QUARTERLY FINANCIAL REPORT - Form 8-K

Objectives

On the Effective Date, the Plan became effective and the Debtors emerged from bankruptcy with a new Board of Directors (LBHI's Board of Directors hereinafter referred to as the "Board"). The Company continues to pursue the objectives of asset value maximization and timely distributions to creditors of available cash through the optimal execution of an orderly wind down process. Pursuant to the Plan, the Plan Administrator has made and expects to continue to make distributions to creditors of LBHI.

Basis of Presentation

The information and data included in the Quarterly Financial Report, including the Notes to the Cash Flow Estimates (the "Quarterly Financial Report") are derived from sources available to LBHI and LBHI-Controlled Affiliates (collectively, the "Company"). The term "LBHI-Controlled Affiliates" refers to those affiliates that are directly or indirectly controlled by LBHI and have not filed for protection under Chapter 11 of the Bankruptcy Code. LBHI-Controlled Affiliates excludes, among others, certain affiliates (such as Lehman Brothers International (Europe) (in administration) ("LBIE")) that were not managed or controlled by LBHI as of the Effective Date and are under separate administrations abroad (collectively, "Non-Controlled Affiliates").

The information and data included in these cash flow estimates and notes thereto (the "December 31, 2023 Cash Flow Estimates") were prepared to update the October 5, 2023 Cash Flow Estimates filed on December 29, 2023 (the "October 5, 2023 CFE") and are based on estimated cash flows from assets managed in an orderly wind down and/or sale (and related costs of operations) until the Company's activities are fully resolved.

These December 31, 2023 Cash Flow Estimates include an estimate of expenses to be paid through final termination of the Company on such matters as asset disposition, litigation and disputed claims resolution, administrative wind-down, and related activities. These estimates also include the estimated costs of a small subset of the Company's current staff committed to stay for many years, if necessary, to oversee the resolution of remaining disputes, other matters, and residual wind down activities. These estimates are subject to ongoing review and revision. Actual expenses may differ materially from these estimates.

The Company has prepared the Quarterly Financial Report based on the information available to the Company at the date of filing; however, such information may be incomplete and may be materially deficient. Material uncertainties continue to exist regarding the ultimate value realizable from the Company's assets, the timing of asset recoveries, future costs, and the eventual level of allowed creditors' claims. Accordingly, the Quarterly Financial Report is not meant to be relied upon as a complete description of the Company, its business, condition (financial or otherwise), results of operations, prospects, assets, or liabilities. The Company reserves all rights to revise this report.

In preparing the Quarterly Financial Report, the Company made various estimates and assumptions based on information available to the Company. As such, this report contains forward-looking statements that involve known and unknown risks, uncertainties and other factors which may cause the Company's actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including all statements containing information regarding the intent, belief or current expectation of the Company and members of its management. Accordingly, the financial information herein is subject to change and any such change may be material.

The Quarterly Financial Report should be read in conjunction with the Company's previous filings, including Form 8-K reports as filed with the United States Securities and Exchange Commission ("SEC"), the Plan and related Disclosure Statement (the "Disclosure Statement") dated August 31, 2011, and other documents filed after the Commencement Dates with various regulatory agencies or theBankruptcy Court by LBHI and LBHI-Controlled Affiliates.

Future expenses and distributions are dependent in large measure on the resolution of various legal matters involving the Company and its Non-Controlled Affiliates. (See Litigation below.) The remaining legal matters require resolution in the United States, as well as multiple foreign jurisdictions, including the United Kingdom (UK), Germany, Switzerland, India, and Australia. The timing for achieving final administrative or judicial resolution of these legal issues is uncertain. Consequently, the Company cannot definitively specify a date for the final termination of its activities.

All cash flows in these Estimates are presented on an undiscounted basis.

Key Assumptions

Recoveries from Non-Controlled Affiliates

Estimates of recoveries from Non-Controlled Affiliates are based on information obtained from both Non-Controlled Affiliates' fiduciaries, as well as information obtained by the Company through settlement negotiations and involvement on creditors' committees. (See Note 2 - Due from Non-Controlled Affiliates for additional information)

Certain receivables from Non-Controlled Affiliates are denominated in foreign currencies, and as such, estimated recoveries related to these receivables are subject to movements in foreign exchange rates. The Company does not hedge against movements in foreign exchange rates.

