Silver Point Capital Vendor Financial Services

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Demystifying the Claims Put Option

• Silver Point CapitalVendor Financial Services

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INTRODUCTION TO THE CLAIMS PUT OPTION

• Claims Put Option
• The Claims Put Option was created in response to
  a demand by the vendor community for a risk
  mitigation product that covered distressed and
  difficult to insure accounts. Traditionally,
  credit insurers will only insure a vendors
  entire portfolio of accounts, often excluding
  those accounts that are not rated
  investment-grade by SP or Moodys (the
  Ratings Agencies). They generally do not
  insure just one or two troubled accounts. Also,
  when an insurer becomes nervous about a credit
  due to a downgrade by the Ratings Agencies or
  other material adverse change, they often will
  pull or cancel their coverage on further
  shipments to that credit. This is because the
  purpose of credit insurance is to mitigate the
  risk of loss from catastrophic events, not the
  risk of loss from a slowly deteriorating credit
  limping into bankruptcy protection. Thus, when
  you need credit insurance the most, it is often
  unavailable.
• The Claims Put Option enables a vendor to ensure
  a certain recovery (anywhere from 70 - 100) on
  a distressed account for a certain time period
  (usually anywhere from 6 to 12 months) in the
  event the obligor/customer defaults on payment
  due to a bankruptcy filing or other defined
  insolvency event. Pricing for put coverage (the
  Premium) is based on several factors, including
  the particular obligors creditworthiness,
  product supply and demand, and the size and
  duration of the put contract.

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KEY TERMS IN A CLAIMS PUT OPTION AGREEMENT

• Put Option The Buyer has the right, but not the
  obligation, to sell receivables that become a
  bankruptcy claim for a specific
• period of time at a pre-negotiated price
  (Put Sell)
• Buyer of the The vendor seeking to mitigate or
  hedge its credit risk
• Put Option to a customer
• Seller of the A financial institution that is
  willing to assume the
• Put Option credit risk of the customer for a
  fee (aka Put Underwriter)
• Debtor This is vendors customer and the obligor
  on the receivables

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KEY TERMS IN A CLAIMS PUT OPTION AGREEMENT (Cont.)

• Trigger Event An agreed upon event that must
  occur before the Buyer
• of the Put has the right to put receivables to
  the Seller. Customarily a Chapter 11 or
  Chapter 7 filing, or a publicly announced
  general moratorium on payment to trade vendors
• Put Premium Fee the Buyer pays the Seller
  (similar to the premium
• paid on an insurance policy) for the credit
  protection
• Exercise Price Price at which the Buyer of the
  Put Option has the right to
• (Strike Price) sell the receivables to the Put
  Underwriter
• Maturity The date by which a Trigger Event must
  occur or the Put expires and the Buyer loses
  the right to sell the receivables

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SOME CONSIDERATIONS WHEN PURCHASING A CLAIMS PUT
OPTION

• Counter Party Risk
• Creditworthiness of Put Seller is key
• Knowing your counter party
• References (How was their closing experience?
  How was their experience exercising the Put?)
• Financial Statements (assets under management,
  investor lock-up period, diversification, etc.)
• ? Of the entity that is your counter party on
  the Put Agreement - not the parent, an affiliate,
  or sub
• ? Watch out for shell entities organized to do
  risky deals
• Relationship Builders (Do they want to help the
  credit dept, or gain an entry to the treasury
  dept?)
• Letter of Credit (If counter party risk is a
  concern, can an L/C be provided?)

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CONSIDERATIONS WHEN PURCHASING A CLAIMS PUT
OPTION (Cont.)

• Documentation
• Make sure you know what you are buying ask if
  anything is unclear
• Price is not everything you get what you pay
  for
• Document should be customized to fit vendors
  needs (Nothing is market standard!)
• Things to look for
• Ability of Put Seller to assign their obligation
  (Important)
• ? Will I ever have to deal with anyone but my
  original counterparty?
• Conditions to exercising the Put (Are they
  reasonable?)
• Timing of payment after a Trigger Event (When do
  I get paid?)
• Early termination clauses (Non-starter!)

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COMPARING CLAIMS PUT OPTIONS TO TRADITIONAL RISK
MANAGEMENT PRODUCTS
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HOW DOES A PUT UNDERWRITER HEDGE ITS RISK?

• Shorting a Public Security (Stock or Bonds)
• ? The Put Seller borrows the security and
  simultaneously sells it in the marketplace.
• ? If the price of the stock or bond goes down,
  which will happen in the event of a bankruptcy
  filing, the Put Seller makes money. This acts as
  a form of reinsurance.
• ? However, if the price of the stock or bond
  goes up, which will happen if the credit
  recovers or if the market perceives it as
  recovering, the Put Seller loses money.

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EXAMPLE OF PUT UNDERWRITER HEDGING ITS RISK

• Company ABC is experiencing financial distress
  its vendors seek ways to manage the risk
• Insurers wont underwrite the risk, Put
  Underwriter will because of hedging capability
• So, Underwriter shorts 100 shares of Company
  ABCs stock at 10
• If the stock trades up, Underwriter loses money.
  For example, if the stock moves up to 15 per
  share, Underwriter will lose 500.
• If the stock trades down, Underwriter makes
  money. For example, if the stock moves down to
  2 per share, Underwriter makes 800.
• If the worst-case scenario happens and Company
  ABC files bankruptcy, the 1,000 made by
  Underwriter from the stock short offsets the
  funds paid to vendors

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USING CLAIMS PUT OPTIONS TO INCREASE PROFITS AND
GAIN MARKET SHARE

• Identify customers with internal credit limits
  that are impeding your companys sales growth
• If your profit margin on those accounts exceed
  the cost of the Put Premium, you will increase
  your companys profitability
• Think proactively and lock in long-term
  coverage - then, if the credit of the customer
  continues to deteriorate, you will have the
  comfort and security to continue to ship and gain
  market share from competitors
• Claims Put Options can be used to supplement
  traditional credit insurance

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ABOUT SILVER POINT CAPITAL

• Silver Point Capital is a specialty finance and
  investment company with 6 billion in capital
  that focuses on distressed and other special
  situation investing.
• The Vendor Financial Services Group within Silver
  Point provides credit risk management products
  (such as factoring and Claims Put Options) to
  vendors of companies experiencing financial
  distress and/or bankruptcy.
• Silver Point is one of the largest purchasers of
  bankruptcy claims and distressed receivables in
  the marketplace.
• For further information, please contact
• Brian Jarmain Jason B. Carney
• Director of Business Development Business
  Development
• (203)-542-4032 (203)-542-4034
• bjarmain_at_silverpointcapital.com jcarney_at_silverpoi
  ntcapital.com