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					                                                                    JANUARY 2 0 0 4




                      RESTRUCTURING - EVOLUTION OF A CREDIT EVENT
C O N FI D EN TI AL
AN D
P R I VAT E
ST R I C T LY
                                              Restructuring in Historical Context
                                                  Some events prompting re-examination of 1999 Definitions


                                                  Conseco
                                                    Bank debt restructured (compensated maturity extension)
                                                    Significant price disparity between short-dated bank debt and longer-dated bonds
                                                    Potential moral hazards and significant value in cheapest-to-deliver option led to debate about
                                                    the proper form of restructuring as a credit event


                                                  National Power
                                                    De-merger resulted in two entities of very different credit quality (Innogy and International
                                                    Power)
                                                    “Successor” unclear under 1999 definitions, inspired “Successor Supplement”
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                  Railtrack PLC
                                                    Raised issue of whether convertible bonds are “Not contingent.”
                                                    Led to publication of “Convertible and Exchangeable Supplement”



                                                  Ratings agencies’ concerns regarding credit events



                                                                                                                                                       1
                                              Evolution of “Restructuring”: 1991-1999
                                                 1991 Definition of Restructuring

                                                  Addendum to the 1991 ISDA definitions required that the terms of an obligation become
                                                   “materially less favorable” to its holders

                                                  Highlighted the desirability of “materiality tests” under the “long form” contract

                                                  Asian crisis (Indonesia, Korean issuers) in 1997 and default of Russia on local paper and Paris Club
                                                   debt in 1998 demonstrated subjectivity and contractual uncertainty of definition

                                                 1999 Definition of Restructuring

                                                  The 1999 definition provided more objectivity by listing specific events that would constitute
                                                   “restructuring” in a credit default swap contract
                                                    a reduction in the rate or amount of interest payable
                                                    a reduction in the amount of principal,
                                                    a postponement of payment (interest or principal),
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                    a change in ranking of priority (subordination),
                                                    a change in the currency of composition of any payment

                                                  To allow for negotiation of changes in interest rates or maturity extensions on bank loans under
                                                   circumstances falling well short of severity of bankruptcy or payment default, ISDA drafting
                                                   committee introduced exception to definition
                                                    the aforementioned events would not be considered a Restructuring if the event did not
                                                     “directly or indirectly result from a deterioration in the creditworthiness or financial condition
                                                     of the Reference Entity.”

                                                                                                                                                          2
                                              Restructuring in Historical Context
                                                  Conseco - a case study in Restructuring

                                                   Stock price plunged after a $350mm charge in 2000 and announcement of intent to sell Green
                                                    Tree, which Conseco had acquired in 1998

                                                   Conseco debt downgraded several notches after effectively losing access to the CP market and
                                                    having to draw on bank backstop facilities

                                                   Over the summer of 2000, Conseco accumulated $450mm in cash through improved operations
                                                    and sale of non-strategic assets, but had used all its bank borrowing capacity to repay maturing
                                                    debt and was facing repayment of bank lines

                                                   Bankers chose to extend maturity of Conseco’s loans instead of demanding timely repayment and
                                                    likely pushing them into bankruptcy
                                                     Conseco would repay $450mm of an outstanding credit line in full
                                                     Maturity of the remaining $900mm in debt would be extended by roughly 15 months, interest
                                                      rate would rise from L+50 to L+250, and bank lenders would achieve a form of collateralization
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                   A Restructuring Event had clearly occurred, but -
                                                     Bonds maturing essentially at the same time as the bank facility were repaid in full
                                                     The restructured 15 month loan was trading at around 92% of face value
                                                     Banks who triggered credit derivatives protection were able to receive par for delivery of long-
                                                      dated senior unsecured bonds that they had sourced from the secondary market at around 68%
                                                      of face value

                                                   Outstanding notionals of CDS referencing Conseco exceeded $350mm and protection sellers lost
                                                    over $60mm, but not a single contract was litigated in court - a successful test for the CDS
                                                    markets, but highlighted need for refining the contract to better avoid perverse outcomes
                                                                                                                                                       3
                                              Move toward Modified Restructuring
                                                  Modified Restructuring fine-tunes triggers and limits deliverables

                                                   Addressing market participants’ needs
                                                     Bank hedgers did not need any meaningful delivery optionality since bank forebearance in the
                                                      US seldom exceeds more than 18 months
                                                     Protection sellers strongly wanted the maturity of Deliverable Obligations to be capped in a
                                                      Restructuring event
                                                     Dealer community wanted to minimize mismatches on its books

