Subject: FW: Revised Loss Definition.DOC
From: [email-masked]
To: [email-masked]
Cc: legal <[email-masked]>, [email-masked]
Date: Fri, 21 Sep 2001 12:25:24 -0700 (PDT)

Kim, 

I have reviewed the language your counsel sent and have discussed it with our 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 "cost of funding" since this can be a very real issue when a replacement transaction requires a premium to be paid because of the off-market position.  Premiums for such positions will have a cost of funding component.  The removal of the concept of "loss or cost incurred as a result of terminating, liquidating, or obtaining or reestablishing a hedge or trading position" is also 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 terminating a hedge by entering into an offsetting transaction (the equivalent of a replacement transaction) rather than an outright termination with the hedge 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 the actual damages occasioned by the Defaulting Party's failure to perform.  If the Defaulting Party objects to the Non-defaulting Party's calculation then such calculation would be subject to negotiation or litigation and final determination by a New York court.  

We would propose modifying your changes to read as follows: 

Insert the following into Part 1(e), after the period at the end thereof.  

"The definition of Loss shall be amended and restated in its entirety as follows: 

"Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith and in a commercially reasonable manner its total losses and costs (or gain, in which case expressed as a negative number), without duplication, in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result 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 replacement transaction.  Loss does not include any loss of bargain, cost of funding or, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading positions.  Furthermore, 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 determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably 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 willing to use the following definition, which was originally drafted by Goldman Sachs, in lieu of the Loss definition.
  
"Replacement Value" , means, with respect to each Terminated Transaction or group of Terminated Transactions, as the case may be, and a party, an amount 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 costs (or gains, in which case expressed as a negative number) in connection with that Terminated Transaction or group of terminated Transactions.  A Determining Party (or its agent) may determine Replacement Values for all Terminated Transactions, any group of Terminated Transactions or individual Terminated Transactions, and may apply different valuation methods to different Transactions or groups of Transactions.   A Determining Party (or its agent) will determine Replacement Values for all Terminated Transactions as of the Early Termination Date, or, if that would not be commercially reasonable, as of the latest date or dates before or the earliest date or dates after the Early Termination Date as would be commercially reasonable under then prevailing circumstances.

The definition of Loss would be replaced throughout the ISDA by the definition of Replacement Value.  

We hope that one of these definitions will work for you.  Please call if you have any questions or comments on the definitions.

Regards,
Brent