No. of Recommendations: 11
A while ago, Joel posted about XFH where he said (BTW, there's a story there too; but it's not mine to tell...)

It's my story, but I didn't have time to post at the time, and I had forgotten about it until recently when the issue of Lehman trust preferreds came up again.

So, here is the story.....

I had owned (and still do own) XFH.

The week before Memorial Day, I noticed an article indicating that Motorola had issued a tender offer on some of their debt. Knowing that I owned XFH, based on underlying Motorola debt, I looked a little further, and found that the debt that had the tender offer was indeed the debt underlying XFH. So, I went looking to try to find out what was going to happen to XFH - because I didn't really want it called - I really would like to continue getting the cash flow.

So after looking at the 8-K for XFH and seeing that The Registrant is a wholly-owned, indirect subsidiary of Lehman Brothers Holdings Inc. ("LBHI"), I called the toll-free number for “questions related to Lehman Brothers Holdings Inc.’s Chapter 11 filing” and asked if the underlying bonds were going to be tendered by the trust. I was told that the rep didn’t have the information, but he would escalate it. I then got a message with a call back number from an attorney with Weil, Gotshal & Manges - Lehman's BK counsel.

So – I called the attorney back and talked to her. Initially, she told me that the Capital Trust was not a creditor, so I would have to call Lehman ABS directly. So I found the 8-K and it had a phone number for Lehman ABS, which I called. The receptionist transferred me to a guy who gave me the number for the Lehman Legal Hotline – which goes to……. Weil, Gotshal & Manges. (I know you were surprised by that ;-) )

So, I called the attorney back, while I had the 8-K open in front of me, and told her that I tried calling Lehman ABS directly and they referred me back to the Lehman Legal Hotline. I also told her that the 8-K said that Lehman ABS (“The Registrant”) “is a wholly-owned, indirect subsidiary of Lehman Brothers Holdings Inc. (“LBHI”)”. She then figured out that while Lehman ABS isn’t a creditor, they are associated with the bankruptcy filing, so she said she would call me back.

When she called me back, she asked if I had any documentation of how the securities I own (XFH) were related to the underlying bonds, and how the capital trust worked. I started explaining my understanding and she said, “Just a minute. Let me get the guy who works on the trust issues on the line, too”. So she transferred me to him.

I explained to him that I owned XFH and was wondering if the bonds were going to be tendered and the trust dissolved, calling my securities. I happened to mention “Third Party Trust Preferred” and he wanted to understand the difference between a Third Party and a regular Trust Preferred, so I explained my understanding, telling him I’m not a lawyer or a securities person, so it was just a layman’s understanding – a regular Trust Preferred is set up by the original bond issuer, while a Third Party Trust Preferred is set up by an entity that buys the underlying securities from the original issuer or on the open market, and then sets up the Trust. He then asked if there were any other underlying securities in the trust, or if it was just the Motorola bonds, and I told him that as far as I knew, it was just the Motorola bonds. He also asked if there were other stockholders, and I told him that there were.

He then questioned whether Lehman ABS actually has any economic interest and/or would be the ones making the decision on whether to tender the bonds, or if the it was the holders of the XFH shares who would be requesting redemption. I told him I thought that Lehman ABS had an economic interest, as they own a lot more bonds than would be required to pay off the XFH shareholders, and depending on the actual tender price, Lehman ABS could come out several million ahead. He said he didn’t know if Lehman ABS was actually the owner of the bonds, and he asked if I had any documentation, so I said I could get him a copy of the IPO Prospectus. He said that would be good, so I directed him to QuantumOnLine and got him to pull up the XFH page that has the link to the prospectus. He was happy to see that.

He said that they would research the issue and get back to me, probably next week. I mentioned that the tender offer is only good through June 7. He said “Good. We have a few days, then.” (I believe that this call was on May 28).

So, after the Memorial Day weekend, I didn't hear anything for a day or so, so I called the original attorney back. She told me what Joel has already let the board know - that in order for the tender offer to be accepted by the trust, 100% of the certificate holders must agree to accept the tender offer. If the bond were being called, then there wouldn't be a choice, and the certificates would be called, too. But with a tender offer, it's an optional redemption, so there is 100% agreement required.

Apparently, 100% agreement wasn't received, since XFH is still trading and hasn't been called.

However, if the prices in the bond market continue to rise, I wouldn't be surprised to see the bankruptcy estate start desiring to sell bonds that underlie these 3rd party trust preferreds. This is probably especially true if the trust owns more bonds than it would take to pay off the certificate holders, as is the case in XFH.

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