You are on page 1of 8

LSTA Market Advisory February 2, 2009 Physical Settlement of Credit Default Swap Transactions Referencing Lyondell Chemical Company1

A. Background

The Loan Syndications and Trading Association, Inc. (LSTA), in cooperation with the International Swaps and Derivatives Association, Inc. (ISDA), is issuing this Market Advisory (the Lyondell Advisory) in connection with the Credit Event of Lyondell Chemical Company (Lyondell) in the Credit Default Swap (CDS) market, and the corresponding publication by ISDA of the 2009 Lyondell Entities CDS Protocol (the Lyondell Protocol).2 The purpose of the Lyondell Protocol is to facilitate the settlement of certain open CDS positions following the Lyondell Credit Event. We understand that the Deliverable Obligations of Lyondell under the Lyondell Protocol include any of the following loans that is an obligation of Lyondell either directly or as provider of a Qualifying Affiliate Guarantee: the Primary Revolving Credit Loans (the Lyondell Revolving Loan), the U.S. Tranche A Dollar Term Loan, the U.S. Tranche B-1 Dollar Term Loan, the U.S. Tranche B-2 Dollar Term Loan and the U.S. Tranche B-3 Dollar Term Loan (the U.S. Tranche A Dollar Term Loan, the U.S. Tranche B-1 Dollar Term Loan, the U.S. Tranche B2 Dollar Term Loan and the U.S. Tranche B-3 Dollar Term Loan, collectively, the Lyondell Term Loans, and all such Deliverable Obligations collectively, the Lyondell Loans) issued under (and as defined in) the Credit Agreement (the Lyondell Loan Agreement), dated as of December 20, 2007 and amended and restated as of April 30, 20083, by and among LyondellBasell Industries AF S.C.A., as the Company, Lyondell, as the U.S. Borrower, Basell Holdings B.V. and Basell Finance Company B.V., as the Dutch Borrowers, Basell Germany Holdings GmbH, as the German Borrower, the lenders party thereto from time to time and Citibank, N.A., as Primary Administrative Agent4 (the Agent).5 We also understand that physical settlement -- the delivery of a Deliverable Obligation from the Buyer under the relevant CDS transaction (Protection Buyer) to the Seller under the relevant CDS transaction (Protection Seller) -- will apply to CDS transactions generated by the
1

2 3

This Lyondell Advisory does not address the settlement of any transaction documented by a confirmation providing that physical settlement will take place pursuant to the Syndicated Secured Loan Credit Default Swap Physical Settlement Rider published by the LSTA (such transactions, LCDS Transactions.) The Lyondell Protocol can be found at www.isda.org. There is an indication in public filings that this Credit Agreement was amended on December 8, 2008, but that amendment does not appear to be publicly filed. We understand that the Agent has resigned (though the date of effectiveness of the resignation has not been confirmed) and we are not aware of the identity of the replacement agent. These developments may have implications with respect to the efficient processing of loan transfers by assignment. This Lyondell Advisory is only intended to address settlement of CDS positions by delivery of the Lyondell Loans. The appropriate conventions for delivery of other Deliverable Obligations should be considered separately.

auction process pursuant to the terms of the Lyondell Protocol (Protocol Transactions)6 and may apply to CDS transactions settled outside the Lyondell Protocol (Direct Transactions and, together with Protocol Transactions, Physically Settled Transactions). For participants delivering any Lyondell Loan under Physically Settled Transactions, guidance for physical settlement is found in Section 8.2 of the governing 2003 ISDA Credit Derivatives Definitions (the Credit Derivatives Definitions), which provides that Delivery shall be effected using documentation substantially in the form of the documentation customarily used in the relevant market for Delivery of such Loan at that time. With respect to Protocol Transactions, all capitalized terms used but not defined in this Lyondell Advisory shall have the meanings ascribed thereto in the Lyondell Protocol or, if not defined in the Lyondell Protocol, in the Credit Derivatives Definitions, and with respect to Direct Transactions, all capitalized terms used but not defined in this Lyondell Advisory shall have the meanings ascribed thereto in the relevant confirmation or the Credit Derivatives Definitions, as applicable. B. Physical Settlement on Distressed Documentation

The Lyondell Loans are predominantly trading in the secondary loan market on distressed documentation at this time. Accordingly, parties intending to settle any Physically Settled Transaction by Delivery of a Lyondell Loan should use existing distressed documentation customarily used in the secondary loan market to effect physical settlement of such transactions, as modified pursuant to Section D below. C. The Lyondell Loan Agreement

The Lyondell Loan Agreement can be found at http://idea.sec.gov/Archives/edgar/data/ 842635/000084263508000026/lyo8kexhibit4-2.htm, and should be reviewed by parties intending to settle any Physically Settled Transaction by Delivery of a Lyondell Loan. A number of issues arise under the Lyondell Loan Agreement with respect to transfers of the Lyondell Loans, including the key issues highlighted below. Parties to Physically Settled Transactions are encouraged to consult their legal advisors with respect to these and other issues relating to the transfer of the Lyondell Loans. All terms used in this Section C but not defined in this Lyondell Advisory are used as defined in the Lyondell Loan Agreement. 1. Pursuant to Section 8.05 of the Lyondell Loan Agreement (referred to herein as the CAM Exchange Provision), as of the CAM Exchange Date, which occurred on January 6, 2009, each lender under the Lyondell Loan Agreement was automatically deemed to have exchanged its interests in the Designated Obligations (defined to include the principal and interest on each class of loans and certain accrued and unpaid fees under the Lyondell Loan Agreement) for a pro rata share of all Designated Obligations owed to all lenders under the Lyondell Loan Agreement (the post-CAM Exchange Date holdings of each lender is referred to as the Lyondell Strip).

