated” its claim by over $1 billion, and saying that it may actually owe Lehman money. More recently, the two have fought over document discovery and subpoenas, driving up Credit Suisse’s legal costs. As time has ticked on, Credit Suisse’s interest costs tied to the hedge fund participation have also grown.
The resolution will be a boon for Lehman’s creditors. In December, its estate estimated the Credit Suisse resolution at $573 million.
For Credit Suisse, the claim resides within the bank’s strategic resolution unit, where it deals with matters that are already winding down. The bank has said it wants to close the unit by the end of 2018, and a resolution doesn’t change Credit Suisse’s guidance for the unit.
The case is: Lehman Brothers Holdings vs. Credit Suisse AG, 13-01676, U.S. Bankruptcy Court (Manhattan)
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