Update: Private Ratings, Europe & Swaps. Friday, April 20, 2018

Transcription

1 Update: Private Ratings, Europe & Swaps Friday, April 20, 2018

2 Speakers Charles J. Kolin Greenberg Traurig Gregory M. Remec Fitch Ratings Patricia Volhard Debevoise & Plimpton Richard E. Buckley (Moderator) Prudential Financial, Inc. 2

3 Regulatory developments in Europe ACIC Regulatory Update Patricia Volhard

4 Agenda I. Regulatory Landscape post-brexit and Impact on Fund Structures II. MiFID II III. The new ESG Standards 4

5 I. Regulatory Landscape post-brexit and Impact on Fund Structures Benefits of European structure Under AIFMD, fully authorized managers established in the EU benefit from the passporting regime. It allows them to market the fund in any EU jurisdiction. Without a passport, marketing is subject to national registration/approval requirement (if at all available) European investors often prefer European structures (e.g. insurance companies (Solvency II), pension funds) With Brexit becoming effective, UK will be non-eu, like the US Hence, the impact of Brexit becomes relevant where you or your investors need/prefer an EU structure or where you have relied on the marketing passport (e.g. UK as parallel fund for EU investors) 5

6 I. Regulatory Landscape post-brexit and Impact on Fund Structures Non-EU Investor Sponsor US Advisor Advises (discretionary or non discretionary) Manager UK EU 27 * Manages UK Advisor GP Appoints Manages EU Investor Main Fund US Structure Co-investment EU-Parallel Fund UK EU 27 EU27 Depositary Portfolio * Manager can be own manager (i.e. Manager builds/moves team from the UK to the EU27- typical manager jurisdictions are Ireland or Luxembourg) OR manager could be a service provider ( rented manager ). 6

7 I. Regulatory Landscape post-brexit and Impact on Fund Structures Discretionary Advice/Delegation of Portfolio Management European Securities and Market Authority (ESMA) s Opinion (31 May and 13 July 2017) Special attention should be granted to avoid letter-box entities in the EU27 Outsourcing and delegation to third countries is only possible under strict conditions (including effective supervision by the NCAs) Contractual arrangements ensure that authorized entities, internal control functions, external auditors and NCAs have effective access to data related to the delegated functions Delegates to cooperate with these parties at all times 7

8 Poll the Audience Question Has Brexit impacted fund structures? A) Not yet B) No business as usual C) Yes managers are rearranging structures as we sit here D) Possibly wait and see 8

9 I. Regulatory Landscape post-brexit and impact on Fund Structures Discretionary Advice/Delegation of Portfolio Management (2) ESA s Legal Framework Review (20 September 2017) by the European Commission proposes new powers to ESMA: ESMA plays a more important role in supervising delegation to non EU countries Assessment of newly set-up managers prior to the authorization and registration by the national regulator High substance requirement Ongoing monitoring of delegation arrangements in compliance with substance requirement and justification of delegation to non EU countries 9

10 II. MiFID II- Scope MiFID II currently applies to EU investment firms, market operators, data reporting services providers, that includes: Funds sponsors if they are EU investment firms EU investment firms in relation to their regulated services (advice, portfolio management) In UK also UK managers (AIFMs) 10

11 II. MiFID II (simplified): Where could it be relevant in a fund structure? Investors Fundraising Fund Sponsor is an EU Investment Firm/ Bank Advises (1) (5) GP US Manager EU Advisor Research (3) Research (2) Fund EU Broker SPV Portfolio (4) (1) Disclosure requirement regarding product recommended (2) Free research cannot be provided unless certain exceptions apply (3) Free research can be provided (and accepted) (4) If portfolio investments are securities, traded on a market, transaction reporting requirements may apply (5) Product governance, definition of investor target market 11

12 III. The New ESG Standards EU s obligations under the Paris Agreement on climate change January 2018: Commission s High Level Expert Group (HLEG) on sustainable finance published its final report aiming at : establishing an EU sustainability taxonomy clarifying investor duties to extend the time horizons of investment and bring greater focus on environmental, ESG factors into investment decisions EU Omnibus proposal (amending AIFMD, Solvency II, and other legislation) would ensure that these changes take place across the entire investment chain upgrading disclosures to make sustainability opportunities and risks transparent developing official European sustainability standards for some financial assets Integrating sustainability into the governance of financial institutions and financial supervision and enlarging the role of the European Supervisory Authorities to promote sustainable finance as part of their existing mandate Wide-ranging recommendations are likely to influence the Commission s reform agenda 12