The submission of bids, offers and Physical Settlement Requests in connection with the Lyondell Protocol will result in new CDS transactions subject to physical settlement.

The Agent has prepared a summary of the CAM Exchange Provision and certain related procedures (the Updated CAM Summary), which is attached as Annex 1 hereto. The Updated CAM Summary was published on February 1, 2009 together with a notice (the Agent Notice), which is attached as Annex 2 hereto, confirming that the procedures described in the Updated CAM Summary supersede those described in the Agent's posting regarding the CAM Exchange Provision dated January 22, 2009. The Updated CAM Summary indicates that on and after February 5, 2009, lenders will be permitted to assign any class of loans under the Lyondell Loan Agreement on a non-pro rata basis. Therefore, we understand that the CAM Exchange Provision will not require the Protection Buyer under a Physically Settled Transaction to Deliver a pro rata portion of the Lyondell Strip in order to effect Delivery of a Lyondell Loan, so long as Delivery of the Lyondell Loan is effected on or after February 5, 2009. Pursuant to the CAM Exchange Provision, from and after the CAM Exchange Date, the Lyondell Loans will comprise only a portion of the Lyondell Strip held by each lender. Therefore, Protection Buyers under Physically Settled Transactions should be aware that their pre-CAM Exchange Date holdings in the Lyondell Loans may no longer be sufficient to effect Physical Settlement in full of Physically Settled Transactions. Protection Buyers should contact the Agent for further information about their post-CAM Exchange Date holdings. Parties to Physically Settled Transactions are encouraged to review the CAM Exchange Provision and the Updated CAM Summary, and should contact the Agent with any questions regarding the impact of the CAM Exchange Provision on transfers of, and payments under, the Lyondell Loans. 2. The Lyondell Loan Agreement permits transfers of the Lyondell Loans to assignees upon the fulfillment of certain conditions, as set forth in Section 10.07(b) of the Lyondell Loan Agreement. Parties to Physically Settled Transactions are encouraged to review Section 10.07(b) of the Lyondell Loan Agreement and contact the Agent with any questions regarding the application of these requirements. 3. Because the Lyondell Loans are secured by collateral located in multiple jurisdictions, we understand that there may be negative tax implications for certain purchasers of the Lyondell Loans, particularly with respect to certain tax consequences relating to collateral in the form of real property located in Germany, as well as other jurisdictional requirements or concerns. Parties to Physically Settled Transactions are encouraged to consult their legal and tax advisors with respect to these issues. D. Specific Guidance for Distressed Documentation

Within the standard distressed documentation framework, we advise market participants to make the following modifications in order to ensure efficient settlement and allow the secondary loan market and the CDS market to resolve, on a consistent basis, key settlement issues involved in the delivery of the Lyondell Loans: 1. The parties should be guided by the terms of an LSTA Distressed Trade Confirmation (the LSTA Distressed Confirmation) and the Standard Terms and Conditions for

Distressed Trade Confirmations (the LSTA Standard Terms)7, each as published by the LSTA in its most recent form as of the date hereof. 2. The following modifications should be made to the LSTA Distressed Confirmation and the LSTA Standard Terms, as applicable: (a) The Trade Date should be the first day on which delivery of a Notice of Physical Settlement is effective.8 9 (b) Purchase Price: Protection Seller shall pay an amount (or, if negative, Protection Buyer shall pay the absolute value of an amount) equal to the Purchase Price (as defined in the LSTA Standard Terms) that corresponds to the relevant Deliverable Obligation, assuming a Purchase Rate equal to the Final Price with respect to Lyondell, in the case of Protocol Transactions, and the Reference Price, in the case of Direct Transactions, in lieu of the Physical Settlement Amount. (c) Trades Flat should be specified as the applicable convention for Accrued Interest.10 (d) Unless otherwise specified in an applicable CDS confirmation or related documentation or unless otherwise agreed by the parties, the Form of Purchase should be Assignment Only and if Delivery by assignment has not been effected on or prior to the Alternative Procedure Start Date, Section 9.10 of the Credit Derivatives Definitions should apply. If settlement of a Physically Settled Transaction is effected pursuant to Section 9.10 of the Credit Derivatives Definitions, the terms of the LSTA Distressed Confirmation and the LSTA Standard Terms as modified herein, including without limitation the Compensation for Delayed Settlement provisions referenced below, shall no longer apply.11 (e) For the avoidance of doubt, the Compensation for Delayed Settlement provisions of Section 6 of the LSTA Standard Terms shall apply if physical settlement is effected by Delivery of the Lyondell Loans. (f) The Transfer Documentation for purposes of Section 10 of the LSTA Standard Terms should be:
7 8

