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Welcome to the

Welcome to the. 36 th Bond Attorneys’ Workshop. It’s a Contact Sport: Corporate Trust Concerns that Bond Attorneys Need to Anticipate. 36 th ANNUAL BOND ATTORNEYS’ WORKSHOP October 12-14, 2011.

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  1. Welcometo the 36th Bond Attorneys’ Workshop

  2. It’s a Contact Sport:Corporate Trust Concerns that Bond Attorneys Need to Anticipate 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  3. Bryant D. BarberLewis and Roca LLP, Phoenix, ArizonaVirginia A. HousumWells Fargo Bank, N.A., Minneapolis, MinnesotaPatrick J. McLaughlinDorsey & Whitney, LLP, Minneapolis, MinnesotaDavid J. FernandezCarter Ledyard & Milburn LLP, New York, New York Panelists 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  4. Panel Agenda Points of Emphasis (Take Aways) Defensive Drafting Context: The Role of the Trustee and Common Misconceptions Structuring: Document “Hot Buttons” and Drafting Suggestions Embracing the Worst Case: Default Administration 101 Recent Litigation of Interest 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  5. Each material provision of an indenture must be viewed from the post-default perspective of bondholders trying to maximize their net recovery. Bond attorneys can reduce their exposure (claims and reputational damage) by making certain that bondholders (or the Trustee acting on their behalf) have a clear legal and factual basis to enforce the underlying documents. Points of Emphasis (Take Aways) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  6. 3. The draftsperson has to think through the mechanical steps and the timing of any instruction to the Trustee that pertains to each material servicing function (e.g., investing trust funds, collecting revenues, monitoring the obligor, responding to incipient defaults, and enforcing remedies). Incomplete or ambiguous instructions may provide a basis for complex and protracted litigation. 4. The parties to an indenture and the related financing documents are constantly engaged in managing and reallocating risk and expense. Careful drafting that anticipates pragmatic solutions is essential to minimizing bad behavior. Points of Emphasis (Take Aways)(continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  7. 1. Transaction Counsel Must Anticipate Defaults Investors Expect A (Relatively) Clear Path to Sources of Payment and Security Strength of the Credit: No Defense For Poor Drafting Lack of Clarity in Financing Documents is Fuel for Protracted Litigation Document Provisions Pertaining to the Administration of Remedies are Ripe with Exposure 2. Understand the Context: Risk Identification 3. Structure with a Purpose: Risk Allocation 4. Embrace the Worst Case Scenario: Risk Management Defensive Drafting 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  8. Why a Trustee? Pre-Default Duties Nature and Source Contractual in Nature Express Duties; No Implied Duties Depends, in part, on Specific Terms of Financing Documents Typical Pre-Default Duties Context: The Role of the Trustee and Common Misconceptions 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  9. 3. Common Misconceptions Discretionary Decision-Making Trustee Functioning as Lender Powers to Extend Waivers Duty to Investigate, Inquire or Engage in Affirmative Monitoring Investment Management Disclosure Compliance Context: The Role of the Trustee and Common Misconceptions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  10. 4. Post Event of Default Duties Heightened Standard of Care: “Prudent Person”/”Prudent Corporate Trustee” Fiduciary in nature Charged to exercise “the rights and powers vested in it by” the indenture (or bond resolution) Traditional: acceleration, collection actions, foreclosure and liquidation of collateral Possible alternative undertakings: depends on circumstances and terms of the applicable documents – work-out, forbearance agreements, restructuring, mandamus or other injunctive remedy, receivership Control issues: controlling party (bondholders vs. credit enhancer), majority bondholder direction, advocating minority interests Non-impairment clauses or other restrictions Use of advisors and experts Recovery of costs and expenses Context: The Role of the Trustee and Common Misconceptions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  11. Enhanced language to address financial decline of Insurers or Credit Enhancers Define “material and adverse effect” on Bondholders Improving access to information pre and post default Alternative terms concerning removal, replacement or resignation of Trustee Enhanced terms concerning covenant (non-payment) breaches and retention of consultants Enhanced definition of defaults/events of defaults Addition of the concept of “Trustee Default” and “Trustee Cure Period”, especially in agreements such as forward purchase or forward delivery agreements Structuring: Document “Hot Buttons” and Drafting Suggestions 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  12. 