Paulson & Co, the hedge fund that made billions from betting on a collapse in mortgage-backed securities during the financial crisis, has made more than $550 million from a recovery in the value of bonds it bought in failed investment bank Lehman Brothers.
The world’s third-largest hedge fund has made a profit of $554 million before legal fees, on more than 2,000 trades in Lehman bonds that started the day the investment bank filed for bankruptcy in 2008, according to an analysis of court documents by the Financial Times.
The profit will be realized by a settlement between warring creditors to the largest corporate failure in history, a deal partly driven by hard bargaining by Paulson & Co and allies.
It is a much-needed boost for the $38 billion hedge fund, headed by John Paulson, that has struggled with poor performance and high-profile blunders in recent months.
Under the final agreement, owners of Lehman holding company bonds will receive 21.1 cents for each dollar in face value, versus the 17.4 cents proposed initially by the Lehman estate. Mr Paulson’s funds hold the bonds at an average of 7.3 cents on the dollar, meaning they own bonds with a face value of $4 billion for which they paid about $290 million, net of sales, to acquire.
While Paulson & Co bought Lehman bonds on September 15 2008, at 35 cents on the dollar, prices then dropped as the fund spent $890 million to accumulate debt with a face value of $6.8 billion over two-and-a-half years. Profitable sales from late 2009 onwards further improved the position.
By comparison, hedge fund Fir Tree paid a net $340 million, or 22.7 cents per dollar, for a notional $1.5 billion of Lehman bonds. Peer Taconic paid 21 cents for the $2 billion of face value debt it owns.
The market price for the bonds on Friday stood at 26 cents, reflecting an expectation that recoveries for all bondholders may improve if Lehman recognizes fewer claims, or if the value of remaining assets rises substantially. If it can sell its bonds at that price, Paulson & Co’s profit on Lehman would rise to $780 million.
This would contrast with recent high-profile reversals including a C$562 million ($585 million) loss on Sino Forest, a Chinese forestry company fighting accusations of accounting irregularities. (Sino Forest shares rose 28.1 percent in Toronto trading on Monday after Wellington Management disclosed it had built up an 11.5 percent stake in the company.)
Premier Foods, a UK food manufacturer in which Paulson & Co had reported a 12 percent stake in October, has dropped more than 20 percent since a profit warning on Thursday.
Paulson & Co was a member of a group of Lehman bondholders that filed their own bankruptcy plan for the bank and argued against rival pay-out plans that would have paid bondholders as little as 16 cents on the dollar. The final settlement, at 21.1 cents for the bondholders, was closer to bondholders’ own proposal of more than 24 cents.
The group had pushed back aggressively against the Lehman estate and other creditors, including big banks such as Goldman Sachs and Deutsche Bank, to win a larger share of Lehman’s pay-outs.