credit enhancement: like make-up for...

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Asian Credit Strategy

Credit enhancement: Like make-up for bonds

Credit Strategy | Asia 01 November 2013

Michele Barlow +852 2536 3750 Research Analyst Merrill Lynch (Hong Kong) [email protected] GEMS Corporate Strategy MLPF&S GEMS Corporate Credit Rsch +1 646 855 4096 MLPF&S

Chart 1: Actual pick-up over relevant bank senior benchmark vs. estimated FV for SBLCs

Source: BofA Merrill Lynch Global Research

Table 1: SBLC framework building blocks

Korea, HK,

S'pore China India Senior + guarantee 35bps 40bps N/A + SBLC +20bps +40bps

Senior + SBLC start 55bps 80bps 100bps Currency differences/ Capital controls

+20bps

Re-investment risk Coupon loss * default probability Need bank consent to trigger SBLC +10bps Source: BofA Merrill Lynch Global Research

We create a broad framework for valuing SBLC backed bonds

Over the last few years we’ve seen an increasing number of credit enhanced bonds, in particular, bonds backed by bank standby letters of credit. As part of a review of this product, we’ve created a framework for thinking about valuations by taking a building block approach for the features we believe matter for valuation (see Table 1 for a summary of our framework). As a result, we’ve been able to assign an estimated ‘fair value’ for the outstanding bonds and compare this to where the bonds currently trade in relation to the SBLC provider’s senior unsecured bonds (or best proxy available). Based on this analysis, we find that the HAIAIR ’20 and SUELIN ’18 bonds appear to be expensive while on the other side, the ZHTONG ’18 and CITICS ’18 bonds look to provide the best value with moderate value in COSHOL ‘20s. The ZIJMIN and CHRESO are closer to fair value.

What are the key features of SBLCs impacting valuation? An SBLC serves as a secondary payment mechanism in the event that the borrower is unable to pay it is like ‘insurance’ rather than a direct guarantee. In our building block approach we start with the spread of the SBLC bank provider, incorporate the pick-up associated with guaranteed bonds (they never trade on top of the guarantor) and then add some additional cost for the uncertainty surrounding enforcement which is untested and may be impacted by jurisdictional differences. We add a little extra for the uncertainty related to on-shore branches. It is also important to incorporate the ease/difficulty in triggering and drawing down under the SBLC. Finally, we take into consideration the underlying fundamentals of the issuer since the likelihood of triggering increases as the issuer fundamentals weaken.

What’s driving the SBLC issuance and will there be more? The rationale behind seeking ‘insurance’ from a bank is to reduce the company’s cost of funding by ‘enhancing’ their credit via the SBLC. The fees paid by issuers will vary based on the underlying riskiness of the company and the level of collateral that may or may not be provided to the bank. Fees are negotiated between the issuer and the bank and not disclosed as part of the documentation. However, it is understood that the fee levels can be as much as 300bp. If the fee levels are higher, the costs may be prohibitive for the issuer. So supply to some extent will be driven by whether the cost of the SBLC coupon plus fee charge is cheaper than where they may be able to borrow from banks on-shore (if they have access). Anecdotally we are hearing that there is quite a pipeline of deals building. How many get across the line before this ‘arbitrage’ disappears (or regulators start to crack down) is a question with no easy answer. Maybe the answer is simply - more.

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ZIJM

IN '1

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ICS

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IAIR

'20

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ELI

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Actual FV

Asian Cred i t S t ra tegy 01 November 2013

Valuing credit enhanced bonds Over the last few years we’ve seen an increasing number of bonds which have received credit enhancement from banks including guarantees provided for their overseas businesses (e.g. CDB on Amber Circle, CCB on CCBL Funding, BofC on Azure Orbit and ICBC on Skysea International), guarantees given on unrelated companies (e.g. KDB on Doosan Infracore), a bank put structure (e.g. KDB, Hana and Woori consortium provided put for Doosan Infracore capital securities) along a number of standby letter of credit (SBLC) facilities provided for borrowers.

