Online Workshop (hard copy version) Member options regarding their Liquidating Trust Introduction Welcome to a workshop developed to help you better understand the market for Restructured Notes that are held in the Liquidating Trust Fund and your options for the Liquidating Trust units that you have in your retirement account. You should take this workshop if you have Liquidating Trust units within your University retirement funds. If you are not sure if you have Liquidating Trust units, you can check your pension plan holdings online. Log in to your account, click on Balance and your Liquidating Trust units will be clearly listed separately from any of your other fund investments. If you do have Liquidating Trust Units, this workshop will be helpful. You should make sure that you look at "Redeeming or Holding Liquidating Trust: Key Facts and Considerations" Disclaimer: Please note that this workshop is not designed to offer investment, financial or tax advice. It is information to assist you in determining what changes, if any, you want to make to your Liquidating Trust holdings. The information is current as of March 31, 2010. Please ensure that you seek independant financial advice. Please let us know if you require information in alternate formats or if any other arrangements can make our services accessible to you. The objectives of this workshop are to: Part 1 - Information Give you a brief background about your Liquidating Trust holdings: Explain Restructured Notes, including the main risk characteristics and their maturity date Explain your options; Update you on the market for Restructured Notes and go through a few possible scenarios for how the Restructured Notes might perform in the future, to help you consider your options. Part 2 - Action Items and Resources Review the paperwork you will need to complete if you elect to redeem your Liquidating Trust holdings; Provide you with links to other resources; Identify where you should direct your questions
Part 1 - Information Background on your Liquidating Trust holdings No one person has exactly the same amount of exposure to the Liquidating Trust because the amount you hold is linked to the amount you had originally invested in any of the five Western retirement plans' investment funds that were holding non-bank Asset Backed Commercial Paper in the fall of 2007. Though the amount each plan member has will vary based on their individual asset mix, the Restructured Notes represent less than 2% of the entire assets of the Western retirement plans' funds. Restructured Notes is a term to describe the group of securities that were exchanged for non-bank Asset Backed Commercial Paper (ABCP) as part of the restructuring of the ABCP market by the courts in early 2009. A detailed background on the issue is available here. Redemption restrictions have been in place since the fall of 2007 either because there was no market for the non-bank ABCP or because restrictions were imposed by third parties. In January 2009 the court approved a plan for the restructuring of the market and Restructured Notes were exchanged for the ABCP. The Joint Pension Board has been monitoring the Restructured Notes market with the assistance of the Kilgour Advisory Group. The Board had planned to search for a buyer for the Restructured Notes if a market for the notes had not developed by mid-2010. Recently we have observed enough bids in the market to establish a market price and to enable the removal of redemption restrictions. This means that if you want to redeem your Liquidating Trust units, you can do so at the current market price starting May 31, 2010. You still have the option to hold on to your Liquidating Trust units to maturity or redeem all or some of your units in any future month. What does the Liquidating Trust hold? Currently, the Liquidating Trust holds the Restructured Notes and some cash. It is important to know that the Liquidating Trust holds different Restructured Notes of varying grades of quality. We refer to these as: A-1 Notes; A-2 Notes; B Notes; C Notes; Tracking Notes 13. A-1 notes are the highest quality. As of July 31, 2010, the composition of the Liquidating Trust was as follows: Type of Notes Proportion of Liquidating Trust A-1 54.0% A-2 29.6% B 5.4% C 2.8% Tracking Notes 13 2.8% Cash 5.6% Every Liquidating Trust unit is the exact same blend of each kind of note and cash. The Liquidating Trust is a fixed income fund of fixed income securities including but not necessarily limited to holding the five grades of Restructured Notes and cash with a view to maximizing the return on the fund. The manager for the fund may sell assets in the Liquidating Trust if in the opinion of the manager this would maximize the return on the fund while preserving capital.
