user_s guide to the physical settlement rider for syndicated secured loan credit defaults swaps

7/27/2019 User_s Guide to the Physical Settlement Rider for Syndicated Secured Loan Credit Defaults Swaps

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USER'S GUIDE

TO THE PHYSICAL SETTLEMENTRIDERFOR SYNDICATED SECURED LOAN

CREDIT DEFAULT SWAPS

OCTOBER 1, 2007

Copyright LSTA 2007. All rights reserved.


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TABLE OF CONTENTS

Page

I.INTRODUCTION.........................................................................................................................1II.BACKGROUND OF LCDS........................................................................................................2

A.Standard CDS.....................................................................................................................2B.Summary of LCDS and LCDX Terms................................................................................4

1.Credit Events..............................................................................................................42.Syndicated Secured.....................................................................................................43.Unfunded Revolvers...................................................................................................54.Settlement ..................................................................................................................55.Compensation for Delayed Physical Settlement.........................................................66.Succession Events.......................................................................................................6

III.SYNDICATED SECURED: THE DEALER POLL..............................................................6A.Markit and the Syndicated Secured Loan Polling Rules ...................................................6B.Substitute Reference Obligations........................................................................................7C.Syndicated Secured Dispute Resolution.............................................................................7

IV.THE PHYSICAL SETTLEMENT RIDER................................................................................8A.The Starting Point: The LSTA Confirmation.....................................................................8B.Next Step: Preparing the Transaction Documents..............................................................9

1.Key Innovations........................................................................................................10(a)Market Standard Indemnity...........................................................................10(b)No Negotiation..............................................................................................10

2.Drafting the Documentation.....................................................................................10

(a)LSTA PSA.....................................................................................................10(b)Amendments to LCDS PSA..........................................................................12

(i)Amendments to Section 1.2. ..................................................... ..........12(ii)Amendment to Section 6.1(a). ................................................. ..........12(iii)Addition of Section 6.5. ............................................ ......... ........ ......13

(c)Participation, Subparticipation or Assignment of Participation....................13(d)Execution and Delivery.................................................................................14

C.Fast-Track to Physical Settlement: Timelines for Delivery of Documents......................141.Settlement by Assignment........................................................................................152.Settlement by Fall-Back Participation......................................................................163.Settlement by Initial Participation, Subparticipation or Assignment of Participation

18(a)Assignment Delay..........................................................................................18(b)Protection Buyer holds Deliverable Obligation by Participation or Subparticipation.................................................................................................18(c)Initial Participation Timeline.........................................................................19

D.Consequences of Delayed Settlement...............................................................................211.Protection Seller Delay: Additional Termination Event ..........................................21

(a)Assignment....................................................................................................21

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(b)Fall-Back Participation..................................................................................22(c)Initial Participation........................................................................................22

2.Protection Buyer Delay: Delayed Compensation ....................................................22(a)Delayed Compensation Payment under Direct-settled Transactions.............22(b)Delayed Compensation Payments under Auction Transactions....................23

(c)Buy-in............................................................................................................23E.Cash Settlement.................................................................................................................241.Cash Settlement Following Attempted Physical Settlement ...................................24

(a)Introduction....................................................................................................24(b)Cash Settlement Timeline..............................................................................25(c)The Auction...................................................................................................25(d)The Requirements of the Bids.......................................................................26(e)Calculation of the Cash Settlement Amount..................................................27

2.Cash Settlement Pursuant to a Buy-in......................................................................28

V.CONCLUSION..........................................................................................................................28

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THE LOAN SYNDICATIONS AND TRADING ASSOCIATION, INC.

USER'S GUIDETO THE PHYSICAL SETTLEMENT RIDER

FOR SYNDICATED SECURED LOAN CREDIT DEFAULT SWAPS

I. INTRODUCTION

The LSTA is issuing this User's Guide 1 in connection with the North AmericanSyndicated Secured Loan Credit Default Swap (LCDS) product and the LCDS index(LCDX) product, which have been developed cooperatively by the International Swaps andDerivatives Association, Inc. (ISDA), the LSTA and an independent working group consistingof representatives from the dealer and buy-side communities.

In connection with the LCDS and LCDX products, ISDA assumed primary responsibilityfor overseeing the development of the Syndicated Secured Loan Credit Default Swap StandardTerms Supplement (the LCDS Standard Terms), the LCDX Untranched Transactions StandardTerms Supplement (the LCDX Untranched Standard Terms) and the LCDX TrancheTransactions Standard Terms Supplement (the LCDX Tranche Standard Terms and, together with the LCDX Untranched Standard Terms, the LCDX Standard Terms), each of which can

be found at www.isda.org. The LSTA assumed primary responsibility for overseeing thedevelopment of the Physical Settlement Rider to the LCDS Standard Terms and the LCDXStandard Terms, which can be found at www.lsta.org.

The LCDS Standard Terms and the Physical Settlement Rider were originally publishedin June of 2006 and amended in May of 2007. This Users Guide focuses on the 2007 versions

because they govern current and future transactions. When discussing legacy transactionsgoverned by the 2006 versions, the original documents are referred to as the 2006 LCDSStandard Terms and the 2006 Physical Settlement Rider.

The robust auction procedures used in the credit default swap market to determine the price of an underlying bond deliverable after a credit event have been made applicable to LCDSand LCDX by virtue of the 2007 documentation. Accordingly, the majority of LCDS and LCDXtransactions are expected to cash settle pursuant to an ISDA sponsored auction. Nonetheless,

physical settlement pursuant to the Physical Settlement Rider will continue to apply to certaintransactions, as described herein.

Because physically settled transactions enable Protection Buyer to physically deliver a

secured loan to Protection Seller upon the occurrence of a Credit Event in return for a1 This User's Guide provides a brief overview of the LCDS and LCDX products and is not

intended to be a substitute for transaction- and credit-specific due diligence, or review of the most recentLCDS Standard Terms and LCDX Standard Terms, as published by ISDA, and the most recent PhysicalSettlement Rider, as published by the LSTA. Nothing in this Users Guide constitutes the provision of legal, regulatory, credit, financial or other professional advice by the LSTA to its members or any other recipient of this Users Guide. Users of this Users Guide are responsible for forming their own view asto the accuracy of the information contained herein, which information is provided without warranty of any kind, express or implied. This User's Guide has been prepared for the LSTA by Richards Kibbe &Orbe LLP.


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protection payment, the Physical Settlement Rider harmonizes the standards for physicalsettlement under a standard credit default swap transaction with existing standards and market

practices for settlement of transfers in the distressed loan market. The Physical Settlement Rider specifies the form of transfer documentation that will be used by LCDS and LCDX market

participants to transfer loans after a Credit Event and regulates the settlement of loan deliveryobligations that arise under LCDS and LCDX transactions. The Physical Settlement Rider also

sets forth mandatory, abbreviated timeframes for completing such transfers.This User's Guide provides general background on the LCDS and LCDX products, and a

detailed description of the Physical Settlement Rider. This User's Guide describes and explainsthe key terms and concepts introduced by the Physical Settlement Rider and is intended to assistcounterparties and their counsel in taking full advantage of the efficient settlement techniques

prescribed in the Physical Settlement Rider following a Credit Event in the LCDS or LCDXmarket. 2 However, participants in the LCDS and LCDX markets should carefully review thePhysical Settlement Rider and dedicate sufficient resources in order to understand and timely

perform their obligations following a Credit Event. Most importantly, from a practical perspective, participants in the LCDS market are encouraged to establish internal operational procedures and controls well in advance of any Credit Event, since the time needed to understandthe requirements of, and perform the obligations under, the Physical Settlement Rider will beexceedingly short once a Credit Event has occurred.

II. BACKGROUND OF LCDS

A. Standard CDS

Under a standard credit default swap (CDS), Protection Seller sells, and ProtectionBuyer buys, a notional amount of protection against the default of a Reference Entity specifiedin the confirmation. The protection applies for the Term of the transaction, from theEffective Date to the Scheduled Termination Date specified in the confirmation. During the

Term, Protection Buyer makes premium payments and receives protection against theoccurrence of specific Credit Events described in the confirmation. If a specified Credit Eventoccurs, Protection Buyer has the right to deliver certain Deliverable Obligations of theReference Entity to Protection Seller and to receive the par value of the Deliverable Obligationin exchange. In a standard CDS transaction, the Deliverable Obligation is generally a bond or other unsecured obligation of the Reference Entity.

