1987 ISDA Interest Rate and Currency Exchange Agreement
A Jolly Contrarian owner’s manual™
Affected Party and 5(b) in a Nutshell™
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Original text
“Affected Party” has the meaning specified in Section 5(b).
5(b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below, a Tax Event Upon Merger if the event is specified in (iii) below or a Credit Event Upon Merger if the event is specified in (iv) below:-
- (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which such Swap Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):-
- (1) to perform any absolute or contingent obligation to make a payment or to receive a payment in respect of such Swap Transaction or to comply with any other material provision of this Agreement relating to such Swap Transaction; or
- (2) to perform, or for any applicable Specified Entity to perform, any contingent or other obligation which the party (or such Specified Entity) has under any Credit Support Document relating to such Swap Transaction;
- 5(b)(ii) Tax Event.
- (1) The party (which will be the Affected Party) will be required on the next succeeding Scheduled Payment Date to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e)) as a result of a Change in Tax Law; or
- (2) there is a substantial likelihood that the party (which will be the Affected Party) will be required on the next succeeding Scheduled Payment Date to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e)) and such substantial likelihood results from an action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which such Swap Transaction was entered into (regardless of whether such action was taken or brought with respect to a party to this Agreement);
- 5(b)(iii) Tax Event Upon Merger. The party (the “Burdened Party”) on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount, in either case as a result of a party consolidating or amalgamating with, or merging into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); or
- 5(b)(iv) Credit Event Upon Merger. If “Credit Event Upon Merger” is specified in Part I of the Schedule as applying to the party, such party (“X”) consolidates or amalgamates with, or merges into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity (which will be the Affected Party) is materially weaker than that of X immediately prior to such action.
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Resources and Navigation
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Comparisons
Not even ISDA’s crack drafting squad™ could confect something worthwhile to say which might improve this Spartan piece of text. But note the concept of Affected Party is sprayed liberally throughout Section 5(b), and it means something different in almost every context so you’re guaranteed to have fun there.
Elsewhere there is much monkeying around as regards the concept of Illegality, particularly insofar as it relates to Credit Support Documents, and the newly introduced Force Majeure.
Basics
The Affected Party is the one who is subject to a Section 5(b) Termination Event, as opposed to the perpetrator of a Section 5(a) Event of Default — thus one of a marginally less opprobrious character, seeing as Termination Events are generally not considered to be one’s fault as such, but just regrettable things that happen that no-one expected, or wanted, but bring what was once a beautiful relationship to an end.
It’s not you, it’s — well, it’s not me either — it’s just that confounded tax event that occurred upon your recent merger.
Note that, in its wisdom, ISDA’s crack drafting squad™ chose not to have a generic term for the sort of person who is subject to either a Termination Event or an Event of Default, so there is much “Defaulting Party and/or Affected Party, as the case may be” sort of malarkey. This depresses we prose stylists, but ISDA’s crack drafting squad™ has never cared about us, so we should hardly be surprised.
Practical differences between “Affected Party” and “Defaulting Party”
What is the practical, economic difference between being closed out on the same Transaction for an Event of Default and a Termination Event?
This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it in simple English.
To be fair the topic might be chiefly of academic interest were it not for the unfortunate habit of the same “real world” event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. What if my Tax Event upon Merger is also a Credit Event Upon Merger and, for that matter, also a Force Majeure Event? That kind of question.
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See also
References