Lehman Brothers Minibond saga : the products

The Lehman Brothers Minibond saga arose from the company’s bankruptcy filing in September 2008 and centred on the impact this had on several structured investment products linked to the failed investment bank. When investors discovered that the company’s collapse could cause them to lose all or most of the money they had invested in these products, there was intense public outrage. Media reports revealed how complex these products were and raised questions about their suitability for the mass market. Many of the affected investors claimed that they did not fully understand the risks involved and that the distributors had misrepresented and mis-sold the products.

Structured products made their debut in Singapore’s retail investment market in 1999 and quickly became the fastest-growing segment of the financial services industry. Financial institutions offered an increasing array of such products to cater to growing demand. Over the years, the products offered became more complex, with structured notes like Minibond Notes entering the scene less than three years before the failure of Lehman Brothers. Some of the structures were so complex that even trained financial advisers had difficulty comprehending how they worked. Nonetheless, retail investors flocked to these products without fully understanding them, drawn by the attractive coupons, which were much higher than fixed deposit rates. It was estimated that about S$3 billion worth of structured products were sold in Singapore in 2007, the year before Lehman Brothers’ collapse brought the market for these products to a standstill.

The affected products
The products in the minibond saga were the Minibond Notes programme (issued in nine series), High Notes 5, Jubilee Series 3 LinkEarner Notes and Pinnacle Series 9 and 10 Notes. They belong to a category of structured financial instruments called first-to-default credit-linked notes. They pay the investor a stream of interest/coupon at regular intervals until the maturity date. When the notes mature, the investor will receive either his principal or an amount calculated based on a specific formula. Generally, they do not provide a guarantee to protect investors from losing all of their original investment.

They are called credit-linked because their returns are linked to the credit performance of a portfolio of entities, which could be corporations or autonomous states (but often reputable companies with good credit ratings). These reference entities are not parties to the notes. The first-to-default element means that the notes will be terminated/redeemed before maturity if just one of the reference entities experiences what is known as a credit event such as bankruptcy or failure to make debt repayments. When this happens, the note issuer will sell the underlying assets (purchased using proceeds from the note issue) and use the recovered value to meet its various payment obligations. Early termination of the notes may also be triggered by a drastic decline in the market value of the underlying assets, which usually include collateralised debt obligations (CDOs).

These notes typically involve a credit default swap agreement between the note issuer and another entity referred to as the swap counterparty. Throughout the note’s tenor (which could be up to ten years), the two parties exchange a series of payments – the note issuer channels the returns from the underlying assets to the swap counterparty in exchange for a series of payments that it then uses to pay the note holders. If a credit event occurs, the swap counterparty’s right to payment ranks ahead of the note holders’.

Lehman Brothers, which arranged the Minibond programme, was the swap counterparty for the notes. Nine series were launched between April 2006 and August 2008. In 2007, Minibond Notes were named the best credit structured deal by The Asset, a Hong Kong-based financial magazine. Each series had six or seven reference entities, which differed between the series. For example, the first series referenced American Express, Citigroup, DBS Bank, JPMorgan Chase & Co, Singapore Telecommunications (Singtel) and Standard Chartered Bank, but the last two series referenced Aviva Public Limited Company (PLC), HSBC Bank PLC, Prudential PLC, Singtel, Malaysia and China.

Unlike in the Minibond programme, Lehman Brothers’ role in High Notes 5 and Jubilee Series 3 LinkEarner Notes was that of a reference entity. Both were launched in 2007. DBS Bank was the arranger and the swap counterparty for High Notes 5, while Merrill Lynch was the same for Jubilee Series 3 LinkEarner Notes. Besides Lehman Brothers, there were seven other reference entities in High Notes 5, including Goldman Sachs, Macquarie Bank, Merrill Lynch and Morgan Stanley. Jubilee Series 3 LinkEarner Notes had four other reference entities, namely, Macquarie Bank, Morgan Stanley, Oversea-Chinese Banking Corp (better known as OCBC Bank) and United Overseas Bank.

In the case of Pinnacle Series 9 and 10 Notes, Lehman Brothers was included in the underlying portfolio of CDOs. The notes were arranged by Morgan Stanley, which was also the swap counterparty. The reference entities were SingTel, Temasek Holdings, Australia, Hong Kong and Singapore.

Minibond Notes, Jubilee Series 3 LinkEarner Notes and Pinnacle Series 9 and 10 Notes were issued by special purpose vehicles created solely for issuing the notes, whereas High Notes 5 was issued by DBS Bank. These notes offered interest rates of at least 4% per annum with tenors of between five and seven years. Minimum investment sums ranged from S$5,000 to S$25,000, though many people invested much more.

In total, about 10,000 retail investors placed over S$500 million in these notes. They included about 8,000 people who invested S$375 million in Minibond Notes, more than 1,400 who bought S$103 million worth of High Notes 5, 350 who put S$23 million into Jubilee Series 3 Linkearner Notes, and about 700 who had S$26 million invested in Pinnacle Notes Series 9 and 10.

Valerie Chew

Francis Chan, “DBS High Notes Investors at Risk,” Straits Times, 18 September 2008. (From NewspaperSG)


Francis Chan, “Credit-Linked Notes May Be worthless,” Straits Times, 14 November 2008, 6. (From NewspaperSG)

Gabriel Chen, “Structured Products, Anyone?,” Straits Times, 7 December 2008, 36. (From NewspaperSG)

Genevieve Cua, “Lehman Brothers Launches Credit-Linked Note,” Business Times, 4 April 2006, 6. (From NewspaperSG)

Genevieve Cua, “What Are Structured Notes?” Business Times, 23 August 2006, 32. (From NewspaperSG)


Jubilee Series 3: LinkEarner Notes,” OCBC Securities Pte Ltd, last retrieved 5 March 2010.

K. Tan, “Personal Wealth: Messy End to Structured Products,” The Edge Singapore (29 September 2008). (Call no. RSING 338.7095957 ES)

Lorna Tan, “Coming to Terms with Risks,” Straits Times, 28 September 2008, 27. (From NewspaperSG)

Minibond Series 9 & 10: Pricing Statement dated 27 June 2008,” Minibond Limited, last retrieved 5 March 2010.

Monetary Authority of Singapore, “MAS Welcomes Announcement of the Distribution of the Recovery Values of the Minibond Notes,” press release, 3 February 2010.  

Siow Li Sen, “Investors Fret over Lehman’s Minibonds,” Business Times, 17 September 2008, 1. (From NewspaperSG)

Tan Dawn Wei and Francis Chan, “‘When It Happened, I Was Shocked’,” Straits Times, 19 October 2008, 8. (From NewspaperSG)

Further resource
Oliver Chen and Anand Srinivasan, “Which Credit Products Are Suited to the Masses?,” Straits Times, 29 October 2008, 22. (From NewspaperSG)

Steffen Tolle, et al., Structured Products in Wealth Management (Singapore: John Wiley & Sons (Asia), 2008). (Call no. RBUS 332.6 STR)

The information in this article is valid as at 2010 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.

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