2 In addition to this User's Guide, the LSTA published a Market Advisory in May of 2006 relatingto the "Market Standard Indemnity" contained in the Physical Settlement Rider. The Market StandardAdvisory is available at www.lsta.org.

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PROTECTION BUYER PROTECTION SELLERCredit Protection

Premium Payments

Credit Event must occur during thisTerm for protection to be triggered.

EFFECTIVE DATESCHEDULED

TERMINATION DATE

PROTECTION BUYER PROTECTION SELLERCredit Protection

Premium Payments

Credit Event must occur during thisTerm for protection to be triggered.

EFFECTIVE DATESCHEDULED

TERMINATION DATE


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After the occurrence of a Credit Event, three notices must be delivered within set time periods to trigger the settlement obligations of the parties and identify the specific DeliverableObligation that will be delivered by Protection Buyer. The first, called the Credit Event

Notice, may be delivered by either party and must describe in reasonable detail the facts of theCredit Event. The Credit Event Notice must be delivered by the 14th calendar day after theScheduled Termination Date of the CDS transaction.

The party that delivers the Credit Event Notice must also deliver a Notice of PubliclyAvailable Information that lists publicly available information confirming the Credit Event.Like the Credit Event Notice, the Notice of Publicly Available Information must be delivered onor before the 14th calendar day after the Scheduled Termination Date of the CDS transaction.The date on which both of these notices have been delivered is referred to as the EventDetermination Date.

Finally, a Notice of Physical Settlement (the NOPS) must be delivered by the 30thcalendar day after the Event Determination Date. The NOPS is always delivered by ProtectionBuyer, and it identifies the specific Deliverable Obligation that Protection Buyer will deliver toProtection Seller in exchange for the protection payment. The Physical Settlement Date,which is the expected date for settlement of a CDS transaction, occurs a specified number of Business Days, typically thirty (30), after delivery of the NOPS.

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Credit Event must occuron or after the EffectiveDate and on or before theScheduled TerminationDate

Date on which the following2 notices are effective:

- Credit Event Notice

- Notice of PubliclyAvailable Information

Protection Buyer mustdeliver NOPS by the 30 thcalendar day after EventDetermination Date

CREDITEVENT

EVENTDETERMINATION DATE

NOTICE OF PHYSICALSETTLEMENT (NOPS) PHYSICAL

SETTLEMENT DATE

30 Calendar Days 30 Business Days

Event DeterminationDate must occur by

the 14 th calendarday after theScheduled

Termination Date

Credit Event must occuron or after the EffectiveDate and on or before theScheduled TerminationDate

Date on which the following2 notices are effective:

- Credit Event Notice

- Notice of PubliclyAvailable Information

Protection Buyer mustdeliver NOPS by the 30 thcalendar day after EventDetermination Date

CREDITEVENT

EVENTDETERMINATION DATE

NOTICE OF PHYSICALSETTLEMENT (NOPS) PHYSICAL

SETTLEMENT DATE

30 Calendar Days 30 Business Days

Event DeterminationDate must occur by

the 14 th calendarday after theScheduled

Termination Date


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B. Summary of LCDS and LCDX Terms

While both the LCDS and LCDX Standard Terms reflect the principal terms andstructure of a standard ISDA CDS transaction, LCDS and LCDX transactions are necessarilydifferent because the Deliverable Obligation is a secured loan. Set forth below is a summary of some of the key terms and concepts used in LCDS and LCDX transactions and how these differ from the terms of a CDS transaction.

1. Credit Events

Under LCDS and LCDX, two separate Credit Events are specified. If theReference Entity (i) fails to make a scheduled payment of $1 million or more of BorrowedMoney (including loans, bonds, etc.) after the expiration of any grace period applicable to such

payment, or (ii) enters bankruptcy proceedings, then Protection Buyer becomes entitled to trigger settlement of the relevant contract. Unlike many investment grade CDS contracts, the LCDSStandard Terms and LCDX Standard Terms do not include Restructuring as a Credit Event. 3

2. Syndicated Secured

As in a standard CDS transaction, to be eligible for delivery under an LCDS or LCDX confirmation in the case of physical settlement, an obligation must (i) be an obligation of the Reference Entity, and (ii) meet various Deliverable Obligation Characteristics specified inthe confirmation. Deliverable Obligations can either be direct obligations of the ReferenceEntity or loans guaranteed by the Reference Entity on behalf of its downstream affiliates (toqualify as Deliverable Obligations, obligations guaranteed by the Reference Entity must satisfycertain further characteristics, including ownership by the Reference Entity of at least 50% of thevoting stock of the underlying obligor on the date of the issuance of the guarantee).

Most importantly, under LCDS and LCDX, a Deliverable Obligation must be aSyndicated Secured loan of the Reference Entity. Many of the unique features of the LCDSand LCDX products flow from this requirement. The Syndicated Secured characteristic is notdetermined by reference to a legal definition. Instead, a dealer poll guides the parties to the setof loans that are eligible for delivery as Deliverable Obligations, and to the loan that will be theReference Obligation under the LCDS and LCDX confirmations. 4 The dealer poll mechanismis discussed at length below in Section III.

Under LCDS and LCDX, Syndicated Secured means any obligation, includingany contingent obligation to pay or repay borrowed money resulting from the funding of anunfunded commitment, (i) that arises under a syndicated loan agreement and (ii) that, on the

relevant day, trades as a loan of the Designated Priority under the then-current trading practicesin the primary or secondary loan market, as the case may be. Designated Priority refers to aloan's specified lien priority (e.g., first, second, etc.). The definition is based on a marketstandard, rather than a legal definition, in order to (i) eliminate uncertainty involved in legal

3 Though "Restructuring" is not a standard Credit Event in LCDS or LCDX, the LCDS StandardTerms and the LCDX Standard Terms can be modified to apply this Credit Event to any bespoke trade.

4 The Reference Obligation is a loan that serves as a benchmark to determine which other loanscan be delivered.

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While standard CDS requires parties to physically settle transactions usingtransfer documentation customarily used in the relevant market, LCDS and LCDX, through thePhysical Settlement Rider, require parties to physically settle using non-negotiable settlement

procedures and documentation based upon modified LSTA documentation and settlementstandards.

5. Compensation for Delayed Physical Settlement

Unlike standard CDS, if physical delivery is not attempted by the PhysicalSettlement Date in an LCDS or LCDX transaction for which an auction is not run (and cashsettlement does not apply), compensation for delayed settlement (calculated as described in thePhysical Settlement Rider) will accrue in favor of Protection Seller. In addition, standard LSTAdelayed compensation will apply to trades that physically settle at an auction price. Both delayedcompensation regimes are discussed below under Section IV D.

6. Succession Events

In LCDS and LCDX, like standard CDS, if a Reference Entity is subject to aSuccession Event, such as a merger or similar corporate event where another entity assumesthe debt obligations of the Reference Entity, the credit default swap may migrate to one or moreSuccessor Reference Entities. Under standard CDS, a Successor Reference Entity is identified

by tracing the amount of debt obligations, including all bonds and loans, of the originalReference Entity assumed by the new entity. However, under LCDS and LCDX, rather thantracing all bonds and loans, this determination is made by tracing only the Syndicated SecuredLoans assumed by the new entity.

III. SYNDICATED SECURED: THE DEALER POLL

While certain Deliverable Obligation Characteristics in LCDS and LCDX are defined

by reference to ISDA's 2003 Credit Derivatives Definitions, the most important DeliverableObligation Characteristic is not subject to a legal definition. Each Deliverable Obligation, aswell as any Reference Obligation, must meet the definition of Syndicated Secured, discussedin Section II B 2 above. Syndicated Secured is determined by a dealer poll in accordance withthe following guidelines.

A. Markit and the Syndicated Secured Loan Polling Rules

Markit Group Limited (Markit) has established a database of loans traded in the primary and secondary loan markets and will conduct periodic polls of specified dealers todetermine whether the loans of a Reference Entity are Syndicated Secured, and if SyndicatedSecured, their Designated Priority. Markit has published Syndicated Secured Loan PollingRules that specify in detail the polling procedures used to determine this information. Inaddition, Markit will maintain on its website, www.markit.com, a list (the Relevant SecuredList) for each Reference Entity of the Loans that are Syndicated Secured of a DesignatedPriority.

