USER'S GUIDE TO THE PHYSICAL SETTLEMENT RIDER FOR SYNDICATED SECURED LOAN CREDIT DEFAULT SWAPS

OCTOBER 1, 2007

Copyright LSTA 2007. All rights reserved.

TABLE OF CONTENTS Page I.INTRODUCTION.........................................................................................................................1 II.BACKGROUND OF LCDS........................................................................................................2 A.Standard CDS.....................................................................................................................2 B.Summary of LCDS and LCDX Terms................................................................................4 1.Credit Events..............................................................................................................4 2.Syndicated Secured.....................................................................................................4 3.Unfunded Revolvers...................................................................................................5 4.Settlement ..................................................................................................................5 5.Compensation for Delayed Physical Settlement.........................................................6 6.Succession Events.......................................................................................................6 III.SYNDICATED SECURED: THE DEALER POLL..............................................................6 A.Markit and the Syndicated Secured Loan Polling Rules ...................................................6 B.Substitute Reference Obligations........................................................................................7 C.Syndicated Secured Dispute Resolution.............................................................................7 IV.THE PHYSICAL SETTLEMENT RIDER................................................................................8 A.The Starting Point: The LSTA Confirmation.....................................................................8 B.Next Step: Preparing the Transaction Documents..............................................................9 1.Key Innovations........................................................................................................10 (a)Market Standard Indemnity...........................................................................10 (b)No Negotiation..............................................................................................10 2.Drafting the Documentation.....................................................................................10 (a)LSTA PSA.....................................................................................................10 (b)Amendments to LCDS PSA..........................................................................12 (i)Amendments to Section 1.2. ...............................................................12 (ii)Amendment to Section 6.1(a). ...........................................................12 (iii)Addition of Section 6.5. ...................................................................13 (c)Participation, Subparticipation or Assignment of Participation....................13 (d)Execution and Delivery.................................................................................14 C.Fast-Track to Physical Settlement: Timelines for Delivery of Documents......................14 1.Settlement by Assignment........................................................................................15 2.Settlement by Fall-Back Participation......................................................................16 3.Settlement by Initial Participation, Subparticipation or Assignment of Participation 18 (a)Assignment Delay..........................................................................................18 (b)Protection Buyer holds Deliverable Obligation by Participation or Subparticipation.................................................................................................18 (c)Initial Participation Timeline.........................................................................19 D.Consequences of Delayed Settlement...............................................................................21 1.Protection Seller Delay: Additional Termination Event ..........................................21 (a)Assignment....................................................................................................21 i

(b)Fall-Back Participation..................................................................................22 (c)Initial Participation........................................................................................22 2.Protection Buyer Delay: Delayed Compensation ....................................................22 (a)Delayed Compensation Payment under Direct-settled Transactions.............22 (b)Delayed Compensation Payments under Auction Transactions....................23 (c)Buy-in............................................................................................................23 E.Cash Settlement.................................................................................................................24 1.Cash Settlement Following Attempted Physical Settlement ...................................24 (a)Introduction....................................................................................................24 (b)Cash Settlement Timeline..............................................................................25 (c)The Auction...................................................................................................25 (d)The Requirements of the Bids.......................................................................26 (e)Calculation of the Cash Settlement Amount..................................................27 2.Cash Settlement Pursuant to a Buy-in......................................................................28 V.CONCLUSION..........................................................................................................................28

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THE LOAN SYNDICATIONS AND TRADING ASSOCIATION, INC. USER'S GUIDE TO THE PHYSICAL SETTLEMENT RIDER FOR SYNDICATED SECURED LOAN CREDIT DEFAULT SWAPS I. INTRODUCTION

The LSTA is issuing this User's Guide1 in connection with the North American Syndicated Secured Loan Credit Default Swap (LCDS) product and the LCDS index (LCDX) product, which have been developed cooperatively by the International Swaps and Derivatives Association, Inc. (ISDA), the LSTA and an independent working group consisting of representatives from the dealer and buy-side communities. In connection with the LCDS and LCDX products, ISDA assumed primary responsibility for overseeing the development of the Syndicated Secured Loan Credit Default Swap Standard Terms Supplement (the LCDS Standard Terms), the LCDX Untranched Transactions Standard Terms Supplement (the LCDX Untranched Standard Terms) and the LCDX Tranche Transactions Standard Terms Supplement (the LCDX Tranche Standard Terms and, together with the LCDX Untranched Standard Terms, the LCDX Standard Terms), each of which can be found at www.isda.org. The LSTA assumed primary responsibility for overseeing the development of the Physical Settlement Rider to the LCDS Standard Terms and the LCDX Standard Terms, which can be found at www.lsta.org. The LCDS Standard Terms and the Physical Settlement Rider were originally published in June of 2006 and amended in May of 2007. This Users Guide focuses on the 2007 versions because they govern current and future transactions. When discussing legacy transactions governed by the 2006 versions, the original documents are referred to as the 2006 LCDS Standard Terms and the 2006 Physical Settlement Rider. The robust auction procedures used in the credit default swap market to determine the price of an underlying bond deliverable after a credit event have been made applicable to LCDS and LCDX by virtue of the 2007 documentation. Accordingly, the majority of LCDS and LCDX transactions are expected to cash settle pursuant to an ISDA sponsored auction. Nonetheless, physical settlement pursuant to the Physical Settlement Rider will continue to apply to certain transactions, as described herein. Because physically settled transactions enable Protection Buyer to physically deliver a secured loan to Protection Seller upon the occurrence of a Credit Event in return for a
This User's Guide provides a brief overview of the LCDS and LCDX products and is not intended to be a substitute for transaction- and credit-specific due diligence, or review of the most recent LCDS Standard Terms and LCDX Standard Terms, as published by ISDA, and the most recent Physical Settlement Rider, as published by the LSTA. Nothing in this Users Guide constitutes the provision of legal, regulatory, credit, financial or other professional advice by the LSTA to its members or any other recipient of this Users Guide. Users of this Users Guide are responsible for forming their own view as to the accuracy of the information contained herein, which information is provided without warranty of any kind, express or implied. This User's Guide has been prepared for the LSTA by Richards Kibbe & Orbe LLP.
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protection payment, the Physical Settlement Rider harmonizes the standards for physical settlement under a standard credit default swap transaction with existing standards and market practices for settlement of transfers in the distressed loan market. The Physical Settlement Rider specifies the form of transfer documentation that will be used by LCDS and LCDX market participants to transfer loans after a Credit Event and regulates the settlement of loan delivery obligations that arise under LCDS and LCDX transactions. The Physical Settlement Rider also sets forth mandatory, abbreviated timeframes for completing such transfers. This User's Guide provides general background on the LCDS and LCDX products, and a detailed description of the Physical Settlement Rider. This User's Guide describes and explains the key terms and concepts introduced by the Physical Settlement Rider and is intended to assist counterparties and their counsel in taking full advantage of the efficient settlement techniques prescribed in the Physical Settlement Rider following a Credit Event in the LCDS or LCDX market.2 However, participants in the LCDS and LCDX markets should carefully review the Physical Settlement Rider and dedicate sufficient resources in order to understand and timely perform their obligations following a Credit Event. Most importantly, from a practical perspective, participants in the LCDS market are encouraged to establish internal operational procedures and controls well in advance of any Credit Event, since the time needed to understand the requirements of, and perform the obligations under, the Physical Settlement Rider will be exceedingly short once a Credit Event has occurred. II. BACKGROUND OF LCDS A. Standard CDS

Under a standard credit default swap (CDS), Protection Seller sells, and Protection Buyer buys, a notional amount of protection against the default of a Reference Entity specified in the confirmation. The protection applies for the Term of the transaction, from the Effective Date to the Scheduled Termination Date specified in the confirmation. During the Term, Protection Buyer makes premium payments and receives protection against the occurrence of specific Credit Events described in the confirmation. If a specified Credit Event occurs, Protection Buyer has the right to deliver certain Deliverable Obligations of the Reference Entity to Protection Seller and to receive the par value of the Deliverable Obligation in exchange. In a standard CDS transaction, the Deliverable Obligation is generally a bond or other unsecured obligation of the Reference Entity.
Premium Payments

PROTECTION BUYER
Credit Protection

PROTECTION SELLER

EFFECTIVE DATE Credit Event must occur during this Term for protection to be triggered.

