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Enron Mail |
Hi Mark,
Thanks for your response. Sorry, I didn't provide you my number here in Tokyo. For future reference, my office number is 81-3 5219-4578. I'll try to give you a ring Wednesday morning (Houston time) to discuss the going forward strategy. Attached hereto, are the draft documents, modified in accordance with your comments/questions and my responsive comments (which are set forth below in red). Look forward to seeing you soon. Hi Susan- Please review the attached documents from the tax perspective. Thanks. Best regards, John Mark Taylor@ECT 08/22/2000 06:59 PM To: John Viverito/Corp/Enron@Enron cc: Subject: Japanese ISDA Documents Dear John: So sorry for the delay. I hope it hasn't caused too much inconvenience. No problem! I would have called to apologize in person but believe it or not I don't have your phone number! Here are my comments to the draft documents you sent: Part 1 (b) In our other derivatives trading, the cross default test applies to Enron Corp. with a Threshold of US$100,000,000. To accomplish this in the schedule, Threshold Amount for the Enron party would apply to our Credit Support Provider if there is going to be an Enron Corp. guaranty and the dollar figure adjusted accordingly. The Schedule has been revised. Please advise if the equivalent change should be made to paragraph (b)(iv)(B) of paragraph 13 of the CSA. Part 1 (d) Has Baker & McKenzie recommended this? We rely on local counsel advice for this provision but our preference is that the termination in a bankruptcy context not be automatic unless it needs to be. The risk in the automatic situation is that the market moves significantly before we are even aware of the situation, i.e. the outstanding transactions terminate automatically, leaving us with an open, unhedged position which we are not able to protect since we are not aware of it. In the U.S. the bankruptcy code allows us to terminate after the filing of a bankruptcy according to the terms of the agreement so we know exactly the time to rehedge. According to B&M, the ability to set-off against Japanese counterparties is limited by certain laws relating to insolvency including the Bankruptcy Law. These laws give a trustee the right to cherry pick contracts. Accordingly, it is the general practice in Japan for parties to elect automatic early termination to ensure that close out netting takes place before the trustee's right to cherry pick comes into effect. In December 1998, a netting law came into effect in Japan which specifically permits close out netting (notwithstanding the trustee's right to cherry pick). The netting law only applies where one of the parties to the transaction is a financial institution (Mitsui Marine and Fire, Sanwa and IBJ, would all qualify). From a legal perspective, it is now arguable that automatic early termination should not be adopted (for the same reasons as are described in you message). However, as a matter of Japanese market practice, B&M has advised that most schedules with Japanese counterparties still specify automatic early termination. Accordingly, the automatic early termination provision in place. Please confirm that this is acceptable. Please also note, that the automatic early termination provision will be necessary when Enron Japan deals with Japanese corporations that are not financial institutions. Part 1 (e) We usually choose Loss here as the method which gives the non-defaulting party the most flexibility. Market Quotation is often suggested because of its apparent objective nature. However, in many of the markets where we operate, quotations will not be available, where they are available they may well not be meaningful, and the Loss method gives flexibility (while still requiring commercial reasonableness). The Schedule has been revised. Part 1 (h)(ix) This Additional Event of Default only applies when there is no collateral annex. When we have the ability to ask for (or be asked for) collateral in the case of a downgrading, we build that event into the Paragraph 13 to trigger a reduction of the threshold to zero which requires the posting of collateral to cover any open position. If the party fails, it then becomes a default allowing termination. The Schedule has been revised. Part 1 (h)(x) Wouldn't the cross default be triggered before this could happen? B&M has advised that although the cross default provisions may well be triggered before this clause applies, the clause is standard in Japan and is not detrimental to Enron, therefore the clause has been left in place. Part 2 Have our internal Tax people approved this? I have copied Susan Musch on this e-mail, so that she may review the documents for tax purposes. Part 3 I am not familiar with the Representative Director concept or some of the corporate documents referred to. Since Enron Corp. will be a Credit Support Provider, does it have a Representative Director, etc.? The clause has been