In an LCDS transaction, Protection Buyer and Protection Seller will specify a ReferenceEntity and a Designated Priority (typically first lien or second lien) in their confirmation,and in an LCDX transaction, the parties will reference an index comprised of a portfolio of

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Reference Entities with a Designated Priority for each Reference Entity. Markit will run a seriesof dealer polls on significant Reference Entities to determine which debt obligations of thoseReference Entities are Syndicated Secured loans of the Designated Priority. Markit will publishthe results of the polls on their website, and all parties in the market will be bound by Markit'sdetermination. In addition to these initial polls, participating dealers may request at any time thatMarkit run a poll with respect to a new Reference Entity.

As a general rule, Markit will identify the loan that is the Reference Obligation on theRelevant Secured List, and the Reference Obligation may change as the Relevant Secured List isupdated. Markits identification is binding on all parties across the market. If the ReferenceEntity is a borrower that is not covered by Markit's polls, then the parties' designation of theReference Obligation will be applicable until the Reference Entity is covered by Markit.

B. Substitute Reference Obligations

In the single-name LCDS product, if the Relevant Secured List is withdrawn, if there isno Relevant Secured List due to a Succession Event, or if the Reference Entity is not covered byMarkit and the Reference Obligation specified by the parties is repaid, materially reduced, or fails to be Syndicated Secured, then the Calculation Agent (generally the Protection Seller or thedealer party to the LCDS) must attempt to identify a Substitute Reference Obligation. TheSubstitute Reference Obligation must be Syndicated Secured. If the Calculation Agent identifiesa Substitute Reference Obligation, either party may dispute the Syndicated Secured nature of thisLoan, as further described in Section III C below. If a Substitute Reference Obligation has not

been identified (or its identification is subject to dispute) 30 Business Days after the CalculationAgent begins its search, either party may cancel the LCDS transaction, and no further paymentsare due by either party. This is the only case where the parties have an option to terminate theLCDS transaction.

Under LCDX transactions, the Calculation Agent has no duty to search for a Substitute

Reference Obligation. If a Relevant Secured List is withdrawn, or if there is no existing list for aReference Entity due to the occurrence of a Succession Event, and in each case no new RelevantSecured List is published within 30 Business Days, then the relevant portion of the transaction isautomatically cancelled and no further payments are due by either party on this portion of theLCDX transaction.

C. Syndicated Secured Dispute Resolution

Under LCDS, both parties, in the case of the designation of a Substitute ReferenceObligation, and Protection Seller, in the case of the designation of a Deliverable Obligation, maydispute the Syndicated Secured nature of the relevant obligation. In an LCDX transaction that

physically settles, Protection Seller has a similar dispute right with respect to Protection Buyer'sdesignation of a Deliverable Obligation. In the event of a dispute, Markit (or the CalculationAgent in limited circumstances) will conduct a dealer poll to resolve the dispute. If the relevantobligation is determined not to be Syndicated Secured, the Calculation Agent may identify a newSubstitute Reference Obligation, or the Protection Buyer may identify a new DeliverableObligation. In the event of a dispute, the Calculation Agent will request that Markit run a new

poll on the disputed obligation. The parties agree to be bound by the results of that poll.

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IV. THE PHYSICAL SETTLEMENT RIDER

The Physical Settlement Rider is the detailed enhancement to the LCDS Standard Termsand LCDX Standard Terms that regulates the physical settlement process following a CreditEvent. The Physical Settlement Rider reflects the harmonization of settlement mechanics in thecurrent secondary loan market, based upon the documentation and procedures developed by theLSTA, with the settlement demands of the CDS market. The Physical Settlement Rider addresses an inherent incompatibility between the loan market, where lengthy upstream reviewand detailed negotiation of documentation often results in prolonged settlement times, and theCDS market, where expeditious settlement times are not only demanded by regulators and

participants, but are necessary because the outstanding notional amount of CDS contracts willlikely exceed the amount of physical obligations available and eligible for delivery.

Legacy LCDS transactions subject to the 2006 LCDS Standard Terms are required to physically settle pursuant to the 2006 Physical Settlement Rider, unless another arrangement has been made. However, the current LCDS Standard Terms and the LCDX Standard Terms requirecash settlement pursuant to an auction, and physical settlement only applies as a fallback. Inaddition, ISDA launched a protocol in July of 2007, which enabled parties with open LCDStransactions that were subject to the 2006 LCDS Standard Terms to amend their trades to besubject to the updated documentation. Therefore, the number of trades that are expected to settle

physically will be limited to (i) legacy trades that remain subject to the 2006 LCDS StandardTerms, (ii) trades on Reference Entities for which an auction either is not held or fails, (iii)LCDS and LCDX transactions that are ineligible for the auction because of the failure to fulfillcertain documentation conditions, and (iv) trades that result from physical settlement requestssubmitted into an auction.

The remainder of this User's Guide is intended to guide LCDS and LCDX counterpartiesthrough the physical settlement process set forth in the 2007 version of the Physical SettlementRider.

A. The Starting Point: The LSTA Confirmation

Once the NOPS has been delivered and can no longer be modified by Protection Buyer (the NOPS Fixing Date) 6, Protection Buyer and Protection Seller are deemed to have enteredinto a transaction governed by the then-current LSTA Distressed Trade Confirmation (LSTAConfirmation). The NOPS Fixing Date is the LSTA Trade Date under the LSTAConfirmation. The relevant and necessary terms of the LCDS and LCDX transaction are deemedto be incorporated in the LSTA Confirmation through the following amendments to the LSTAConfirmation which are set forth in the Physical Settlement Rider: 7

6

Under LCDS and LCDX, the NOPS Fixing Date occurs on the third Business Day followingProtection Buyer's initial delivery of a NOPS, whereas in the standard CDS market, Protection Buyer maychange its NOPS at any time on or before the Physical Settlement Date. The NOPS Fixing Date isintended to provide certainty to the parties in LCDS and LCDX transactions, given the complexity of the

physical loan settlement process as compared to the electronic settlement process normally employed inconnection with the delivery of bonds.

7 The Physical Settlement Rider deems the LSTA Trade Confirmation to be created as of the NOPS Fixing Date and does not require the parties to evidence the LCDS or LCDX transaction in writingwith an actual LSTA Trade Confirmation.

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the LSTA Trade Date is the NOPS Fixing Date;

the LSTA Seller is the Protection Buyer;

the LSTA Buyer is the Protection Seller;

the Credit Agreement is the underlying loan or credit agreement relating to theDeliverable Obligation (or, in the case that Protection Buyer delivers an obligationthat is guaranteed by the Reference Entity and meets certain other specifiedrequirements (an Underlying Obligation), the loan or credit agreement relating tothe Underlying Obligation);

the Borrower is the Reference Entity (or, in the case that Protection Buyer deliversa Qualifying Guarantee, the Underlying Obligor)

the LSTA Confirmation Form of Purchase default is Assignment, although thePhysical Settlement Rider provides for specific instances where the transaction may

settle by Participation, Subparticipation or Assignment of Participation; the Purchase Amount is the amount of commitment of the Deliverable Obligation

that Protection Buyer indicates in the NOPS that it will deliver;

Type of Debt is a revolving loan, term loan, or any other relevant description of theDeliverable Obligation;

the convention for Accrued Interest is the then-current market convention for theDeliverable Obligation on the LSTA Trade Date, as determined by the CalculationAgent;

Transfer Documentation is prepared by Protection Buyer;

the amount of the Purchase Price is the amount described in the LCDS StandardTerms or the LCDX Standard Terms (generally par multiplied by fundedcommitment); and

the Physical Settlement Rider provides that, if an LCDS or LCDX transaction closes by Participation, Protection Seller will have no voting rights and will be required to post cash collateral for any portion of the Deliverable Obligation that is unfunded.Accordingly, Section 15 of the LSTA Confirmation does not apply.

B. Next Step: Preparing the Transaction Documents

The Physical Settlement Rider provides specific guidance in connection with the preparation and delivery of transfer documents upon physical settlement. While there is a presumption that parties will settle by Assignment, the Physical Settlement Rider also containsdrafting guidelines with respect to settlement by Participation, Subparticipation and Assignmentof Participation if settlement by Assignment is not possible, or if settlement by Participation isotherwise acceptable to the parties. The transfer documentation evidencing most physically

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settled LCDS and LCDX transactions, whether settling by Assignment, Participation or Assignment of Participation, will be the LSTA Purchase and Sale Agreement for DistressedTrades (LSTA PSA) as published by the LSTA on the NOPS Fixing Date, as modified byspecific amendments reflected in the Physical Settlement Rider.

