The hedge fund major MAN GROUP PLC (PINK:MNGPF) announced Friday plans to offload its outstanding legal claims against the bankrupt investment bank Lehman Brothers Holdings Inc. (PINK:LEHMQ) for $456 million. The company plans to sell the claim at a 32 percent premium over the exposure’s value as of June. 30, to Hutchinson Investors, a unit of the hedge fund Baupost Group, run by Seth Klarman.
Apart from the sale price of $456 million, MAN GROUP PLC (PINK:MNGPF) could also be eligible for an additional future payment of $5 million, provided the claim is recovered over an undisclosed threshold. The London based hedge fund, acquired the claims from its subsidiary GLG Partners for $355 million, which had made trades with Lehman Brothers before it collapsed in 2008.
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A spokesman says: “The transaction allows MAN GROUP PLC (PINK:MNGPF) to benefit from the payment of the total consideration, while retaining certain obligations to the funds”. “The proceeds will increase Man’s regulatory capital surplus and further enhance its net cash position”.
The struggling hedge fund plans to use the proceeds from the sale to boost its capital reserves. Owing to its weak performance, investors have been pulling out funds from the company. In its third quarterly report, MAN GROUP PLC (PINK:MNGPF) revealed that net outflows rose 60 percent, to $2.2 billion, compared with $1.4 billion in the three months that ended June 30.
At the time of announcing third quarter results, Man’s chief executive, Peter Clarke, said “Investor sentiment, and consequently the outlook for flows, continues to be subdued. The flow environment continues to be challenging, and this was reflected in lower sales in the quarter”.
The hedge fund also revised its full year outlook, after the results, saying, “Following today’s Q3 statement, we amend our EPS forecasts, from 12.7p to 12.1p 2013 and from 14.1p to 11.4p 2014. This reflects lower performance fee EPS expectations longer term. Due to better-than-expected AUM mix (more high-margin guaranteed products); we raise 2012E EPS slightly from 8.7p to 9.0p”.
As a measure to improve the bottom line, the London based firm announced plans to cut costs by almost $200 million by the end of 2013. The British firm also appointed, Jonathan Sorrell, a former Goldman Sachs Group, Inc. (NYSE:GS) executive, as its new finance director.
BAML’s European analysts note that this will increase regulatory capital by around $140m, reflecting a combination of the after tax profit on the sale and the reg cap set against the position previously. They see this as clearly positive for Man’s balance sheet. They had never worried about this before, but nevertheless this is good news. They are not changing earnings estimates.
Citigroup estimates the benefit to Man’s regulatory capital position (reported at around $500m surplus at end June 2012) at $180m. This reflects the gain on sale + the benefit of the conversion of the Lehman claims (20% capital charge) to cash (0% capital charge).
In the trading session, this morning, company’s shares fell less than 1 percent in London.