Singapore told Lehman-linked “minibonds” set to default

Saeed Azhar

Singapore’s central bank said on Tuesday investors holding credit-linked notes linked to Lehman Brothers had received no coupon payments toward the end of the grace period on Tuesday, which would trigger an event of default.

The trustee, HSBC Institutional Trust Services, told the Monetary Authority of Singapore that it will consider proposals from some investors to replace Lehman as a counterparty for all series of the so-called “minibonds” linked to the collapsed U.S. bank. The grace period ends on Tuesday night Singapore time.

“As requested by some investors, the trustee will consider all proposals for a new swap counterparty to replace Lehman Brothers for all series of the minibond programme,” the MAS said in a statement.

The volume of the paper was not known.

Investors in Hong Kong, Singapore and Indonesia have expressed outrage in the past few weeks that the bond-like products they bought were actually complex derivatives and they stood to lose most or all of what they had invested.

The products include Lehman-linked mini-bonds sold in Hong Kong and Singapore, many of which offered modest returns of between 4 and 6 percent, and DBS Group’s High Notes 5 series, which offered around 5 percent and were linked to eight securities including Lehman bonds.

In its latest statement, the MAS said if the proposal to swap the counterparty does not go through, the trustee will start selling the underlying securities and use the proceeds to pay off bond holders.

“MAS would expect the trustee to act in noteholders’ interests by disposing of the underlying securities in an orderly fashion,” it said.

Hong Kong’s government proposed on Monday a way to let investors recoup some losses reported by Hong Kong newspapers to be $2 billion in securities linked to Lehman, urging distributing banks to buy the bonds back.

Singapore’s central bank said the proposal to replace Lehman as a counterparty should be fully explored before other alternatives, such as a potential buy-back by distributors, is considered.

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