SCHEDULED TERMINATION DATE

In addition to this User's Guide, the LSTA published a Market Advisory in May of 2006 relating to the "Market Standard Indemnity" contained in the Physical Settlement Rider. The Market Standard Advisory is available at www.lsta.org.

After the occurrence of a Credit Event, three notices must be delivered within set time periods to trigger the settlement obligations of the parties and identify the specific Deliverable Obligation that will be delivered by Protection Buyer. The first, called the Credit Event Notice, may be delivered by either party and must describe in reasonable detail the facts of the Credit Event. The Credit Event Notice must be delivered by the 14th calendar day after the Scheduled Termination Date of the CDS transaction. The party that delivers the Credit Event Notice must also deliver a Notice of Publicly Available Information that lists publicly available information confirming the Credit Event. Like the Credit Event Notice, the Notice of Publicly Available Information must be delivered on or before the 14th calendar day after the Scheduled Termination Date of the CDS transaction. The date on which both of these notices have been delivered is referred to as the Event Determination Date. Finally, a Notice of Physical Settlement (the NOPS) must be delivered by the 30th calendar day after the Event Determination Date. The NOPS is always delivered by Protection Buyer, and it identifies the specific Deliverable Obligation that Protection Buyer will deliver to Protection Seller in exchange for the protection payment. The Physical Settlement Date, which is the expected date for settlement of a CDS transaction, occurs a specified number of Business Days, typically thirty (30), after delivery of the NOPS.
Event Determination Date must occur by the 1 4th calendar day after the Scheduled Termination Date

30 Calendar Days

30 Business Days

CREDIT EVENT

EVENT DETERMINATION DATE

NOTICE OF PHYSICAL SETTLEMENT (NOPS)

PHYSICAL SETTLEMENT DATE

Credit Event must occur on or after the Effective Date and on or before the Scheduled Termination Date

Date on which the following 2 notices are effective: - Credit Event Notice - Notice of Publicly Available Information

Protection Buyer must deliver NOPS by the 30th calendar day after Event Determination Date

B.

Summary of LCDS and LCDX Terms

While both the LCDS and LCDX Standard Terms reflect the principal terms and structure of a standard ISDA CDS transaction, LCDS and LCDX transactions are necessarily different because the Deliverable Obligation is a secured loan. Set forth below is a summary of some of the key terms and concepts used in LCDS and LCDX transactions and how these differ from the terms of a CDS transaction. 1. Credit Events

Under LCDS and LCDX, two separate Credit Events are specified. If the Reference Entity (i) fails to make a scheduled payment of $1 million or more of Borrowed Money (including loans, bonds, etc.) after the expiration of any grace period applicable to such payment, or (ii) enters bankruptcy proceedings, then Protection Buyer becomes entitled to trigger settlement of the relevant contract. Unlike many investment grade CDS contracts, the LCDS Standard Terms and LCDX Standard Terms do not include Restructuring as a Credit Event.3 2. Syndicated Secured

As in a standard CDS transaction, to be eligible for delivery under an LCDS or LCDX confirmation in the case of physical settlement, an obligation must (i) be an obligation of the Reference Entity, and (ii) meet various Deliverable Obligation Characteristics specified in the confirmation. Deliverable Obligations can either be direct obligations of the Reference Entity or loans guaranteed by the Reference Entity on behalf of its downstream affiliates (to qualify as Deliverable Obligations, obligations guaranteed by the Reference Entity must satisfy certain further characteristics, including ownership by the Reference Entity of at least 50% of the voting stock of the underlying obligor on the date of the issuance of the guarantee). Most importantly, under LCDS and LCDX, a Deliverable Obligation must be a Syndicated Secured loan of the Reference Entity. Many of the unique features of the LCDS and LCDX products flow from this requirement. The Syndicated Secured characteristic is not determined by reference to a legal definition. Instead, a dealer poll guides the parties to the set of loans that are eligible for delivery as Deliverable Obligations, and to the loan that will be the Reference Obligation under the LCDS and LCDX confirmations.4 The dealer poll mechanism is discussed at length below in Section III. Under LCDS and LCDX, Syndicated Secured means any obligation, including any contingent obligation to pay or repay borrowed money resulting from the funding of an unfunded commitment, (i) that arises under a syndicated loan agreement and (ii) that, on the relevant day, trades as a loan of the Designated Priority under the then-current trading practices in the primary or secondary loan market, as the case may be. Designated Priority refers to a loan's specified lien priority (e.g., first, second, etc.). The definition is based on a market standard, rather than a legal definition, in order to (i) eliminate uncertainty involved in legal
Though "Restructuring" is not a standard Credit Event in LCDS or LCDX, the LCDS Standard Terms and the LCDX Standard Terms can be modified to apply this Credit Event to any bespoke trade. The Reference Obligation is a loan that serves as a benchmark to determine which other loans can be delivered.
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interpretation of a definition of secured and (ii) create a standardized, liquid product where the Reference Obligation is consistent across the market. Because Syndicated Secured is determined by reference to a trading market, dealer polls, not the parties to the LCDS or LCDX confirmation, determine the relevant Reference Obligation, and ultimately, the list of permitted Deliverable Obligations. Protection Buyer and Protection Seller need only specify the Reference Entity and a Designated Priority in an LCDS confirmation, or the relevant index in an LCDX confirmation. 3. Unfunded Revolvers

Under an LCDS or LCDX, unlike standard CDS, unfunded revolver or letter of credit commitments are eligible Deliverable Obligations and may be delivered after a Credit Event. In the case of physical settlement, the amount payable by Protection Seller is calculated based on the LSTA Purchase Price calculation. Therefore, in the event that Protection Buyer delivers a fully unfunded revolver, no payment will be due from the Protection Seller in the case that the Reference Price is 100%. While no protection payment is made on any unfunded commitment that is delivered, the obligation to satisfy any future draws shifts to the Protection Seller upon delivery.5 4. Settlement

Pursuant to the LCDS Standard Terms and the LCDX Standard Terms, as of May 22, 2007, all LCDS and LCDX transactions are subject to cash settlement pursuant to an ISDAsponsored auction process. The auction is modeled on successful auctions run by ISDA in the CDS market. ISDA and participating dealers will (i) determine whether an auction should be run in connection with the Credit Event of a particular Reference Entity, (ii) publish applicable auction settlement terms which include, among other things, a Common Event Determination Date that will apply to all parties, and (iii) run an auction in order to determine a market-wide Final Price of the Deliverable Obligations for cash settlement. With respect to individual LCDS and LCDX transactions, if (i) an auction is announced prior to the NOPS Fixing Date (as defined in Section IV A below); (ii) the Event Determination Date under the relevant contract occurs before the auction determines a Final Price; and (iii) the Common Event Determination Date identified in the relevant auction settlement terms occurs before the Scheduled Termination Date under the relevant contract, then such transactions will cash settle at the auction-generated Final Price. If these conditions are not met, if an auction fails to determine a Final Price or if an auction is not run with respect to the relevant Reference Entity, then the Protection Buyer will deliver a NOPS and the relevant transaction will physically settle.
A fully funded revolving loan is always deliverable by Protection Buyer. A fully unfunded revolving commitment is also deliverable, as described in Section B 3 above. However, in the event that the unfunded portion of a revolving commitment is terminated, the terminated commitment is not deliverable. If such unfunded commitment is terminated prior to the NOPS Fixing Date (as defined in Section IV A below), Protection Buyer is permitted to deliver an amount of funded revolving loan equal to the notional amount of its LCDS contract. However, if Protection Buyer specifies in a NOPS that it will deliver partially funded and partially unfunded revolving commitment, and the unfunded portion of that commitment is terminated on or after the NOPS Fixing Date, Protection Buyer will not be permitted to deliver additional Deliverable Obligations nor collect any payments from Protection Seller in respect of the terminated portion of its Deliverable Obligation.
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While standard CDS requires parties to physically settle transactions using transfer documentation customarily used in the relevant market, LCDS and LCDX, through the Physical Settlement Rider, require parties to physically settle using non-negotiable settlement procedures and documentation based upon modified LSTA documentation and settlement standards. 5. Compensation for Delayed Physical Settlement

