A STRING of councils in Western Australia are expecting millions to be wiped off the value of high-risk securities following the collapse of US investment bank Lehman Brothers early this week.
With the 158-year-old bank filing for Chapter 11 bankruptcy, a credit event is likely to be triggered which would severely decrease the credit support available to the structure of the collateralised debt obligations.
However, local governments are remaining optimistic, relieved that despite the events that have transpired not all the CDOs sold by Lehman Brothers have defaulted, with councils continuing to receive interest on their face value.
In August last year, 35 councils across Australia had a combined $25 million invested in Lehman Brothers' Federation CDOs, which had promised an annual return of 7.16 per cent to investors.
Lehman last year bought the Grange Securities business that sold exposure to the sub-prime mortgage market to local councils, mainly through the Federation CDOs.
In June, WA Business News revealed that the Grange advisory firm, now called Lehman Brothers Australia, was negotiating a settlement deal with the 35 Australian councils it sold CDOs to.
The firm was offering to exchange the CDOs for unsecured bank issued notes, offering a return of 1 per cent a year.
City of Swan chief executive Mike Foley this week said the council, which declined Lehman's proposal, was lucky it only had Federation in its investment portfolio to worry about.
"We'll just have to sit tight and wait and see what happens," he said.
Other councils, like the City of Melville, were not so lucky, with half of the value wiped off its $21.2 million CDO investment portfolio since August last year.
Acting chief executive Marten Tieleman said the council had been receiving monthly valuations of its CDOs from Lehman Brothers, but expected that service to now cease.
"At this stage, despite a number of credit events, none of the city's CDOs have defaulted, so we continue to receive income from our investments," he said.
A spokesperson for the Town of Kwinana said although the council had eight CDOs in its investment portfolio, it was uncertain how many had been directly affected by the collapse.
After taking independent advice in June, the council also declined the Lehman Brothers offer to exchange its CDOs for unsecured bank issued notes.