The majority of estimated remaining recoveries from Non-Controlled Affiliates are contingent upon (i) the resolution of matters in dispute and/or active litigation, (ii) the receipt of non-U.S. government and/or Court approvals, and/or (iii) the final wind down of estates not controlled by LBHI. As such, the timing and amount of future recoveries from Non-Controlled Affiliates are uncertain, and actual recoveries may differ materially from these estimates.

At this stage, the number of outstanding matters has been substantially reduced, allowing for greater transparency into the Company's internal and confidential assumptions regarding expected recoveries on individual contested matters. Such transparency could undermine the ability of the Company to achieve optimal outcomes through negotiated settlements. Solely for the purpose of maintaining the confidentiality of its assumptions relating to these uncertain recoveries, which are informed by privileged advice from counsel, the Company excludes from its December 31, 2023 Cash Flow Estimates all potential recoveries related to the dispute between LBHI and other creditors (known as "ECAPS") over entitlements to certain funds available for subordinated creditors at non-controlled UK affiliate Lehman Brothers Holdings PLC ("LBH PLC"). As a result, LBHI excludes from its December 31, 2023 Cash Flow Estimates all potential recoveries from its subordinated debt claim against LBH PLC (including indirectly LBIE's litigation against AGR), its agreements with holders of approximately 16.8% of ECAPS, as well as its partial settlement agreement with all ECAPS' holders. (See Excluded Recoveries in Note 4 - Legal Proceedings for further information.)

Litigation

The Company is involved directly and/or indirectly in numerous litigations and disputes that will impact its recoveries from Non-Controlled Affiliates. The Company's estimates of recoveries from Non-Controlled Affiliates incorporate the Company's current assumptions regarding the resolution of these matters. The December 31, 2023 Cash Flow Estimates exclude all potential recoveries from LBHI's subordinated debt claim against LBH PLC (including indirectly LBIE's litigation against AGR), its agreements with holders of approximately 16.8% of ECAPS, as well as its partial settlement agreement with all ECAPS' holders, which are treated as Excluded Recoveries herein (see Note 4 - Legal Proceedings in for additional information). The estimated costs (i.e., professional, legal, and advisory fees) of supporting all of the Company's litigations, including the Excluded Recoveries, are included.

Reporting of Claim Assignments

As part of the Company's planned operational wind down and legal entity dissolution process, LBHI has received claims against itself by way of assignment from various affiliated entities, with no resulting economic effect on estimated overall recoveries. The receivables and payables of such claims are netted in this Quarterly Financial Report.

This Quarterly Financial Report:

Due from Affiliates (as shown in the Balance Sheets and Note 2 and Note 3 herein)

Due from Affiliates represents (i) LBHI and LBHI-Controlled Affiliates receivables related to transactions with Non-Controlled Affiliates, and (ii) LBHI receivables related to transactions with LBHI-Controlled Affiliates.

In these December 31, 2023 Balance Sheets, Due from Non-Controlled Affiliates and Due from LBHI-Controlled Affiliates are recorded at estimated maximum potential remaining recoveries. These estimates for maximum potential remaining recoveries are materially higher in the aggregate than the Company's current total estimated recoveries on these claims. These estimates are subject to ongoing review and revision.

The Company owns the following claims against LBH PLC, a non-controlled affiliate in administration in the UK: (i) senior claims with an aggregate remaining unpaid balance of GBP 94 million; and (ii) subordinated claims of GBP 1.1 billion (which are affected by agreements with holders of approximately 16.8% of ECAPS, and a partial settlement agreement with all ECAPS' holders). LBH PLC is the sole beneficiary of all distributions flowing from Lehman Brothers Holdings Intermediate 2 Ltd. ("LBHI2"), and LBHI2 is, other than Elliott Management Corporation and King Street Capital Management Corporation L.P. (together, the "Funds"), the sole beneficiary of the Wentworth Joint Venture related to LBIE (described below).

Wentworth Joint Venture related to LBIE

A joint venture was formed on January 31, 2014 to facilitate the resolution of LBIE claims (the "Joint Venture"). The economic beneficiaries of the Joint Venture include LBHI2 and the Funds.