Unlike standard CDS, if physical delivery is not attempted by the Physical Settlement Date in an LCDS or LCDX transaction for which an auction is not run (and cash settlement does not apply), compensation for delayed settlement (calculated as described in the Physical Settlement Rider) will accrue in favor of Protection Seller. In addition, standard LSTA delayed compensation will apply to trades that physically settle at an auction price. Both delayed compensation regimes are discussed below under Section IV D. 6. Succession Events

In LCDS and LCDX, like standard CDS, if a Reference Entity is subject to a Succession Event, such as a merger or similar corporate event where another entity assumes the debt obligations of the Reference Entity, the credit default swap may migrate to one or more Successor Reference Entities. Under standard CDS, a Successor Reference Entity is identified by tracing the amount of debt obligations, including all bonds and loans, of the original Reference Entity assumed by the new entity. However, under LCDS and LCDX, rather than tracing all bonds and loans, this determination is made by tracing only the Syndicated Secured Loans assumed by the new entity. III. SYNDICATED SECURED: THE DEALER POLL

While certain Deliverable Obligation Characteristics in LCDS and LCDX are defined by reference to ISDA's 2003 Credit Derivatives Definitions, the most important Deliverable Obligation Characteristic is not subject to a legal definition. Each Deliverable Obligation, as well as any Reference Obligation, must meet the definition of Syndicated Secured, discussed in Section II B 2 above. Syndicated Secured is determined by a dealer poll in accordance with the following guidelines. A. Markit and the Syndicated Secured Loan Polling Rules

Markit Group Limited (Markit) has established a database of loans traded in the primary and secondary loan markets and will conduct periodic polls of specified dealers to determine whether the loans of a Reference Entity are Syndicated Secured, and if Syndicated Secured, their Designated Priority. Markit has published Syndicated Secured Loan Polling Rules that specify in detail the polling procedures used to determine this information. In addition, Markit will maintain on its website, www.markit.com, a list (the Relevant Secured List) for each Reference Entity of the Loans that are Syndicated Secured of a Designated Priority. In an LCDS transaction, Protection Buyer and Protection Seller will specify a Reference Entity and a Designated Priority (typically first lien or second lien) in their confirmation, and in an LCDX transaction, the parties will reference an index comprised of a portfolio of 6

Reference Entities with a Designated Priority for each Reference Entity. Markit will run a series of dealer polls on significant Reference Entities to determine which debt obligations of those Reference Entities are Syndicated Secured loans of the Designated Priority. Markit will publish the results of the polls on their website, and all parties in the market will be bound by Markit's determination. In addition to these initial polls, participating dealers may request at any time that Markit run a poll with respect to a new Reference Entity. As a general rule, Markit will identify the loan that is the Reference Obligation on the Relevant Secured List, and the Reference Obligation may change as the Relevant Secured List is updated. Markits identification is binding on all parties across the market. If the Reference Entity is a borrower that is not covered by Markit's polls, then the parties' designation of the Reference Obligation will be applicable until the Reference Entity is covered by Markit. B. Substitute Reference Obligations

In the single-name LCDS product, if the Relevant Secured List is withdrawn, if there is no Relevant Secured List due to a Succession Event, or if the Reference Entity is not covered by Markit and the Reference Obligation specified by the parties is repaid, materially reduced, or fails to be Syndicated Secured, then the Calculation Agent (generally the Protection Seller or the dealer party to the LCDS) must attempt to identify a Substitute Reference Obligation. The Substitute Reference Obligation must be Syndicated Secured. If the Calculation Agent identifies a Substitute Reference Obligation, either party may dispute the Syndicated Secured nature of this Loan, as further described in Section III C below. If a Substitute Reference Obligation has not been identified (or its identification is subject to dispute) 30 Business Days after the Calculation Agent begins its search, either party may cancel the LCDS transaction, and no further payments are due by either party. This is the only case where the parties have an option to terminate the LCDS transaction. Under LCDX transactions, the Calculation Agent has no duty to search for a Substitute Reference Obligation. If a Relevant Secured List is withdrawn, or if there is no existing list for a Reference Entity due to the occurrence of a Succession Event, and in each case no new Relevant Secured List is published within 30 Business Days, then the relevant portion of the transaction is automatically cancelled and no further payments are due by either party on this portion of the LCDX transaction. C. Syndicated Secured Dispute Resolution

Under LCDS, both parties, in the case of the designation of a Substitute Reference Obligation, and Protection Seller, in the case of the designation of a Deliverable Obligation, may dispute the Syndicated Secured nature of the relevant obligation. In an LCDX transaction that physically settles, Protection Seller has a similar dispute right with respect to Protection Buyer's designation of a Deliverable Obligation. In the event of a dispute, Markit (or the Calculation Agent in limited circumstances) will conduct a dealer poll to resolve the dispute. If the relevant obligation is determined not to be Syndicated Secured, the Calculation Agent may identify a new Substitute Reference Obligation, or the Protection Buyer may identify a new Deliverable Obligation. In the event of a dispute, the Calculation Agent will request that Markit run a new poll on the disputed obligation. The parties agree to be bound by the results of that poll.

IV.

THE PHYSICAL SETTLEMENT RIDER

The Physical Settlement Rider is the detailed enhancement to the LCDS Standard Terms and LCDX Standard Terms that regulates the physical settlement process following a Credit Event. The Physical Settlement Rider reflects the harmonization of settlement mechanics in the current secondary loan market, based upon the documentation and procedures developed by the LSTA, with the settlement demands of the CDS market. The Physical Settlement Rider addresses an inherent incompatibility between the loan market, where lengthy upstream review and detailed negotiation of documentation often results in prolonged settlement times, and the CDS market, where expeditious settlement times are not only demanded by regulators and participants, but are necessary because the outstanding notional amount of CDS contracts will likely exceed the amount of physical obligations available and eligible for delivery. Legacy LCDS transactions subject to the 2006 LCDS Standard Terms are required to physically settle pursuant to the 2006 Physical Settlement Rider, unless another arrangement has been made. However, the current LCDS Standard Terms and the LCDX Standard Terms require cash settlement pursuant to an auction, and physical settlement only applies as a fallback. In addition, ISDA launched a protocol in July of 2007, which enabled parties with open LCDS transactions that were subject to the 2006 LCDS Standard Terms to amend their trades to be subject to the updated documentation. Therefore, the number of trades that are expected to settle physically will be limited to (i) legacy trades that remain subject to the 2006 LCDS Standard Terms, (ii) trades on Reference Entities for which an auction either is not held or fails, (iii) LCDS and LCDX transactions that are ineligible for the auction because of the failure to fulfill certain documentation conditions, and (iv) trades that result from physical settlement requests submitted into an auction. The remainder of this User's Guide is intended to guide LCDS and LCDX counterparties through the physical settlement process set forth in the 2007 version of the Physical Settlement Rider. A. The Starting Point: The LSTA Confirmation