13 III. The New ESG Standards Fiduciary duties should be clarified for institutional investors and fund managers ( sustainability issues to be taken into account in decision-making ) Generally speaking, trustees (and most other asset managers) have a duty to invest in the manner, and for the purposes, mandated by the beneficiaries. L Law is not harmonised, and the investor s duty is applied differently in different European legal systems Commission has taken forward some suggestions A public consultation from the Commission on institutional investors and asset managers duties regarding sustainability has ended on 28 January 2018 Aim of a public consultation is to collect the views and opinions of interested parties on an issue in order to inform the impact assessment process 13

14 ACIC 2018 Spring Conference - Chicago

15 Global Infrastructure Group Coverage Overview Sector Subsectors Ratings Transportation Tollroads, Airports, Seaports, Transit & Rail, Parking 285 Energy & Industrials Oil & Gas, Power, Transmission, Renewables, Chemicals & Mining 117 Other Utilities, Public Infra, WBS Solid Waste, Water/Wastewater, Telecom 34 Sports & Entertainment Stadiums, Arenas, Leagues, Teams 32 Social Infrastructure Healthcare, Education, Housing, Government Buildings 9 Subsector Distribution Regional Distribution Other Util. & Public Infra Sports/ 4% Entertainme nt 7% WBS 3% Social Infrastructure 2% Latin America 21% Asia Pacific 2% Energy & Industrials 24% Transportatio n 60% EMEA 21% North America 56% 70 analytical professionals Approx. 500 credits covered Analytical expertise across the spectrum North America 269 EMEA 98 Latin America 101 Asia Pacific 9 15

16 North America Energy & Industrials Ratings Coverage Sector Subsectors Ratings Energy & Industrials Thermal, Renewables and Transmission 60 Biomass & Landfill Gas 7% Industrial Hydro 3% Geothermal 3% 3% Thermal 31% LNG & Pipeline 10% Transmission & Utility 12% Solar 15% Wind 18% 16

17 Fitch Infrastructure Master Criteria: Key Rating Drivers Completion Risk Contract Terms & Credit Support Cost and delay risk Contractor protection Operation and Revenue Risks Operation and Maintenance issues/costs Contracted or volume/price risk revenues Technology risk/obsolescence Infrastructure & Project Finance Master Criteria Debt Structure Financial Profile Capital Structure Repayment Profile Covenants/security/reserves Scenario Analysis & Projections Financial Metrics Structure and Information Legal structure/jurisdiction/termination Sponsor experience/ownership Information flow/expert reports Macro Risks Country risk Event risks Counterparty risk Industry issues 17

18 Analytical Framework: Thermal Power Projects Peer Group Analysis Cash Flow Analysis Rating Completion Risk Key Rating Drivers Debt Structure Revenue Risk (Volume/Price) Operations Risk Supply Risk 18

19 Global Infrastructure & Project Finance Group Energy Sector Topics Corporate Tax Rate Reduction Impact for Renewable Energy Projects Investment and Production Tax Credits Impact of PV Solar Panel Tariff Thermal Power Outlook Audience Participation Question 19

20 Global Infrastructure & Project Finance Group Corporate Tax Rate Reduction Impact for Renewable Energy Projects Tax rate reduced from 35% to 21% beginning 2018 No direct ratings impact, taxes are paid after debt service is paid for projects Reduces value of tax credits and depreciation for tax equity investors Biggest impact for new projects seeking tax equity financing Less impact on existing projects that have used up majority of depreciation and/or tax credits May change flip dates which could affect back-leveraged portfolio transactions 20

21 Global Infrastructure & Project Finance Group Energy Sector Topics Poll the Audience Question Is there any price impact for bonds carrying an ESG (Environmental, Social and Governance) designation, score, or rating? A) Yes B) Yes but <= 100 bps C) It depends D) No 21

22 Global Infrastructure & Project Finance Group Investment and Production Tax Credits Not changed under recent tax bill, had been considered for elimination or other potentially adverse revisions Phase-out schedule maintained as established under Obama administration in 2016 Wind PTC steps down to 60% of original value (2.3 cents/kwh) in 2018, 40% in 2019, 0% thereafter Solar ITC at 30% through 2019, 26% in 2020, 22% in 2021, 10% thereafter (0% for residential) 22