Outside of these structures, we’ve also seen a number of structures in China which provide enhancement via Keepwell deeds which may or may not include an equity interest purchase undertaking. We’ve written quite extensively on many of the China SOE and high yield bond structures, most recently in a report on the China SOE Oil bond structure & fair trading relationship. In addition, SSG Resources has received a parent guarantee with a letter of comfort from the Sarawak Government to maintain sufficient reserves available for paying bond interest/principal. We would view this as being similar to the implicit support provided to the Korean quasi-sovereign banks.

For now, we will focus on the bank-related structures, SBLCs in particular given the large number of bonds issued under this structure, looking at what features are important for valuation and attempt to create a framework for valuation.

What’s an SBLC and why issue this structure? A standby letter of credit serves as a secondary payment mechanism in the event that the borrower is unable to pay either its coupon or principal. It is not a direct bank guarantee, it acts more like insurance. As such it is considered a contingent liability which is not accounted for on balance sheet. However, it will be included in the calculation of a bank’s credit exposure limits to a particular group/sector and will attract a capital charge similar to on-balance sheet loans. By offering this insurance, the bank will receive fee income from the issuer.

The fees paid by issuers will vary based on the underlying riskiness of the company and the level of collateral that may or may not be provided to the bank. Fees are negotiated between the issuer and the bank and not disclosed as part of the documentation. However, it is understood that the fee levels can be as much as 300bps. If the fee levels are higher, the costs may be prohibitive for the issuer. After all, the rationale behind seeking ‘insurance’ from a bank is to reduce the company’s cost of funding by ‘enhancing’ their credit via the SBLC.

Exhibit 1: Standard standby letter of credit structure

Source: Moody’s


The rating agencies will rate SBLCs at the same level of the issuing bank if support is readily available to bondholders, the amount is sufficient to cover the interest accrued during the longest possible period between the last payment made before the default and the payment for principal after default, the mechanism allows for timely payment of interest and principal and the SBLC is legally enforceable. This allows a company to raise funding more cheaply.

This begs the question, how much are we going to see? Anecdotally we are hearing from our capital markets colleagues and some of the law firms drafting these documents that there is more in the pipeline. How much more is tough to call. From a bank’s perspective, fees of up to 300bps which do not require funding (although does require a capital commitment) is attractive. On the issuer side, to some degree this will be based on the differential between the on-shore China lending rate (assuming that some although not all of the companies issuing SBLCs have access to on-shore loans) and the cost of issuing these bonds in the off-shore bond market.

Today the on-shore lending rate for 3-5yr loans is 6.4% and borrowers can access this market from between 0.9x and 1.3x this level but we can’t forget that interest on loans are tax deductible (25% tax rate). This creates a rough ceiling of 4.3%-6.25%. Most Chinese issuers have issued bonds with coupons just over 2% to as high as 4.5% (this won’t be relevant for the SUELIN bonds of course as the comparison is the on-shore Rupee rate which is even higher). So, higher off-shore interest rates/spread widening will likely impact supply but today is quite viable. Regulator push-back could also be a factor as there may be increased worries about the banks increasing exposure to weaker quality companies. Provisions and NPLs for Chinese banks are rising as we’ve seen in the recent results announcements this quarter.

So, if the SBLC bonds are given the same ratings of the banks that issue them, and legal opinions are provided on the bonds and the structure which imply the SBLCs are irrevocable, unconditional and enforceable, why don’t they trade at the same level of a bank’s senior unsecured obligations? To some degree, for the same reason that actual guaranteed bonds do not trade at the same level as the guarantor’s bonds – enforcement and the timeliness of that enforcement is less certain given lack of precedent and the different jurisdictions involved.

What SBLC features matter for valuations? Credit risk of the SBLC provider As banks provide ‘issuer insurance’ to investors the real starting point for valuation is the SBLC credit provider’s senior unsecured spreads. However, even fully guaranteed bonds don’t tend to trade on top of the guarantor’s spread levels. As we mentioned earlier (and will demonstrate later), the differential is due to the likelihood of the underlying issuer defaulting triggering the guarantee thereby creating reinvestment risk as well as the uncertainty around enforcement and timeliness of payment. The same rationale holds true for SBLCs but structural and jurisdictional differences in SBLC documentation may increase or decrease the timeliness of enforceability.