modified to allow different documents to be specified in connection with the Enron Corp. guarantee. Please fill in the blanks to specify the appropriate documents. Sorry for the oversight. The legal opinion requirement is one that we can waive if local counsel does not think it necessary. In many non-US jurisdictions, local counsel have advised that an opinion be obtained - in some cases derivatives transactions are so uncommon that they might be outside the ordinary course of business and therefore require special board approval; in others, derivatives would not be permissible activities for a company unless express provision is made in the corporate documents, etc. B&M has stated that in practice they have never been given or asked to review a Japanese law opinion in relation to a specific ISDA schedule entered into by a Japanese counterparty and would expect Japanese counterparties to be reluctant to provide such opinions. Part 5 (b) (g)&(h) These representations originate with CFTC rules in mind (although they may be helpful for other reasons as well). If neither party is in the US, the CFTC reason may go away. On the other hand, since we are choosing New York law to apply the argument might be made that US federal law applies as well. If that is our theory, there are additional representations (the Eligible Swap Participant reps) that we should think about putting back in. These representations were tailored with the Japanese prohibition on gambling in mind. I was not able to find the "eligible swap participant" representation in the Enron US ISDA Form (although there is a reference to this in the opinion). Please inform me as to the wording that needs to be added for New York purposes. Part 5 (d) We are currently evaluating whether we should revise this section to make reference to the ISDA 2000 definitions. While I think we will get there, we haven't actually made the decision yet. So far I guess we leave it the way it is. OK Part 5 (j) My only concern here is with the value of the Enron Corp. guaranty as a form for a guaranty from a Japanese entity. Any differences in Japan from US practice we should be worried about? For the swap counterparties currently being considered by Enron (Mitsui Marine, IBJ and Sanwa) no guarantees are being required. B&M has advised, the form of the Enron Corp. guarantee would generally be acceptable for guaranteeing the obligations of Japanese counterparties. However, there are a number of changes that may be considered including switching the governing law and jurisdiction provisions to Japan for ease of enforcement against parties whose principal assets are located in Japan. It is recommended that the guarantee be reviewed in further detail before it is actually proposed to counterparties. Paragraph 13 I have to admit I'm not as familiar with the Paragraph 13 provisions as the Schedule. My only concern here is with the MAC clause and it looks like there's a glitch in the form. It seems to me that if the counterparty is only rated by one of the 2 major agencies we shouldn't be pegged with a MAC if only one of our agencies stops rating us. The way it is drafted now if either S&P or Moody's stops rating us, even if the remaining rating is very high we will have a MAC occur. The counterparty doesn't have to worry about Moody's at all. Just a thought. The suggested change has been made. Additionally, the provision has been modified to provide that a MAC will occur with respect to Enron, only if both rating agencies downgrade Enron Corp. Please confirm this is OK. On the guaranty, you will need to run the choice of law and jurisdiction changes past Clement Abrams at Corp. Legal. My only comment is that we would usually have a cap that is a bit higher (in this case maybe an extra $5,000,000) than the threshold in the CSA - that gives the counterparty a little wiggle room if we fail to post collateral after the threshold is exceeded. I will separately forward the guaranty to Clement Abrams for his approval. The cap has been increased to US$20,000,000. Tana is preparing a red-line for me that hopefully will show all of the changes between the US form and the Japan form. I may have a few more comments after I see how that comes out but don't expect many. I apologize that the red-line was not fully made against the US form. I hope this is helpful. Mark- This has been very helpful! Please feel free to call and we can walk through these over the phone if that would be useful. We should also talk about the most efficient way to prepare these going forward. It might make sense for Credit to send their worksheets to the paralegals here for a first draft which would then go to you for review before going to the counterparty. It may slow things down by a day or two but it would free you up to work on other things. All excellent ideas. We're looking forward to having you back. Looking forward to seeing you soon. Thanks again.
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