Once the NOPS has been delivered and can no longer be modified by Protection Buyer (the NOPS Fixing Date)6, Protection Buyer and Protection Seller are deemed to have entered into a transaction governed by the then-current LSTA Distressed Trade Confirmation (LSTA Confirmation). The NOPS Fixing Date is the LSTA Trade Date under the LSTA Confirmation. The relevant and necessary terms of the LCDS and LCDX transaction are deemed to be incorporated in the LSTA Confirmation through the following amendments to the LSTA Confirmation which are set forth in the Physical Settlement Rider:7
Under LCDS and LCDX, the NOPS Fixing Date occurs on the third Business Day following Protection Buyer's initial delivery of a NOPS, whereas in the standard CDS market, Protection Buyer may change its NOPS at any time on or before the Physical Settlement Date. The NOPS Fixing Date is intended to provide certainty to the parties in LCDS and LCDX transactions, given the complexity of the physical loan settlement process as compared to the electronic settlement process normally employed in connection with the delivery of bonds. The Physical Settlement Rider deems the LSTA Trade Confirmation to be created as of the NOPS Fixing Date and does not require the parties to evidence the LCDS or LCDX transaction in writing with an actual LSTA Trade Confirmation.
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the LSTA Trade Date is the NOPS Fixing Date; the LSTA Seller is the Protection Buyer; the LSTA Buyer is the Protection Seller; the Credit Agreement is the underlying loan or credit agreement relating to the Deliverable Obligation (or, in the case that Protection Buyer delivers an obligation that is guaranteed by the Reference Entity and meets certain other specified requirements (an Underlying Obligation), the loan or credit agreement relating to the Underlying Obligation); the Borrower is the Reference Entity (or, in the case that Protection Buyer delivers a Qualifying Guarantee, the Underlying Obligor) the LSTA Confirmation Form of Purchase default is Assignment, although the Physical Settlement Rider provides for specific instances where the transaction may settle by Participation, Subparticipation or Assignment of Participation; the Purchase Amount is the amount of commitment of the Deliverable Obligation that Protection Buyer indicates in the NOPS that it will deliver; Type of Debt is a revolving loan, term loan, or any other relevant description of the Deliverable Obligation; the convention for Accrued Interest is the then-current market convention for the Deliverable Obligation on the LSTA Trade Date, as determined by the Calculation Agent; Transfer Documentation is prepared by Protection Buyer; the amount of the Purchase Price is the amount described in the LCDS Standard Terms or the LCDX Standard Terms (generally par multiplied by funded commitment); and the Physical Settlement Rider provides that, if an LCDS or LCDX transaction closes by Participation, Protection Seller will have no voting rights and will be required to post cash collateral for any portion of the Deliverable Obligation that is unfunded. Accordingly, Section 15 of the LSTA Confirmation does not apply. Next Step: Preparing the Transaction Documents

B.

The Physical Settlement Rider provides specific guidance in connection with the preparation and delivery of transfer documents upon physical settlement. While there is a presumption that parties will settle by Assignment, the Physical Settlement Rider also contains drafting guidelines with respect to settlement by Participation, Subparticipation and Assignment of Participation if settlement by Assignment is not possible, or if settlement by Participation is otherwise acceptable to the parties. The transfer documentation evidencing most physically 9

settled LCDS and LCDX transactions, whether settling by Assignment, Participation or Assignment of Participation, will be the LSTA Purchase and Sale Agreement for Distressed Trades (LSTA PSA) as published by the LSTA on the NOPS Fixing Date, as modified by specific amendments reflected in the Physical Settlement Rider. 1. Key Innovations

The Physical Settlement Rider contains two key innovations which are intended to facilitate expedited settlement following a Credit Event. (a) Market Standard Indemnity

The LSTA PSA on which any LCDS and LCDX transaction settles (an LCDS PSA) will include various amendments, the most important of which is the Market Standard Indemnity. The Market Standard Indemnity requires Protection Buyer to hold Protection Seller harmless for any inconsistency between the LCDS PSA (and its predecessor transfer agreements) and standard market practice relating to the Deliverable Obligation. This new provision is intended to allow LCDS and LCDX counterparties promptly to prepare and execute transfer documentation without negotiation or upstream review, while providing Protection Seller with the benefit of customized, credit-specific protections which may evolve and be negotiated by participants in the cash market. All LCDS and LCDX counterparties are encouraged carefully to review the LSTA Market Advisory published by the LSTA in June of 2006, entitled Loan Credit Default Swap 'Market Standard Indemnity,' which is available at www.lsta.org. The Market Advisory provides additional detail regarding the Market Standard Indemnity, as well as important information regarding the treatment of the Market Standard Indemnity in the cash loan market. (b) No Negotiation

The Market Standard Indemnity is designed to provide Protection Seller with any market standard protections relating to the Deliverable Obligation that are not reflected in the form LSTA PSA. After Protection Buyer has prepared the LCDS PSA in accordance with the guidance provided in this Section IV B, including the insertion of the Market Standard Indemnity, Protection Seller may not negotiate the documents or request any additional modifications to any provisions. This innovation to the LCDS and LCDX products is intended to facilitate market-wide prompt and efficient settlement following a Credit Event. 2. Drafting the Documentation (a) LSTA PSA

Protection Buyer should refer to the LSTA's website (www.lsta.org) as of the NOPS Fixing Date for the most recent version of the LSTA PSA. That form will serve as the starting point for the documentation evidencing physical settlement of most LCDS and LCDX transactions, whether ultimately closed by Assignment, Participation, Subparticipation or Assignment of Participation. 10

Before the specific amendments reflected in the Physical Settlement Rider are made to the LSTA PSA, Protection Buyer should make the credit-specific modifications to the LSTA PSA to reflect the information listed in Section IV A above, as well as any additional information that is required by the form of the LSTA PSA. Protection Buyer will need to supply the following information, which relates to the Deliverable Obligation or the parties: CUSIP Number of Deliverable Obligation, if available Administrative Agent Description of assignment document in Credit Agreement Transfer fee (if any) under Credit Agreement

Protection Buyer's and Protection Seller's wire and delivery instructions and signature blocks List of Credit Documents delivered to Protection Seller

If the Reference Entity/Borrower is subject to a bankruptcy proceeding, then the following information needs to be supplied:

Caption of Bankruptcy Case Bankruptcy Court Bar Date Filing Date Proof of Claim: Filing Date, description of Proof of Claim as filed and identity of entity filing, if applicable Description of Adequate Protection Order, if any

In addition to amending the LSTA PSA, Protection Buyer should also determine whether there are any obstacles or requirements relating to a transfer of the Deliverable Obligation to Protection Seller. Any such requirements or obstacles will be relevant as Protection Buyer assesses certain options involved in the Timelines for Delivery of Documents, discussed in Section IV C below. The following is a list of some of the requirements or obstacles Protection Buyer should identify at this stage, most of which can be found in the Credit Agreement relating to the Deliverable Obligation: Minimum Transfer Size Minimum Hold Whether Protection Seller is an Eligible Assignee Required Consents (of Borrower, Agent or other party)

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(b)

Amendments to LCDS PSA.

The Physical Settlement Rider includes a number of specific amendments that need to be made to any LCDS PSA, including the Market Standard Indemnity discussed above. These amendments are included in Section 2(e) of the Physical Settlement Rider, and Protection Buyer must insert each amendment exactly as it is stated in the Physical Settlement Rider into Section 26 (Further Provisions) of any LCDS PSA. The amendments are as follows: (i) Amendments to Section 1.2.

The amendments to Section 1.2 of the LCDS PSA should only be made in connection with LCDS and LCDX transactions that do not settle at an auction price. These amendments, set forth below, confirm that standard LSTA Compensation for Delayed Settlement does not apply to such transactions:8 (a) The definition of 'Adequate Protection Payments' shall be amended by (i) deleting the language 'the earlier of (a)' from the end of the fourth line thereof and (ii) deleting the language 'and (b) T+20' from the end thereof. (b) The definition of 'Business Day' shall be amended by (i) replacing the comma immediately preceding clause (c) thereof with the word 'or,' (ii) deleting the word 'or' immediately preceding clause (d) thereof and (iii) deleting clause (d) thereof. (c) The definition of 'Pre-Settlement Date Accruals' shall be amended by (i) deleting the language 'the earlier of (a)' from the second line thereof and (ii) deleting the language 'and (b) T+20' from the second line thereof. (d) The definition of 'T+20' shall be deleted in its entirety. (ii) Amendment to Section 6.1(a).

The Market Standard Indemnity is incorporated by the following amendment to Section 6.1(a) of the LCDS PSA: 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
Note that, as discussed in greater detail below, standard LSTA Compensation for Delayed Settlement does apply to transactions that settle at an auction price.
8

12

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.' (iii) Addition of Section 6.5.