Timeliness of payment and enforceability on an SBLC Turning to timeliness of enforceability, there are a few areas of focus that investors should consider when thinking about how to value these structures.


Default triggers/process for drawdown under SBLC Events of default are pretty standard for most bonds but there are a few nuances in terms of triggers and drawdowns which can have implications for timeliness of payment and therefore valuation, in our view.

BOC backed bonds: Pre-funding requirements set out drawdown of SBLC prior to coupon payment date. Failure to prepay is not an event of default if the amount has been subsequently paid by the LC Bank following a drawing under the SBLC. If there is an event of default, a minimum 25% of bondholders must agree to request immediate payment for principal and accrued interest. The stated amount of the SBLC in each case will cover the principal and all coupons to be paid during the life of the bond.

SBI backed bonds (SUELIN): It is an event of default if the issuer fails to meet prepayment requirements. The bonds immediately accelerate on an event of default. The stated amount of the SBLC is enough to cover the principal and one coupon only.

DBS backed bonds (CHRESO): There is no pre-payment requirement. It is an event of default if the interest/principal has not been paid after a 30 day/7 day respective grace period. The trustee cannot draw down on the SBLC without SBLC bank consent which reduces flexibility on payment timing for the investor. The stated amount of the SBLC is enough to cover the principal and one coupon plus enough to cover an additional 1% accrued interest payable by the issuer from the bond due date up to the date on which payment under the letter of credit is required to be made by the SBLC bank.

Enforcement procedure and repatriation hurdles for SBLC All of the outstanding SBLCs are issued under English Law. However enforcement in the event of dispute may be more complicated by the different jurisdictions. This may be further complicated by SBLCs issued by on-shore branches in China given the lack of full currency convertibility and potential regulatory hurdles. BOC’s on-shore branches have provided RMB denominated SBLCs for HAIAIR ‘20s and COSHOL ‘22s although provide sufficient amounts to cover the full amount of the SBLC even in the event of large currency moves. This structure has been untested in the bond market context on this basis.

Cross-default and novation clauses may be less relevant Other features which may be considered would include a lack of cross-default with the SBLC bank although this may be less worrisome for highly rated banks like DBS (as there is no cross default in the CHRESO bonds). Just to clarify, the cross-default language in the BOC and SBI bonds is based on a banks’ default on other indebtedness which would trigger a default on the SBLC. There is no cross-default if the bank fails to pay under the SBLC.

Another consideration would be a novation clause allowing another bank to replace the original SBLC provider. Again, in the case of the CHRESO bonds, there is a novation clause but for novation to take place, Moody’s confirms in writing that it will not reduce or withdraw its ratings for the Bonds as a result of such novation. There could be some differences in the bank spreads for the replacement SBLC provider although given that few banks remain at the Aa1 level of DBS, this risks are relatively low. Risks will increase for banks with lower ratings which investors may want to consider in valuations.


Credit risk of the issuer Last but certainly not least, investors do need to take into consideration the underlying credit fundamentals of the issuer. The weaker the credit fundamentals, the closer an issuer will be to triggering the SBLC through failure to pre-fund, pay its coupon or pay back its principal. A default and acceleration of the bonds would lead to re-investment risk. Interestingly a number of the BOC SBLC backed issuers have provided a Keepwell. The Keepwell is meant to ensure a positive net worth of the issuer and that it has sufficient liquidity to ensure timely payment. However, the Keepwell is not a guarantee or a legal obligation of the parent company. Enforceability of Keepwell agreements is uncertain. Therefore, while it may provide some enhancement to the credit which is nice to have, it cannot be counted on as a guarantee from the parent.

Creating a valuation framework The uncertainties surrounding the ease of drawing down on SLBCs make it difficult to provide any kind of nuanced valuation framework. However, we attempt to provide a building block approach to provide a broad assessment of ‘fair value’ for SLBCs. Certainly there will be a ‘finger in the air’ element to the analysis but we hope to provide a methodology which investors can use where they can may any adjustments they feel necessary for valuing SLBCs.