10

11

The LSTA Distressed Confirmation and the LSTA Standard Terms can be found at www.lsta.org. This Trade Date for purposes of the LSTA Distressed Confirmation may be inconsistent with the Trade Date relating to LCDS Transactions that are settled by transfer of the Lyondell Loans. For purposes of the Credit Derivatives Definitions, the Physical Settlement Date relating to the Lyondell Loans should be the 30th Business Day after the Trade Date under the LSTA Distressed Confirmation. The Trades Flat interest convention may be inconsistent with the interest convention applicable to the Lyondell Loans under LCDS Transactions and under transactions in the secondary loan market, where we expect a Settled Without Accrued Interest convention will apply. This may create a basis risk for parties receiving and transferring the Lyondell Loans under different conventions. Parties to Physically Settled Transactions should carefully review Section 9.10 of the Credit Derivatives Definitions. This provision may constitute the only settlement option in the event there are delays in the processing of transfers of the Lyondell Loans by assignment, whether as a result of the Agents resignation or otherwise.

(i) the Assignment and Assumption in the form stipulated in the Lyondell Loan Agreement, and (ii) a supplemental purchase and sale agreement (a PSA) in the form of the LSTA Purchase and Sale Agreement for Distressed Trades published by the LSTA in its most recent form as of the date hereof, with the following modifications: (A) Amendment to Section 6.1(a). 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, and the following shall be added at the end of the first sentence of Section 6.1(a): or (iv) this Agreement or any Predecessor Transfer Agreement being inconsistent with standard market practice applicable to the Loans and Commitments (in the case of this Agreement, on the Settlement Date, or in the case of any Predecessor Transfer Agreement, on the settlement date thereof), which inconsistency results in Buyer's receiving proportionately less in payments or distributions under, or less favorable 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 the Loans and Commitments by Buyer at a price that is less than the applicable market price at the time of such resale. (B) The following provision shall be added to the Standard Terms as new Section 6.5: 6.5 No Indemnifying Party shall be required to indemnify any Indemnified Party under Section 6.1(a)(i) or Section 6.2(a) to the extent that standard market practice applicable to the Loans and Commitments on the Settlement Date, in the case of this Agreement, or on the settlement date thereof, in the case of any Predecessor Transfer Agreement, would limit the indemnification obligation of the Indemnifying Party as a result of a modification to the representations, warranties, covenants or agreements of the Indemnifying Party. The inclusion above of the Market Standard Indemnity, which is applicable to LCDS Transactions, is intended to facilitate efficient settlement of Physically Settled Transactions. Therefore, consistent with the treatment of this provision under LCDS Transactions, no additional modifications to the PSA should be negotiated. (g) should not apply. For the avoidance of doubt, Section 15 of the LSTA Standard Terms

Calculation Agent, acting in good faith and in a commercially reasonable manner, should determine or resolve (after consultation with the parties) any remaining issues related to the Delivery of the Lyondell Loans in accordance with these recommendations. 3. Unless otherwise agreed between the parties to a Physically Settled Transaction, settlement of a Physically Settled Transaction by the Delivery of any Lyondell Loan in accordance with this Lyondell Advisory (i) should not include any rights of Protection Buyer or any other party to participate in the Term DIP Facility or to receive any New Money DIP Loans or Roll Up DIP Loans or any related Term DIP Facility fees, (ii) should not require Protection Buyer nor any other party to participate in the Term DIP Facility with respect to the Deliverable Obligation, and (iii) should not be effected by delivery of any New Money DIP Loans, Roll Up DIP Loans or Term DIP Facility fees. All terms used in this provision and not defined in this Lyondell Advisory are used as defined in the Interim Order (I) Authorizing Debtors (A) To Obtain Post-Petition Financing Pursuant To 11 U.S.C. 105, 361, 362, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e), (B) To Utilize Cash Collateral Pursuant to 11 U.S.C. 363 and (C) To Purchase Certain Assets Pursuant To 11 U.S.C. 363, (II) Granting Adequate Protection To Pre-Petition Secured Parties Pursuant To 11 U.S.C. 361, 362, 363 and 364 and (III) Scheduling Final Hearing Pursuant To Bankruptcy Rules 4001(b) and (c), dated January 8, 2009 and issued by the United States Bankruptcy Court for the Southern District of New York, in In re: Lyondell Chemical Company, et al., Chapter 11 Case No. 09-10023 (REG) (Jointly Administered.) 4. In the event of any inconsistency between the LSTA Distressed Confirmation or the LSTA Standard Terms and the Lyondell Protocol or the Credit Derivatives Definitions, the Lyondell Protocol or the Credit Derivatives Definitions, as applicable, should govern. Please call or email Elliot Ganz (212.880.3003 / eganz@lsta.org) or Bridget Marsh (212.880.3004 / bmarsh@lsta.org) at the LSTA with any questions regarding this Lyondell Advisory.

Annex 1

[SEE ATTACHED]

Annex 2

[SEE ATTACHED]

You might also like