Presentation on theme: "BEFORE THE EXTERNAL REVIEW PANEL OF THE DETERMINATIONS COMMITTEE OF THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. DC ISSUE: 2009-100901 SLIDES."— Presentation transcript:
BEFORE THE EXTERNAL REVIEW PANEL OF THE DETERMINATIONS COMMITTEE OF THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. DC ISSUE: 2009-100901 SLIDES SUBMITTED ON BEHALF OF THE “YES” ANSWER TO THE REVIEWABLE QUESTION This slide presentation was prepared for purposes of the oral argument before the External Review Panel. It is not a complete presentation of the “Yes” Position on the Reviewable Question. For a more complete presentation of the “Yes” Position, please refer to the Brief and Appendix thereto.
1 Has a Restructuring Credit Event occurred with respect to CEMEX, S.A.B. de C.V.? This Reviewable Question presents two issues that call upon the Panel to apply the plain terms of the “Restructuring” definition under the 2003 Definitions: (1) Did Cemex consummate a transaction on August 14, 2009 that “postpone[d]” a due date or dates for “the payment of principal or premium” with respect to one or more “Obligations” of Cemex? (2) Does the August 14 Transaction fall within the limited exception of Section 4.7(b)(iii), because it did not “directly or indirectly result from a deterioration in the creditworthiness or financial condition” of Cemex? The answer to the Reviewable Question is “yes,” because the August 14 Transaction (1) was a Restructuring under Section 4.7(a); and (2) is not excluded by Section 4.7(b)(iii). This slide presentation used in connection with oral argument before the External Review Panel is not a complete presentation of the “Yes” Position on the Reviewable Question, but was a visual aid to accompany oral argument. For a presentation of the “Yes” Position, see the Brief in Favor of the “Yes” Answer to the Reviewable Question.
2 Cemex Postponed the Due Date for Payments Under One or More of its Obligations. The May 2005 Facility is a direct Multiple Holder Obligation of Cemex in the amount of $1.2 billion; it was fully drawn at the time of the August 14 Transaction. Prior to the restructuring, it matured in 2011. As a result of the August 14 Transaction, it now matures in 2014. Cemex stated in writing that the August 14 Transaction postponed the maturities of all but $1 billion of Cemex’s consolidated bank debt. Amendment and later maturity date also confirmed by Bloomberg. The Publicly Available Information reasonably confirms facts to determine that the August 14 Transaction deferred the due dates for payments under the May 2005 Facility. The due dates for at least $200 million of principal payments under Cemex’s May 2005 facility were postponed by the August 14 Transaction.
3 Cemex Postponed the Due Date for Payments Under One or More of its Obligations. In its SEC filings, CEMEX admitted that the August 14 Transaction extended the maturities of its existing financing facilities: “The financing agreement extends the maturities of approximately U.S.$15.0 billion in syndicated and bilateral bank and private placement obligations... with a final maturity of approximately U.S.$6.8 billion on February 14, 2014.” (Ex. N, Prospectus S-3). “[O]ur existing bank facilities that are included in the financing agreement....” (Id. S-16). “Interest rate. The base rates, LIBOR rates and Euribor rates applicable to our existing facilities remain in place ….” (Id. S-86) “Maturity. The maturity of all our financing agreement facilities has been extended until February 14, 2014.” (Id.). Cemex’s obligations under the prior facilities “continue to be in full force and effect...” (Id.). “Each existing facility that is part of the financing agreement contains a cross-default provision....” (Id. S-89).
4 The Limited Exception of Section 4.7(b)(iii) Does Not Apply An event that otherwise satisfies Section 4.7(a) is not a Restructuring if it “does not directly or indirectly result from a deterioration in the creditworthiness or financial condition of the Reference Entity.” 2003 Definitions 4.7(b)(iii) (emphasis added). This is a limited exception. Cemex’s financial condition led directly to its restructuring. “Directly or indirectly” is used to convey a broader concept of causation than proximate, or direct, causation in tort and other contexts. Introduction to the 1999 Definitions: the applicability of the exception will not be a difficult determination to make in the “vast majority of cases” because it will generally “be clear when the creditworthiness of a Reference Entity has improved or remained the same.” 1999 Definitions, Practice Notes.