First building block: Bank guarantee spread pick-up Let’s start with the bank guaranteed bonds. Today the DAEHIM ’16 bonds are trading 40-45bps wide of the KDB ’17 bonds (or 35-40bps for curve). The average historical relationship has been about 30bps so we’re slightly higher than recent history. If we look back at the Hana Bank ’12 government guarantee bonds we find that the pick-up started as wide as 150bps but slowly moved lower as risk premiums in general fell with less bank stress. The closer the bonds moved to maturity the less liquid they became with the bonds eventually showing they were trading inside of the sovereign bonds.

It’s worth spending a minute to discuss the sovereign vs. quasi-sovereign relationship in Korea as another way of thinking about support. Korean quasi-sovereign banks have generally traded at a 1.2-1.5x multiple over the sovereign. As spreads were tighter, multiples widened, as spreads widened, multiples moved lower. Today, KDB/KEXIM bonds trade about 40bps wide of the Korean sovereign. Given that there is no explicit guarantee, only an implicit guarantee, this would suggest that the DAEHIM guaranteed bonds may be trading a little on the cheap side by comparison.

Unfortunately it’s difficult to look at this comparison in China given that there is little bank senior outstanding which can provide a base for comparison. If we look at the ACIRC 2% ‘17s vs. SDBC 2% ’17 FXCDs, the current pick-up is about 35bps based on levels for the SDBC FXCDs from Bloomberg. This is a very rough measure as FXCDs are not particularly liquid. However, this doesn’t seem too far off the ~30-40bps we’ve seen in Korea. Looking at this another way, we look at the ICBCAS 4.875% ’21 bonds (Skysea guaranteed bonds) and compare them to the ICBCAS 2.75% ‘17s bonds (ICBC China Singapore Branch). If we subtract 40bps from the ‘21s as the “guarantee cost” then the pick-up for curve is about 23bps which doesn’t seem too far off. Interestingly what this shows is that there is not much difference in what investors want in terms of a pick-up over the guarantor for Korea relative to China.

Chart 2: Hana ’12 guarantee bonds vs. Korea ‘13


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Hana '12 vs. Korea '13


Second building block: How much more for SBLCs? So if we start with the guarantee structure of 30bps for Korea (and other jurisdictions like HK and Singapore) and 40bps for China, what more do we need to add for the uncertainty related to SLBCs? Not an easy answer. How do we think about it? Well, given the stronger legal jurisdictions for HK, Korea and Singapore we would add another 20bps for the additional uncertainty. It may well be that we are overstating the issue of timely enforcement over a guarantee but since there is some uncertainty, we’ll err on the side of caution.

So, what about China? All of the bonds with SLBCs provided by BOC are with the Chinese entity (not the HK entity) but four of six are provided by their off-shore branches. Legal counsel opinions are provided by branch jurisdiction when drafting the SLBCs to assure enforcement. In accordance with the “Law of the People’s Republic of China on Commercial Banks” and a circular issued by the People’s Bank of China, if a branch of a commercial bank fails to fully perform its obligations, the commercial bank shall fulfill the obligations. As English Law is enforceable in the off-shore branches which are then enforceable with the on-shore bank, this helps to reduce some of the worries about jurisdiction. The SBLC bonds with on-shore branch (and usually currency mismatches) may be slightly more at risk. Additionally, we think that the more BOC backed bonds which are issued, the more investors may want given supply. Therefore, we add 40bps for the SLBC structure for Chinese backed SBLCs and another 20bps for bonds which are backed by an on-shore branch for some repatriation risk.

In the case of India, we add 20bps over the 80bps starting point for the Chinese bank SLBCs (or the same level we use for the on-shore China branch issuers) as enforceability is notoriously difficult in India. According to the SUELIN documentation “it may not be possible for investors to effect service of process upon the SBLC Bank or such persons in jurisdictions outside India, or to enforce against them judgments obtained in courts outside India. India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments.” However, the UK is considered a reciprocating territory whereby a judgment may be enforced in India although there are exceptions which may end up tying up the process in India. Timeliness is a higher risk in India we think.