The final amendment to the LCDS PSA is the addition of Section 6.5, which is intended to balance the Market Standard Indemnity by providing a benefit to Protection Buyer. While the Market Standard Indemnity requires Protection Buyer to grant all additional protections (e.g., modified representations, additional indemnities, etc.) in the LCDS PSA that are deemed to be standard market practice in the cash loan market relating to the Deliverable Obligations, Section 6.5 enables Protection Buyer to take advantage of standard market practice modifications that would limit the representation and indemnification obligations of the Protection Buyer. For example, if standard transactions in the cash loan market for a particular Deliverable Obligation contained an additional LSTA seller indemnity to address a unique risk, the Market Standard Indemnity would require Protection Buyer to provide that same indemnity. If the same documentation also reflected a limitation or carveout relating to one of the standard seller representations in the LSTA PSA, Section 6.5 of the LCDS PSA would provide Protection Buyer with the benefit of that limited representation as well. Section 6.5 reads as follows: 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. (c) Participation, Subparticipation or Assignment of Participation

If an LCDS or LCDX transaction settles by Participation, as further described below in Section IV C 2, the Physical Settlement Rider provides that the transfer documentation will be the LSTA Distressed Participation Agreement published on the NOPS Fixing Date, modified to reflect (i) the same amendments described above and (ii) the provisions included in Annex 1 to the Physical Settlement Rider which reflect that Protection Seller will not receive voting rights as a participant and will be required to post cash collateral for any unfunded portion of the Deliverable Obligations. If the LSTA has not published a Distressed Participation Agreement at that time, Protection Buyer should use the LCDS PSA as amended, and insert each 13

of the additional amendments provided on Annex 1 to the Physical Settlement Rider into Section 26 (Further Provisions) of the LCDS PSA. Annex 1 to the Physical Settlement Rider creates a participation relationship between Protection Buyer (as grantor) and Protection Seller (as participant). The participation provides for automatic elevation in the event that consent to Assignment is received. Some of the terms reflected in the form of participation agreement required for LCDS and LCDX trades, such as the voting rights and cash collateral provisions described above, may not be anticipated by regular cash loan market participants. Protection Buyer and Protection Seller may modify these terms, or any other terms contained in the Physical Settlement Rider, but they must agree to do so on the LCDS or LCDX Trade Date. No negotiation of documentation should take place after a Credit Event. In the case of a Subparticipation, the Physical Settlement Rider provides that Protection Buyer will deliver a subparticipation in a form substantially similar to the relevant participation described above. Protection Buyer should make only the changes necessary to convert the participation agreement into a subparticipation agreement. In the case of an Assignment of Participation, Protection Buyer will deliver an assignment substantially similar to the LCDS PSA, which reflects only the changes necessary to convert the assignment agreement into an assignment of participation agreement. (d) Execution and Delivery

Once Protection Buyer has finalized the draft of the LCDS PSA, Participation, Subparticipation or Assignment of Participation Agreement, as applicable (each, an LCDS Transfer Document), Protection Buyer should execute and deliver such draft, along with any other documents (such as an Assignment and Acceptance) that are required under the Credit Agreement or any related documents for the transfer of the Deliverable Obligation, to Protection Seller as soon as practicable. While Protection Seller is not permitted to negotiate the terms of the LCDS Transfer Document, Protection Seller should carefully review the LCDS Transfer Document it receives from Protection Buyer to ensure that the credit-specific information, as well as the amendments included in the Physical Settlement Rider, are accurate and complete. Protection Seller is, in most cases, provided only 3 Business Days to do so, and should adjust its operational priorities accordingly. C. Fast-Track to Physical Settlement: Timelines for Delivery of Documents The LSTA suite of standard documentation has substantially reduced the settlement delays and long timeframes that have traditionally characterized physical settlement in the cash market for distressed loans. However, due to the negotiation-intensive nature of physical settlement of loans, and the need for agent or other third party consent to most transfers, settlement timelines for loans are still generally longer than settlement timelines in the bond market, where bond transactions normally settle electronically. The Physical Settlement Rider imposes mandatory, abbreviated timelines on Protection Buyer and Protection Seller with respect to the delivery and execution of documents, which timelines are not present in the cash market for distressed loans. These abbreviated timelines, in conjunction with the elimination of 14

negotiation of the transfer documents, are intended to achieve the goal of prompt physical settlement of LCDS and LCDX transactions. Protection Buyer and Protection Seller should familiarize themselves with these timelines and carefully monitor the passage of time after the NOPS Fixing Date. Once the NOPS Fixing Date has occurred, each party is required to comply with various deadlines or face certain consequences, including termination of the LCDS contract and cancellation of all payment obligations. Market participants should note that the settlement timelines set forth below are not triggered until Protection Buyer both (i) delivers documents, and (ii) is the legal and beneficial owner of the Deliverable Obligation. Protection Buyers are permitted to deliver documents prior to the settlement of their purchase of the Deliverable Obligation in order to effect several assignments simultaneously, as is standard practice in the secondary loan market. However, any such early delivery of documents is not sufficient to trigger the various consequences built into these settlement timelines. 1. Settlement by Assignment

Except in the limited circumstances described in Section IV C 3 below, Protection Buyer and Protection Seller are required to attempt physical settlement of any LCDS or LCDX transaction by Assignment. The following timeline shows the steps involved in the Assignment process, as well as the timelines imposed on the parties by the Physical Settlement Rider: ASSIGNMENT TIMELINE Assignment: Action to be Taken Protection Buyer (i) is the legal and beneficial owner of the relevant amount of the Deliverable Obligation and (ii) delivers a full set of transfer documents necessary to transfer Deliverable Obligation by Assignment (including LCDS PSA, any other documents necessary for such transfer under the Credit Agreement, and a full set of predecessor transfer agreements) (the date on which both conditions are fulfilled, the Proposed Assignment Settlement Date) Protection Seller executes and delivers Assignment documents to Protection Buyer Parties attempt to obtain the fulfillment or waiver of any consent, approval, acknowledgement, notice or other requirement to transfer the Deliverable Obligation by Assignment Parties close by Assignment Deadline As soon as practicable after the NOPS Fixing Date

On or before the third Business Day after the Proposed Assignment Settlement Date All such requirements must be fulfilled by the 13th Business Day following the Proposed Assignment Settlement Date On the date all consents are received or requirements fulfilled, if such date is on or before the 13th Business Day following the Proposed Assignment Settlement Date

15

2.

Settlement by Fall-Back Participation

If settlement by Assignment has not occurred on or before the 13th Business Day following the Proposed Assignment Settlement Date, Protection Buyer and Protection Seller must then attempt to settle the LCDS or LCDX transaction by Participation. This requires Protection Buyer to draft a Participation Agreement in accordance with the guidelines set forth in Section IV B 2 (c) above, either by using the current LSTA form of Distressed Participation Agreement, if any, or by converting the LCDS PSA it previously delivered in anticipation of settlement by Assignment into a Participation Agreement. The following timeline shows the steps involved in the Fall-Back Participation process, as well as the deadlines imposed on the parties by the Physical Settlement Rider:

FALL-BACK PARTICIPATION TIMELINE Fall-Back Participation: Action to be Taken Protection Buyer delivers a full set of transfer documents necessary to transfer Deliverable Obligation by Participation (including LCDS Participation Agreement, any other documents necessary for such transfer under the Credit Agreement, and a full set of predecessor transfer agreements) (the date of delivery, the Proposed Fall-Back Participation Settlement Date) Protection Seller, at its option, either (i) executes and delivers Participation documents to Protection Buyer or (ii) delivers a Cash Election Notice, exercising its option to avoid taking a participation interest by cash settling Deadline On or before the 14th Business Day following the Proposed Assignment Settlement Date

On or before the fifth Business Day after the Proposed Fall-Back Participation Settlement Date

16

Parties attempt to obtain the fulfillment or waiver of any consent, approval, acknowledgement, notice or other requirement to transfer the Deliverable Obligation by Participation Parties close by Participation

All such requirements must be fulfilled by the 15th Business Day following the Proposed Fall-Back Participation Settlement Date On the date all consents are received or requirements fulfilled, if such date is on or before the 15th Business Day following the Proposed Fall-Back Participation Settlement Date On the date Protection Seller delivers a Cash Election Notice OR On the 15th Business Day following the Proposed Fall-Back Participation Settlement Date if consents to Participation are not received by such date

OR Parties begin the cash settlement process described in Section IV E below

The following chart illustrates the timelines for settlement by Assignment and Fall-Back Participation:
Protection Seller must sign Assignment documents within 3 Business Days If all consents are received by 13th Business Day after Proposed Assignment Settlement Date, close CLOSE BY ASSIGNMENT PROPOSED FALL-BACK PARTICIPATION SETTLEMENT DATE
5B us ine ss Da ys

