On November 14, 2008, a letter was sent to derivatives counterparties of Lehman Brothers Holdings Inc. and its affiliates (collectively, “Lehman”) notifying them of Lehman’s Motion to Settle or Assign Derivative Contracts. The letter concerns a motion filed in the bankruptcy court by Lehman Brothers Debtors on November 13, 2008, which seeks to establish two procedures relating to its pre-petition derivative contracts with counterparties. We have summarized the key provisions of Lehman’s motion below, along with a discussion of the potential impact this motion could have on Lehman’s derivatives counterparties. For the motion, please click here.

If you have a trade with Lehman for which you did not send a notice of termination, please note the following.

The first procedure, if approved, would provide a mechanism for Lehman to assume pre-petition executory derivatives contracts with counterparties and assign such contracts to third parties without the counterparty’s consent. For any such assumption and assignment, Lehman would need to assume and assign all transactions under a master agreement. This procedure would only apply to derivative contracts that have not yet been terminated. Under this procedure, Lehman would give notice to the counterparty of a non-terminated derivatives contract of its intent to assume and assign the contract, the total of Lehman’s proposed cure amount, and a statement indicating that the assignee (or its Credit Support Provider/Guarantor) shall have at least a credit rating of A-. If these conditions are met, Lehman would be able to assign the contract without the consent of the counterparty. Under the procedures, the counterparty could object to the amount proposed to cure past defaults and to whether there may be additional defaults, but not to the identity of the assignee. If the parties are not able to resolve objections, Lehman could go to the bankruptcy court to seek specific approval for the assignment. After Lehman assigns the agreement, it then would need to provide notice to the counterparty of the consummation of the assignment. After the assumption and assignment of such agreement, the counterparty no longer would have the right to terminate the agreement based on Lehman’s defaults. This procedure would not limit or affect a counterparty who already has terminated its transactions with Lehman.

If you have a trade with Lehman for which you did send a termination notice and calculation of termination payment, please note the following.

The second procedure, if approved, would provide Lehman the authority to resolve termination amounts resulting from the termination of derivative contracts. It also would give Lehman the authority to enter into settlement agreements related to such terminations, including agreeing to the provision of releases between the parties. The procedure would significantly streamline the approval process in reaching a settlement with Lehman for terminated transactions.

The hearing on this motion currently is scheduled for December 3, 2008, with objections due on November 28, 2008.

We do not think this motion should adversely impact clients that have terminated their trades with Lehman. If a counterparty has terminated all of its trades with Lehman, in general, there should be no issue with Lehman’s right to terminate other trades, assuming Lehman receives appropriate consideration for such assignments. Likewise, the streamlining of the process for determining amounts due in the bankruptcy would allow the parties to negotiate the amount themselves rather than have to file a separate motion with the court for each settlement.