State-run Power Sector Assets and Liabilities Management Corp. is filing $3.5 million worth of “contractual claims” against the bankrupt Lehman Brothers Special Financing Inc. for hedging transactions it entered into last 2007.
PSALM president Emmanuel R. Ledesma Jr. said the government was now looking to tap international lawyers and was even willing to spend as much as $500,000 to recover the amount. He, however, stressed that these claims were not losses, contrary to news reports that claimed PSALM lost $3.5 million in investments when Lehman Brothers filed for bankruptcy proceedings in 2008.
PSALM made the clarification in response to published claims of Eastern Samar Rep. Ben Evardone, whose allegations resulted from an Invitation to Bid (ITB) that PSALM issued to procure the services of a legal counsel in connection with the transaction.
Ledesma first clarified that the transaction that PSALM entered into with Lehman Brothers was not an investment but a hedging transaction, specifically a Principal Only Swap (POS) transaction.
“The transaction could be likened to an insurance purchase wherein PSALM pays an annual expense premium of 2.687 percent on the notional amount of $100 million for 19 years. In exchange, PSALM, or the government, has the right to buy dollars at P44.788 in 2028 regardless of the foreign exchange rate at that time,” Ledesma explained.
Ledesma said that when Lehman Brothers filed for bankruptcy three years ago, PSALM had only made two premium payments. As such, PSALM immediately invoked the International Swaps and Derivatives Association Inc. (Isda) agreement upon learning of the Lehman Brothers bankruptcy, terminated the transaction on Nov. 3, 2008, and replaced it with a new POS with the same terms and conditions.
“The replacement is to ensure the continuous protection of PSALM’s transaction that it initially made with Lehman Brothers,” Ledesma emphasized.
“Hence, to say that PSALM lost in the deal is totally inaccurate. In fact, the value of the Lehman swap that was replaced may now be sold in the derivatives market for up to approximately $12.85 million as of November 2011,” he explained.
Ledesma further clarified that the reason for the ITB is to tie up loose ends with Lehman Brothers to ensure the continuous protection of PSALM’s rights under the Isda. The international legal counsel that the government plans to tap will then help facilitate PSALM’s claims.