MF Global administrators could make 100% return to creditors

KPMG ADMINISTRATORS to MF Global could make a 100% return to unsecured creditors, according to the latest financial outcome report.

Available funds could amount to between $3bn (£1.94bn) and $3.18bn, by the end of the administration, with total client money and unsecured claims of between $3.1bn and $3.18bn.

The administrators also confirmed that unsecured creditors or customers whose funds were not segregated are likely to receive their first payment of 43p for every £1 owed. While secured creditors, whose funds were segregated, will receive a second payment of 44 cents for every $1 owed, taking total returns to 70 cents, later this year.

The segregated pool is denominated in dollars and the unsecured pool is denominated in pounds sterling.

Richard Heis, the KPMG partner appointed as joint special administrator alongside Richard Fleming and Mike Pink following the bank’s collapse in October 2011, said: “Returning funds will feel like a long journey for many claimants and it is certainly the case that the first use of the special administration regime for investment banks has had some challenges.”

Creditors were told last July they would have to wait for any funds to be distributed pending the outcome of a legal dispute between the bank’s US and UK arms over ownership of MF Global’s assets. The US entity wanted to be treated as a secured creditor and pushed for $639m to be repaid in full by MF Global UK.

In early January, the administrators were able to negotiate a deal whereby the debt was broken into two sections with $196m added to the secured creditor pot, where it was likely to receive a higher payout; and the remaining balance added to the unsecured creditor pot – of which between 26% and 60% is likely to be repaid.

One of the key changes to what was previously published in the last financial outcome update in May, is a payment of $95m to MF Global UK. This is a settlement between the US arm and a third party to pay the UK entity.

Administrators were waiting for a third party, which Accountancy Age understands to be JP Morgan, to drop its claim and return funds to MF Global UK. The collapsed bank MF Global held funds in various financial institutions and never had a physical bank of its own. It is understood that JP Morgan declined to return funds it was holding until its own claim against the US arm were fulfilled.

Other changes in the latest report include the categorisation of certain pension payments following a Supreme Court ruling in July, which will result in defined benefit pension payments being paid as unsecured creditors, as opposed to having an ‘expense of administration’ categorisation.

In a judgment in Lehman Brothers’ and Nortel’s battle with the Pensions Regulator to determine how certain pension payments should be categorised, the Supreme Court reversed an earlier decision by the High Court and Court of Appeal which had effectively allowed defined benefit pension payments to be ranked as a super-creditor and paid ahead of all other creditors. These types of pension payments will be treated as an unsecured creditor.

Another significant change since the last financial outcome report was the rejection of more than 1,700 client money and general creditor claims. Following an order the administrators obtained from the High Court in June, a Bar Date for client money was set. Beyond this date the administrators are not required to reserve funds for these types of claims unless a rejection is appealed. So far there has been one formal appeal to a rejected claim.

“Since our appointment we have made strong progress in recovering the majority of funds and assets of this highly complex business; progressing legal clarification in the High Court and agreeing settlement terms with the US group companies,” Heis said.

The collapse of MF Global saw the first special administration take place in the UK. A special administration entails the administrators focusing on three tasks: making a swift return of client assets; ensuring timely engagement with authorities; and rescuing the business as a going concern, or winding it up in the best interests of the creditors.

A regular administration involves the latter, but not the first two objectives.

With those tasks in mind, special administrators would try to ascertain the funds held in segregated accounts – which are clients’ funds for investment – and then return the funds to them. In regular administrations, assets are pooled together and then divided between creditors.

The special administration regime (SAR) was created in February 2011 after Lehman Brothers collapsed at the end of 2008. The first payout to creditors was made in November 2012.