Published September 17, 2008

Investors fret over Lehman's Minibonds

Distributors waiting for unwinding instructions from bankrupt US bank

By SIOW LI SEN
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(SINGAPORE) Events that have unfolded in the United States over the past few days could hurt some investors here. Those who had bought Minibond notes worth almost $500 million, arranged by Lehman Brothers over the last two years, were left in the dark yesterday as to how much they might recover as there is no news yet from the bankrupt US bank.

Unlike what their name suggests, Minibonds are not bonds but a derivative product that offers investors little protection.

Meanwhile, there may be better news for those that invested in the All Weather Booster Notes arranged by Merrill Lynch that were sold earlier this month, but have not been issued yet. BT understands that the Monetary Authority of Singapore (MAS) might look at giving these investors an option to withdraw from the deal. Merrill itself has just been sold to Bank of America.

Investors who bought Minibonds are more likely to get burnt. A fair number could be retail investors given that the minimum amount sold was $5,000. The Minibond notes were sold over the last two years under series 2 to 10, the latest of which was just last month.

One retail investor who sunk $5,000 into Minibond series 3 said: 'I should have bought a watch.' Another who had bought $2 million worth was more sanguine, saying that he will 'move on'.



According to one broker, the earlier Minibond series was quite popular because they offered as much as 5 per cent dividend, and were invested mainly in high yielding collateralised debt obligations (CDOs), which only got a bad name after the US sub-prime mortgage crisis broke in the middle of 2007.

Distributors of Minibonds which include local and foreign banks, brokerages and Hong Leong Finance were getting anxious calls from clients yesterday but could not shed much light as they had yet to hear from Lehman.

Said a CIMB-GK Securities executive: 'I'm also waiting for news - I didn't invest but some of my friends invested in it.'

Carol Fong, chief executive of CIMB-GK Securities, said that the firm was in touch with Lehman Brothers in Hong Kong to assist clients with their enquiries on the Minibonds.

'In response to enquiries from customers, OCBC Securities has advised them to wait for further news from Lehman Brothers on how the investment bank will unwind the transactions and pay noteholders the credit event redemption amount,' said Koh Ching Ching, OCBC Bank spokeswoman.

'We are currently taking legal advice and will keep our clients updated,' said Ajay Mathur, RBS, head of retail banking.

A United Overseas Bank spokeswoman said that the bank is taking a proactive approach in updating clients on the latest developments. 'I've been explaining the whole day to all walks of life,' said Daniel Seah, UOB Kay Hian senior officer. He said that there was value in the underlying assets which were invested by Minibond, a company set up to issue the notes.

Minibond has to sell these assets. After deducting the costs involved in the termination, what is left will be paid back to investors, he said. 'The main thing is, how much investors can get back depends on the open market value of the assets.'

The problem lies in the value of the assets, such as CDOs which have become tainted by negative publicity, although not all are associated with sub-prime mortgages.

The latest Minibond series 9 and 10 which were sold last month focused on safer assets such as bonds, said Mr Seah. The underlying assets in series 9 and 10 consist of senior secured and unsecured securities issued or guaranteed by major US and European banks, according to the document lodged with MAS.

The document also said that Minibond has issued seven series of notes under the programme, with the outstanding amount at about $482 million.

As for the All Weather Booster Notes arranged by Merrill Lynch, Mr Seah said that he understands that investors could be offered a choice of backing out if they want to. Distributors may then refund their clients.

The sale of the All Weather Booster Notes closed on Sept 12 and the money collected from investors is currently held by the distributors - ABN Amro Bank, AmFraser Securities, CIMB GK, Citibank, DBS Vickers, DMG & Partners, OCBC Securities, Standard Chartered Bank and UOB Kay Hian. The notes will only be issued on Sept 20.