Paulson's Lehman Bet Poised To Wipe Out Sino-Forest Loss

Jul 5 2011 | 1:13pm ET

Paulson & Co. may recoup almost every penny it lost on a Chinese timber bet with its bet on Lehman Brothers bonds.

Under a deal struck by two warring groups of creditors last week, Paulson is poised to enjoy a $554 million profit on its Lehman bond holdings. While the hedge fund first bought Lehman bonds just before the bank collapsed in 2008 for 14 cents more than the agreement calls for it to be paid, it gorged itself on bonds over the ensuing two-and-a-half years, and now owns about $4 billion worth of bonds it paid an average of 7.3 cents for, Financial News reports.

The Lehman deal calls for bondholders to receive 21.1 cents on the dollar.

The $554 million profit, which still requires official creditor approval to become a reality, will offset the $574 million Paulson lost last month on Sino-Forest Corp. That company's shares plummeted when hedge fund Muddy Waters accused it of overstating its timberland holdings in China's Yunnan Province, leading Paulson to dump its 12.5% stake two weeks ago.

The hedge fund probably should have held onto that stake for a little longer: News Friday that Wellington Management had taken an 11.5% stake in Sino-Forest sent the company's shares, which had fallen more than 80%, up 30%. Sino-Forest, which trades in Toronto, is up a further 19% today.

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