What are Restructured Notes? Approximately 90% of the Restructured Notes held in the Liquidating Trust are fixed income securities that pay a variable interest rate. The rate is variable because it depends on the prevailing rates for bankers acceptances. Over 90% of the Restructured Notes in the Liquidating Trust are currently rated investment grade by a rating agency with a rating of BBB (low) or A. Over time the underlying assets held for the Restructured Notes (for example credit card loans) pay income and principal at maturity and these payments are expected to be used to pay interest on the Restructured Notes and re-pay the principal at maturity. If there are losses attributable to the assets held by the Restructured Notes, this will negatively affect their value. The Restructured Notes are not guaranteed, and are subject to investment risk. The structure and much of the assets in the Restructured Notes are from the original non-bank Asset Backed Commercial Paper. The non-bank ABCP was created when a financial institution (such as an investment bank) purchased some assets (for example car loans, mortgages or credit card receivables) from a third party. The financial institution would finance the purchase of the assets by issuing commercial paper to investors. The financial institution used the income generated by the assets it purchased to pay interest to investors who purchased the paper and the financial institutions kept the difference as profit. Because commercial paper was a short term security (i.e. it matures within a year) new commercial paper needed to be re-issued on a regular basis because the underlying assets have a longer maturity. There was a mismatch between the long term assets held and the short term commercial paper issued against those assets. When no investor wanted to purchase the securities, the market froze. In January 2009 a restructuring plan was approved by the court. The plan resulted in the exchanging of asset backed commercial paper for Restructured Notes. The Restructured Notes hold the same assets but the maturity date for the Restructured Notes matches the underlying assets, removing the need to find a new purchaser for commercial paper every few months. This is generally considered an improvement from the original non-bank Asset Backed Commercial Paper and was designed to address one of the inherent issues, that was partly responsible for the market collapse. Let s look at the current market and go through a few scenarios for the future to help you consider your options. The main valuation questions for the Liquidating Trust units we identified: How much would you get if you sold right now? What is the likelihood of recuperating value if holding on to the units until the notes mature in 2017? o What s the maximum value you might anticipate in the future if you don t sell now? o What s the minimum value you might anticipate if you don t sell now?
How the risk and return profile of the units might compare with other fixed income investments of similar risk and maturity. The chart below shows the recent bids (prices investors were willing to pay for the notes) in the market for the five types of Restructured Notes that are held within the Liquidating Trust. At the bottom of the chart we calculated what the Liquidating Trust unit value would be for the month. Based on recent market activity, including bids for the Restructured Notes, the value for the Liquidating Trust units as of March 31, 2010 is $61.88. Here is an overview of the recent market activity as of March 31, 2010. The bottom line shows the market value of the Liquidating Trust unit. Type of Notes Indicative Bids A-1 $0.67 A-2 $0.56 B $0.20 C $0.025 Tracking Notes 13 Market Value - Liquidating Trust Unit at March 31, 2010 No bid $61.88 The Liquidating Trust Unit value will be posted on the pension system with the other monthly fund values and is available here. We cannot predict what the value of the notes will be in the future, and there is also no guarantee on what the value of the Liquidating Trust units will be over time or at maturity. The scenarios set out below are designed to provide you with some information based upon scenarios that our consultant considers to be possible outcomes. The decision to remove redemption restrictions on the Liquidating Trust is based on the liquidity that has developed in the market for the Notes. There is a possibility that, in the future, the market for the Notes could again become illiquid (for instance, in the event of a very severe economic crisis). While we do not anticipate this will occur, such an event could mean that temporary redemption restrictions may again need to be placed on the Liquidating Trust. Main Risks for the Restructured Notes The main risks to consider when assessing the Restructured Notes are: 1. CREDIT RISK: The risk that loans underlying the Notes will default, requiring payments from the investment vehicle for the Restructured Notes to the lenders, thereby reducing the principal available to repay note holders at maturity. Currently, this is the principal risk of the Notes. 2. TRIGGER RISK: The risk that the credit markets will generally deteriorate, which means that the cost for borrowing money would increase and borrowers would default on the loans that underlie the Restructured Notes. Such a situation would require the investment vehicle for the Restructured Notes to post additional collateral (increase the assets that support the loans)
