Message-ID: <7730853.1075858594549.JavaMail.evans@thyme> Date: Fri, 21 Sep 2001 12:25:24 -0700 (PDT) From: brent.hendry@enron.com To: kimberly.donohue@saccapital.com Subject: FW: Revised Loss Definition.DOC Cc: legal <.taylor@enron.com>, tanya.rohauer@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable Bcc: legal <.taylor@enron.com>, tanya.rohauer@enron.com X-From: Hendry, Brent X-To: 'kimberly.donohue@saccapital.com' X-cc: Taylor, Mark E (Legal) , Rohauer, Tanya X-bcc: X-Folder: \MTAYLO1 (Non-Privileged)\Taylor, Mark E (Legal)\Deleted Items X-Origin: Taylor-M X-FileName: MTAYLO1 (Non-Privileged).pst Kim,=20 I have reviewed the language your counsel sent and have discussed it with o= ur General Counsel. We can agree to remove the loss of bargain concept but= not the other two damage concepts. We do not agree to the removal of "cos= t of funding" since this can be a very real issue when a replacement transa= ction requires a premium to be paid because of the off-market position. Pr= emiums for such positions will have a cost of funding component. The remov= al of the concept of "loss or cost incurred as a result of terminating, liq= uidating, or obtaining or reestablishing a hedge or trading position" is al= so a very real factor in calculating damages. It may very well be that the= termination of a hedge is the more cost effective alternative to replacing= the transaction. Furthermore, the you can obtain the same effect of termi= nating a hedge by entering into an offsetting transaction (the equivalent o= f a replacement transaction) rather than an outright termination with the h= edge counterparty. Because the termination of a hedge is the other side of = the coin, so to speak, it makes sense to leave it in the definition of Loss= . We can clarify that such losses and costs are without duplication, which= I think was one of your outside counsels concerns. The definition of Loss= as was written is designed so that the Non-defaulting party can recover th= e actual damages occasioned by the Defaulting Party's failure to perform. = If the Defaulting Party objects to the Non-defaulting Party's calculation t= hen such calculation would be subject to negotiation or litigation and fina= l determination by a New York court. =20 We would propose modifying your changes to read as follows:=20 Insert the following into Part 1(e), after the period at the end thereof. = =20 "The definition of Loss shall be amended and restated in its entirety as fo= llows:=20 "Loss" means, with respect to this Agreement or one or more Terminated Tran= sactions, as the case may be, and a party, the Termination Currency Equival= ent of an amount that party reasonably determines in good faith and in a co= mmercially reasonable manner its total losses and costs (or gain, in which = case expressed as a negative number), without duplication, in connection wi= th this Agreement or that Terminated Transaction or group of Terminated Tra= nsactions, as the case may be, including any cost of funding or, at the ele= ction of such party but without duplication, loss or cost incurred as a res= ult of its terminating, liquidating, obtaining or reestablishing any hedge = or related trading position (or any gain resulting from any of them). to = be equal to the actual replacement cost to that party in entering into a re= placement transaction. Loss does not include any loss of bargain, cost of = funding or, loss or cost incurred as a result of its terminating, liquidati= ng, obtaining or reestablishing any hedge or related trading positions. Fu= rthermore, Loss does not include loss of bargain, or a party's legal fees = and out-of-pocket expenses referred to under Section 11. A party will dete= rmine its Loss as of the relevant Early Termination Date, or, if that is no= t reasonably practicable, as of the earliest date thereafter as is reasonab= ly practicable. A party may (but need not) determine its Loss by reference= to quotations of relevant rates or prices from one or more leading dealers= in the relevant market." If the concept of a Replacement Value is preferable to you we are also wil= ling to use the following definition, which was originally drafted by Goldm= an Sachs, in lieu of the Loss definition. =20 "Replacement Value" , means, with respect to each Terminated Transaction or= group of Terminated Transactions, as the case may be, and a party, an amou= nt that the party (the "Determining Party") or its agent determines in good= faith and in a commercially reasonable manner to be its total losses and c= osts (or gains, in which case expressed as a negative number) in connection= with that Terminated Transaction or group of terminated Transactions. A D= etermining Party (or its agent) may determine Replacement Values for all Te= rminated Transactions, any group of Terminated Transactions or individual T= erminated Transactions, and may apply different valuation methods to differ= ent Transactions or groups of Transactions. A Determining Party (or its a= gent) will determine Replacement Values for all Terminated Transactions as = of the Early Termination Date, or, if that would not be commercially reason= able, as of the latest date or dates before or the earliest date or dates a= fter the Early Termination Date as would be commercially reasonable under t= hen prevailing circumstances. The definition of Loss would be replaced throughout the ISDA by the definit= ion of Replacement Value. =20 We hope that one of these definitions will work for you. Please call if yo= u have any questions or comments on the definitions. Regards, Brent