ADDITIONAL TERMINATION EVENT

See Section IV D 1Below

NOPS FIXING DATE

3rd Business Day after initial NOPS sent

3B us ine ss Da ys Date on which Protection Buyer delivers all documents to effect an Assignment must occur as soon as practicable after NOPS Fixing Date, unless Protection Buyer effects a Proposed Initial Participation Settlement Date below

PROPOSED ASSIGNMENT SETTLEMENT DATE

ys Da ess n i s Bu

13

14 Business Days

5 Business Days

CASH ELECTION NOTICE

Protection Seller may elect cash settlement on or before 5th Business Day following Proposed Fall-Back Participation Settlement Date

ATE

If Protection Seller does not sign assignment documents within 3 Business Days, Additional Termination Event occurs

If consents to Assignment are not received by 13th Business Day after Proposed Assignment Settlement Date, Protection Buyer must deliver participation documents on the 14th Business Day after Proposed Assignment Settlement Date

ys Da ss ine us 5B

CLOSE BY PART Protection Seller must sign part documents within 5 Business Days if no consents are required, close that day and subsequently elevate when consents to assignment are received

MOVE TO CASH SETTLEMENT

17

If Protection Seller has returned signatures but consents have not been received and/or legal requirements have not been fulfilled by 15th Business Day after the Proposed Fall-Back Participation Settlement Date, automatic cash settlement

3.

Settlement by Initial Participation, Subparticipation or Assignment of Participation

As discussed in Section IV C 1 above, the Physical Settlement Rider provides that Assignment is the preferred method of settlement, and requires that Protection Buyer and Protection Seller attempt to settle by Assignment as an initial matter in most cases. However, there are two circumstances where Protection Buyer is permitted to skip over the requirement to attempt settlement by Assignment, and jump directly to settlement by Participation, Subparticipation or Assignment of Participation (each, an Initial Participation): (a) Assignment Delay

If Protection Buyer is a lender and determines in its reasonable judgment that settlement by Assignment would not be effected within 13 Business Days due to any third party requirement, Protection Buyer can deliver a Participation. Examples of scenarios this clause is intended to address include: Agent freeze that Protection Buyer knows will not be lifted within 13 Business Days Minimum transfer requirement exceeds amount of Deliverable Obligation to be delivered by Protection Buyer, and Agent will neither accept an oversale/buyback arrangement nor otherwise waive the requirement Definition of Eligible Assignee in Credit Agreement expressly excludes Protection Seller and no waiver is feasible (e.g., no hedge funds are permitted to be lenders and Agent has refused to grant a waiver of this requirement) (b) Protection Buyer holds Deliverable Obligation by Participation or Subparticipation If Protection Buyer holds either a Participation interest or a Subparticipation interest in the Deliverable Obligation, then Protection Buyer can deliver a Subparticipation or an Assignment of Participation. Prior to the Physical Settlement Date, this is optional: Protection Buyer has the choice either to deliver this inventory or, if there is a reason Protection Buyer would prefer to continue to hold this inventory, to attempt to find different inventory in the market to deliver. However, Protection Buyer is required to deliver this inventory on the Physical Settlement Date if it has been unable by that date to deliver the full outstanding principal balance of such Deliverable Obligation specified in the NOPS. This requirement is intended to promote expedient settlement timelines by requiring that all available inventory be used to satisfy LCDS and LCDX settlement obligations, while enabling Protection Buyer to retain some flexibility with respect to the inventory it holds.

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(c)

Initial Participation Timeline

The following timeline shows the steps involved in the Initial Participation process, as well as the timelines imposed on the parties by the Physical Settlement Rider: INITIAL PARTICIPATION TIMELINE Initial Participation: Action to be Taken Protection Buyer (i) is either the legal and beneficial owner of the Deliverable Obligation or is the beneficial owner of the Deliverable Obligation and (ii) delivers a full set of transfer documents necessary to transfer Deliverable Obligation by Initial Participation (including LCDS Participation Agreement, any other documents necessary for such transfer under the Credit Agreement, and a full set of predecessor transfer agreements) (the date on which both conditions are fulfilled, the Proposed Initial Participation Settlement Date) Deadline As soon as practicable after the NOPS Fixing Date (if Protection Buyer is a Lender and determines that Assignment would not be effected within 13 Business Days, or if Protection Buyer holds the Deliverable Obligation by Participation or Subparticipation and exercises its option to deliver Initial Participation documents) OR Where Protection Buyer holds the Deliverable Obligation by Participation or Subparticipation, on the Physical Settlement Date if Protection Buyer has been unable to deliver the full outstanding principal amount of the Deliverable Obligation specified in the NOPS prior to that date

19

Protection Seller, at its option, either (i) executes On or before the fifth Business Day after the and delivers Initial Participation documents to Proposed Initial Participation Settlement Date Protection Buyer or (ii) delivers a Cash Election Notice, exercising its option to avoid taking a participation interest by cash settling Parties attempt to obtain the fulfillment or waiver All such requirements must be fulfilled by the of any consent, approval, acknowledgement, 15th Business Day following the Proposed notice or other requirement to transfer the Initial Participation Settlement Date Deliverable Obligation by Initial Participation Parties close by Initial Participation On the date all consents are received or requirements fulfilled, if such date is on or before the 15th Business Day following the Proposed Initial Participation Settlement Date

OR Parties must begin the cash settlement process described in Section IV E below On the date Protection Seller delivers a Cash Election Notice OR On the 15th Business Day following the Proposed Initial Participation Settlement Date if consents to Participation are not received by such date

20

The following chart illustrates the timelines for settlement by Initial Participation:
s

s ine us 5 B ys Da

ADDITIONA L TERMINATI ON EVENT

See Section IV D 1 below

NOPS FIXING DATE

PROPOSED INITIAL PARTICIPATIO N SETTLEMENT DATE If Protection Buyer holds the Deliverable Obligation by Participation or Subparticipation, it may deliver subparticipation or assignment of participation documents without first delivering assignment documents If Protection Buyer is a lender of record, it may deliver participation documents without first delivering assignment documents if it determines, in its reasonable judgment, that Assignment will not be effected within 13 Business Days due to a required third-party consent or approval, or applicable law

5 Bu s Days iness

CASH ELECTION NOTICE

3rd Business Day after initial NOPS sent

Protection Seller may elect cash settlement on or before 5th Business Day following Proposed Initial Participation Settlement Date

5 Da Bu ys sin es s

CLOSE BY PART OR SUBPART

Protection Seller must sign participation documents within 5 Business Days if no consents are required, If Protection Seller has returned close by participation that signatures but consents have not day and subsequently been received and/or legal elevate when consents to requirements have not been assignment are received fulfilled by 15th Business Day after the Proposed Initial Participation Settlement Date, automatic cash settlement

MOVE TO CASH SETTLEMEN T

D.

Consequences of Delayed Settlement

In order to promote compliance with settlement timelines, the Physical Settlement Rider provides three specific incentives for the parties to comply with the requirements set forth in the Physical Settlement Rider, that are based on concepts borrowed from both ISDA and LSTA documentation. 1. Protection Seller Delay: Additional Termination Event

At the following three points in the settlement timelines, if Protection Seller fails to comply in a timely fashion with the deadlines imposed on it by the Physical Settlement Rider, an Additional Termination Event under the ISDA Master Agreement between Protection Buyer and Protection Seller occurs: (a) Assignment

Protection Seller MUST (i) deliver its signatures on the Assignment documents on or before the third Business Day after its receipt of such documents AND (ii) pay the Purchase Price on the day it delivers its signatures or, if any third party requirements apply, on the day it receives a fully executed set of Assignment documents evidencing compliance with all such requirements;

21

(b)

Fall-Back Participation

Protection Seller MUST either (A) (i) deliver its signatures on the FallBack Participation documents on or before the fifth Business Day after its receipt of such documents AND (ii) pay the Purchase Price on the day it delivers its signatures or, if any third party requirements apply, on the day it receives a fully executed set of Fall-Back Participation documents evidencing compliance with all such requirements OR (B) deliver a Cash Election Notice on or before the fifth Business Day after its receipt of Participation documents; OR (c) Initial Participation