perhaps to a level that is beyond its ability to do so. This risk has fallen significantly in the last year because the ability to get credit has improved. 3. COLLATERAL RISK: The risk that the cash and high-grade securities held as collateral will default, reducing principal at maturity. Collateral risk is marginal. Let s look at credit risk in more detail as this is the principle risk affecting the value of these notes: As of March 31, 2010, the composition of the Liquidating Trust was as follows: Type of Notes Proportion of Liquidating Trust A-1 56.1% A-2 30.8% B 5.6% C 2.9% Tracking Notes 13 2.9% Cash 1.7% As such, most of the notes held in the Liquidating Trust are of the highest quality. As the underlying assets (the assets backing the notes) suffer losses, the lower quality notes (starting with the C notes) start to lose value. The way the Restructured Notes are designed, the underlying assets need to generate losses of 50% before the A-1 Notes start losing value. Credit Risk The Notes are structured such that losses first affect the C Notes, then climb up to the Bs, A-2s, and ultimately A-1s Thus, lower notes provide a cushion against losses for the higher notes. The C Notes are most risky and in fact have already been affected by losses of 37% of their par value because of defaults in the pool. If additional losses are made in the Restructured Notes pool, the principal value available upon maturity to the Cs, Bs and possibly the A-2s could be reduced. Examples Here are four examples that range from optimistic to pessimistic and estimate the value of the Liquidating Trust at maturity in January 2017. These examples have been prepared for us by the Kilgour Advisory Group. The examples are designed to provide a sense of the value for the Liquidating Trust unit using a range of possible credit risk outcomes but we have no information as to the actual range of possible outcomes or the likelihood of any particular outcome used in the examples. The expected value at maturity of the Liquidating Trust is highly dependent on three variables:
1. The value at maturity of assets backing the notes (see collateral risk); 2. The losses generated by financial transactions the notes are exposed to (see credit risk); and 3. The likelihood of the noteholders being forced to come up with more assets to guarantee the notes (see trigger risk). Collateral and trigger risks are now marginal, as explained previously, so most of the value of the Restructured Notes at maturity will depend on the underlying losses generated by the various transactions. Our consultant prepared examples with varying underlying losses assumptions. Currently the underlying losses represent 1.1% of the portfolio. The Chart below shows the estimated value of the Liquidating Trust at maturity (2017) based on 4 examples. Liquidating Trust Maturity Value Possible Economic Scenarios Example 1 Example 2 Example 3 Example 4 Optimistic Realistic Conservative Worst Case Underlying losses assumed Estimated Value at Maturity of UWO Notes (January 2017) Estimated Liquidating Trust Price at maturity with no interest payments 4.1% 10% 25% 100% $22.4 MM $21.0 MM $18.3 MM $0 $98.48 $92.41 $80.38 $0.00 * Examples have been updated as of July 31, 2010 Scenario 4 is a worst case scenario that would require a severe financial crisis. As we have seen, the four examples produce four different values at maturity. Most of the securities in the Liquidating Trust pay an interest rate of 3-month Bankers Acceptances minus 0.50%. Threemonth bankers acceptances have returned on average 3.28% over the past 10 years. As noted above, interest payments were not included in the estimates of the Liquidating Trust's maturity value. In order to assist you to better understand the risk and return characteristics of the Liquidating Trust units, we have compared possible returns on the Liquidating Trust units to the expected return on a portfolio of BBB corporate bonds, which have similar risk as the Liquidating Trust. You can expect an annualized return of 4.43%, based on yields for BBB corporate bonds as of July 31, 2010. This is a reasonably good comparator because approximately 90% of the restructured notes held in the Liquidating Trust are rated A or BBB(low).
This table compares holding the Liquidating Trust units with holding BBB corporate bonds. Possible Value at Maturity Example 1 Example 2 Example 3 Example 4 Example 4 Optimistic Realistic Conservative Equal Expected Worst Case Return Estimated Liquidating Trust Price at maturity(jan 2017) Underlying losses assumed Liquidating Trust Price At July 31, 2010 Estimated Expected Annualized Capital Gain to Maturity (January 2017) Estimated Expected Annualized Interest Payment Total Estimated Expected Return at maturity (Jan 2017) Yield on BBB Corporate Bonds (July 31, 2010) $98.48 $92.41 $80.38 $85.00 $0.00 4.1% 10% 25% 11.92% 100% $63.34 $63.34 $63.34 63.34% $63.34 6.86% 5.80% 3.53% 4.43% -100% 2.33% 1.54% 0.89% 0% 0% 9.19% 7.34% 4.42% 4.43% -100% 4.43% 4.43% 4.43% 4.43% 4.43% * Examples have been updated as of July 31, 2010 As you can see, under each example (except the worst-case scenario) the expected return of holding the Liquidating Trust units is equal or greater than the return that could be expected investing in BBB corporate bonds.
You may be wondering how the risk and return characteristics of the Liquidating Trust units might compare with an investment that is a safe fixed income investment such as Government of Canada Bonds. For illustration purposes we have used Government of Canada Bonds expiring in 2017. These bonds yield 3.36% as of August 18, 2010. This table compares holding the Notes with redeeming them now and re-investing the proceeds in safe Government Bonds. Possible Value at Maturity Redemption Scenario Example 1 Example 2 Example 3 Example 4 Optimistic Realistic Conservative Worst Case Estimated Liquidating Trust Unit Value at Maturity Jan 2017 (excluding any interest payments) Estimated Unit Value of Accumulated Interest Payments: Estimated Liquidating Trust Unit Value at Maturity Jan 2017 (including any possible interest payment): Yield on 7-Yr Gov't of Canada Bonds (As of Aug. 18, 2010): Value at maturity with Gov't of Canada Bonds $98.48 $92.41 $80.38 $0 $16.60 $10.95 $6.31 $0 $115.08 $103.36 $86.69 $0 2.36% 2.36% 2.36% 2.36% $74.80 $74.80 $74.80 $74.80 * Examples have been updated as of July 31, 2010 The higher risk associated with the Liquidating Trust units yields higher returns than the Government of Canada bonds under all the economic examples illustrated except the worst-case example. Explaining your options 1. Redeem some or all of your Liquidating Trust units in any month Effective May 31, 2010 members who have Liquidating Trust units in their retirement account have the option to redeem all or some of their units and reinvest the proceeds into other investment funds in their retirement account at that time or in any given month as long as the market remains liquid. 2. Hold on to the units until they mature or choose to sell at a later date If you do not complete paper work providing us with instruction to sell your Liquidating Trust units, it will remain invested in the Liquidating Trust until the earliest of: A decision to redeem by you in the future -OR- The assets held in the Liquidating Trust mature for the most part in 2017.