1. Key Innovations

The Physical Settlement Rider contains two key innovations which are intendedto facilitate expedited settlement following a Credit Event.

(a) Market Standard Indemnity

The LSTA PSA on which any LCDS and LCDX transaction settles (anLCDS PSA) will include various amendments, the most important of which is the MarketStandard Indemnity. The Market Standard Indemnity requires Protection Buyer to holdProtection Seller harmless for any inconsistency between the LCDS PSA (and its predecessor transfer agreements) and standard market practice relating to the Deliverable Obligation. Thisnew provision is intended to allow LCDS and LCDX counterparties promptly to prepare andexecute transfer documentation without negotiation or upstream review, while providingProtection Seller with the benefit of customized, credit-specific protections which may evolveand be negotiated by participants in the cash market.

All LCDS and LCDX counterparties are encouraged carefully to reviewthe LSTA Market Advisory published by the LSTA in June of 2006, entitled Loan CreditDefault Swap 'Market Standard Indemnity,' which is available at www.lsta.org. The MarketAdvisory provides additional detail regarding the Market Standard Indemnity, as well asimportant information regarding the treatment of the Market Standard Indemnity in the cash loanmarket.

(b) No NegotiationThe Market Standard Indemnity is designed to provide Protection Seller

with any market standard protections relating to the Deliverable Obligation that are notreflected in the form LSTA PSA. After Protection Buyer has prepared the LCDS PSA inaccordance with the guidance provided in this Section IV B, including the insertion of theMarket Standard Indemnity, Protection Seller may not negotiate the documents or request anyadditional modifications to any provisions. This innovation to the LCDS and LCDX products isintended to facilitate market-wide prompt and efficient settlement following a Credit Event.

2. Drafting the Documentation

(a) LSTA PSA

Protection Buyer should refer to the LSTA's website (www.lsta.org) as of the NOPS Fixing Date for the most recent version of the LSTA PSA. That form will serve as thestarting point for the documentation evidencing physical settlement of most LCDS and LCDXtransactions, whether ultimately closed by Assignment, Participation, Subparticipation or Assignment of Participation.

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(b) Amendments to LCDS PSA.

The Physical Settlement Rider includes a number of specific amendmentsthat need to be made to any LCDS PSA, including the Market Standard Indemnity discussedabove. These amendments are included in Section 2(e) of the Physical Settlement Rider, andProtection Buyer must insert each amendment exactly as it is stated in the Physical SettlementRider into Section 26 (Further Provisions) of any LCDS PSA. The amendments are as follows:

(i) Amendments to Section 1.2 .

The amendments to Section 1.2 of the LCDS PSA should only be made inconnection with LCDS and LCDX transactions that do not settle at an auction price. Theseamendments, set forth below, confirm that standard LSTA Compensation for DelayedSettlement does not apply to such transactions: 8

(a) The definition of 'Adequate Protection Payments' shall beamended by (i) deleting the language 'the earlier of (a)' from the end of thefourth line thereof and (ii) deleting the language 'and (b) T+20' from theend thereof.

(b) The definition of 'Business Day' shall be amended by (i)replacing the comma immediately preceding clause (c) thereof with theword 'or,' (ii) deleting the word 'or' immediately preceding clause (d)thereof and (iii) deleting clause (d) thereof.

(c) The definition of 'Pre-Settlement Date Accruals' shall beamended by (i) deleting the language 'the earlier of (a)' from the secondline thereof and (ii) deleting the language 'and (b) T+20' from the secondline thereof.

(d) The definition of 'T+20' shall be deleted in its entirety.

(ii) Amendment to Section 6.1(a) .

The Market Standard Indemnity is incorporated by the followingamendment to Section 6.1(a) of the LCDS PSA:

The word 'or' appearing at the end of clause (ii) of Section 6.1(a)of the Standard Terms shall be deleted and replaced with a comma, andthe following shall be added at the end of the first sentence of Section6.1(a):

'or (iv) this Agreement or any Predecessor Transfer Agreement being inconsistent with standard market practice applicable tothe Loans and Commitments (in the case of this Agreement, on theSettlement Date, or in the case of any Predecessor Transfer Agreement, onthe settlement date thereof), which inconsistency results in Buyer's

8 Note that, as discussed in greater detail below, standard LSTA Compensation for DelayedSettlement does apply to transactions that settle at an auction price.

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receiving proportionately less in payments or distributions under, or lessfavorable treatment (including the timing of payments or distributions) for,the Transferred Rights than is received by other Lenders holding loans or commitments of the same tranche as the Loans and Commitments under documentation that is consistent with such standard market practice;

provided, however, that Seller shall not be required to indemnify Buyer

under this clause (iv) for losses arising from any subsequent resale of theLoans and Commitments by Buyer at a price that is less than theapplicable market price at the time of such resale.'

(iii) Addition of Section 6.5 .

The final amendment to the LCDS PSA is the addition of Section6.5, which is intended to balance the Market Standard Indemnity by

providing a benefit to Protection Buyer. While the Market StandardIndemnity requires Protection Buyer to grant all additional protections(e.g., modified representations, additional indemnities, etc.) in the LCDSPSA that are deemed to be standard market practice in the cash loanmarket relating to the Deliverable Obligations, Section 6.5 enablesProtection Buyer to take advantage of standard market practicemodifications that would limit the representation and indemnificationobligations of the Protection Buyer. For example, if standard transactionsin the cash loan market for a particular Deliverable Obligation containedan additional LSTA seller indemnity to address a unique risk, the MarketStandard Indemnity would require Protection Buyer to provide that sameindemnity. If the same documentation also reflected a limitation or carve-out relating to one of the standard seller representations in the LSTA PSA,Section 6.5 of the LCDS PSA would provide Protection Buyer with the

benefit of that limited representation as well. Section 6.5 reads as follows:

6.5 No Indemnifying Party shall be required to indemnify anyIndemnified Party under Section 6.1(a)(i) or Section 6.2(a) to the extentthat standard market practice applicable to the Loans and Commitments onthe Settlement Date, in the case of this Agreement, or on the settlementdate thereof, in the case of any Predecessor Transfer Agreement, wouldlimit the indemnification obligation of the Indemnifying Party as a resultof a modification to the representations, warranties, covenants or agreements of the Indemnifying Party.

(c) Participation, Subparticipation or Assignment of Participation

If an LCDS or LCDX transaction settles by Participation, as further described below in Section IV C 2, the Physical Settlement Rider provides that the transfer documentation will be the LSTA Distressed Participation Agreement published on the NOPSFixing Date, modified to reflect (i) the same amendments described above and (ii) the provisionsincluded in Annex 1 to the Physical Settlement Rider which reflect that Protection Seller will notreceive voting rights as a participant and will be required to post cash collateral for any unfunded

portion of the Deliverable Obligations. If the LSTA has not published a Distressed ParticipationAgreement at that time, Protection Buyer should use the LCDS PSA as amended, and insert each

13


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of the additional amendments provided on Annex 1 to the Physical Settlement Rider into Section26 (Further Provisions) of the LCDS PSA. Annex 1 to the Physical Settlement Rider creates a

participation relationship between Protection Buyer (as grantor) and Protection Seller (as participant). The participation provides for automatic elevation in the event that consent toAssignment is received.

Some of the terms reflected in the form of participation agreementrequired for LCDS and LCDX trades, such as the voting rights and cash collateral provisionsdescribed above, may not be anticipated by regular cash loan market participants. ProtectionBuyer and Protection Seller may modify these terms, or any other terms contained in thePhysical Settlement Rider, but they must agree to do so on the LCDS or LCDX Trade Date. Nonegotiation of documentation should take place after a Credit Event.

In the case of a Subparticipation, the Physical Settlement Rider providesthat Protection Buyer will deliver a subparticipation in a form substantially similar to therelevant participation described above. Protection Buyer should make only the changesnecessary to convert the participation agreement into a subparticipation agreement. In the caseof an Assignment of Participation, Protection Buyer will deliver an assignment substantiallysimilar to the LCDS PSA, which reflects only the changes necessary to convert the assignmentagreement into an assignment of participation agreement.