Protection Seller MUST either (A) (i) deliver its signatures on the Initial Participation documents on or before the fifth Business Day after its receipt of such documents AND (ii) pay the Purchase Price on the day it delivers its signatures or, if any third party requirements apply, on the day it receives a fully executed set of Initial Participation documents evidencing compliance with all such requirements OR (B) deliver a Cash Election Notice on or before the fifth Business Day after its receipt of Initial Participation documents. If Protection Seller fails to comply with any of these requirements, Protection Buyer, as the non-defaulting party (or the Non-Affected Party, as defined in the ISDA 2002 Master Agreement), has the right immediately to terminate the relevant transaction. Unlike some ISDA Additional Termination Events which give rise to the right of the NonAffected Party to terminate all transactions under the ISDA Master Agreement between the parties, it is important to note that this Additional Termination Event will only apply to the affected LCDS or LCDX transaction. If the Protection Buyer exercises its early termination option, no further payments will be due under the confirmation from either party (i.e., Protection Buyer's protection payments cease and Protection Seller's conditional obligation to deliver a par payment is eliminated.) However, a termination amount may be payable under the ISDA Master Agreement between Protection Buyer and Protection Seller and, if so, Protection Buyer will determine the termination amount.9 2. Protection Buyer Delay: Delayed Compensation (a) Delayed Compensation Payment under Direct-settled Transactions Standard LSTA delayed compensation does not apply to LCDS and LCDX transactions that do not settle at an auction-generated price (Direct-settled Transactions). These include LCDS and LCDX transactions on Reference Entities for which an auction either is not held or fails, legacy transactions documented pursuant to the 2006 LCDS Standard Terms and transactions that are ineligible for inclusion in the auction due to a failure to
Both parties should carefully review the terms of their governing ISDA Master Agreement to determine how the termination amount, if any, will be calculated in connection with any Additional Termination Event under the LCDS confirmation. The payment will typically be comprised of (1) the "Close-Out Amounts," as defined in the ISDA Master Agreement (generally, a calculation of the replacement cost of the material terms of the terminated transaction to the burdened party), plus (2) the unpaid amounts owed under the relevant transaction to Protection Buyer before the early termination date minus (3) the unpaid amounts owed under the relevant transaction to Protection Seller before the early termination date.
9

22

fulfill applicable conditions. Instead, a form of delayed compensation (LCDS Delayed Compensation) has been imposed on Protection Buyers under Direct-settled Transactions as an economic incentive to purchase the Deliverable Obligation and deliver settlement documents as quickly as possible. LCDS Delayed Compensation specifically targets Protection Buyers that do not own the Deliverable Obligation, and reflects an attempt to prevent them from delaying delivery of settlement documents by waiting for the price of that Deliverable Obligation to decrease before purchasing it. If Protection Buyer does not both (i) own the Deliverable Obligation and (ii) deliver a full set of documents to effect delivery of the Deliverable Obligation by the Physical Settlement Date, Protection Buyer will begin to accrue a delayed compensation amount payable to Protection Seller. This amount is equal to (i) the total rate of interest payable in respect of the Deliverable Obligation as of the NOPS Fixing Date under the relevant Credit Agreement (excluding any default interest) regardless of whether or not such interest was actually paid, or if a bankruptcy court has issued a final order authorizing or ordering adequate protection payments to the lenders, the total rate of interest stated in such final order, minus (ii) the average LIBO Rate (as defined in the LSTA Standard Terms and Conditions for Distressed Trade Confirmations) for the entire period of delay. This amount will accrue from the Physical Settlement Date until the earlier of the date on which Protection Buyer owns the Deliverable Obligation and delivers settlement documents and the date that is 90 calendar days after the Physical Settlement Date. Any such amount payable by Protection Buyer will be deducted from the Physical Settlement Amount payable by Protection Seller or, if a Protection Buyer owes a Physical Settlement Amount to Protection Seller, the delayed compensation amount will be added to such settlement amount, upon delivery by Protection Buyer of the Deliverable Obligation. (b) Delayed Compensation Payments under Auction Transactions

LCDS Delayed Compensation does not apply to LCDS and LCDX transactions that settle at an auction-generated price (Auction Transactions). These include LCDS and LCDX transactions on Reference Entities for which a successful auction is run, as well as trades generated by physical settlement requests submitted into a successful auction. Instead, standard LSTA delayed compensation will apply to Auction Transactions using the NOPS Fixing Date as the LSTA trade date, and subject to the convention for Accrued Interest determined by the Calculation Agent to be the market standard convention applicable to the Deliverable Obligation on that date. (c) Buy-in

Under both Direct-settled Transactions and Auction Transactions, Protection Seller will have a buy-in right to the extent Protection Buyer has not bought in the Deliverable Obligation and delivered settlement documents by the 90th calendar day after the Physical Settlement Date. For the first 30 calendar days of such buy-in right, Protection Seller may purchase the Deliverable Obligation or Deliverable Obligations identified in the NOPS in order to close out all or a portion of the relevant LCDS or LCDX transaction. After such 30-day period and until the transaction is settled in full, Protection Seller may purchase (i) in the case of a Direct-settled Transaction, any other loan satisfying the Syndicated Secured characteristic on 23

the Event Determination Date and satisfying each other Deliverable Obligation characteristic as of the buy-in date, and (ii) in the case of an Auction Transaction, any other Deliverable Obligation specified in the auction settlement terms. Protection Buyer has the right to dispute the Syndicated Secured nature of any Deliverable Obligation under (i), which dispute will be resolved in a manner similar to that described in Section III C above. If Protection Seller chooses to exercise its buy-in right, it must attempt to obtain offers from three or more dealers for the sale of the relevant Deliverable Obligation. The lowest offer will be the Buy-in Price at which the LCDS or LCDX transaction will cash settle, and such settlement will occur on the twentieth business day after the Protection Seller notifies Protection Buyer of the Buy-in Price or Prices. The buy-in transaction will be settled on documentation consistent with market practice applicable to the Deliverable Obligation that may, but is not obligated to, be subject to the Physical Settlement Rider. The documentation governing the buy-in transaction may not, however, be governed by documentation containing provisions more favorable to Protection Seller than those in the Physical Settlement Rider. E. Cash Settlement 1. Cash Settlement Following Attempted Physical Settlement

In the case that either (1) Protection Seller delivers a Cash Election Notice or (2) consents to participation are still pending on the 15th Business Day following a Proposed FallBack Participation Settlement Date or Proposed Initial Participation Settlement Date, the parties immediately move to Cash Settlement. (a) Introduction

The LSTA Confirmation includes settlement default rules familiar to market participants: if a transaction cannot be settled by assignment, such transaction will be settled as a participation, and if the transaction cannot be settled by participation, the transaction will be settled on the basis of a mutually agreeable alternative structure or other arrangement that affords Buyer and Seller the economic equivalent of the agreed-upon trade. This standard is based on the assumption that two parties will be able to reach bilateral agreement on an appropriate cash payment to settle a trade in the event of a failed settlement. While this standard may be appropriate for the cash loan market, more certainty is necessary in the CDS and LCDS markets given (a) the inherent disparity in negotiating power between Protection Buyer and Protection Seller after the occurrence of a Credit Event and (b) the need for fast, efficient settlement. The 2003 ISDA Credit Derivatives Definitions set forth a detailed auction mechanism for cash settlement for these reasons. The partial cash settlement provisions included in the Physical Settlement Rider implement a simplified form of a CDS cash auction. The fallback auction mechanics that apply to standard CDS transactions, which allow for multiple auctions in the event an auction fails to draw bids, have not been included in the Physical Settlement Rider for the sake of simplicity and certainty.

24

(b)

Cash Settlement Timeline

The date which is either (a) the date on which Protection Seller delivers a Cash Election Notice or (b) the 15th Business Day after a Proposed Fall-Back Participation Settlement Date or a Proposed Initial Participation Settlement Date, is called the Cash Settlement Trigger Date. The third Business Day following the Cash Settlement Trigger Date is called the Valuation Date. On that date, the Calculation Agent will conduct an auction for the Deliverable Obligation that has not been delivered, and the results of the auction will determine the Final Price of that Deliverable Obligation, which price will be used to determine the Cash Settlement Amount payable by Protection Seller. The third Business Day following the calculation of the Final Price is called the Cash Settlement Date, which is the date on which the Cash Settlement Amount is paid and the LCDS or LCDX transaction terminates. (c) The Auction

The Calculation Agent will attempt to obtain firm quotations (or guaranteed bids) with respect to the Deliverable Obligation on the Valuation Date from at least five dealers. If the Calculation Agent receives two or more firm quotations, the highest received is the Final Price. If the Calculation Agent receives fewer than two firm quotations, the Calculation Agent will, in consultation with the parties to the LCDS or LCDX transaction, determine the Final Price. The Calculation Agent is obligated to use commercially reasonable efforts to notify Protection Buyer of each firm quotation received, so that Protection Buyer has the opportunity to accept, and transact on the basis of, such bid.

