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Rauxon Energy Co. Sales Presentation Downgrade Contingent Protection on UJB

Rauxon Energy Co. Sales Presentation Downgrade Contingent Protection on UJB. Stanley Securities September 23, 2010. The World Class Team.

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Rauxon Energy Co. Sales Presentation Downgrade Contingent Protection on UJB

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  1. Rauxon Energy Co. Sales PresentationDowngrade Contingent Protection on UJB Stanley Securities September 23, 2010

  2. The World Class Team David Lin, Investment Grade Credit ResearchShengbiao Luo, Credit Hybrids SalesCasey Wang, Market Risk ManagementGeorge Wang, Credit Hybrids TradingPeilin Zhang, Quantitative Credit Strategies

  3. Agenda • The Objective • The solution – downgrade contingent protection • Cashflow • Payoff Scenarios • Cost Analysis • Suitability and limitation • Appendix – Term Sheet

  4. The Objective • Offer counterparty default protection against deep in the money FX Forward: • Counterparty: UJB Financial • Notional: 500MM EUR • Time to maturity: 3 years • Contractual forward price: $1.024/EUR • Spot USD/EUR rate: $1.22/EUR • Current Exposure: $98MM • Need protection against UJB’s gradual financial distress

  5. The Solution Rating Contingent Credit Default Swap (RCCDS) • Credit protection contingent on rating downgrade • Notional of default payoff contingent on mark to market value of FX forward • $0.5MM savings in protection cost

  6. Cash flows UJB downgrades Risk Leg Time Premium Leg

  7. Payoff Scenario

  8. RCCDS is Cost Effective 25% reduction in premium compared with full protection * Based on current MV of FX forward, future exposure may vary

  9. Suitability and Limitations • No protection against out of blue default • May need to remake the FX Forward trade • Cost: $50K

  10. $500,000 to your bottom line

  11. Term Sheet • Protection Seller: Stanley Securities • Protection Buyer: Rauxon Energy Co. • Trade Date: 10/1/2010 • Expiration Date: 9/30/2013 • Reference Entity: UJB Financial Seller Pays: • Payoff: (FX Forward Market Value)+ × (1 – Recovery) • Credit Event: Downgrade, followed by bankruptcy • Settlement: Cash (USD) Buyer pays: • 56 bps on $98MM notional • Standardized quarterly schedule

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