8. Trustee discretion or responsibility over investment selection (even if exculpated from loss) of funds held in trust accounts (and related “Eligible Investments” or “Permitted Investments” issues). Example: “…Funds held in the [_____] Account shall be invested in Eligible Investments selected by the Trustee…” or “Funds held in the [_____] Account shall be invested in Eligible Investments selected by the Borrower or, if the Borrower shall fail for three (3) consecutive Business Days to so instruct the Trustee, by the Trustee…” 9. Stated or implied responsibility for UCC perfection. Example: “The Trustee shall take such action as may be necessary to maintain the perfection of the security interest granted hereunder” or “The Trustee shall prepare and file UCC continuations statements, and shall take such other actions, as may be necessary to maintain the perfection and priority of the security interests granted hereunder.” Structuring: Document “Hot Buttons” and Drafting Suggestions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  13. 10. Responsibility to affirmatively review or evaluate construction fund requisitions (or supporting materials) or to exercise discretion regarding the same. Example: Terms allowing withdrawal upon requisition “approved by the Trustee” or “in form and content acceptable to the Trustee” or “upon such requisition and supporting materials as the Trustee mat require” or calling for surveys, title reports, etc to be “acceptable to the Trustee or as it may require.” 11. Responsibility to affirmatively review or evaluate borrower financial reports, management reports, rebate certificates or continuing disclosure reports. Example: Terms stating or implying review or approval by the Trustee, or calling for the same to be “in form and content acceptable” to the Trustee; or failing to state affirmatively that the Trustee is not under a responsibility to review or examine the content. Structuring: Document “Hot Buttons” and Drafting Suggestions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  14. 12. Terms treating the Trustee as a “lender” exercising business discretion (pre-default) in the administration of a loan (unless accompanied by a clear objective standard to apply): Example: Covenants prohibiting or restricting actions “unless consented to by the Trustee” or allowing actions “upon such terms as the Trustee may approve” or calling for required opinions or similar deliverables to be “as may be required by the Trustee.” 13. Any deviation from the commonly accepted pre-default (strictly contractual) and post-default ("prudent person“) Trustee standard of care. Example: “The Trustee shall take whatever action is necessary to protect the interests of Noteholders.” Instead, should be: “Except upon the occurrence and during continuance of an Event of Default the Trustee shall have only such duties as are expressly set forth herein… Upon the occurrence and during continuance of an Event of Default, the Trustee exercise such of the rights and powers vested in it by the indenture, using the same degree of care and skill in their exercise, as a prudent person would under the circumstance in the conduct of his or her own affairs.” Structuring: Document “Hot Buttons” and Drafting Suggestions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  15. 14. Lack of appropriate indemnification, expense recovery or charging lien. Example: Indenture trustee should be provided complete indemnification from any expense, loss and liability (including attorneys fees and expenses) incurred in the acceptance or performance of its duties or administration of the trusts which it has been charged to administer (often qualified to exclude losses caused by its own [gross] negligence or willful misconduct); recovery of amounts owing to the Trustee should be included as a secured obligation in all granting language; and Trustee should be granted a charging lien ahead of bond holders. 15. Lack or absence of standard Trustee protections: Example: Should be an express recitation of the standard, commonly accepted indenture trustee immunities and protections, such as: Trustee ability to rely on documents it receives in good faith without investigation; ability to receive and rely on advice of counsel; not liable for errors of judgment unless negligent in ascertaining facts; not obliged to take action unless indemnified to its satisfaction against expense and liability; etc. Structuring: Document “Hot Buttons” and Drafting Suggestions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  16. 