23 Global Infrastructure & Project Finance Group Impact of PV Solar Panel Tariff Steps down from 30% to 15% through 2021 then goes away Investment Tax Credit starts to decline for projects with construction started after by 2019 (but do not have to begin operating until by 2023) Solar panel prices have been declining for years and will continue declining Will increase cost of electricity produced by new utility-scale projects by $ $0.002/kWh, depending on region and solar resource Primary impact will be job losses for smaller PV installers, and some utility scale projects may be delayed 23

24 Global Infrastructure & Project Finance Group Thermal Power Outlook US energy demand growth has been stagnant for over 10 years Load growth quit following economic growth starting about 2000 Energy efficiency largely to blame: Negawatts Total US net electricity generation fell by 1.5% in 2017 Natural gas generation fell by 7.7%, coal by 2.5% (first time ever decrease for both in one year) Gas generation surpassed coal for first time in 2015 Horizontal drilling and hydraulic fracturing enabled historically low gas prices Older and less efficient coal plants cannot compete economically Any tax on carbon emissions will make renewable energy more competitive Renewables combined with battery storage eventually will cost less than gasfired generation 24

25 Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT 25

26 New York 33 Whitehall Street New York, NY London 30 North Colonnade Canary Wharf London, E14 5GN

27 Calculating Swap Breakage Amounts Applying the Formula American College of Investment Counsel Spring Investment Forum Calculating Swap Breakage Amounts via the Updated Model Form Methodology April 20,

28 Overview of Proposed Changes to Model Form Make-Whole Amount and Swap Breakage Indemnity (draft date April 25, 2007) Updating definitions of Make-Whole Amount and Modified Make-Whole Amount to reflect changes in the updated Model Form Note Purchase Agreements Clarify that if there is any Note that is a Swapped Note outstanding on the date of notice of prepayment or such Note being accelerated, then such Note shall continue to be a Swapped Note until payment in full of all amounts thereunder Provide for swap breakage amount in connection with a purchase of a Swapped Note (in addition to prepayments of a Swapped Note) Determination and payment of swap breakage amount following prepayment in full of all other amounts owing on the Swapped Notes (as opposed to being concurrently paid or deducted against such amounts) both ways for a gain and loss Return of full swap breakage amount gain to Issuer after payment in full of all other amounts on the Swapped Notes (as opposed to only being deducted against Make-Whole Amount in connection with an acceleration of a Swapped Note) Provide for actual termination of swap agreement with respect to determining swap breakage amount (as opposed to a hypothetical termination of swap agreement) Alternative method to two-step formula process of calculating swap breakage amount under the Existing Model Form Swap Indemnity 28

29 Overview of Proposed Changes to Model Form Make-Whole Amount and Swap Breakage Indemnity Poll Question: After having gone through Existing Model Form Swap Indemnity numerous times over the last 10+ years do you feel you have a good understanding on exactly how it works? 1. Yes 2. No 3. Call my favorite Outside Counsel 29

30 Swap Breakage Amount Determined and Paid Following Prepayment In Full of All Other Amounts on the Swapped Notes Timing for Payment of Swap Breakage Amount Existing Model Form Swap Indemnity Under the Existing Model Form Swap Indemnity (i) any swap breakage loss is paid from the Issuer to the Noteholder concurrently with the prepayment or purchase of the Swapped Note and (ii) any swap breakage gain is deducted from the principal, interest and Make-Whole Amount or Modified Make-Whole Amount to be paid in connection with any prepayment or purchase of a Swapped Note. Proposed Model Form Swap Indemnity Under the Proposed Model Form Swap Indemnity, in connection with a prepayment or purchase of a Swapped Note swap breakage amount is determined and paid following the payment in full of all other amounts owing on the Swapped Notes (i.e., principal, accrued interest and Make-Whole Amount or Modified Make-Whole Amount). After such payments have been made on the Swapped Note then the Noteholder must notify the Issuer of any swap breakage amount within a reasonable period of time thereafter and either, as applicable (i) the Issuer must pay to the Noteholder any swap breakage loss (i.e., the Noteholder is out of the money under the cash flow swap under the Swap Agreement) within 5 business days following such notice or (ii) the Noteholder must pay to the Issuer any swap breakage gain (i.e., the Noteholder is in the money under the cash flow swap under the Swap Agreement) within 5 business days following such notice. Reasons for Change: (1) Proposed changes to Existing Model Form Swap Indemnity provide for actual termination of Swap Agreement resulting from any prepayment or purchase of Swapped Notes (versus hypothetical termination under Existing Model Form Swap Indemnity); and (2) Noteholders will prefer not to terminate their Swap Agreement until they are certain of receiving the prepayment in full (otherwise Noteholders could risk being unhedged on their Swapped Note if the prepayment or purchase does not occur). 30

