x Abu Dhabi, UAEMonday 24 July 2017

Dubai fund considered last-minute bid for Lehman

Investment Corporation of Dubai was considering investing in Lehman as the bank made desperate attempts to raise capital to keep it afloat.

Investment Corporation of Dubai (ICD), the sovereign fund that owns Emirates Airline, approached Lehman Brothers about an investment of up to US$4 billion (Dh14.48bn) just days before the US bank collapsed in 2008, according to documents released over the weekend. The investment offer was part of Lehman's last-gasp efforts to raise capital in an ultimately failed attempt to stay afloat.

The planned ICD investment, along with other approaches from sovereign funds in Kuwait and Korea, were ultimately scrapped, and Lehman failed in September 2008 after it was denied a government rescue. Lehman's bankruptcy, which is being adjudicated by a US court, is the largest ever in the US. ICD, which had prior business dealings with Lehman, first approached the bank on March 15 2008 about an equity investment. At that point, however, "Lehman told ICD that Lehman's capital and liquidity positions were very strong and that Lehman was not interested in raising 'equity capital' at that time", according to a 2,200-page report written by Anton Valukas, an attorney investigating the Lehman Brothers collapse.

"ICD responded that if and when Lehman considered raising capital, ICD should be Lehman's 'first call in the Middle East'," it says. The next proposals came on the brink of Lehman's failure, as the bank was hammering out a plan to spin off its embattled commercial property portfolio into an entity to be called "SpinCo". Under the plan, which was later mimicked by other US investment banks, Lehman wanted to separate its good assets - referred to as "clean Lehman" inside the company - from its risky ones, which would be farmed out to SpinCo.

Lehman looked to ICD in early August "as a potential investor for up to $250 million in SpinCo junior, or mezzanine, debt" documents say. There was an exchange of term sheets, or offers to enter into an investment, but no deal materialised. That, however, was not the last of Lehman's attempts to involve ICD in its rescue. In early September, Lehman's former head of global investment banking, Hugh "Skip" McGee, proposed something called "Project Indigo", which involved ICD making a $2bn investment in Lehman after SpinCo was formed. Rothschild, the British bank advising ICD, "informed Lehman that ICD had concerns about the real estate market and future write-downs". Through the final stages of Lehman's pre-bankruptcy existence, the acquisition of a stake in Lehman's Investment Management Division (IMD), which was considered a "crown jewel" asset, featured prominently in discussions with ICD. On September 4, just 11 days before Lehman filed for bankruptcy protection in the US, ICD made two offers to Lehman, according to Mr Valukas's report. Under the first, it would pay up to $4bn for 50.1 per cent of Neuberger Berman, the private wealth management arm of IMD.

After Lehman did not respond to the first proposal, a second proposal was made for a $3.25bn investment in the company after the spin-off, but it was contingent on Lehman raising $3.25bn in capital, and required "protection for ICD against up to $2bn in write-downs by Lehman over the next year". Additionally, ICD wanted to have the option to convert its Lehman shares into shares of IMD "in the event of substantial write-downs or a ratings downgrade".

The negotiations ended, however, on September 9, less than a week before Lehman's bankruptcy. "According to McGee," the Valukas report says, "ICD said that it needed a 'time out' after Lehman's stock declined by nearly 50 per cent in a single day on September 9, 2008." afitch@thenational.ae