Third building block: Incorporating issuer fundamentals While much of the valuation for these bonds comes from the ‘insurance’ provided by the SBLC provider (bank), we cannot completely ignore the underlying fundamentals. i.e. all SBLCs issued by BOC should not trade at the same level. Companies with weaker fundamentals will have a higher probability of triggering the SBLC and an event of default (although this varies by structure) which would lead to refinancing risk. So how do we value this?

On a simplistic basis, the potential loss is the coupon income that would be received if the issuer had not defaulted multiplied by the probability of default. We assume no recovery since investors are not owed any additional coupon income once the bonds are accelerated. We take the coupon income owed today (the potential loss although to be perfectly accurate any income accrued to the next coupon will be paid under the SBLC agreements).

To assess probability of default, we take the Moody’s matched maturity cumulative default information for our estimated rating but given the probability of default will fall as we move closer to maturity and the coupon loss will also fall, we take half of the cumulative default rate to take into consideration the time decay.


In some cases, the issuers have on-shore ratings (and off-shore ratings) but we have tried to err on the side of caution when assigning ratings. For example, the CITICS bonds have a BBB rating but we’ve assumed they fall into the BB category. The ZHTONG bonds have a BB rating but we assume they are more like a B. The ZIJMIN bonds have a AAA on-shore rating (we understand due to the size of the company) but we assume a much weaker credit profile and given them a B rating. We take the potential loss/owed coupons adjusting into bps dividing by the number of years outstanding. We then take that figure and multiply by the proportion owed (outstanding coupons + principal).

Table 2: Incorporating issuer fundamentals based on potential re-investment risk

CHRESO 2.125%

'17 CITICS

2.5% '18 COSHOL

4% '22

HAIAIR 3.625%

'20 SUELIN 4.969 '18

ZHTONG 4.5% '18

ZIJMIN 4.25% '16

Owed in coupons ($mn) 26 90 380 118 145 75 71 Assumed rating BB BB BBB BB CCC B B Potential loss 1.0 10 6 22 91 45 28 Proportion of total owed 6.00% 10.10% 27.50% 19.10% 18.30% 18.40% 12.90% Loss in bps/year 6 10 6 22 91 45 28 Source: BofA Merrill Lynch Global Research

Fourth building block: Approval/procedural differences This last building block is a catch all for other structural and procedural differences in the bonds. As we discuss earlier, we don’t assign much value in the lack of cross-default / addition of the novation clause in the case of the DBS backed SBLC bonds. However, we do think investors should want additional spread pick-up given the need for bank consent to trigger the SBLC. We add 10bps for the added uncertainty.

Pulling all the building blocks together in a chart Table 3: Building block summary

Korea, HK, S'pore China India

Guarantee structure over senior 30bps 40bps N/A SBLC over guarantee +20bps +40bps

Starting point over bank senior 50bps 80bps 100bps Currency differences/ Capital controls

+20bps

Re-investment risk Coupon loss * default probability Need bank consent to trigger SBLC +10bps Source: BofA Merrill Lynch Global Research

Where do bonds trade vs. our ‘fair values’? Well first we need to figure out where these bond currently trade vs. their relevant bank senior comparable before we employ our building block analysis. This is pretty straightforward for the DBS and SBI backed SBLCs but is a little more challenging for the BOC backed SBLCs given that there is little BOC paper outstanding (only BCHINA 3.75% ’16 which we use to compare to Zijin SBLC). For the rest, we use the ICBCAS (on-shore entity) bonds as a proxy. The ICBCAS 2.75% ’17 bonds are the China bank’s Singapore branch. We can then compare the 2018 bonds to these bonds. However, the ICBCAS 4.875% ’21 bonds are the Skysea guaranteed bonds. Therefore, we need to make an adjustment for the guarantee (40bps) and slight curve adjustment for the ’20 and ’22 SBLC bonds (5bps). So after all this, where do the bonds stack up?


Chart 3: Current pick-up for SBLC bonds over comparable bank senior


Based on our broad framework, the HAIAIR ’20 and SUELIN ’18 bonds look the expensive while the ZHTONG ‘18 and CITICS ’18 bonds provide the best value while COSHOL ‘18s offer moderate value. The CHRESO and ZIJMIN bonds appear to be trading around the fair value zone with CHRESO on the slightly expensive side and ZIJMIN on the slightly cheap side.

