The outlook has brightened for local councils holding troubled Lehman Brothers investments, after the collapsed US investment bank offered to cut a deal with its creditors.
US-based Lehman Brothers Holdings Inc has told the Australian arm of Lehman it could unwind troubled debt securities to pay the company an undisclosed sum ''under certain conditions''.
The administrators of Lehman Australia, PPB, this week told creditors about the confidential proposal, which could lead to better returns to creditors than expected.
Dozens of local councils and charities invested $1.2 billion in complex securities called collateralised debt obligations, which were sold by Lehman's Australian arm.
The AAA-rated assets have since plunged in value - it has been estimated the councils and charities stand to lose more than $600 million from the collapse of Lehman.
Under Lehman's latest proposal, the councils' CDO losses could be lower than this, but they are unlikely to recoup all their capital.
Administrators had previously proposed to pay the councils between 2¢ and 13¢ in the dollar through a deed of company arrangement - which the councils challenged in court. A partner with Piper Alderman, Amanda Banton, which is representing 56 of about 70 affected councils, said Lehman Inc's move was promising for the councils, as Lehman's Australian arm may now have more money to offer creditors.
''Councils may also receive some of the collateral back for Lehman-issued notes which they hold,'' Ms Banton said.
Ms Banton added that the previous deed entered into by the administrators may have blocked the councils from accessing these funds, as the deed released Lehman's foreign arms from any actions against them by CDO holders.
The Federal Court scrapped the deed last year, a move Lehman Australia has challenged in the High Court.
''We are pleased that the deed which released creditors claims on the US arm of Lehman was set aside, and are optimistic that the appeal to the High Court will be dismissed so that an orderly liquidation of Lehman Australia can occur without compromising any creditors' rights including those of councils,'' Ms Banton said.