31 Return of Full Swap Breakage Amount Gain to Issuer After Payment In Full of All Other Amounts on the Swapped Notes Return of Swap Breakage Amount Gain Existing Model Form Swap Indemnity Under the Existing Model Form Swap Indemnity any swap breakage gain is deducted from the Make-Whole Amount or Modified Make-Whole Amount upon repayment of a Swapped Note pursuant to Section 12.1 of the Note Purchase Agreement. Proposed Model Form Swap Indemnity Under the Proposed Model Form Swap Indemnity, in connection with an acceleration of a Swapped Note under Section 12.1 of the Note Purchase Agreement the Noteholder is required to pay to the Issuer any swap breakage gain within 5 business days following the payment in full of all other amounts owing on the Swapped Notes (i.e., principal, accrued interest and Make-Whole Amount or Modified Make-Whole Amount). Reasons for Change: (1) Clarify that before any swap breakage gain is paid to the Issuer all other amounts due on the Swapped Notes have been paid in full. While this was also the intention in the Existing Model Form Swap Indemnity, there have been instances in practice where Issuers have requested that swap breakage gain be netted against Make- Whole Amount, principal and interest upon the Swapped Note becoming immediately due and payable pursuant to Section 12.1 (as opposed to at the time of full repayment of the Swapped Note). This will reduce claim and recovery in a bankruptcy; and (2) Provide for reimbursement to the Issuer of the full amount of any swap breakage gain (after payment in full of all other amounts owing on the Swapped Notes). This is in line with more of market practice today and is a more balanced approach (after giving effect to the full repayment of a Swapped Note). 31

32 Actual Termination of a Swap Agreement with Respect to Determining Swap Breakage Amount (as opposed to a hypothetical termination of swap agreement) Actual versus Hypothetical Termination of Swap Agreement in Determining Swap Breakage Amount Existing Model Form Swap Indemnity Under the Existing Model Form Swap Indemnity swap breakage amount could be determined on a hypothetical termination of a Swap Agreement. Proposed Model Form Swap Indemnity Under the Proposed Model Form Swap Indemnity, as an actual amendment or termination of a Swap Agreement of a Noteholder would be necessary with respect to determining its swap breakage amount in connection with a prepayment or purchase of a Note or an acceleration of a Swapped Note under Section 12.1 of the Note Purchase Agreement. Reasons for Change: The hypothetical termination permitted under the Existing Model Form Swap Indemnity led to certain concerns being raised in the market as to how Noteholders would calculate Net Loss and Net Gain (specifically the Swap Breakage Amount component since this is market determined, i.e., marking to market ), and therefore leading to complex negotiations of certain assumptions and stipulations to be agreed to in determining such amount, which assumptions and stipulations may not be consistent with how Noteholders are in reality terminating their Swap Agreements and therefore leading to potential gaps in the swap indemnity. Under the Proposed Model Form Swap Indemnity the swap breakage amount is determined as a result of an actual amendment or termination of a swap agreement and is to be determined by the Noteholder in good faith and in a commercially reasonable manner in accordance with customary practices for calculating such amounts under the ISDA 1992 Multi-Currency Cross Border Master Agreement or ISDA 2002 Master Agreement, as applicable. 32

33 Alternative Method to Calculating Swap Breakage Amount Under The Existing Model Form Swap Indemnity Calculating Swap Breakage Amount under the Model Form Swap Indemnity Existing Model Form Swap Indemnity Current methodology to calculate swap breakage amount under the Existing Model Form Swap Breakage Indemnity is a two-step process formula determined as the Net Loss / Net Gain. In determining the Net Loss or Net Gain, the traditional swap formula compares the difference between: (1) the USD equivalent of principal and accrued interest (which is reflected in the USD side of the cash flow hedge in the Swap Agreement); and (2) all amounts of principal and accrued interest due under the Swapped Note (converted in USD at current spot rate), plus/minus Swap Breakage Amount (as defined under the Existing Model Form Swap Indemnity and is determined as the market price to forgo any future payments or obligations under the Swap Agreement). Under the Existing Model Form Swap Breakage Indemnity terminology, the Net Loss or Net Gain is the difference between: (1) Swapped Note Called Notional Amount (with accrued interest) and (2) Swapped Note Called Principal (with accrued interest) (to be converted in USD at current spot rates), plus/minus Swap Breakage Amount. 33