(d) Execution and Delivery

Once Protection Buyer has finalized the draft of the LCDS PSA,Participation, Subparticipation or Assignment of Participation Agreement, as applicable (each,an LCDS Transfer Document), Protection Buyer should execute and deliver such draft, alongwith any other documents (such as an Assignment and Acceptance) that are required under theCredit Agreement or any related documents for the transfer of the Deliverable Obligation, toProtection Seller as soon as practicable.

While Protection Seller is not permitted to negotiate the terms of theLCDS Transfer Document, Protection Seller should carefully review the LCDS Transfer Document it receives from Protection Buyer to ensure that the credit-specific information, aswell as the amendments included in the Physical Settlement Rider, are accurate and complete.Protection Seller is, in most cases, provided only 3 Business Days to do so, and should adjust itsoperational priorities accordingly.

C. Fast-Track to Physical Settlement: Timelines for Deliveryof Documents

The LSTA suite of standard documentation has substantially reduced the settlementdelays and long timeframes that have traditionally characterized physical settlement in the cashmarket for distressed loans. However, due to the negotiation-intensive nature of physicalsettlement of loans, and the need for agent or other third party consent to most transfers,settlement timelines for loans are still generally longer than settlement timelines in the bondmarket, where bond transactions normally settle electronically. The Physical Settlement Rider imposes mandatory, abbreviated timelines on Protection Buyer and Protection Seller with respectto the delivery and execution of documents, which timelines are not present in the cash marketfor distressed loans. These abbreviated timelines, in conjunction with the elimination of

14


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negotiation of the transfer documents, are intended to achieve the goal of prompt physicalsettlement of LCDS and LCDX transactions.

Protection Buyer and Protection Seller should familiarize themselves with these timelinesand carefully monitor the passage of time after the NOPS Fixing Date. Once the NOPS FixingDate has occurred, each party is required to comply with various deadlines or face certainconsequences, including termination of the LCDS contract and cancellation of all paymentobligations.

Market participants should note that the settlement timelines set forth below are nottriggered until Protection Buyer both (i) delivers documents, and (ii) is the legal and beneficialowner of the Deliverable Obligation. Protection Buyers are permitted to deliver documents prior to the settlement of their purchase of the Deliverable Obligation in order to effect severalassignments simultaneously, as is standard practice in the secondary loan market. However, anysuch early delivery of documents is not sufficient to trigger the various consequences built intothese settlement timelines.

1. Settlement by Assignment

Except in the limited circumstances described in Section IV C 3 below, ProtectionBuyer and Protection Seller are required to attempt physical settlement of any LCDS or LCDXtransaction by Assignment. The following timeline shows the steps involved in the Assignment

process, as well as the timelines imposed on the parties by the Physical Settlement Rider:

ASSIGNMENT TIMELINE

Assignment: Action to be Taken Deadline

Protection Buyer (i) is the legal and beneficialowner of the relevant amount of the Deliverable

Obligation and (ii) delivers a full set of transfer documents necessary to transfer DeliverableObligation by Assignment (including LCDS PSA,any other documents necessary for such transfer under the Credit Agreement, and a full set of

predecessor transfer agreements) (the date on which both conditions are fulfilled, the ProposedAssignment Settlement Date )

As soon as practicable after the NOPSFixing Date

Protection Seller executes and delivers Assignmentdocuments to Protection Buyer

On or before the third Business Day after the Proposed Assignment Settlement Date

Parties attempt to obtain the fulfillment or waiver of any consent, approval, acknowledgement, noticeor other requirement to transfer the DeliverableObligation by Assignment

All such requirements must be fulfilled bythe 13th Business Day following theProposed Assignment Settlement Date

Parties close by Assignment On the date all consents are received or requirements fulfilled, if such date is on or

before the 13th Business Day followingthe Proposed Assignment Settlement Date

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2. Settlement by Fall-Back Participation

If settlement by Assignment has not occurred on or before the 13th Business Dayfollowing the Proposed Assignment Settlement Date, Protection Buyer and Protection Seller must then attempt to settle the LCDS or LCDX transaction by Participation. This requiresProtection Buyer to draft a Participation Agreement in accordance with the guidelines set forth inSection IV B 2 (c) above, either by using the current LSTA form of Distressed ParticipationAgreement, if any, or by converting the LCDS PSA it previously delivered in anticipation of settlement by Assignment into a Participation Agreement. The following timeline shows thesteps involved in the Fall-Back Participation process, as well as the deadlines imposed on the

parties by the Physical Settlement Rider:

FALL-BACK PARTICIPATION TIMELINE

Fall-Back Participation: Action to be Taken Deadline

Protection Buyer delivers a full set of transfer documents necessary to transfer DeliverableObligation by Participation (including LCDSParticipation Agreement, any other documentsnecessary for such transfer under the CreditAgreement, and a full set of predecessor transfer agreements) (the date of delivery, the ProposedFall-Back Participation Settlement Date )

On or before the 14th Business Day following the Proposed AssignmentSettlement Date

Protection Seller , at its option, either (i) executesand delivers Participation documents to Protection

Buyer or (ii) delivers a Cash Election Notice,exercising its option to avoid taking a participationinterest by cash settling

On or before the fifth Business Day after the Proposed Fall-Back Participation

Settlement Date

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Parties attempt to obtain the fulfillment or waiver of any consent, approval, acknowledgement, noticeor other requirement to transfer the DeliverableObligation by Participation

All such requirements must be fulfilled bythe 15th Business Day following theProposed Fall-Back ParticipationSettlement Date

Parties close by Participation On the date all consents are received or requirements fulfilled, if such date is on or

before the 15th Business Day followingthe Proposed Fall-Back ParticipationSettlement Date

OR

Parties begin the cash settlement process describedin Section IV E below

On the date Protection Seller delivers aCash Election Notice

OR

On the 15th Business Day following theProposed Fall-Back ParticipationSettlement Date if consents to Participationare not received by such date

The following chart illustrates the timelines for settlement by Assignment and Fall-Back Participation:

17

If Protection Seller hasreturned signatures butconsents have not beenreceived and/or legalrequirements have not beenfulfilled by 15th Business Dayafter the Proposed Fall-BackParticipation Settlement Date,automatic cash settlement

PROPOSEDASSIGNMENTSETTLEMENT

DATE

MOVE TOCASH

SETTLEMENT

Date on which ProtectionBuyer delivers all documentsto effect an Assignmentmust occur as soon aspracticable after NOPS FixingDate, unless ProtectionBuyer effects a ProposedInitial ParticipationSettlement Date below

ATE

CLOSEBY

ASSIGNMENT

If Protection Seller does notsign assignment documentswithin 3 Business Days,Additional TerminationEvent occurs

Protection Seller must signAssignment documents within 3Business Days

If consents to Assignmentare not received by 13 thBusiness Day after ProposedAssignment SettlementDate, Protection Buyer mustdeliver participationdocuments on the 14 thBusiness Day after ProposedAssignment Settlement Date

CASHELECTIONNOTICE

ADDITIONAL TERMINATION

EVENT

If all consents are receivedby 13 th Business Day afterProposed AssignmentSettlement Date, close

Protection Seller must signpart documents within 5Business Days if noconsents are required, closethat day and subsequentlyelevate when consents toassignment are received

See Section IV D 1Below

Protection Seller may electcash settlement on or before5th Business Day followingProposed Fall-BackParticipation Settlement Date

CLOSEBY

PART

1 3

B u s i n e s

s D a y s

3 B u s i n e s s D a y s

14 BusinessDays

5 Business Days

5 B u s i n e

s s D a

y s


NOPSFIXING DATE

PROPOSEDFALL-BACK

PARTICIPATIONSETTLEMENT

DATE

3rd Business

Day afterinitialNOPS sent

If Protection Seller hasreturned signatures butconsents have not beenreceived and/or legalrequirements have not beenfulfilled by 15th Business Dayafter the Proposed Fall-BackParticipation Settlement Date,automatic cash settlement

PROPOSEDASSIGNMENTSETTLEMENT

DATE

MOVE TOCASH

SETTLEMENT

Date on which ProtectionBuyer delivers all documentsto effect an Assignmentmust occur as soon aspracticable after NOPS FixingDate, unless ProtectionBuyer effects a ProposedInitial ParticipationSettlement Date below

