iHeartCommunications, Inc.

This statement is submitted in connection with the resolution of the ISDA Credit Derivatives Determinations Committee (Americas) (the “DC”) to hold one or more auctions to settle Relevant Transactions with respect to the Failure to Pay Credit Event regarding iHeartCommunications, Inc. (“iHeart”) in order to request that an additional issue be deliberated by the convened DC.  We understand the DC is scheduled to discuss auction details on December 22, 2016, and we respectfully request that the DC consider such auction details in light of two key facts that make iHeart’s situation unusual.

First, as often is not the case in typical CDS auctions, the Deliverable Obligations with respect to iHeart CDS are still performing, and current interest thereon is expected to be timely paid in full.  Second, iHeart’s 14% senior notes due 2021 (the “14% Notes”), which are expected to be the cheapest to deliver of the Deliverable Obligations, are nearing the end of a semiannual interest period, with the next interest payment date scheduled to occur on February 1, 2017.  For the reasons discussed below, we respectfully request that the DC set the Auction Date such that the Auction Settlement Date would occur on or shortly after February 1, 2017 (i.e., on or shortly after the next interest payment date of the 14% Notes) to minimize potentially skewed auction results.

The convention for auction settlement, based on previous auction settlement terms, provides that participating bidders submit bids for the Deliverable Obligations that take into account accrued and unpaid interest expected to be received by a buyer of the relevant obligation.  Since the February 1, 2017 interest payment date for the 14% Notes is approaching, a significant amount of unpaid interest on the 14% Notes has accrued.  If participating bidders submit bids for the Deliverable Obligations that reflect the likelihood of payment and expected receipt of such interest, the Auction Final Price in the iHeart auction will be artificially inflated due to the considerable accrued interest component reflected in the bids.  Ordinarily, an Auction Final Price does not reflect an expectation of a significant, if any, interest payment, since Reference Entities experiencing a Failure to Pay Credit Event typically are not paying current interest on any of their obligations. However, since iHeart is expected to continue to pay current interest on the 14% Notes, any auction settlement prior to the February 1, 2017 interest payment date for the 14% Notes will result in protection buyers receiving a payment from protection sellers that effectively deducts the accrued and unpaid interest on the 14% Notes, and any protection buyers who beneficially own the 14% Notes will be effectively deprived of the accrued and unpaid interest earned during the period they held the 14% Notes.  If, however, the settlement date for the auction occurs on February 1, 2017 or shortly thereafter, the bid prices and the Final Price in the auction (and therefore the Auction Settlement Amount paid by the protection seller) will not be skewed by a significant amount of accrued and unpaid interest (if any).

We respectfully request that the settlement date for the iHeart auction be set no earlier than February 1, 2017 in order to ensure that accrued and unpaid interest does not unduly affect the Auction Final Price.  As CDS are intended to protect against an impairment of the principal amount of the reference obligation, accrued and unpaid interest at the time of the auction should not significantly impact the amount recoverable by protection buyers.  At the inception of a CDS, a protection seller is not expecting to receive current interest payments in respect of Deliverable Obligations that are subject to a Failure to Pay Credit Event (even more so in respect of periods prior to the occurrence of such a Credit Event).  Conversely, protection buyers who also held Deliverable Obligations rightly expect to receive accrued interest paid on performing Deliverable Obligations they carried. A settlement of the auction before February 1, 2017 would result in an effective transfer of accrued and unpaid interest from the holders of the 14% Notes (i.e., CDS protection buyers) to the protection sellers—in essence, unfairly depriving protection buyers who are noteholders from of interest accrued by decreasing the Auction Settlement Amount through increased bid prices (which reflected the accrued and unpaid interest).  We respectfully submit that it is more equitable to allow the payment of interest that has accrued on obligations held by the protection buyers and holders of the 14% Notes to them rather than transferring the benefit of the accrued and unpaid interest to the protection sellers, who are not lenders to the Reference Entity.  In the instant case, the amount of the transfer could be as high as 7% of the notional principal amount of the 14% Notes. Therefore, we believe it would be most fair and equitable to set the Auction Date such that settlement of the auction occurs no earlier than February 1, 2017 since such settlement date would minimize or even eliminate any transfer of amounts in respect of accrued and unpaid interest between the parties to CDS.

Furthermore, a distortion of the Auction Final Price determined pursuant to the CDS auction will have knock-on effects, as the recovery level will be used to set cash settlement amounts for other related products (e.g., recovery locks of iHeart CDS and various series of the CDX North America High Yield Index as well as all associated Tranche products related to the index).  An Auction Final Price that incorporates accrued and unpaid interest on the 14% Notes will not be consistent with quoted prices for the 14% Notes and would distort the settlement for such other related products.  This would likely have the effect of artificially creating a materially different Auction Final Price when compared to the observable market clearing price for the cheapest to deliver Deliverable Obligation traded in the market at the same time as the auction, inconsistent with previous CDS auction results.  Setting the Auction Date such that settlement occurs on or shortly after February 1, 2017 would essentially eliminate this potential disparity and make the auction results consistent with previous auctions.

Although the DC Rules provide a general guideline for the Auction Date to be the third business day preceding the 30th calendar day after a Credit Event Resolution Request Date, it is both within the DC’s discretion and consistent with the DC’s past practice to set the Auction Date to a later date.  See Rule 3.2(b) of the DC Rules; see e.g., Alpha Appalachia Holdings, Inc. (where the Auction Date was 45 days after the related Credit Event Resolution Request Date); Abengoa S.A. (the Auction Date was 35 days after the Credit Event Resolution Request Date); Caesars Entertainment Operating Company Inc. (the Auction Date was 34 days after the Credit Event Resolution Request Date) and Sino Forest Corporation (the Auction Date was 37 days after the Credit Event Resolution Request Date).
 As an alternative to scheduling the auction such that the Auction Settlement Date occurs on or shortly after February 1, 2017, the DC could adopt auction settlement terms that expressly address the allocation of accrued interest to achieve the allocation described above.  However, we believe setting the Auction Date such that the Auction Settlement Date occurs on or shortly after February 1, 2017 would resolve the issue without the need for the iHeart auction terms to deviate from prior precedent.