                                                   By incorporating the provisions of the Restructuring Supplement (May 2001) and checking the
                                                    “Restructuring Maturity Limitation Applicable” box in the standard confirmation -
                                                     If protection buyer triggers after a Restructuring credit event only, the maximum maturity of
                                                      deliverables must be no later than the longer of:
                                                      1) Scheduled termination of the CDS contract; and
                                                      2) the shorter of;
                                                         a) 30 months (in the case of all Deliverable Obligations) after legally effective Restructuring
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                         date, or
                                                         b) latest final maturity date of any Restructured Bond or Loan (provided that this maximum
                                                         maturity can never be less than the remaining tenor of the triggered contract)
                                                     Deliverable obligation must be “fully transferable” (consent not required) to “eligible
                                                      tranferee” (wide range of institutional market participants)
                                                     Restructuring credit event can only be triggered for Obligations that 1) have more than 3
                                                      holders in the case of a Bond or a Loan, and 2) in the case of loans only, require at least a 2/3
                                                      majority to implement a Restructuring
                                                     Restructuring of bilateral loans are not triggers, though they are still deliverable if they
                                                      otherwise meet Deliverable Obligation definitions
                                                                                                                                                           4
                                              Move toward Modified Restructuring - continued
                                                 Multiplicity of curves post-Conseco
                                                  From Autumn 2000 to the adoption of the Restructuring Supplement, the US market traded many reference names
                                                   in two forms - with 1999 Restructuring, and without Restructuring

                                                  Obtaining a price for the inclusion of Restructuring in a disciplined derivatives framework is difficult because the
                                                   probability of Restructuring is not an observable or hedgeable parameter, though it is possible to determine rough
                                                   pricing boundaries and direction/magnitude of sensitivities of the price given factors such as tenor, credit spread,
                                                   and recovery rate assumptions.

                                                  But, as observed for most US names, 1999 Restructuring commanded about 10% more spread than protection
                                                   without Restructuring during that period

                                                  Since the adoption of the Restructuring Supplement, Modified Restructuring (MR) in US names has tended to trade
                                                   at about a 5% premium to protection without Restructuring (NR)
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                                                                                                                                          5
                                              Modified Modified Restructuring
                                                 History

                                                   Though Modified Restructuring has been used for trades on US, Autralian and New Zealand
                                                    Reference entities since the Supplement was published, MR was not adopted as a market
                                                    standard for European, Japanese, and other Asian Reference Entities

                                                   An alternative version of Modified Restructuring was introduced and adopted within the 2003
                                                    Definitions to cover European Reference Entities

                                                 MMR - the specifics

                                                  Where (a) Modified Restructuring Maturity Limitation and Conditionally Transferable Obligation
                                                    are specified as applicable in the Confirmation and (b) the Buyer of protection triggers the
                                                    contract in respect of which the only Credit Event is Restructuring then:
                                                     the Deliverable Obligation will have a maximum maturity no later than the longer of:
                                                      1) Scheduled Termination Date of the CDS contract; and
                                                      2) 60 months (in the case of Restructured Bonds or Loans) or 30 months (in the case of all other
                                                         Deliverable Obligations) following the legally effective date of the Restructuring
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                     the Deliverable Obligation has to be transferable to any bank, financial institution, or other
                                                      entity which is regularly engaged in or established for the purpose of making, purchasing or
                                                      investing in loans, securities or other financial assets either (I) without consent or (ii) with
                                                      consent of the Reference Entity, not to be unreasonably withheld

                                                  Differences to MR and why -
                                                     MMR provides for longer maturity cap for Restructured Bonds and Loans than MR (30 months)
                                                      because it may be more common to see longer maturity extensions in the European market
                                                     More common for borrowers in Europe to restrict transferability of debt instruments to banks
                                                      and financial institutions
                                                                                                                                                         6
                                              Modified Modified Restructuring (2)

                                                             In 2003, a customer buys 5 year protection on EnergyCo

                                                             June 2004, EnergyCo enters legally binding agreement to restructure certain of its
                                                                bonds

                                                             You can deliver (1) restructured bonds maturing before mid 2009 and (2) non
                                                                restructured bonds maturing before 2008


                                                                                                     30 month
                                                                                                     Maturity    Maturity     60 month
                                                                                                        Cap       Floor      Maturity Cap
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                     2003          2004       2005            2006        2007        2008      2009        2010
                                                    Effective                                                          STD
                                                                          Legally effective
                                                                          date of
                                                                          Restructuring




                                                                                                                                                   7
                                              Modified Modified Restructuring (3)
                                              (Europe and US)

                                                      Feature:               MR (US standard)                  MMR (European Standard)



                                                      Maturity Cap:          30 month cap                       30 month cap for non restructured
                                                                                                                  obligations
                                                                             Floored at STD
                                                                                                                60 month cap for restructured
                                                                                                                  obligations