5 The Limited Exception of Section 4.7(b)(iii) Does Not Apply Cemex’s auditors stated that, as of June 29, 2009, there was “substantial doubt” about “the Company’s ability to continue as a going concern” in light of its inability to fulfill its obligations. Cemex entered into Extension Agreement in April 2009 and deferred expiration of that agreement in June 2009 with respect to $1.116 billion in principal payments due between March 24 and July 31, 2009. Multiple, deep downgrades of credit ratings to below investment grade, citing concerns regarding Cemex’s ability to service its debt. Downturns in Cemex’s market, more severe than market as a whole, negatively impacted Cemex’s liquidity. Cemex disclosed on a conference call announcing the August 14 Transaction that, without the extension of maturity dates provided by that Transaction, it could not meet its obligations coming due during 2009 to 2011. Cemex did not restructure its obligations because it had improved or unchanged creditworthiness. Among other things:
6 A Restructuring By Any Other Name... Informal statements on which “No” Position relies referring to August 14 Transaction as a “refinancing” do not abrogate SEC disclosures that confirm what the Transaction actually did: it amended Cemex’s obligations by extending their maturities. Oral statements and press releases by Cemex also contradict statements upon which the “No” Position relies. The applicable Publicly Available Information (“PAI”) standard is whether there is any “information that reasonably confirms any of the facts” that a Section 4.7(a) event has occurred. The standard does not require statements proving the occurrence of such an event “beyond a reasonable doubt.” No basis for imposing a PAI standard that would, in effect, require that no Restructuring could be triggered without prior examination of the actual legal documents. Such a requirement would impose an improper amendment to the PAI standard, be impractical and burdensome (in many cases, impossible), and often could not be satisfied without violating disclosure restrictions.
7 Other Indicators of Financial Condition of CEMEX Do Not Alter Analysis of Section 4.7(b)(iii) Any purported improvement in Cemex’s creditworthiness and financial condition, CDS spreads, and stock price after it began discussions with its lenders in March 2009 does not alter the analysis, but reflects the market’s perception that a restructuring by Cemex would enhance its financial viability. “No” Position’s analysis of Cemex’s financial condition is missing key data points, which, when considered, show clear deterioration. Cemex decisions after March 2009 (e.g., cost reductions, asset sales, securitization of accounts receivables, paying interest on bonds) do not show that this case falls within Section 4.7(b)(iii), but only further underscore that this case does not fall within this limited exception. As stated in the Practice Notes to the 1999 Definitions, a restructuring where an issuer begins discussions with its lenders while under distress and its creditworthiness thereafter improves during negotiations should still be deemed to result “indirectly” from the issuer’s deterioration. Whether Cemex could have met its obligations through some means other than the August 14 Transaction is unclear and, for purposes of this analysis, irrelevant.
8 The Clear Facts Here Require the Conclusion That a Restructuring Credit Event Has Occurred “Precedent” cited by No Position (e.g., Liz Claiborne) is not useful: (i) no record of the grounds for such decisions; (ii) determinations made by individual market participants before binding process provided for by the DC Rules; (iii) credit condition of Liz Claiborne materially different than Cemex. Amendments to definitions vs. grafting language onto them based on suppositions about “policy” or “market practice.” Concepts of “proximity” and “gravity” vs. plain language of the Restructuring definition. Even if one accepts the “No” Position’s characterization, Cemex’s August 14 Transaction was “proximate” to its deterioration in creditworthiness and financial condition and undertaken in “grave” circumstances. DC’s role is to decide the Reviewable Question “based on the provisions of the 2003 Definitions.” DC Rules § 2.5(a).
9 The Restructuring Trigger Over Time Pre-1999 Long-form Confirm: Materiality requirement (effect of transaction is that the terms of the “Obligation are, overall, materially less favorable”). 1999 Definitions: Intended to provide a “more objective approach” than the Long-form Confirm and to make Section 4.7(b)(iii) a “limited exception.” Former materiality standard rejected as unworkable. 2000 Conseco Restructuring: Concern that restructuring events could yield arbitrary economic results; market responded by changing deliverables (2001 Restructuring Supplement), not trigger. 2002 Xerox Restructuring: Market consensus (including dealers on the No side here) that Restructuring Credit Event had occurred; small group with narrow interests thereafter sought to change definition to limit it to “Restructuring-as-workout,” i.e., only where restructuring is tantamount to bankruptcy. No change to trigger. 2003 Definitions: Notwithstanding Conseco and Xerox, market decided not to amend the trigger or impose materiality requirement. July 2009 Supplement: Market again did not narrow the trigger.
10 This Is Not The Forum For Altering the Definition of Restructuring In summary, this case does not present a difficult question. DC vote did not exceed 60% threshold. The Panel therefore decides for itself, by simple majority vote, what is the “better answer” to the Question. DC Rules § 4.6(d)(ii). Restructuring should not be equated with Bankruptcy or Failure to Pay Credit Event. This would be inconsistent with both the plain text of the definition— which provides for a separate Restructuring Credit Event—and the market’s differential pricing for a CDS that provides for a Restructuring Credit Event. Adding requirement that a determination be made that “but for the restructuring,” a Bankruptcy or Failure to Pay Credit Event would have occurred, would fundamentally change the Restructuring Credit Event definition and constitute a deemed amendment that has consistently been rejected by the market. Under the plain meaning of the definition and the actual facts of this case, the answer to the Reviewable Question should be “yes.”