Model Form Make-Whole and Swap Breakage Indemnity:
- A “Replacement Swap Agreement” (included in the definition of “Original Swap Agreement” in Section 8.[X](b) of the Model Form) now also includes a replacement swap agreement entered into as a result of “an acceleration and rescission thereof of such Swapped Note as provided in Section 12.3” of the NPA (in addition to it already covering non-scheduled partial prepayments of Swapped Notes prior to their scheduled maturity). Recall that the terms Original Swap Agreement (including Replacement Swap Agreement) and New Swap Agreement are used is the determination of Make-Whole Amount and Swap Breakage Amount. An Original Swap Agreement is entered into as of Closing and its pricing terms are applicable in determining Make-Whole Amount and Swap Breakage Amount. If during the course of the deal a Noteholder would have to enter into a replacement swap as a result of the Issuer making a non-scheduled partial prepayment of Swapped Notes prior to their scheduled maturity or an acceleration and rescission of that acceleration of the Swapped Notes, then that replacement swap would be considered a “Replacement Swap Agreement” (and therefore an “Original Swap Agreement”). If during the course of the deal a Noteholder would enter into a replacement swap for any other reason, that swap would be considered a “New Swap Agreement”. The relevance is that in determining Make-Whole Amount and Swap Breakage Amount, if a Noteholder has entered into a New Swap Agreement, then generally speaking the Noteholder would receive the lesser Make-Whole Amount and Swap Breakage Amount as determined under each of the Original Swap Agreement and New Swap Agreement.
- In the same vein as above, a new proviso has been added to the definition of “Swapped Note Remaining Schedule Swap Payments” in Section 8.[X](b) of the Model Form which provides that “if the Swap Agreement with respect to such Swapped Note is not an Original Swap Agreement, then the interest on such Swapped Note Called Principal shall not exceed the amount in U.S. Dollars that would have been due with respect to such Swapped Note under the terms of the Original Swap Agreement”. This language was included as correlative language to that included in the proviso at the end of the defined term “Swapped Note Called Notional Amount” Section 8.[X](b) of the Model Form, which makes clear that the Swapped Note Called Notional Amount shall not exceed the amount in U.S. Dollars which would have been due to the holder of such Swapped Note under the terms of the relevant Original Swap Agreement. This is also correlative to the language in the proviso at the end of the definition of “Swap Breakage Amount” in Section 8.[Y](b) of the Model Form which provides that the Swap Breakage Amount is the lesser of that as determined under the Original Swap Agreement and New Swap Agreement. Please remember that these provisions only affect those Noteholders that have actually entered into a “Replacement Swap Agreement”.
- Section 8.[Y](a) of the original draft of the Model Form Make-Whole and Swap Breakage Indemnity provided that in connection with a prepayment or acceleration of Swapped Notes (a “Swap Unwind Event”) (i) the Issuer will pay to the Noteholder any Swap Breakage Loss within 5 business days following receipt by the Issuer of a Swap Breakage Amount Notice and (ii) the Noteholder will pay to the Issuer any Swap Breakage Gain within 5 business days following the payment in full of all other amounts owing on the Swapped Notes (i.e., principal, accrued interest and Make-Whole Amount or Modified Make-Whole Amount).
Some of the market commentary was for the payment of the Swap Breakage Amount to be paid/netted concurrently with all other amounts on the same payment date. However, after discussion with the TPMC members and certain swaps professionals advising the TPMC (including those representing certain of the larger insurance institutions), institutions are reluctant to change the payment of the Swap Breakage Amount to the same day because that would mean that the Noteholders would have to enter into a forward termination of their swaps prior to the scheduled payment date in order to determine the Swap Breakage Amount and have it paid/netted on the scheduled payment date with all other amounts. Many of the institutions prefer not to terminate or amend their Swap Agreement until they are certain of receiving the payment in full (otherwise Noteholders could risk being unhedged on their Swapped Note if the payment does not occur).
As a compromise, the TPMC members have agreed to put a short time period in which Noteholders must determine the Swap Breakage Amount and give notice thereof following a Swap Unwind Event, followed by the payment of the Swap Breakage Amount. In this regard, although the language as described in the first paragraph of this Paragraph 3 stays the same, there are two relevant changes as part of the compromise. First, the Swap Breakage Amount must “promptly, but no longer than two Business Days following such Swap Unwind Event, be reported to the Company in writing and in reasonable detail (the “Swap Breakage Amount Notice”)”. Second, additional flexibility has been built into the date of payment of the Swap Breakage Amount by permitting alternative arrangements to be agreed to between the Issuer and the holder of a Swapped Note. In this regard, the Issuer and Noteholders holding a Swapped Note may be able to agree to a structure in a cooperative prepayment whereby all payments/netting occur on the same date subject to certain terms and conditions.