Valuation of Lehman Bonds

[dinu]

Hi David,

On the wake of the bankruptcy of Lehman Bros, I was just looking at how their bonds be valued in the event of the issuer filing for Chapter 11.

Could we use the expected recovery rate as the proxy for valuation or is there any other way out.

Thanks in advance for the excellent forum.

Regards,

Dinu Mathew

 

[David Harper CFA FRM]

Hi Dinu,

I *assume* some of LEH bonds are currently priced in the secondary market; i.e., have post-default prices. Otherwise, I wouldn't know where to begin. I *imagine* some of the estimates are based on fundamental balance sheet analysis. As in, list the bonds and obligations by seniority, take the assets, and make some huge assumptions. But for Lehman, yikes, that would be a complex analysis fraught with assumptions - dozens of creditors, dozens of instruments, a maze of claims.

I have not looked at them (I just haven't been invested in financials for a long while) so I don't have any facts, but i would just *guess* that their senior bonds are going to recovery nicely. The post-default prices right now, i think, may be volatile (containing much "optionality"). So, as usual, the recoveries may vary widely by seniority. Often the post-default, being discounted, understates the ultimate recovery. But net-net, I'd venture recovery estimate at the moment on a junior bond/subordinated claim (esp. given that counterparty derivative claims may flow into the claim hierarchy) would be a real SWAG type exercise....sorry i don't have better information...

Thanks for liking the forum! David

 

[David Harper CFA FRM]

Dinu,

Did you catch this today on Lehman's bonds?
http://dealbook.blogs.nytimes.com/2008/10/10/early-results-published-in-lehman-swaps-auction/

8.625 cents on the dollar. I am frankly surprised/shocked it is so low...David

 

[dinu]

Hi David,

I am too shocked. Are we really on the verge of a major catastrophe relating to valuation of lehmans bonds. With $270billion at stake I presume why not?

Thanks a lot for the response.

Regards

Dinu