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ZIJMIN '16 CITICS '18 ZHTONG'18

HAIAIR '20 COSHOL'22

SUELIN'18

CHRESO'17

Actual FV

01 November 2013


9

Appendix: Structural features of the outstanding SBLCs Table 4: Main structural features of SBLCs

CHRESO 2.125% 10/05/17

CITICS 2.5% 05/03/18

COSHOL 4% 12/03/22

HAIAIR 3.625% 02/07/20

HAISEC 3.95% 10/29/18

SUELIN 4.969% 03/28/18

ZHTONG 4.5% 6/16/18

ZIJMIN 4.25% 06/30/16

Issuer China Resources Cement

CITIC Securities Finance 2013 Company Ltd.

Cosco Finance 2011 Hainan Airline HK Co. Ltd.

Haitong International Finance Holdings Ltd. AE Rotor Holding China ZhengTong

Auto Services Zijin Intl Finance Co.

Ltd

Parent Company China Resources Ltd. CITIC Securities Company Ltd. COSCO Pacific Ltd. Hainan Airline Co. Ltd. Haitong Securities

Co., Ltd. Suzlon Energy Zijin Mining Group Co. Ltd.

Name and Branch of Guarantor DBS Bank, Hong Kong branch

Bank of China, Macau Branch

Bank of China, Beijing Branch

Bank of China, Hainan Branch

Bank of China, Singapore Branch State Bank of India Bank of China, Macau

Branch Bank of China, Paris

Branch

Trustee DB Trustees (HK) Ltd. Citicorp International Ltd.

The Hongkong and Shanghai Banking

Corporation Limited DB Trustees (HK) Ltd.

The Hongkong and Shanghai Banking

Corporation Limited

The Bank of New York Mellon, London

Branch

The Bank of New York Mellon, London

Branch

BNP Paribas Trust Corp. UK LTd.

Currency USD USD Issuing - USD; SBLC - RMB

Issuing - USD; SBLC - RMB USD USD USD USD

Rank Sr. Unsecured Sr. Unsecured Sr. Unsecured Sr. Unsecured Sr. Unsecured Sr. Unsecured Sr. Unsecured Sr. Unsecured

Issuer rating N/A Dagong: AAA/S&P: BBB+ N/A SBCR: AA+/

Chengxin: AA- (Neg) Chengxin: AAA Crisil: BB+ Chengxin: AA-

/Moody's: Ba3/ S&P: BB-

Chengxin: AAA

Bond rating Moody's: Aa1 S&P: A Moody's: A1 Moody's: A1/S&P: A Moody's: A1 Moody's: Baa2 Moody's: A1 Moody's: A1

Guarantor rating Moody's: Aa1 Moody's: A1, S&P: A Moody's: A1, S&P: A Moody's: A1, S&P: A Moody's: A1 Moody's: Baa2/ S&P: BBB/ Fitch: BBB Moody's: A1 Moody's: A1, S&P: A

Issue size $400M $800M $1000M $500M $900M $647M $335M $480M

SBLC size $405.8M $901.7M

RMB equivalent of $1000M plus interest payable plus any fees and expenses payable

by the Issuer in connection with the

bonds

RMB equivalent of $500M plus interest

payable plus any fees and expenses payable

by the Issuer in connection with the

bonds

$1,079M $655M $407M $600M

Coupon 2.125% 2.50% 4% 3.625% 3.950% 4.969% 5% 4.25% Coupon type Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed Coupon freq. Semi-Annual Semi-Annual Semi-Annual Semi-Annual Semi-Annual Quarterly Semi-Annual Semi-Annual Issue price 99.75 99.753 98.766 99.237 99.574 100 100 99.276

Issue Spread Treasury 2017 + 155bps

Treasury 2018 + 185bps







Coverage description

Principal plus one coupon plus additional 1% interest on coupon for payment in arrears

