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By Steve Slater and Tommy Wilkes
LONDON, Sept 15 (Reuters) - Hedge funds which gambled on howmuch money would be recovered from the bankrupt carcass ofLehman Brothers are set to make hundreds of millions of poundsfrom a full payout to creditors of the European arm.
Five years on from the collapse, payouts to Lehman'screditors in Europe are on course to top 100 percent some timenext year, following a recovery of assets by administrators andlegal victories over other parts of the ex-U.S. investment bank.
"We were reasonably confident there would be somesignificant funds, but never in our wildest dreams would we havethought it would be 100 pence in the pound," said Tony Lomas,joint administrator for Lehman Brothers International Europe(LBIE) and partner at PricewaterhouseCoopers.
The collapse of Lehman Brothers on Sept. 15, 2008, plungedthe global financial system into chaos. Its European arm,headquartered in London, was the largest and most complex partof the group because it was a hub for trading and investments,spanning asset classes and dozens of countries.
Closing down the business and trying to recover assets forcreditors has involved unwinding thousands of derivativescontracts and share trades and figuring out who owns what,making it the most complex bankruptcy of a single entity ever.
Creditors' claims now trade between 120 and 135 percent in asecondary or "grey" market for their value, compared to as lowas 10 percent in the weeks after the collapse, reflecting anexpectation that a premium will be paid.
After creditors are fully paid, LBIE should also have cashleft over to pay interest to unsecured creditors - who can get 8percent a year under UK law - or subordinated bondholders.
Original creditors, including hedge funds which had Lehmanas their prime broker, banks, and trade suppliers such as aphotocopying or legal firms, may not all be winners, however.
"A lot (of original creditors) have sold their claims,particularly as pricing improved and got towards 100 percent,"
said Alyson Lockett, partner at UK law firm Simmons andSimmons, who has advised over 100 original creditors and alsoworked for distressed debt investors trading the claims.
LUCRATIVE TRADE
The list of hedge funds which bought Lehman paper after thebank's demise reads like a Who's Who of so-called "distresseddebt" funds, and includes Baupost Group, Elliott Management,King Street Capital and Paulson & Co, industry sources said.
The sources said it was hard to quantify how many of theclaims were held by distressed debt specialists, but it could behalf or more.
"A significant proportion of these claims is now in thehands of a small collection of distressed debt investors," Lomassaid.
The bankruptcy has turned into one of most lucrative tradessince the financial crisis for these largely New York-basedfunds which pride themselves on snapping up debt when panickedsellers have rushed for the exit.
Paulson, which led an investor group pushing for a betterpayout for creditors, started buying Lehman bonds the day itfiled for bankruptcy, paying as little as 7.5 cents on thedollar in late 2008, according to news reports citing U.S. courtpapers.
Others got in later and the trade became the largestposition on some funds' books, topping 10 percent of theirassets.
"It was a big bankruptcy and if you had the patience and didthe work, it was a great trade," said one fund executive.
All the named funds declined to comment or could notimmediately be reached.
PwC expects about 40 billion pounds ($63.3 billion) to bereturned to LBIE's creditors, including near 23 billion poundsfor trust claimants and about 16 billion pounds for up to 3,400unsecured creditors.
Two dividends worth a combined 68.5 percent of claims havealready been paid to unsecured creditors and another dividend inNovember should take the tally towards 100 percent, Lomas said.
Legal wins against other defunct Lehman units and pastsettlements with the bank's trading counterparties has freed upcash for distribution. More payouts will be made, but the finaldividend may take more than a decade because of legal wrangling.
"It's not inconceivable that it could be 10 or 20 years,"said Lockett.
LBIE has had about 500 staff working on the wind-down,complemented by 200 PwC staff, all under Lomas in a Canary Wharftower that has sight of the former Lehman European headquarters.More than 350 staff are former Lehman employees.
Costs including wages, rent, systems and legal advice, arerunning at about 300 million pounds a year, and PwC's fees hadreached about 600 million pounds by March.
Lomas, 56, who has previously worked on the bankruptcies ofMG Rover and the European arm of Enron, said LBIE was likely tokeep him busy until he retires in four years.
"It's 20 times as complex and big as Enron. It'sunparalleled," he said.
For other stories on Lehman Brothers:
Five years after Lehman, risk moves into the shadows
In post-Lehman clean-up, top banker prosecutions stumble
"You work for Lehman? I thought that went bust"