                                                                                                                Floored at STD

                                                      Transferability:       Must be transferable to extensive Must be transferable to entities
                                                                             list of entities without consent  regularly engaged in loan and securities
                                                                                                               markets with consent not to be
                                                                                                               unreasonably withheld
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                      Obligations covered:   At least three holders and        At least three holders and in the case of
                                                                             requires a 2/3 majority to        a Loan, requires a 2/3 majority to
                                                                             implement restructuring           implement restructuring




                                                                                                                                                           8
                                              Valuing Restructuring - Grasping for a model framework

                                                 Restructuring Premium in the Japanese CDS market


                                                  Since the adoption of the 2003 Definitions, there are four choices regarding Restructuring as a
                                                   Credit Event - Restructuring, MR, MMR, and NR

                                                  Japanese CDS markets have continued to adhere to three credit events (Bankruptcy, Failure to
                                                   Pay, and Restructuring) as a market standard despite 1) the large proportion of the Japanese
                                                   credit markets being comprised of bilateral loans, and 2) indications that MR or even NR CDS are
                                                   acceptable to Japanese banks as hedges for regulatory capital purposes

                                                  Because of rampant moral hazard and the relatively high likelihood of Restructuring being a
                                                   Credit Event, the Japanese CDS market provides fertile ground for thinking about the
                                                   Restructuring Premium

                                                  Worth noting that, unlike other markets, the Japanese CDS market has never experienced a
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                   Credit Event on an actively-traded name with material CDS contracts outstanding, so remains an
                                                   untested market

                                                  Intuitively, the value of Restructuring in a CDS contract will be a function of the likelihood that
                                                   Restructuring will be the trigger Credit Event, as well as the Recovery Rate upon Restructuring




                                                                                                                                                         9
                                              Valuing Restructuring (2)
                                                  Estimating the Relative Likelihood of Restructuring and Recovery Rates

                                                  We assume that three factors are the most important for determining the relative likelihood of
                                                   Restructuring as a Credit Event for Japanese corporate reference entities
                                                    Size of debt
                                                      — larger companies with higher debt levels are more likely to receive financial support in
                                                        “debt forgiveness” form than being forced into bankruptcy
                                                    Size of overseas operations (ratio of overseas sales used as proxy)
                                                      — The larger the proportion of overseas operations, the higher the likelihood of debt
                                                        restructuring, as bankruptcy rehabilitation plans will more likely involve foreign creditors
                                                    Level of excess capacity in the sector
                                                      — larger industry excess capacity will tend to decrease likelihood of debt restructuring, as a
                                                        function of doubts concerning ongoing viability


                                                  We then assign scores (1 to 5) for each of the factors, with a lower score corresponding to a
                                                   higher probability of restructuring. The scores are added (3 lowest, 15 highest, but with 1 to
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                   2points added for technology, 1 to 2 points subtracted for infrastructure sectors), and we assume
                                                   that a total score of 12 suggests a 50% chance that Restructuring will be the CE
                                                                ze
                                                              Si of         Score               es
                                                                                    O verseas sal    Score        Excess    Score
                                                               debt                                              capacity
                                                                    l
                                                          over 1 tri.        1      O ver 75%         1      Short           1
                                                                     l
                                                          up to 1 tri.       2      U p to 75%        2      Fair            2
                                                          up to 500bi  l     3      U p to 50%        3         rl gh
                                                                                                             Fai y hi        3
                                                          up to 200bi  l     4      U p to 25%        4      High            4
                                                             ow
                                                          bel 100 bi.   l    5      Bel 10%
                                                                                       ow             5        gni cant
                                                                                                             Si fi           5


                                                                                                                                                       10
                                              Valuing Restructuring (3)
                                                  Estimating the Relative Likelihood of Restructuring and Recovery Rates