While you are an active member of the pension plans or a Western Retirement Income Fund participant/annuitant, the only time when you will be directed to redeem your Liquidating Trust is when you or your estate must divest of your holdings under the Retirement Plans for regulatory reasons. An example would be if you are a member of the Western Retirement Income Fund and you need to make a minimum withdrawal in the calendar year, or if you are a member of one of the pension plans when you cease employment with the University and you choose to withdraw all your other funds from The University of Western Ontario Retirement Plans. If you are no longer an active member of the retirement plans and you stopped working at Western or retired during the period of time when redemption restrictions were imposed and elected to transfer your funds out of the plan, you can now sell your Liquidating Trust units in any given month or hold onto them. Please note that if you choose to leave your Liquidating Trust units in the Retirement Plans, you will start being charged the regular administration fee for the applicable plan starting January 1, 2011. For members who leave or retire after the redemption restrictions have been removed at the end of May 2010, their Liquidating Trust holdings will be processed together with the rest of your pension account. This means, for example that: if you were to stop working at Western in June 2010 and elect to transfer your pension account from Western to another institution, your entire pension account including any Liquidating Trust would be redeemed and the proceeds transferred as per your instructions. Information on how to redeem your Liquidating Trust units follows on the next page. Part 2 Action Items and Resources Making a decision to redeem or not Consider the amount of your exposure relative to your portfolio and your need for liquidity; Assess your risk tolerance for your portfolio as a whole; Consider the upside and downside potential; If you sell you lose the opportunity for any improvements in price but you have no further risk related to these securities losing further value; For current plan members, if you don t make a choice, the default is holding the Notes; Remember to re-balance your portfolio; Seek advice from your outside financial consultant. Review the Paperwork: For Pension Plan members, and Western Retirement Income Fund participants If you do not want to redeem any Liquidating Trust units at this time you do not need to complete any paperwork. You are able to redeem your Liquidating Trust units later in any future month. If you do want to redeem all or some of your Liquidating Trust units and reinvest in one or more of the available funds in your retirement account, you need to complete the Liquidating
Trust Investment Change Form and select either the pension or RIF form. These forms are also available from Human Resources. These transactions cannot be done online. We need to receive this information by the 25th of the month as we do all your other investment allocations. You must submit the completed form to Human Resources either by mail, drop off or fax. Western University Human Resources Support Services Building, Room 5100 London ON N6A 3K7 FAX: 519-661-4104 May 25th is the first month with the option to redeem units and the investment changes would be effective May 31, 2010. Allocations for the Liquidating Trust will be processed first and any other investment allocations made by you for the month will be processed afterwards. If you left the university or retired while the redemption restrictions were in place and you elected to transfer your funds out, you only have Liquidating Trust units left in your account. You will receive an information package to complete. If you have not received your package by the end of June, please contact the Human Resources Communication Centre by email or call (519) 661-2194.
Important information to remember The most recent market price for a Liquidating Trust is $61.88 as at March 31, 2010 The estimated expected value of a Liquidating Trust at maturity (January 2017): o Optimistic: $101 o Realistic: $94 o Conservative: $81 o Worst-case scenario: $0 The deadline to submit a redemption request is the 25th of every month starting on May 25th All requests must be on the prescribed form and no transactions may be made online. Please note that the value you will see online is the value from the previous month. As with all securities in the Western Retirement Plans, we are not able to guarantee what the actual transaction price will be. Links to Resources ABCP Website Market Value for the Liquidating Trust unit Investment change forms Questions: Please feel free to contact us with your questions: HR Communication Centre Support Services Building -Room 5100 Email: hrhelp@uwo.ca Tel: 519-661-2194 You may also make an appointment with a retirement consultant to discuss your retirement account by contacting the HR Communication Centre.