HSBC terminates swaps in Lehman Bros minibonds

The Monetary Authority of Singapore (MAS) says HSBC Institutional Trust Services, the trustee of Lehman Brothers' defaulted minibond notes programme, has terminated the swaps that back series 1 to 8 of the programme, to remove the risk of credit events in the underlying securities.

HSBC Institutional Trust Services told the MAS that such a termination would also help preserve the value of the underlying collateral. As Lehman Brothers could not reference its own name in what essentially are first-to-default, credit-linked note baskets - termed 'minibonds' - its filing for liquidation in September did not constitute a credit event that would have led to the liquidation of the underlying collateral.

The MAS says HSBC Institutional Trust Services made its decision to terminate the swap arrangement "in view of current market conditions", but did not elaborate further.

Swap arrangements are common in many credit derivatives, such as first-to-default credit-linked notes. They are entered into between the arranging investment bank and the issuing special purpose vehicle (SPV) to enable the SPV to receive the promised coupon payment and principal at maturity to distribute to end investors.

HSBC Institutional Trust Services has appointed three partners from PricewaterhouseCoopers (PwC) Singapore as receivers for series 5 to 8 of the minibond note programme. These series have defaulted since the relevant coupon payments were not made by their respective due dates.

MAS says HSBC will continue to use the services of the three PwC partners for the other series that will also default after coupon payments are not made by their due dates. "The receivers' role is to take control of the assets of these notes and to work closely with the trustee towards a solution that is in the best interests of noteholders," the MAS said in a press release published on its website last week.

Meanwhile, the MAS has appointed Deloitte & Touche as an independent financial adviser to investors in Lehman Brothers minibonds. Deloitte & Touche will assess whether restructuring Lehman Brothers' minibond programmes would be a viable option, as opposed to liquidation of the underlying securities.

Singapore's financial regulator has also asked HSBC Institutional Trust Services to work towards updating noteholders by the end of this month regarding whether restructuring remains a viable option.

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