ATE

CLOSEBY

ASSIGNMENT

If Protection Seller does notsign assignment documentswithin 3 Business Days,Additional TerminationEvent occurs

Protection Seller must signAssignment documents within 3Business Days

If consents to Assignmentare not received by 13 thBusiness Day after ProposedAssignment SettlementDate, Protection Buyer mustdeliver participationdocuments on the 14 thBusiness Day after ProposedAssignment Settlement Date

CASHELECTIONNOTICE

ADDITIONAL TERMINATION

EVENT

If all consents are receivedby 13 th Business Day afterProposed AssignmentSettlement Date, close

Protection Seller must signpart documents within 5Business Days if noconsents are required, closethat day and subsequentlyelevate when consents toassignment are received

See Section IV D 1Below

Protection Seller may electcash settlement on or before5th Business Day followingProposed Fall-BackParticipation Settlement Date

CLOSEBY

PART

1 3

B u s i n e s

s D a y s


14 BusinessDays

5 Business Days

5 B u s i n e

s s D a

y s


NOPSFIXING DATE

PROPOSEDFALL-BACK

PARTICIPATIONSETTLEMENT

DATE

3rd Business

Day afterinitialNOPS sent


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3. Settlement by Initial Participation, Subparticipationor Assignment of Participation

As discussed in Section IV C 1 above, the Physical Settlement Rider provides thatAssignment is the preferred method of settlement, and requires that Protection Buyer andProtection Seller attempt to settle by Assignment as an initial matter in most cases. However,there are two circumstances where Protection Buyer is permitted to skip over the requirement toattempt settlement by Assignment, and jump directly to settlement by Participation,Subparticipation or Assignment of Participation (each, an Initial Participation):

(a) Assignment Delay

If Protection Buyer is a lender and determines in its reasonable judgmentthat settlement by Assignment would not be effected within 13 Business Days due to any third

party requirement, Protection Buyer can deliver a Participation. Examples of scenarios thisclause is intended to address include:

Agent freeze that Protection Buyer knows will not be lifted within 13Business Days

Minimum transfer requirement exceeds amount of Deliverable Obligationto be delivered by Protection Buyer, and Agent will neither accept anoversale/buyback arrangement nor otherwise waive the requirement

Definition of Eligible Assignee in Credit Agreement expressly excludesProtection Seller and no waiver is feasible (e.g., no hedge funds are permittedto be lenders and Agent has refused to grant a waiver of this requirement)

(b) Protection Buyer holds Deliverable Obligation by Participation or Subparticipation

If Protection Buyer holds either a Participation interest or aSubparticipation interest in the Deliverable Obligation, then Protection Buyer can deliver aSubparticipation or an Assignment of Participation. Prior to the Physical Settlement Date, this isoptional: Protection Buyer has the choice either to deliver this inventory or, if there is a reasonProtection Buyer would prefer to continue to hold this inventory, to attempt to find different

inventory in the market to deliver. However, Protection Buyer is required to deliver thisinventory on the Physical Settlement Date if it has been unable by that date to deliver the fulloutstanding principal balance of such Deliverable Obligation specified in the NOPS. Thisrequirement is intended to promote expedient settlement timelines by requiring that all availableinventory be used to satisfy LCDS and LCDX settlement obligations, while enabling ProtectionBuyer to retain some flexibility with respect to the inventory it holds.

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Protection Seller , at its option, either (i) executesand delivers Initial Participation documents toProtection Buyer or (ii) delivers a Cash Election

Notice, exercising its option to avoid taking a participation interest by cash settling

On or before the fifth Business Day after theProposed Initial Participation Settlement Date

Parties attempt to obtain the fulfillment or waiver of any consent, approval, acknowledgement,notice or other requirement to transfer theDeliverable Obligation by Initial Participation

All such requirements must be fulfilled by the15th Business Day following the ProposedInitial Participation Settlement Date

Parties close by Initial Participation

OR

Parties must begin the cash settlement processdescribed in Section IV E below

On the date all consents are received or requirements fulfilled, if such date is on or

before the 15th Business Day following theProposed Initial Participation Settlement Date

On the date Protection Seller delivers a CashElection Notice

OR

On the 15th Business Day following theProposed Initial Participation Settlement Dateif consents to Participation are not received bysuch date

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The following chart illustrates the timelines for settlement by Initial Participation:

D. Consequences of Delayed Settlement

In order to promote compliance with settlement timelines, the Physical Settlement Rider provides three specific incentives for the parties to comply with the requirements set forth in thePhysical Settlement Rider, that are based on concepts borrowed from both ISDA and LSTAdocumentation.

1. Protection Seller Delay: Additional TerminationEvent

At the following three points in the settlement timelines, if Protection Seller failsto comply in a timely fashion with the deadlines imposed on it by the Physical Settlement Rider,an Additional Termination Event under the ISDA Master Agreement between ProtectionBuyer and Protection Seller occurs:

(a) Assignment Protection Seller MUST (i) deliver its signatures on the Assignment

documents on or before the third Business Day after its receipt of such documents AND (ii) paythe Purchase Price on the day it delivers its signatures or, if any third party requirements apply,on the day it receives a fully executed set of Assignment documents evidencing compliance withall such requirements;

21

MOVE TOCASH

SETTLEMEN T

If Protection Buyer holds theDeliverable Obligation byParticipation orSubparticipation, it maydeliver subparticipation orassignment of participationdocuments without firstdelivering assignmentdocuments

If Protection Buyer is a lenderof record, it may deliverparticipation documentswithout first deliveringassignment documents if itdetermines, in its reasonable

judgment, that Assignmentwill not be effected within 13Business Days due to arequired third-party consentor approval, or applicable law

CLOSEBY PART

ORSUBPART

CASHELECTION

NOTICE

ADDITIONAL

TERMINATION

EVENT

Protection Seller must signparticipation documentswithin 5 Business Days if no consents are required,close by participation thatday and subsequentlyelevate when consents toassignment are received

See Section IV D 1 below

Protection Seller mayelect cash settlement onor before 5 th Business Dayfollowing Proposed InitialParticipation SettlementDate

If Protection Seller has returnedsignatures but consents have notbeen received and/or legalrequirements have not beenfulfilled by 15 th Business Day afterthe Proposed Initial ParticipationSettlement Date, automatic cashsettlement

5 B u s i

n e s s

D a y s

5 B u s i n e s s

D a y s

5 B u s i n e s s D a y s NOPS

FIXING DATE

3 rd Business Dayafter initial NOPSsent

PROPOSEDINITIAL

PARTICIPATION

SETTLEMENTDATE


25/31

(b) Fall-Back Participation

Protection Seller MUST either (A) (i) deliver its signatures on the Fall-Back Participation documents on or before the fifth Business Day after its receipt of suchdocuments AND (ii) pay the Purchase Price on the day it delivers its signatures or, if any third

party requirements apply, on the day it receives a fully executed set of Fall-Back Participationdocuments evidencing compliance with all such requirements OR (B) deliver a Cash Election

Notice on or before the fifth Business Day after its receipt of Participation documents; OR

(c) Initial Participation

Protection Seller MUST either (A) (i) deliver its signatures on the InitialParticipation documents on or before the fifth Business Day after its receipt of such documentsAND (ii) pay the Purchase Price on the day it delivers its signatures or, if any third partyrequirements apply, on the day it receives a fully executed set of Initial Participation documentsevidencing compliance with all such requirements OR (B) deliver a Cash Election Notice on or

before the fifth Business Day after its receipt of Initial Participation documents.