                                                  With the lowest score 1 (with adjustment) and the highest 15, we assume a linear increase in
                                                   likelihood of 2CEs with each increase in score (and have applied the approach to some names):
                                                                            lty
                                                                    P robabii of               kelhood of R
                                                                                              Li i
                                                                                 t
                                                                       Tw o C redi                  ati
                                                                                                  rel ve to
                                                          S core             TC
                                                                    Events ( E)                         TC E
                                                               1                0%                       NM
                                                               2                5%                      21.0
                                                               3                9%                      10.0
                                                               4               14%                       6.3                                                                                                         kel
                                                                                                                                                                                                                    Li yhood of R
                                                               5               18%                       4.5                                                                            Excess       Total     Fi     ati
                                                                                                                                                                                                                nalrel ve to
                                                               6               23%                       3.4                                            D ebt Score O verseas               ty
                                                                                                                                                                                Score C apaci Score Score Adj Score TC E
                                                                                                                                                                                                            .                   Rem arks
                                                               7               27%                       2.7                N TT                         309
                                                                                                                                                        7,        1        0%       5             2     8 -2      6          3. Infrastructure adj
                                                                                                                                                                                                                              4                  .
                                                               8               32%                       2.1                D oC oM o                    458
                                                                                                                                                        1,        1        0%       5             2     8 -2      6           4                  .
                                                                                                                                                                                                                             3. Infrastructure adj
                                                               9               36%                       1.8                Toyota                       853
                                                                                                                                                        6,        1       63%       2             3     6         6           4
                                                                                                                                                                                                                             3.
                                                              10               41%                       1.4
                                                              11               45%                       1.2
                                                                                                                            Nissan                      2,
                                                                                                                                                         829      1       66%       2             3     6         6          3.
                                                                                                                                                                                                                              4
                                                              12               50%                       1.0                M azda                       667      2       49%       3             3     8         8           1
                                                                                                                                                                                                                             2.
                                                              13               55%                       0.8                Nippon Steel                2,
                                                                                                                                                         019      1       20%       4             4     9         9          1.
                                                                                                                                                                                                                              8
                                                              14               59%                       0.7                Kobe Steel                  1,
                                                                                                                                                         049      1       20%       4             4     9         9           8
                                                                                                                                                                                                                             1.
                                                              15               64%                       0.6
                                                  Estimating the Recovery Rate of Deliverable Obligations for a Japanese corporate reference entity
                                                   upon Restructuring is quite challenging, given paucity of data
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                  We nevertheless look at some historical data of bond prices following Restructuring events as a
                                                   guideline for estimating this parameter
                                                                                         H aseko 6 (03/1/31)                                                   80
                                                   80                                                                                                          70
                                                   70
                                                                                                                                                               60
                                                   60
                                                                                                                                                               50
                                                   50                                                                                                                                                                           i
                                                                                                                                                                                                                              Fujta 12 (01/9/28)
                                                                                                                                  H aseko 6 (03/1/31)          40
                                                   40                                                                                                                                                                           i
                                                                                                                                                                                                                              Fujta 13 (02/12/10)
                                                   30                                                                                                          30
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                                                                                                                                                                                                                                                     11
                                              Valuing Restructuring (4)

                                                  Determining the theoretical basis between 3CEs and 2CEs


                                                  Given an assumption for R2 (expected recovery rate for 2CEs), we can generate a matrix of the
                                                   par spread ratio between 2CE and 3CE CDS (1-S2/S3), as a function of Relative Likelihood of
                                                   Restructuring and Recovery Rate upon Restructuring


                                                                              Par Spread Discount Table (1  S 2 / S 3 )
                                                          R2  30%                                      M
                                                                           0.11    0.25    0.33      0.50      1.00        1.50   2.00   3.00   4.00
                                                             15.00%        12%     23%     29%       38%       55%         65%    71%    78%    83%
                                                             25.00%        11%     21%     26%       35%       52%         62%    68%    76%    81%
                                                             30.00%        10%     20%     25%       33%       50%         60%    67%    75%    80%
                                                             35.00%         9%     19%     24%       32%       48%         58%    65%    74%    79%
                                                    RR       45.00%         8%     16%     21%       28%       44%         54%    61%    70%    76%
RESTRUCTURING - EVOLUTION OF A CREDIT EVENT




                                                             55.00%         7%     14%     18%       24%       39%         49%    56%    66%    72%
                                                             65.00%         5%     11%     14%       20%       33%         43%    50%    60%    67%
                                                             75.00%         4%      8%     11%       15%       26%         35%    42%    52%    59%
                                                             85.00%         2%      5%      7%       10%       18%         24%    30%    39%    46%



                                                  Important to note that, though the model is extremely assumptions-based, it provides for
                                                   thinking about the 2CE-3CE basis occasionally observed (or heard) in the markets. Sony 5yr 2CE
                                                   CDS currently trades at around 75-80% of 5yr 3CE CDS - is this too high?

                                                                                                                                                       12
                         This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with,
                         the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the
                         prior written consent of JPMorgan.

                         The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, all
                         of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent
                         verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of
                         the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets,
                         stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in
                         connection with a transaction nor the legal, tax or accounting effects of consummating a transaction.[The information in this presentation
                         does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which
                         may have significant valuation and other effects.
T I T L E ]




                         JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering
                         to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation.
                         JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the
                         extent that such participation is intended to benefit investors.
[P R E S EN T AT I O N




                         JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities,
                         syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its
                         banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities.




                                                                                                                                                                           13

				
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