Amount outstanding plus accrued interest




Principal and up to one coupon (paid

quarterly) along with accrued interest



Pre-payment Timelines

Pre-funding date N/A 8 business days prior to payment date

8 business days prior to payment date






Window of application N/A Within 2 business days after the pre-

funding date

Within 2 business days after the pre-

funding date


funding date


funding date


funding date


funding date


funding date

Payment by SBLC provider N/A Within 2 business days of receipt of

notice from trustee

Within 1 business day of receipt of notice

from trustee

Within 3 business days of receipt of

notice from trustee


notice from trustee


notice from trustee


notice from trustee


notice from trustee

01 November 2013


10 Table 4: Main structural features of SBLCs

CHRESO 2.125% 10/05/17

CITICS 2.5% 05/03/18

COSHOL 4% 12/03/22

HAIAIR 3.625% 02/07/20

HAISEC 3.95% 10/29/18

SUELIN 4.969% 03/28/18

ZHTONG 4.5% 6/16/18

ZIJMIN 4.25% 06/30/16

EOD trigger requirements

SBLC Bank provides written consent and 25% of bondholders vote to accelerate

25% of bondholders vote to accelerate




Automatic acceleration if EOD is

triggered



Cross-default on SBLC provider triggering default of SBLCs? N/A Cross acceleration

(>=$25M) Cross acceleration



(>=$25M)

Failure to perform obligations, and the

failure continues for a period of 30 days;

Cross default (>=$25M)



SBLC expiry date 11/4/2017 6/2/2018 1/12/2022 3/8/2020 11/29/2018 4/17/2018 7/30/2018 7/30/2016 Do bonds accelerate? No No No No No Yes No No Make-whole No Yes Yes Yes Yes No Yes No Change of control Yes Yes Yes No Yes No Yes No Keepwell No Yes Yes Yes Yes No No Yes Novation Yes No No No No No No No Source: Bond documentation, BofA Merrill Lynch Global Research


Link to Definitions Credit Click here for definitions of commonly used terms. Analyst Certification I, Michele Barlow, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Special Disclosures Some of the securities discussed herein should only be considered for inclusion in accounts qualified for high risk investment.


Important Disclosures BofA Merrill Lynch Credit Opinion Key The BofA Merrill Lynch Global Research Credit Opinion Key is designed to allow BofA Merrill Lynch Global Credit Research to provide recommendations on an issuer’s bonds, capital securities, equity preferreds and CDS as described below. An issuer level recommendation may also be provided in respect of an issuer as explained below. BofA Merrill Lynch Global Research credit recommendations are assigned using a three-month time horizon. Issuer Recommendations: If an issuer credit recommendation is provided, it is applicable to all bonds of the issuer except bonds specifically referenced in the report with a different credit recommendation. Where there is no issuer credit recommendation, only individual bonds with specific recommendations are covered. Issuer credit recommendations do not cover equity preferreds or CDS related to the issuer. Issuer credit recommendations do not cover capital securities of the issuer unless a statement to that effect is provided in the relevant research report. CDS Recommendations: CDS are recommended on an individual basis under the Credit Opinion Key. Issuer credit recommendations do not apply to CDS. Capital Securities: Capital securities are recommended individually unless the research report specifically states that the issuer credit recommendation applies to such securities. In cases where the issuer credit recommendation applies to capital securities of the issuers, it is not applicable to capital securities that we classify as equity preferreds. Equity Preferreds: Equity preferreds are recommended on an individual basis under the Credit Opinion Key. Issuer credit recommendations do not apply to equity preferreds.

Recommendation Investor Action Points (Cash and/or CDS) Primary Investment Return Driver Overweight-100% Up to 100% Overweight of investor's guidelines Compelling spread tightening potential Overweight-70% Up to 70% Overweight of investor's guidelines Carry, plus some spread tightening expected Overweight-30% Up to 30% Overweight of investor's guidelines Good carry, but little spread tightening expected Underweight-30% Down to 30% Underweight of investor's guidelines Unattractive carry, but spreads unlikely to widen Underweight-70% Down to 70% Underweight of investor's guidelines Expected spread underperformance Underweight-100% Down to 100% Underweight of investor's guidelines Material spread widening expected Time horizon – our recommendations have a 3 month trade horizon

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