If Protection Seller fails to comply with any of these requirements,Protection Buyer, as the non-defaulting party (or the Non-Affected Party, as defined in theISDA 2002 Master Agreement), has the right immediately to terminate the relevant transaction.Unlike some ISDA Additional Termination Events which give rise to the right of the Non-Affected Party to terminate all transactions under the ISDA Master Agreement between the

parties, it is important to note that this Additional Termination Event will only apply to theaffected LCDS or LCDX transaction. If the Protection Buyer exercises its early terminationoption, no further payments will be due under the confirmation from either party (i.e., ProtectionBuyer's protection payments cease and Protection Seller's conditional obligation to deliver a par

payment is eliminated.) However, a termination amount may be payable under the ISDA Master Agreement between Protection Buyer and Protection Seller and, if so, Protection Buyer will

determine the termination amount. 9

2. Protection Buyer Delay: Delayed Compensation

(a) Delayed Compensation Payment under Direct-settled Transactions

Standard LSTA delayed compensation does not apply to LCDS andLCDX transactions that do not settle at an auction-generated price (Direct-settledTransactions). These include LCDS and LCDX transactions on Reference Entities for which anauction either is not held or fails, legacy transactions documented pursuant to the 2006 LCDSStandard Terms and transactions that are ineligible for inclusion in the auction due to a failure to

9 Both parties should carefully review the terms of their governing ISDA Master Agreement todetermine how the termination amount, if any, will be calculated in connection with any AdditionalTermination Event under the LCDS confirmation. The payment will typically be comprised of (1) the"Close-Out Amounts," as defined in the ISDA Master Agreement (generally, a calculation of thereplacement cost of the material terms of the terminated transaction to the burdened party), plus (2) theunpaid amounts owed under the relevant transaction to Protection Buyer before the early termination dateminus (3) the unpaid amounts owed under the relevant transaction to Protection Seller before the earlytermination date.

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fulfill applicable conditions. Instead, a form of delayed compensation (LCDS DelayedCompensation) has been imposed on Protection Buyers under Direct-settled Transactions as aneconomic incentive to purchase the Deliverable Obligation and deliver settlement documents asquickly as possible. LCDS Delayed Compensation specifically targets Protection Buyers that donot own the Deliverable Obligation, and reflects an attempt to prevent them from delayingdelivery of settlement documents by waiting for the price of that Deliverable Obligation to

decrease before purchasing it.If Protection Buyer does not both (i) own the Deliverable Obligation and

(ii) deliver a full set of documents to effect delivery of the Deliverable Obligation by thePhysical Settlement Date, Protection Buyer will begin to accrue a delayed compensation amount

payable to Protection Seller. This amount is equal to (i) the total rate of interest payable inrespect of the Deliverable Obligation as of the NOPS Fixing Date under the relevant CreditAgreement (excluding any default interest) regardless of whether or not such interest wasactually paid, or if a bankruptcy court has issued a final order authorizing or ordering adequate

protection payments to the lenders, the total rate of interest stated in such final order, minus (ii)the average LIBO Rate (as defined in the LSTA Standard Terms and Conditions for DistressedTrade Confirmations) for the entire period of delay. This amount will accrue from the PhysicalSettlement Date until the earlier of the date on which Protection Buyer owns the DeliverableObligation and delivers settlement documents and the date that is 90 calendar days after thePhysical Settlement Date.

Any such amount payable by Protection Buyer will be deducted from thePhysical Settlement Amount payable by Protection Seller or, if a Protection Buyer owes aPhysical Settlement Amount to Protection Seller, the delayed compensation amount will beadded to such settlement amount, upon delivery by Protection Buyer of the DeliverableObligation.

(b) Delayed Compensation Payments under Auction Transactions

LCDS Delayed Compensation does not apply to LCDS and LCDXtransactions that settle at an auction-generated price (Auction Transactions). These includeLCDS and LCDX transactions on Reference Entities for which a successful auction is run, aswell as trades generated by physical settlement requests submitted into a successful auction.Instead, standard LSTA delayed compensation will apply to Auction Transactions using the

NOPS Fixing Date as the LSTA trade date, and subject to the convention for Accrued Interestdetermined by the Calculation Agent to be the market standard convention applicable to theDeliverable Obligation on that date.

(c) Buy-in

Under both Direct-settled Transactions and Auction Transactions,Protection Seller will have a buy-in right to the extent Protection Buyer has not bought in theDeliverable Obligation and delivered settlement documents by the 90 th calendar day after thePhysical Settlement Date. For the first 30 calendar days of such buy-in right, Protection Seller may purchase the Deliverable Obligation or Deliverable Obligations identified in the NOPS inorder to close out all or a portion of the relevant LCDS or LCDX transaction. After such 30-day

period and until the transaction is settled in full, Protection Seller may purchase (i) in the case of a Direct-settled Transaction, any other loan satisfying the Syndicated Secured characteristic on

23


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the Event Determination Date and satisfying each other Deliverable Obligation characteristic asof the buy-in date, and (ii) in the case of an Auction Transaction, any other DeliverableObligation specified in the auction settlement terms. Protection Buyer has the right to disputethe Syndicated Secured nature of any Deliverable Obligation under (i), which dispute will beresolved in a manner similar to that described in Section III C above.

If Protection Seller chooses to exercise its buy-in right, it must attempt toobtain offers from three or more dealers for the sale of the relevant Deliverable Obligation. Thelowest offer will be the Buy-in Price at which the LCDS or LCDX transaction will cash settle,and such settlement will occur on the twentieth business day after the Protection Seller notifiesProtection Buyer of the Buy-in Price or Prices. The buy-in transaction will be settled ondocumentation consistent with market practice applicable to the Deliverable Obligation that may,

but is not obligated to, be subject to the Physical Settlement Rider. The documentationgoverning the buy-in transaction may not, however, be governed by documentation containing

provisions more favorable to Protection Seller than those in the Physical Settlement Rider.

E. Cash Settlement

1. Cash Settlement Following Attempted Physical Settlement

In the case that either (1) Protection Seller delivers a Cash Election Notice or (2)consents to participation are still pending on the 15th Business Day following a Proposed Fall-Back Participation Settlement Date or Proposed Initial Participation Settlement Date, the partiesimmediately move to Cash Settlement.

(a) Introduction

The LSTA Confirmation includes settlement default rules familiar to

market participants: if a transaction cannot be settled by assignment, such transaction will besettled as a participation, and if the transaction cannot be settled by participation, the transactionwill be settled on the basis of a mutually agreeable alternative structure or other arrangementthat affords Buyer and Seller the economic equivalent of the agreed-upon trade. This standardis based on the assumption that two parties will be able to reach bilateral agreement on anappropriate cash payment to settle a trade in the event of a failed settlement. While this standardmay be appropriate for the cash loan market, more certainty is necessary in the CDS and LCDSmarkets given (a) the inherent disparity in negotiating power between Protection Buyer andProtection Seller after the occurrence of a Credit Event and (b) the need for fast, efficientsettlement. The 2003 ISDA Credit Derivatives Definitions set forth a detailed auctionmechanism for cash settlement for these reasons.

The partial cash settlement provisions included in the Physical SettlementRider implement a simplified form of a CDS cash auction. The fallback auction mechanics thatapply to standard CDS transactions, which allow for multiple auctions in the event an auctionfails to draw bids, have not been included in the Physical Settlement Rider for the sake of simplicity and certainty.

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(b) Cash Settlement Timeline

The date which is either (a) the date on which Protection Seller delivers aCash Election Notice or (b) the 15th Business Day after a Proposed Fall-Back ParticipationSettlement Date or a Proposed Initial Participation Settlement Date, is called the CashSettlement Trigger Date.

The third Business Day following the Cash Settlement Trigger Date iscalled the Valuation Date. On that date, the Calculation Agent will conductan auction for the Deliverable Obligation that has not been delivered, and theresults of the auction will determine the Final Price of that DeliverableObligation, which price will be used to determine the Cash SettlementAmount payable by Protection Seller.

The third Business Day following the calculation of the Final Price iscalled the Cash Settlement Date, which is the date on which the CashSettlement Amount is paid and the LCDS or LCDX transaction terminates.

(c) The Auction

The Calculation Agent will attempt to obtain firm quotations (or guaranteed bids) with respect to the Deliverable Obligation on the Valuation Date from at leastfive dealers.

If the Calculation Agent receives two or more firm quotations, the highestreceived is the Final Price.

If the Calculation Agent receives fewer than two firm quotations, theCalculation Agent will, in consultation with the parties to the LCDS or LCDXtransaction, determine the Final Price.

The Calculation Agent is obligated to use commercially reasonable efforts tonotify Protection Buyer of each firm quotation received, so that Protection Buyer has theopportunity to accept, and transact on the basis of, such bid.