The Joint Venture includes a joint recovery pool governed by a specific sharing formula. Subject to certain adjustments, which could be material, all recoveries from the Sub Debt, Senior Claim, Preferred Equity, and the Funds' contribution are split as follows:

The "Tier 1 Pool Threshold Amount" is GBP 650 million. The "Tier 2 Pool Threshold Amount" is GBP 1.3 billion plus interest calculated at the simple rate of 2.25% from November 30, 2013 through September 3, 2018; thereafter, interest is calculated at the simple rate of 1.25%. The "Tier 3 Pool Threshold Amount" is GBP 2.2 billion plus interest calculated at the simple rate of 4.25% from November 30, 2013 through September 3, 2018; thereafter, interest is calculated at the simple rate of 2.5%.

A detailed summary of the terms of the parties' commitments and the Joint Venture is available at www.lehman-docket.com in the Key Documents section.

If LBIE makes distributions on the Preferred Equity before aggregate distributions from the Joint Venture to the Funds and LBHI2 have reached GBP 2.2 billion (plus interest), then, in certain circumstances, LBHI2, Luxembourg Finance S.a.r.l. ("Lux Finance") and LBHI shall be obligated to make payments to preserve the economic terms of the transaction as if 100% of the Preferred Equity proceeds had been transferred by LBHI2 to the Joint Venture.

Note 4 - Legal Proceedings (continued)

LBHI owns a claim of GBP 1.1 billion related to the subordinated debt issued by LBH PLC, a non-controlled affiliate in administration in the UK. LBH PLC also has outstanding subordinated notes owned by three third party trusts known as ECAPS I, II, and III. A dispute over the relative priority of these subordinated debt instruments issued by LBH PLC was litigated in the UK courts. The Court of Appeal held that the subordinated notes owned by ECAPS I-III are senior to the subordinated debt owned by LBHI. In August 2022, the Supreme Court declined to consider LBHI's appeal of that decision.

In October 2023, a trial was conducted before Justice Hildyard in the UK High Court on the question of whether statutory interest on ECAPS' subordinated notes claims should be paid before principal on LBHI's subordinated debt claim.

In November 2023, the Court issued its decision in favor of ECAPS, finding that statutory interest on ECAPS's subordinated notes claims should be paid before principal on LBHI's subordinated debt claim.

In January 2024, LBHI filed a request to appeal the decision with the UK Court of Appeal. A decision on that application is pending as of the date of the filing of this report.

The outcome of this matter will have a material effect on LBHI recoveries.

For details related to the partial settlement and further information, please refer to the "ongoing litigation" section of LBH PLC's website: www.pwc.co.uk/services/business-recovery/administrations/non-lbie-companies/lbh-plc-in-administration.html

Solely for the purpose of maintaining the confidentiality of its assumptions relating to these uncertain recoveries, which are informed by privileged advice from counsel, LBHI treats recoveries from this matter as an Excluded Recovery in its December 31, 2023 Cash Flow Estimates. As a result, LBHI excludes from its December 31, 2023 Cash Flow Estimates all potential recoveries from its subordinated debt claim against LBH PLC (including indirectly LBIE's litigation against AGR), and its agreements with holders of approximately 16.8% of the ECAPS.

In November 2011, LBIE sued AG Financial Products Inc. ("AGR"), an affiliate of Assured Guaranty Corp., which in the past had provided credit protection to counterparties under credit default swaps. LBIE's complaint, which was filed in the Supreme Court of the State of New York (the "New York Supreme Court"), alleged that AGR improperly terminated nine credit derivative transactions between LBIE and AGR and improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions between LBIE and AGR. LBIE asserted in the complaint that AGR owes LBIE a termination payment of approximately $1.4 billion.

In July 2018, the New York Supreme Court dismissed LBIE's claims with respect to the nine allegedly improperly terminated transactions in their entirety. That ruling remains subject to appeal. The Court also dismissed the claim that AGR breached its implied duty of good faith and fair dealing with respect to the valuation of the 28 terminated credit derivatives transactions but found that there is a genuine question of fact as to the reasonableness and good faith of AGR's calculation of its loss, and which allowed LBIE to proceed with its claim against AGR for breach of contract.

The trial in the New York Supreme Court, concluded in November 2021. In March 2023, the Court issued its decision in favor of AGR and granted AGR's claim. LBIE appealed that decision, and in March 2024, the Appellate Division of the Supreme Court, First Judicial Department ("Appellate Division") issued its decision upholding the lower court ruling in all respects. LBIE is considering filing an application to appeal that decision to the New York Court of Appeals.

