iHeartCommunications, Inc.

To: ISDA Credit Derivatives Determinations Committee (Americas)
Re:  iHeartCommunications, Inc. Auction Date

This statement is submitted in connection with a general interest question as to the timing of the auction date for the auction (the “Auction”) to be held with respect to iHeartCommunications, Inc. (“iHeart”).  On December 23, 2016, the ISDA Credit Derivatives Determinations Committee (Americas) (the “DC”) stated that it had heard concerns about a substantial coupon payment due by February 1, 2017 and that certain market participants had raised concerns about the impact on the Auction if settlement of Representative Auction-Settled Transactions were to occur prior to this date.  As a result, the DC concluded that it “therefore anticipates holding the Auction on or after February 1, 2017, consistent with the provisions of Section 3.2(d) of the DC Rules to avoid prejudice to buyers or sellers compared to Physical Settlement.”
 
We agree with the DC conclusions and respectfully disagree with the memorandums #2016123001 and #2017010301, which were respectively published on December 30th, 2016 and  January 3rd, 2017. We believe that holding the Auction on or after February 1st, 2017 is the best outcome to achieve fair result for both protections buyers (“PBs” or “Buyer”) and protection sellers (“PSs” or “Seller”).  We also stress the fact that any other Auction Date will create an inappropriate windfall for PSs to the detriment of PBs contrary to claims made by memos 2017010301 and 2016123001

Since DC’s statement on December 23, 2016, market participants have been engaged in trading iHeartMedia bonds and CDS with the expectation that the auction date will be on or after February 1, 2017. iHeartCommunications is one of the most active CDS names in the high yield credit markets. Any further DC action regarding an auction date change will be akin to a market disruption event that the DC has, in the past, worked hard to avoid.

There have been multiple adjustments to the auction dates in the past to avoid causing market disruptions. In the case of Irish Banks, the DC advanced the auction dates so that there was no disruption in the market and to further accommodate debt to equity conversions. Similar auction date adjustments were made in the case of Greece (so that new bonds could be deliverable in the auction) and American Airlines (by shortening the auction date to 15 days after credit event to facilitate easier settlement for Index Tranches)
 
According to the DC Decision, the Auction mechanics are intended to place the parties to a CDS in the same economic position that they would be in if Physical Settlement applied.  It is our belief that an Auction Date of February 1, 2017 or later mirrors what would likely have taken place in if Physical Settlement applied.  The DC has indicated that a date reflecting this process is best representative of market practice, without any intent to favor either protection buyers or protection sellers. See below the hypothetical timeline with references to the 2014 ISDA Credit Derivatives Definitions.
 
·         The iHeart CDS Event Determination Date was December 20, 2016 as specified in the DC Decision published by the DC on December 21, 2016.
·         If Physical Settlement applies as the Fallback Settlement Method, then pursuant to 8.1 of the 2014 CDS Definitions, on or prior to the Physical Settlement Date, the Buyer shall, subject to 11.2(c)(ii), Deliver to Seller the Deliverable Obligations specified in the Notice of Physical Settlement and Seller shall pay to Buyer the Physical Settlement Amount that corresponds to the Deliverable Obligations that the Buyer has Delivered.
o   8.17- Physical Settlement Date is the last day of the longest Physical Settlement Period following the NOPS Cut-Off Date (January 24, 2017).
o   8.19- Physical Settlement Period is the longest number of Business Days for settlement in accordance with then current market practice of such Deliverable Obligation as the Calculation Agent shall determine after consultation with the parties (market practice for iHeart bonds is the standard 3 business day settlement cycle)
o   8.10(a)(i)- NOPS Cut-Off Date is the thirtieth calendar day after the Event Determination Date (January 19, 2017).
·         11.2(c)(ii)- subject to 9.7, Buyer may deliver only the Deliverable Obligations specified in the Notice of Physical Settlement and only up to the amounts specified therein for each such Deliverable Obligation.  Buyer may continue to attempt to deliver the Deliverable Obligations specified in the Notice of Physical Settlement after the Physical Settlement Date.
·         9.7- at any time after the date that is 5 Business Days after the Physical Settlement Date (February 1, 2017), if Buyer has not Delivered any Deliverable Obligations specified in the Notice of Physical Settlement that are Bonds, Seller may exercise a right to close out all or a portion of the Credit Derivatives Transaction by the purchase of such Bonds under the terms of 9.7 (a “buy-in”).  Seller will provide Buyer 2 or more Business Days notice (which may be provided prior to the expiration of the 5 Business Day period after the Physical Settlement Date) of its intention to buy-in, specifying the date of the anticipated buy-in.

Here the potential Buy-in Date is not until February 1, 2017 reflecting the PBs right to delay settlement following the Physical Settlement Date,  and thereby eliminating the risk of a lost interest payment.  Again, as the PB has this right, it is not an inappropriate eschewing of the economics of the settlement of the CDS for them to make this election.  A PB would have the right to assume the risk that delayed settlement could lead to a lower recovery as a result of a PS’s right to Buy-In.  This is the intent of the CDS Definitions.

 We support the DC Decision and agree that selecting an Auction Date on or after February 1, 2017  best reflects the economic expectations of the parties in respect of Physical Settlement. 

 
We confirm that a copy of this statement may be provided for information purposes only to the members of any Credit Derivatives Determinations Committee convened under the DC Rules in connection with the iHeartCommunications, Inc. General Interest Question to consider the issues discussed herein, and that it may be made publicly available on the ISDA Credit Derivatives Determinations Committee website. We accept no responsibility or legal liability in relation to its contents.