34 Alternative Method to Calculating Swap Breakage Amount Under The Existing Model Form Swap Indemnity Calculating Swap Breakage Amount under the Model Form Swap Indemnity Existing Model Form Swap Indemnity Net Loss means the amount, if any, by which: (A) the Swapped Note Called Notional Amount (with accrued interest) exceeds (B) the sum of: (x) the Swapped Note Called Principal (with accrued interest) (converted in USD at current spot rate) plus (or minus in the case of an amount paid) (y) the Swap Breakage Amount received (or paid) by the holder Net Gain means the amount, if any, by which: (A) the Swapped Note Called Notional Amount (with accrued interest) is exceeded by (B) the sum of: (x) the Swapped Note Called Principal (with accrued interest) (converted in USD at current spot rate) plus (or minus in the case of an amount paid) (y) the Swap Breakage Amount received (or paid) by the holder 34

35 Alternative Method to Calculating Swap Breakage Amount Under The Existing Model Form Swap Indemnity Calculating Swap Breakage Amount under the Model Form Swap Indemnity Proposed Model Form Swap Indemnity The proposed Model Form Swap Indemnity removes the Net Loss and Net Gain calculation and simply refers to a Swap Breakage Amount which is to be obtained from the swap counterparty under the Swap Agreement with a Noteholder. In this regard, the Noteholder and the swap counterparty would agree to include as part of the early termination of the Swap Agreement an exchange of final principal and accrued interest payments (called an accelerated exchange of notional ). This one number is the amount to be economically transferred to or from the Issuer without needing to apply more of a formula base (as is the case with Net Loss and Net Gain under the existing Model Form Swap Indemnity). Specifically, the key language (in part) to be included in the Proposed Model Form Swap Indemnity is as follows: Swap Breakage Amount means the amount that is received (the Swap Breakage Gain ) or paid (the Swap Breakage Loss ) by the holder of a Swapped Note in connection with a termination or amendment of its Swap Agreement, where: (i) such Swap Breakage Amount shall be calculated upon the inclusion of an accelerated exchange and payment of principal amounts and associated accrued and unpaid interest, whereby in connection with and incorporated into the termination of the Swap Agreement and determination of the Swap Breakage Amount, all remaining principal payments otherwise scheduled through the natural duration of the Swap Agreement and associated accrued and unpaid interest shall be accelerated and made (in their respective applicable currencies) at the time of the settlement of such termination; and (ii) such Swap Breakage Amount is determined in good faith and in a commercially reasonable manner in accordance with customary practices for calculating such amounts under the ISDA 1992 Multi-Currency Cross Border Master Agreement or ISDA 2002 Master Agreement, as applicable, pursuant to which such holder entered into such Swap Agreement. 35

36 Alternative Method to Calculating Swap Breakage Amount Under The Existing Model Form Swap Indemnity Calculating Swap Breakage Amount under the Model Form Swap Indemnity Proposed Model Form Swap Indemnity As stated on the previous slide, the Noteholder will need to ask the swap counterparty for a Swap Breakage Amount calculation that includes an accelerated exchange and payment of principal amounts and associated accrued and unpaid interest. This means that when the Swapped Note is prepaid early, and the Swap Agreement is terminated, the Noteholder will contract with the swap counterparty for the right to deliver to the swap counterparty the Swapped Note Called Principal (with accrued interest), and in return the Noteholder will receive the Swapped Note Called Notional Amount (with accrued interest). The Noteholder will either pay to or receive the Swap Breakage Amount from the swap counterparty. This Swap Breakage Amount will be paid to or received from the Issuer. Thus, the Noteholder is neutral as to the Swap Breakage Amount. Advantages to the proposed Model Form Swap Indemnity approach: Fewer rate quotes are needed as the economic value of an exchange of a foreign note principal payment with the USD equivalent is included into the swap breakage price to be paid to (or received from) the swap counterparty Noteholder and the Issuer remove FX variance between time of calculation of payments and time of execution of agreements and delivery of payments Easier closing mechanics are anticipated (again, because the swap counterparty both terminates the swap and provides the exchange of principal amounts) The combination of simpler execution (fewer prices to reference) and fewer calculations to perform means an easier process during a stressful prepayment scenario 36

