OfficeMax 2011 Annual Report Download - page 87

Installment Notes, the Note Issuers transferred a total of $1,635 million in cash to Lehman Brothers
Holdings Inc. (“Lehman”) and Wachovia Corporation (“Wachovia”) (which was later purchased by Wells
Fargo & Company) ($817.5 million to each of Lehman and Wachovia). Lehman and Wachovia issued collateral
notes (the “Collateral Notes”) to the Note Issuers. Concurrently with the issuance of the Installment and
Collateral Notes, Lehman and Wachovia guaranteed the respective Installment Notes and the Note Issuers
pledged the Collateral Notes as security for the performance of the Installment Note obligations.
In December 2004, we completed a securitization transaction in which the Company’s interests in the
Installment Notes and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries. The
subsidiaries pledged the Installment Notes and related guarantees and issued securitized notes (the
“Securitization Notes”) in the amount of $1,470 million ($735 million through the structure supported by the
Lehman guaranty and $735 million through the structure supported by the Wachovia guaranty). As a result of
these transactions, we received $1,470 million in cash. Recourse on the Securitization Notes is limited to the
proceeds of the applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty, and
therefore there is no recourse against OfficeMax. The Securitization Notes are 15-year non-amortizing, and were
issued in two equal $735 million tranches paying interest of 5.54% and 5.42%, respectively. The Securitization
Notes are reported as non-recourse debt in the Company’s Consolidated Balance Sheets.
On September 15, 2008, Lehman, the guarantor of half of the Installment Notes and the Securitization
Notes, filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief
under chapter 11 of the United States Bankruptcy Code. Lehman’s bankruptcy filing constituted an event of
default under the $817.5 million Installment Note guaranteed by Lehman. We are required for accounting
purposes to assess the carrying value of assets whenever circumstances indicate that a decline in value may have
occurred. In 2008, we evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to
the estimated amount we then expected to collect ($81.8 million) by recording a non-cash impairment charge of
$735.8 million, pre-tax. The ultimate amount to be realized on the Lehman Guaranteed Installment Note depends
entirely on the proceeds from the Lehman bankruptcy estate.
Lehman’s disclosure statement on its Chapter 11 Plan (the “Disclosure Statement”) was confirmed by the
United States Bankruptcy Court for the Southern District of New York on December 6, 2011. The Disclosure
Statement provides a range of estimated recoveries for various classes of unsecured creditors of Lehman.
Pursuant to a stipulation entered into on October 7, 2011 and approved by the bankruptcy court on December 14,
2011, the claim of the Securitization Note holders through the Note Issuers will be treated as a class 3 senior
unsecured claim (estimated to recover at a rate of approximately 21.1% under the Chapter 11 Plan) rather than
falling into any other class of guarantee claims (estimated to recover at a rate of approximately 11%-13%
depending on the class under the Chapter 11 Plan). Due to this categorization, provisions of the stipulation that
make certain funds unavailable to the claim that would otherwise be available to class 3 senior unsecured
claimants, the status of the bankruptcy proceedings, and based on information in the Disclosure Statement, it
appears that Securitization Note holders may recover at a potential rate within the range of 17% to 20%.
However, uncertainties exist as to the actual recovery that will ultimately be received on the claim. The
disposition of a related claim of the Securitization Note holders through us on the guaranty may result in an
additional recovery and the funds available for claimants will depend on Lehman’s ongoing claims resolution
process, the establishment of reserves for unresolved claims, and the value of the assets Lehman is able to
liquidate. Due to these uncertainties and other factors, we have not increased our assumed recovery rate or the
carrying value of the Lehman Guaranteed Installment Note. We expect that an initial distribution may be made
on the Securitization Note holders’ claim as early as March 30, 2012. Further distributions are expected to occur
over a several-year period. Going forward, we intend to adjust the carrying value of the Lehman Guaranteed
Installment Note as further information regarding our share of the proceeds, if any, from the Lehman bankruptcy
estate becomes available. Recourse on the Securitization Notes is limited to the proceeds from the applicable
pledged Installment Notes and underlying Lehman or Wachovia guaranty, and any proceeds we receive from the
bankruptcy will be distributed to the Securitization Note Holders.. However, under current generally accepted
accounting principles, we are required to continue to recognize the liability related to the Securitization Notes
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