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The following chart illustrates the timelines constituting cash settlement and the auction process:

(d) The Requirements of the Bids

The firm quotations that are submitted by dealers pursuant to the auctionoutlined above are subject to a number of specific requirements, which are set forth in detail in

the Physical Settlement Rider. Dealers must submit bids as opposed to offers, and their bidsmust be for the entire amount of the Deliverable Obligation that has not been delivered. Inaddition, dealers submitting bids must comply with the following guidelines:

The bid must be for a transaction with Protection Buyer for settlement onan LCDS PSA or Participation Agreement;

The bid must be open to Protection Buyer for at least two hours;

The bid must contain a representation that the bidding dealer hascompleted all know your customer requirements or procedures relating to a

transaction with Protection Buyer; and The bid must provide that, if Protection Buyer agrees to deliver theDeliverable Obligation to such dealer on the basis of such bid, the dealer agrees to comply with the timing and other requirements set forth in thePhysical Settlement Rider (including executing settlement documents withinthree Business Days of receipt) and pay a price for such DeliverableObligation based on the Purchase Price Calculation formula included in theLSTA Confirmation assuming a Purchase Rate equal to such dealer's bid and

26

If Calculation Agentreceives 2 5 Quotes,highest =Final Price

If Calculation Agentreceives fewer than 2Quotes, CalculationAgent determines FinalPrice

Protection Buyer mayeither sell to anybidder, in which casethe winning bidderpays the Final Price,or keep the Loan, inwhich case no biddermakes a payment

VALUATIONDATE

CASHSETTLEMENT

TRIGGERDATE

PROTECTION SELLERDELIVERS CASH

ELECTION NOTICE

THIRD PARTY CONSENTS TO PARTICIPATION ORSUBPARTICIPATION ARENOT RECEIVED WITHIN15 BUSINESS DAYS OFPROPOSED FALL-BACK

PARTICIPATIONSETTLEMENT DATE OR

PROPOSED INITIALPARTICIPATION

SETTLEMENT DATE

PROTECTIONSELLER PAYSPAR MINUS

FINAL PRICE

KEEP LOAN

ACCEPT BID,DELIVER LOAN TO

ANY BIDDER

3 Business Days

If Calculation Agentreceives 2 5 Quotes,highest =Final Price

If Calculation Agentreceives fewer than 2Quotes, CalculationAgent determines FinalPrice

Protection Buyer mayeither sell to anybidder, in which casethe winning bidderpays the Final Price,or keep the Loan, inwhich case no biddermakes a payment

VALUATIONDATE

CASHSETTLEMENT

TRIGGERDATE

PROTECTION SELLERDELIVERS CASH

ELECTION NOTICE

THIRD PARTY CONSENTS TO PARTICIPATION ORSUBPARTICIPATION ARENOT RECEIVED WITHIN15 BUSINESS DAYS OFPROPOSED FALL-BACK

PARTICIPATIONSETTLEMENT DATE OR

PROPOSED INITIALPARTICIPATION

SETTLEMENT DATE

PROTECTIONSELLER PAYSPAR MINUS

FINAL PRICE

KEEP LOAN

ACCEPT BID,DELIVER LOAN TO

ANY BIDDER

3 Business Days


30/31

a Trade Date of the Valuation Date. The dealer must agree to pay this priceon the date it executes such settlement documents or, if any third partyrequirements apply to the transfer, on the date it receives a fully executed setof settlement documents evidencing compliance with all such requirements.

(e) Calculation of the Cash Settlement Amount

In the event an LCDS or LCDX transaction closes via Cash Settlement,Protection Buyer can choose to either hit one of the bids received in the auction or keep theDeliverable Obligation. In either case, a Cash Settlement Amount is paid, which amountapproximates a payment of par minus recovery value of the Deliverable Obligation. Theformula, which appears in Section 1(e) of the Physical Settlement Rider, is based on thePurchase Price Calculation provision contained in Section 4 of the LSTA Confirmation, withan assumed Trade Date set as the Valuation Date. The Purchase Price Differential is equal to:

(i) The Purchase Price that would be payable under the LSTAConfirmation assuming a Purchase Rate equal to the Reference Price(typically 100%) minus

(ii) The Purchase Price that would be payable under the LSTAConfirmation assuming a Purchase Rate equal to the Final Price.

If such amount is positive, then Protection Seller pays a Cash SettlementAmount equal to the Purchase Price Differential to Protection Buyer. If such amount is negativeand the relevant transaction is an Auction Transaction, then Protection Buyer will pay theabsolute value of the Purchase Price Differential to Protection Seller. The latter requirement isintended to encourage Protection Buyer to proceed with settlement notwithstanding an increasein the price of Deliverable Obligation to a price above par.

However, participants in the LSTA market should be cognizant of the factthat the standard LSTA Purchase Price Calculation is modified in the context of LCDS andLCDX transactions. Clauses (c) and (d) of Section 4 of the LSTA Confirmation, which providethat the buyer in an LSTA transaction receives credit for any permanent reductions or non-recurring fees after the trade date, are ignored for purposes of subsection (ii) of the abovecalculation. The LSTA conventions dictate that the LSTA buyer should receive the economic

benefits of such events that occur after the trade date, in order that the buyer receives the benefitof its bargain, and confers that benefit through a credit to the buyer's purchase price in theamount of (100% minus the Purchase Rate) times the amount of the permanent reduction or non-recurring fee. According to these conventions, the credit for permanent reductions or non-recurring fees should be received by Protection Seller, as the buyer of the loan. The LCDS

pricing formula however, because it is an equation which subtracts one LSTA purchase pricefrom another, has the potential to distort this intention. Under the formula above, these creditswould have the effect of decreasing the result of the calculation in clause (ii), because thePurchase Rate in that portion is likely to be under 100%. However, since that result is subtractedfrom the result in clause (i), which approximates a par payment because the Reference Price, andthus the Purchase Rate, normally equals 100%, the total Cash Settlement Amount will actually

be increased, not decreased, by the amount of the credit. By eliminating clauses (c) and (d) of Section 4 of the LSTA Confirmation, the Cash Settlement Amount will be decreased by the

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amount of the credit. Thus, the Physical Settlement Rider ensures that the Protection Seller always receives the benefit of such credits in the form of a reduced Cash Settlement Amount 10.

2. Cash Settlement Pursuant to a Buy-in

In the event an LCDX or LCDX transaction settles pursuant to a buy-in, the CashSettlement Amount will be calculated in a manner similar to that described in Section IV E 1(e)above, with the Buy-in Price substituted for the Final Price determined in the partial cashsettlement auction run by the Calculation Agent. Protection Seller will pay the Cash SettlementAmount if the Purchase Price Differential is positive, and Protection Buyer will pay the absolutevalue of the Purchase Price Differential if the Purchase Price Differential is negative and either the relevant transaction is an Auction Transaction or the loan purchased by Purchase Seller is thesame loan identified by Protection Buyer in the NOPS. In addition, Protection Buyer will payany reasonable brokerage costs incurred by Protection Seller to complete the buy-in.

V. CONCLUSION

The Physical Settlement Rider includes strict documentation and timing requirements thatare intended to promote efficient market-wide physical settlement of LCDS and LCDXtransactions. As described in this User's Guide, the Physical Settlement Rider provides variousincentives to promote compliance with these requirements. A thorough understanding of theserequirements and incentives is necessary in order for participants in the LCDS and LCDXmarkets to be prepared in the event their transactions settle physically after a Credit Event. Mostimportantly, market participants are encouraged to review the Physical Settlement Rider itself inconjunction with a review of this User's Guide in order to ensure a complete understanding of the

physical settlement mechanism and to better allocate operational resources after a Credit Event.

10

The following example illustrates this calculation:Facts: Funded principal amount of Deliverable Obligation: $10 million

Reference Price: 100%Final Price: 60%Permanent Reduction after Valuation Date: $1 million

Example 1: LCDS price without deletion of clauses (c) and (d) of Section 4 of LSTA ConfirmationCash Settlement Amount =1. (a) (100% x $10 million) minus (b) zero minus (c) (100% minus 100%) x $1 million minus (d) zeroMINUS2. (a) (60% x $10 million) minus (b) zero minus (c) (100% minus 60%) x $1 million minus (d) zero

= $10,000,000 MINUS $5,600,000 = $4,400,000Example 2: Actual LCDS PriceCash Settlement Amount =1. (a) 100% x $10 million minus (b) zero MINUS2. (a) 60% x $10 million minus (b) zero

= $10,000,000 MINUS $6,000,000 = $4,000,000

In Example 2, Protection Seller received the value of the $1,000,000 permanent reduction in the form of a