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.
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.
1
Cemex Postponed the Due Date for Payments
Under One or More of its Obligations.
The due dates for at least $200 million of principal payments under
Cemex’s May 2005 facility were postponed by the August 14 Transaction.
• 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.
2
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).
3
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.
4
The Limited Exception of Section 4.7(b)(iii)
Does Not Apply
Cemex did not restructure its obligations because it had improved or
unchanged creditworthiness. Among other things:
• 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.
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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.
6
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.
7
The Clear Facts Here Require the Conclusion
That a Restructuring Credit Event Has Occurred
DC’s role is to decide the Reviewable Question “based on the provisions
of the 2003 Definitions.” DC Rules § 2.5(a).
• “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.
8
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.
9
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.”
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