25

The following chart illustrates the timelines constituting cash settlement and the auction process:
PROTECTION SELLER PAYS PAR MINUS FINAL PRICE

PROTECTION SELLER DELIVERS CASH ELECTION NOTICE

ACCEPT BID, DELIVER LOAN TO ANY BIDDER

CASH SETTLEMENT TRIGGER DATE THIRD PARTY CONSENTS TO PARTICIPATION OR SUBPARTICIPATION ARE NOT RECEIVED WITHIN 1 5 BUSINESS DAYS OF PROPOSED FALL-BACK PARTICIPATION SETTLEMENT DATE OR PROPOSED INITIAL PARTICIPATION SETTLEMENT DATE

3 Business Days

VALUATION DATE KEEP LOAN

If Calculation Agent

receives 2 5 Quotes, highest =Final Price

If Calculation Agent

Protection Buyer may

receives fewer than 2 Quotes, Calculation Agent determines Final Price

either sell to any bidder, in which case the winning bidder pays the Final Price, or keep the Loan, in which case no bidder makes a payment

(d)

The Requirements of the Bids

The firm quotations that are submitted by dealers pursuant to the auction outlined above are subject to a number of specific requirements, which are set forth in detail in the Physical Settlement Rider. Dealers must submit bids as opposed to offers, and their bids must be for the entire amount of the Deliverable Obligation that has not been delivered. In addition, dealers submitting bids must comply with the following guidelines: The bid must be for a transaction with Protection Buyer for settlement on an LCDS PSA or Participation Agreement; The bid must be open to Protection Buyer for at least two hours;

The bid must contain a representation that the bidding dealer has completed all know your customer requirements or procedures relating to a transaction with Protection Buyer; and The bid must provide that, if Protection Buyer agrees to deliver the Deliverable Obligation to such dealer on the basis of such bid, the dealer agrees to comply with the timing and other requirements set forth in the Physical Settlement Rider (including executing settlement documents within three Business Days of receipt) and pay a price for such Deliverable Obligation based on the Purchase Price Calculation formula included in the LSTA Confirmation assuming a Purchase Rate equal to such dealer's bid and 26

a Trade Date of the Valuation Date. The dealer must agree to pay this price on the date it executes such settlement documents or, if any third party requirements apply to the transfer, on the date it receives a fully executed set of settlement documents evidencing compliance with all such requirements. (e) Calculation of the Cash Settlement Amount

In the event an LCDS or LCDX transaction closes via Cash Settlement, Protection Buyer can choose to either hit one of the bids received in the auction or keep the Deliverable Obligation. In either case, a Cash Settlement Amount is paid, which amount approximates a payment of par minus recovery value of the Deliverable Obligation. The formula, which appears in Section 1(e) of the Physical Settlement Rider, is based on the Purchase Price Calculation provision contained in Section 4 of the LSTA Confirmation, with an assumed Trade Date set as the Valuation Date. The Purchase Price Differential is equal to: (i) The Purchase Price that would be payable under the LSTA Confirmation assuming a Purchase Rate equal to the Reference Price (typically 100%) minus (ii) The Purchase Price that would be payable under the LSTA Confirmation assuming a Purchase Rate equal to the Final Price. If such amount is positive, then Protection Seller pays a Cash Settlement Amount equal to the Purchase Price Differential to Protection Buyer. If such amount is negative and the relevant transaction is an Auction Transaction, then Protection Buyer will pay the absolute value of the Purchase Price Differential to Protection Seller. The latter requirement is intended to encourage Protection Buyer to proceed with settlement notwithstanding an increase in the price of Deliverable Obligation to a price above par. However, participants in the LSTA market should be cognizant of the fact that the standard LSTA Purchase Price Calculation is modified in the context of LCDS and LCDX transactions. Clauses (c) and (d) of Section 4 of the LSTA Confirmation, which provide that the buyer in an LSTA transaction receives credit for any permanent reductions or nonrecurring fees after the trade date, are ignored for purposes of subsection (ii) of the above calculation. The LSTA conventions dictate that the LSTA buyer should receive the economic benefits of such events that occur after the trade date, in order that the buyer receives the benefit of its bargain, and confers that benefit through a credit to the buyer's purchase price in the amount of (100% minus the Purchase Rate) times the amount of the permanent reduction or nonrecurring fee. According to these conventions, the credit for permanent reductions or nonrecurring fees should be received by Protection Seller, as the buyer of the loan. The LCDS pricing formula however, because it is an equation which subtracts one LSTA purchase price from another, has the potential to distort this intention. Under the formula above, these credits would have the effect of decreasing the result of the calculation in clause (ii), because the Purchase Rate in that portion is likely to be under 100%. However, since that result is subtracted from the result in clause (i), which approximates a par payment because the Reference Price, and thus the Purchase Rate, normally equals 100%, the total Cash Settlement Amount will actually be increased, not decreased, by the amount of the credit. By eliminating clauses (c) and (d) of Section 4 of the LSTA Confirmation, the Cash Settlement Amount will be decreased by the 27

amount of the credit. Thus, the Physical Settlement Rider ensures that the Protection Seller always receives the benefit of such credits in the form of a reduced Cash Settlement Amount10. 2. Cash Settlement Pursuant to a Buy-in

In the event an LCDX or LCDX transaction settles pursuant to a buy-in, the Cash Settlement Amount will be calculated in a manner similar to that described in Section IV E 1(e) above, with the Buy-in Price substituted for the Final Price determined in the partial cash settlement auction run by the Calculation Agent. Protection Seller will pay the Cash Settlement Amount if the Purchase Price Differential is positive, and Protection Buyer will pay the absolute value of the Purchase Price Differential if the Purchase Price Differential is negative and either the relevant transaction is an Auction Transaction or the loan purchased by Purchase Seller is the same loan identified by Protection Buyer in the NOPS. In addition, Protection Buyer will pay any reasonable brokerage costs incurred by Protection Seller to complete the buy-in. V. CONCLUSION

The Physical Settlement Rider includes strict documentation and timing requirements that are intended to promote efficient market-wide physical settlement of LCDS and LCDX transactions. As described in this User's Guide, the Physical Settlement Rider provides various incentives to promote compliance with these requirements. A thorough understanding of these requirements and incentives is necessary in order for participants in the LCDS and LCDX markets to be prepared in the event their transactions settle physically after a Credit Event. Most importantly, market participants are encouraged to review the Physical Settlement Rider itself in conjunction with a review of this User's Guide in order to ensure a complete understanding of the physical settlement mechanism and to better allocate operational resources after a Credit Event.

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The following example illustrates this calculation: Funded principal amount of Deliverable Obligation: $10 million Reference Price: 100% Final Price: 60% Permanent Reduction after Valuation Date: $1 million

Facts:

Example 1: LCDS price without deletion of clauses (c) and (d) of Section 4 of LSTA Confirmation Cash Settlement Amount = 1. (a) (100% x $10 million) minus (b) zero minus (c) (100% minus 100%) x $1 million minus (d) zero MINUS 2. (a) (60% x $10 million) minus (b) zero minus (c) (100% minus 60%) x $1 million minus (d) zero = $10,000,000 MINUS $5,600,000 = $4,400,000 Example 2: Actual LCDS Price Cash Settlement Amount = 1. (a) 100% x $10 million minus (b) zero MINUS 2. (a) 60% x $10 million minus (b) zero = $10,000,000 MINUS $6,000,000 = $4,000,000 In Example 2, Protection Seller received the value of the $1,000,000 permanent reduction in the form of a $400,000 reduction in the Cash Settlement Amount.

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