16. Terms calling for “material adverse affect on bondholders” to be determined by the Trustee. Example: Indenture amendment section permitting amendments meeting stated criteria, followed by something like: “Notwithstanding any term herein to the contrary, the Trustee shall not enter into any amendment having a material adverse effect on bondholders.” 17. Terms improperly imposing any responsibility for tax-exempt qualification on the Trustee, expressly or impliedly. Example: “Notwithstanding any term herein to the contrary, the Trustee will not take any action that would cause interest on the bonds to fail to be exempt from federal taxation.” Or similar terms, in different contexts. Structuring: Document “Hot Buttons” and Drafting Suggestions (continued) 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  17. Embracing the Worst Case: Default Administration 101 • Guiding Principles • Process is Paramount • Timely and Reasonably Detailed Communication is Essential • The Privileges and Immunities Conferred on the Trustee in the Trust Indenture are Not Self Executing • Strategically Managing the Record will Provide the Trustee Advantages over the Course of the Case • Good Case Management Demands Strong Budget Management 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  18. Embracing the Worst Case: Default Administration 101(continued) • Assessment of Rights and Remedies of the Trustee and the Bondholders Upon Event of Default • Duties and Obligations of the Trustee • Rights of the Trustee to Access Trust Funds and Future Revenues to Pay Costs and Expenses • Rights of the Trustee to Indemnification and Exoneration • Rights of the Bondholders to Direct Proceedings • Rights of Third Parties to Participate in or Control the Direction of Proceedings 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  19. Embracing the Worst Case: Default Administration 101(continued) • Organize Administration Infrastructure • Common Interest Agreements • Bondholder Direction and Indemnity Agreements • Bondholder Communications • Financial Advisory Services • Addressing Potential Conflicts of Interest and Positional Conflicts 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  20. Embracing the Worst Case: Default Administration 101(continued) • Assessment of Surrounding Facts • Default Recognition: Understanding the Cause and Extent of the Default • Deciphering Financial Reporting • Determine the Physical Status of the Project • Determine the Identity of the Parties and Their Relationships to the Borrower and the Project • Determine the Status of Performance Under Contract Rights which Benefit Either the Borrower or the Project • Determine the Amount and Nature of Pending or Contingent Claims Against the Borrower and the Project 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  21. Embracing the Worst Case: Default Administration 101(continued) • Assessment of Terms and Conditions in Documents • Outline of Flow of Funds • Review Scope of Covenants and Reporting Requirements • Survey of Documents Purporting to Grant or Perfect Liens and Security Interests • Conditions to Noticing and Acting Upon Events of Default • Identify Intercreditor Concerns • Tax Compliance 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  22. Embracing the Worst Case: Default Administration 101(continued) • Conduct Substantive Analysis of Workout Potential • Determine Need for Expedited Injunctive Relief • Statutes of Limitations, Statutes of Repose and Time Bars to Enforcement • Claims against Guarantors and Sureties • Survey Assets and Cashflows Potentially Available for Use in the Workout • Survey Management and Control Devices Available During the Workout • Obtain Estimates of Workout Costs and Benefit • Assess Risk of Lender Liability • Determine the Ramifications of a Voluntary or Involuntary Filing Under the Bankruptcy Code During the Course of the Workout • Making a Reasonable Estimate of the Results of a Successful Workout 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  23. Embracing the Worst Case: Default Administration 101(continued) • Formulation of a Workout Plan • Gaining Control of the Workout • Define the Limits of the Borrower’s Ability to Manage the Workout • Traditional Commercial Law Courses of Action • State Law Constraints • Tax Planning • Timetables for Performance 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  24. Embracing the Worst Case: Default Administration 101(continued) • Implementation of the Workout Plan • Creation of Priorities Among Creditors • Management and Operating Controls • Collateral • Documentation • Conclusion of Workout Arrangements • Settlement Agreements • Trust Instructions and Bankruptcy Orders • Document Closings 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

  25. Recent Litigation of Interest 36th ANNUAL BOND ATTORNEYS’ WORKSHOPOctober 12-14, 2011

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