Impact of Lehman Brothers on different types of securities

Dear Mr. Tan,
I am not clear why the collapse of Lehman Brothers affect some securities (such as High Notes, Jubilee Notes) more than other securities (such as Minibond)?

REPLY
Lehman Brothers is listed as a "reference entity" in the High Notes series 5 and the Jubilee Notes series 3. When Lehman Brothers entered into a "credit event", the entire capital of the securities is used to pay the swap counter-party. There is nothing left for the noteholders (i.e. investors of these securities).

For the Minibonds, Lehman Brothers is the swap counter-party. With the collapse of Lehman Brothers, another counter party has to be found to take over its place. If this is not done, the underlying securities have to be liquidated now at the current depressed price. This will leave the investors with very little, maybe 20% or less (just a guess). If a new swap counter party is found, the underlying assets can be kept until the maturity date. Hopefully, the price will be higher, but the investors is not likely to get back 100%.

For the securities that have not defaulted yet, the investors will still face the following risks prior to the maturity date:

a) Risk that any of the reference entity may default (similar to the Lehman Brother situation)
b) Risk that the underlying assets may defaults
c) Risk that the swap counterparty may default

All these risks remain quite high, under the current global financial crisis.