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UAE investors who dealt with Lehman to lose most of savings
UAE-based investors who invested their savings in capital protected structured notes and preferred stocks from Lehman Brothers stand to lose most of their investments, Gulf News has learnt.
- By Babu Das Augustine, Banking Editor
- Published: 01:18 September 30, 2008
Dubai: UAE-based investors who invested their savings in capital protected structured notes and preferred stocks from Lehman Brothers stand to lose most of their investments, Gulf News has learnt.
A number of local and international banks sold these investment products to UAE-based investors. Now with the Lehman Brothers gone into bank-ruptcy, many of these products have become either worthless or their face value has fallen to as low as 15 per cent of the original investment.
Take the case of capital protected notes series offered by Lehman and sold by a number of banks operating in the UAE. They were offered at face value of $100 (Dh367) a note and are worth about $15 today. Many customers who invested their own money and up to 3 times leverage from banks now face a bleak future.
A few investors who approached Gulf News yesterday said local banks which offered leverage on these products are demanding their money back through margin calls.
"I had obtained a leverage of about 3 times my original investment from a local bank. Now the bank is asking me to settle at least 50 per cent of the amount. The tenure of the leverage was 15 years. Suddenly they have asked us to pay up the money which is beyond by means," said a customer who bought capital protected notes of Lehman from National Bank of Fuj-airah.
Investors say that these products were sold to them as attractive investment opportunities and leverages were marketed to them with the promise that they will earn them significant appreciation on their capital invested. "Risk factors were never explained. The money I saved up for the last several years to buy a house has been invested in these notes. Not only have I lost my savings, the bank now says I owe them two times the investment I originally made," said an investor.
Banks refute these charges. "The offer documents explained the risk factors adequately. The leverage was offered to help investors to make the maximum of the investment opportunity and it was clearly understood if the market value of these notes fell, margin calls will be made," said Karishma Rupani an official with National Bank of Fujairah, a bank that sold and offered leverage on these products in the UAE.
Bankers said yesterday that although the leverage offered was for 15 years under the current circumstances with the value of the underlying investments fallen substantially, they are forced to make a margin call. Banks say they have legal recourse to recover the money from these investors who have obtained leverage as these loans are issued against promissory notes signed by borrowers as collateral.
"The reality before us is that these investment products have become worthless. Investors need to understand they have to pay the banks what they have taken as loans. Some banks may help them by converting these into personal loans or longer term loans against additional securities," said a banker.
While holders of bonds are likely to get a portion of their investments as Lehman's assets are sold by the liquidators, large numbers of UAE investors who invested in preferred stocks stand to lose their entire investment.
Lehman had estimated debts of $613 billion as of May 31. Holders of unsecured Lehman debt may get less than 50 cents on the dollar according to a recent report by CreditSights Inc.
Lehman's September 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money.
The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman and other leading Wall Street banks used to raise cheaper funding as the credit crisis drove bond yields higher. About three-fifths of the $68.1 billion sold this year were bought by individual investors.
I had obtained a leverage of about 3 times my original investment from a local bank. Now the bank is asking me to settle at least 50 per cent of the amount."
Investor
Lehman product
Capital protected notes
Investment product: 100 per cent capital protected notes
Issuer: Lehman Brothers
Maturity: 15 years
Face value: $100
Coupon rate: 9 per cent per annum
Current status: No protection as Lehman brothers is bankrupt
Current value: approximately $15 a unit
What is Leverage?
Leverage is a loan offered by banks to investors keeping underlying investment plus additional securities as collateral. In the case of Lehman's capital protected notes banks offered leverage up to 3 times the investors' capital against the original investment and a promissory note issued by the investor as collateral to the bank.
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