Solely for the purpose of maintaining the confidentiality of its assumptions relating to these uncertain recoveries, which are informed by privileged advice from counsel, LBHI treats the AGR litigation as an Excluded Recovery herein and therefore excludes estimates for the AGR litigation from these December 31, 2023 Cash Flow Estimates.

Note 4 - Legal Proceedings (continued)

(b) LBIE vs. AG Financial Products ("AGR") (continued)

The ultimate outcome of this litigation will have a material effect on the results of LBH PLC (indirect beneficiary of LBIE). The Company has claims against LBH PLC (see Note 2 - Due from Non-Controlled Affiliates).

Enasarco v. LBF is a dispute regarding the appropriate valuation of a terminated derivative transaction. Enasarco filed a claim of CHF 67 million against LBF based on the alleged loss incurred on the replacement of its derivative trade. The replacement trade was executed several months after the termination date of the original trade with LBF. LBF argued, among other things, that Enasarco had an obligation to value the trade as of the Early Termination Date, which would have resulted in a receivable to LBF, but in any event by a date earlier than that used by Enasarco.

LBF pursued the receivable in the UK courts but was not successful. In Switzerland, LBF rejected Enasarco's claim and Enasarco objected. Enasarco's claim was litigated in first instance Swiss Court (on remand), and in December 2021, that court ruled in favor of Enasarco, granting Enasarco the full amount of its filed claim plus certain legal costs. LBF appealed this ruling to the Superior Court of the Canton of Zurich and in October 2022, the Superior Court denied LBF's appeal on procedural grounds. LBF appealed this decision to the Swiss Federal Supreme Court, and in September 2023, the Court granted LBF's appeal. The appeal is now proceeding in the Superior Court.

LBHI is the largest creditor of LBF, a non-controlled affiliate in liquidation in Switzerland. LBF's remaining future distributions will be materially impacted by the outcome of this legal proceeding.

In addition, the outcome of LBHI's lone remaining disputed claim will be based on the outcome of this litigation (see footnote (3) on page 5 for more information).

Note 5 - Taxes Payable

Taxes payable is an estimate of tax liabilities, net of the estimated impact of any refund claims, deposits, and net operating losses ("NOL"). Taxes payable have been allocated among the members of the LBHI Tax Group pursuant to the Debtor Allocation Agreement. The Debtor Allocation Agreement, which became effective on the Effective Date, addresses the relationship among the Debtors and certain Affiliates with respect to consolidated federal/combined state/local income taxes for pre-petition and post-petition years.

As of December 31, 2023, the Company recorded an estimate of $9.7 million for potential pre- and post-petition amounts owed to federal, state, local and international taxing authorities, net of expected refund claims. Between October 6, 2023, and December 31, 2023, the Company's tax payable decreased by $0.4 million as a result of global tax audit progress.

Net Operating Losses

The NOLs of the LBHI Tax Group (including LBHI-Controlled Affiliates) are subject to audit and adjustment by the IRS and primarily expire in or about 2028. Substantially all of the LBHI Tax Group's current consolidated net operating loss carryovers are attributable to the Debtor. The Plan provides for an orderly liquidation of the Debtors. As previously disclosed in the Company's Quarterly Financial Report as of March 31, 2012 [Docket No. 29731], the LBHI Tax Group received a private letter ruling from the IRS in connection with the Plan going effective that stated (i) the liquidation of the Debtor for U.S. federal income tax purposes may occur over an extended period, and (ii) the reduction of the LBHI Tax Group's NOLs as a result of the discharge of debt pursuant to the Plan generally would not occur until completion of the liquidation.

In January 2020, the Company received a supplemental IRS ruling extending the original ruling relating to the Company's liquidation. All remaining Debtor NOLs not previously utilized to absorb taxable income of the LBHI Tax Group are expected to be fully utilized to offset income resulting from the discharge of debt on the final date of liquidation of LBHI.

Note 6 - Subsequent Events

28^h Plan Distribution

On April 4, 2024, LBHI will make its 28^th Plan Distribution to creditors. The Company will distribute approximately $177 million, including $162 million to creditors on account of claims owned or formerly owned by third party creditors.

Through D28, the Debtors will have made distributions to creditors totaling $129.2 billion, including $96.2 billion on account of claims owned or formerly owned by third party creditors.