HONG KONG: The Lehman Brothers minibond saga that has locked thousands of investors in a bitter battle with their banks for over 10 months will hopefully come to end soon, now that the banks have offered to buy back the structured notes at a discount.

Most investors of the credit-linked structured notes will be able to recover around 70 percent of their original investment under an agreement struck by regulators with 16 banks that distributed the debt derivatives.

The value of minibonds has fallen sharply, with some reduced to zero, after Lehman collapsed last September, causing huge losses to investors.

Holders of the notes, many of whom are elderly or educationally-disadvantaged, have been fiercely lobbying regulators to pressure banks into buying back the notes at 100 percent of their face value, claiming that banks are guilty of misconduct in selling the risky product to unwitting investors.

The notes, guaranteed by Lehman and linked to the credit of some major Hong Kong firms, were sold to some 40,000 investors. In the meantime, some of the notes have matured.

The buyback program, the largest compensation scheme in the history of the city, will cost banks about HK$6.3 billion.

Under the agreement announced by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) last week, banks are offering to repurchase the notes at 60 percent of the nominal value from investors aged below 65 and at 70 percent of the nominal value from investors aged 65 or above.

Investors will get additional compensation if banks recover any residual value from underlying collaterals of the notes.

Around 29,000 investors are qualified for the repurchase offer, said Y.K. Choi, Deputy Chief Executive of the HKMA.

Over 90 percent of the investors will be able to recover around 70 percent of their original investment, said Martin Wheatley, Chief Executive Officer of the SFC.

However, about 2,000 investors are not qualified for the offer, as they are considered either "professional" or "experienced," Secretary for Financial Services and the Treasury Chan Ka-keung said.

The deal was a "good compromise" that would "provide substantial benefits for the vast majority of customers holding minibonds", Wheatley said.

A number of minibond holders are dissatisfied with the offer, with many insisting on a 100 percent payback.

"The arrangement is disappointing," Alliance of Lehman Brothers Victims Chairman Peter Chan said, while admitting some investors may accept the offer.

The government welcomes the scheme, saying it is for the benefit of investors and will allow the financial sector to get back on track.

"The arrangement will spare investors tedious and complicated legal procedures," said Financial Secretary Chan Ka-keung.

Scholars and market watchers also generally believe that an early settlement could be a better choice for investors.

"Most investors are expected to accept the offer to avoid uncertainties that further ravelment will likely involve," said Raymond So, an associate professor at the Department of Finance of the Chinese University of Hong Kong.

Banks will also benefit from the settlement in some sense despite the fact that they are set to suffer huge losses, analysts believe.

The settlement will spare banks perpetual legal actions by investors and regulatory probes, allowing them to focus on their core business. It will also help restore investors' confidence in financial institutions.

Regulators will "discontinue" their investigations against banks if investors accept the offer. However, investigations will continue into cases that involve criminal acts, Choi said.

(HK Edition 07/30/2009 page4)