37 Swap Breakage Sample Calculations Working Example Note Issuance Date: June 15, 2010 Note Maturity: June 15, 2020 EUR Principal Amount: EUR 28,000,000 EUR Interest Rate: 5.20% (June 15 and December 15) Exchange Rate on June 15, 2010: 1.15 EUR = 1.00 USD USD Equivalent on June 15, 2010: USD 24,348,000 USD Fixed Rate (on the Swap Confirmation): 4.90% Assume an early prepayment on March 15, Exchange Rate on March 15, 2018: 0.95 EUR = 1.00 USD USD Swap Breakage (via Market Quotation): (USD 4,111,111) 37

38 Swap Breakage Sample Calculations Working Example Swapped Note Called Notional Amount: USD 24,348,000 Accrued Int. on Swapped Note Called Notional Amt. = 24,348,000 x 4.90% applied for three months USD 298,263 Swapped Note Called Notional Amount (+ accrued interest): USD 24,646,263 Swapped Note Called Principal: EUR 28,000,000 Accrued Int. on Swapped Note Called Principal = 28,000,000 x 5.20% applied for three months EUR 364,000 Swapped Note Called Principal (+ accrued interest): EUR 28,364,000 converted into USD at current spot rate EUR 28,364,000 divided by (0.95) USD 29,856,842 Swap Breakage Amount (paid by Noteholder in this case): USD (4,111,111) 38

39 Swap Breakage Sample Calculations Application of Swap Indemnity under Existing Model Form Swap Indemnity Net Gain is the difference between: (a) USD 29,856,842 minus USD 4,111,111; and (b) USD 24,646,263 Which is equal to: USD 1,099,468 39

40 Swap Breakage Sample Calculations Application of Swap Indemnity under Existing Model Form Swap Indemnity Issuer EUR 28,364,000 USD 4,111,111 Noteholder Note Surrender Swap Breakage Net Gain USD 1,099,468 Swap Counterparty Swapped Note Called Principal (+ accrued interest): EUR 28,364,000 converted into USD at current spot rate EUR 28,364,000 divided by (0.95) USD 29,856,842 Less: Swap Breakage Amount (paid by Noteholder in this case): USD (4,111,111) Less: Net Gain USD (1,099,468) Equals: USD 24,646,263 ** ** This is equal to the Swapped Note Called Notional Amount (+ accrued interest) Noteholder would have received under its Swap Agreement at maturity. 40

41 Swap Breakage Sample Calculations - Alternate Method to Achieve the Same Economics The Noteholder will request from the swap counterpart an alternate Swap Breakage quote that includes an accelerated exchange and payment of principal amounts and associated accrued and unpaid interest. Cash Flows Upon Early Prepayment: Alternate Method Issuer Foreign P+I Note Surrender Noteholder Foreign P+I Swap Counterparty USD Equivalent (swapped rate) Alt. Swap Breakage Includes Accl. Exchange (Alternate Method) The Alternate Swap Breakage (positive or negative) is returned to or paid by the Issuer; it is algebraically equivalent to the calculation of Net Loss or Net Gain under the traditional method. 41

42 Swap Breakage Sample Calculations - Alternate Method to Achieve the Same Economics Remember from our working example above: Swapped Note Called Notional Amount (+ accrued interest): USD 24,646,263 Swapped Note Called Principal: EUR 28,000,000 Swapped Note Called Principal (+ accrued interest): EUR 28,364,000 Issuer EUR 28,364,000 EUR 28,364,000 Noteholder Note Surrender USD 24,646,263 Swap Counterparty Swap Breakage Includes Accl. Exchange (Alternate Method) USD 1,099,468 The Alternate Swap Breakage (positive or negative) is returned to or paid by the Issuer; it is algebraically equivalent to the calculation of Net Loss or Net Gain under the traditional method. 42

43 Defined Terms Terms Used Herein: Existing Model Form Swap Indemnity - Model Form Make-Whole Amount and Swap Breakage Indemnity (draft date April 25, 2007) Issuer desires to issue foreign notes to the US investor market Noteholder a USD balance sheet investor that has purchased a Swapped Note Swapped Note foreign (non-usd) denominated notes subject of a Swap Agreement Swap Agreement a cash flow hedge with a swap counterparty that will place the Noteholder in a position equivalent to that of an original purchase of USD note Proposed Model Form Swap Indemnity - Model Form Make-Whole Amount and Swap Breakage Indemnity (draft date - TBD) #