By Francis Chan

INVESTORS stuck with Minibonds linked to bankrupt Lehman Brothers got some disappointing news last night but also some moderately good news.

First, there is still no swap counterparty to replace Lehman, though proposals are still being examined. This remains the main hope for investors to get their money back.

But on a positive note, the Monetary Authority of Singapore (MAS) announced steps to help preserve the value of their ill-fated investments.

The central bank advised investors, however, to remain patient as other options to restructure the complex product are explored.

One key step taken is that HSBC Institutional Trust Services Singapore - the trustee for Minibonds - has decided to 'terminate the swap arrangements in the underlying securities' for some Minibond series.

This complex-sounding manoeuvre essentially removes one element of risk that could further whittle down the value of the Minibonds.

In simple terms, should efforts to restructure Minibonds fail, what investors get back depends on the value of the underlying securities that backed the Minibonds.

Most Minibonds series were backed by collateralised debt obligations (CDOs), which were in turn backed by assets like bonds.

The problem is that these CDOs also entered into separate swap agreements - different from the main swap agreement that Minibond Limited had with Lehman - that could erode the value of their assets should credit conditions further deteriorate in the global economy.

Terminating these swap agreements at the CDO level stops the latter from happening.

There is still a possibility that investors may lose most or all of their money. But the action taken means that investors are better off, because they are protected from any unnecessary erosion in the final valuation of the notes.

Swap arrangements occurred for Minibonds Series 1 to 8, but not Series 9 and 10.

The Straits Times understands that the move to terminate the swap agreements was initiated by PricewaterhouseCoopers Singapore (PwC), which has been appointed as receiver for the Minibonds series that have defaulted.

PwC's job is to take control of the assets of Minibonds and work closely with the trustee to find the best solution for noteholders.

Meanwhile, the search for a new swap counterparty to replace Lehman continues.

Mr Goh Thien Pong of PwC told ST yesterday that 'draft proposals have been made by the interested parties'.

'The proposals are more complex than a straight substitution of the existing swap counterparty, with legal and financial restructuring implications that need to be closely examined,' he added.

To further protect the interests of Minibond holders, MAS said yesterday that it has appointed Deloitte and Touche Corporate Finance as an independent financial adviser.

Deloitte's job is to advise noteholders on the merits and risks of a proposal, if it is put to them for approval. MAS is paying for Deloitte's services.

MAS has told the HSBC Trustee to work towards providing noteholders with an update on whether this type of restructuring is still a viable option by the end of the month. It said that investors need not take any action now.

In a statement yesterday, MAS managing director Heng Swee Keat said that MAS has been in 'close consultation with the trustee and receivers'.

'We believe that these are reasonable and appropriate steps for the trustee to take to protect the interests of noteholders given current market conditions.'

He added: 'Our work on other fronts, on the formal inquiries and in seeing to the serious and impartial process of handling investors' complaints, is progressing. We will provide updates at the relevant juncture.'

On a related note, MAS responded yesterday to investor advocate Tan Kin Lian's e-mail messages - one to the Prime Minister and two more to the regulator - asking for an independent inquiry into alleged mis-selling of Lehman-linked investment products.

MAS said that in order to be 'fair and transparent to everyone', it cannot reply to particular groups of individuals or individuals writing to MAS on its intended course of action.

'We will continue to communicate with investors through public press statements when appropriate,' it added.

This article was first published in The Straits Times on November 13, 2008.