MONTREAL, Sept. 28 /CNW Telbec/ - Global Diversified Investment Grade
Income Trust ("Global DIGIT") (TSX: DG.UN) announces that it has entered into
a standstill agreement with MMAI-I Trust ("MMAI") in order to formalize
arrangements between Global DIGIT and MMAI under the financial contracts
between them and preserve their respective rights and entitlements, (including
those of their creditors). Pursuant to the standstill agreement, transactions
under such financial contracts that (i) give rise to redemption payments will
be suspended and (ii) generate funds to pay monthly distributions will
continue, but the funds collected under these transactions will be deposited
in a segregated escrow account to be released to Global DIGIT or MMAI in
accordance with their respective rights to such amounts as they may be
ultimately determined. Consequently, the previously announced suspension of
distributions and redemptions will continue until conditions otherwise allow
for their resumption thereof, which is the objective of the Trustees. The
standstill agreement terminates on October 15, 2007, but may be extended by
mutual consent or terminated earlier in limited circumstances or by either
party upon 15 days prior notice.
On August 15, 2007, Global DIGIT announced that it was suspending
distributions as it had been notified by MMAI that MMAI was withholding
payments to Global DIGIT. On August 23 and August 28, 2007, Global DIGIT
further announced that it was suspending distributions and redemptions due to
insufficient resources resulting from MMAI's liquidity problems and inability
to roll over its maturing commercial paper, and that any restructuring of
MMAI's commercial paper may have an as yet undetermined impact on the
continuity and size of payments made to Global DIGIT under the financial
contracts between Global DIGIT and MMAI. Such financial contracts, together
with the financial assets related to them, constitute most of the assets of
MMAI is one of the trusts referred to in an agreement among a number of
financial institutions which was reported in a press release on August 16,
2007 and in the press release on September 6, 2007 announcing the formation of
a PanCanadian Committee to oversee third party commercial paper restructuring
GLOBAL DIGIT ANSWERS SOME QUESTIONS FREQUENTLY ASKED BY INVESTORS
See Appendix A.
About Global DIGIT
Global DIGIT provides an economic interest in a mezzanine tranche of
credit default swap agreements in respect of portfolios of mortgage-backed
securities, asset-backed securities, structured finance securities and
synthetic corporate exposures.
MMAI is a special purpose vehicle rated R-1(high) (short-term) and AAA
(long-term) by DBRS that funds the purchase of eligible assets by issuing
asset-backed commercial paper, extendible commercial paper and floating rate
Q1. I have been following the news about the turmoil in the asset-backed
commercial paper market, but I do not understand how this affects my
investment in Global DIGIT. What is the connection?
A1. Global DIGIT is a publicly-traded investment fund the assets of which
comprise three financial contracts or credit default "swaps", and the
related collateral, entered into with MMAI. MMAI, in turn, has
entered into three mirror credit default swaps with a large
international bank ("Bank"). MMAI has also entered into three other
swaps with the Bank, in respect of which, and in order to purchase
the necessary collateral, MMAI issued asset-backed commercial paper.
MMAI is one of the 22 third party structured asset backed commercial
paper trusts identified in the "Montreal Proposal". Since mid-August,
2007, MMAI has been unable to roll over its maturing commercial
paper. Following this inability to fund itself, MMAI has not repaid
principal nor has it paid interest on its commercial paper. MMAI is
conserving all of its financial resources in anticipation of a
possible restructuring which may emerge from the parties to the
As a counterparty with MMAI under the three swaps, Global DIGIT would
ordinarily expect to continue to receive payments from MMAI. In the
view of MMAI, the terms of its financial arrangements with Global
DIGIT allow it, in certain circumstances, to retain funds otherwise
payable to Global DIGIT and these circumstances are currently
applicable. Global DIGIT has not agreed to this interpretation of the
financial arrangements but has agreed to standstill for the time
being to allow the proposed restructuring plan to be developed.
At the present time it is not possible to determine what the final
repercussions of the turmoil in the asset-backed commercial paper
market will be on Global DIGIT.
Q2. Why do the financial statements of Global DIGIT contain such a large
amount of debt?
A2. Under Canadian generally accepted accounting principles ("GAAP"), the
financial statements of Global DIGIT are consolidated with the
financial statements of MMAI, and therefore include all of MMAI's
debt, including its outstanding commercial paper. Except for accounts
payable and similar liabilities, all of the debts shown on Global
DIGIT's consolidated financial statements are debts of MMAI.
Q3. Is Global DIGIT liable for the debts of MMAI?
A3. No, Global DIGIT is not directly liable for the debts of MMAI (other
than to guarantee MMAI's obligations under the mirror swaps).
However, the legal position of Global DIGIT as a creditor of MMAI and
owner of collateral, and its effective ranking in relation to other
creditors of MMAI, is still being discussed with MMAI. It is for this
reason and to protect the rights of Global DIGIT to amounts held by
MMAI, that Global DIGIT and MMAI have entered into the standstill
Q4. Have any credit defaults occurred in respect of reference obligations
to which Global DIGIT is exposed under the swaps?
A4. Through its swaps, Global DIGIT is exposed to credit defaults in the
reference obligations included in three portfolios of reference
obligations. Since inception, no credit default has occurred in any
reference obligation which would result in a loss to Global DIGIT.
Q5. Are any payments to Global DIGIT still being made under the swaps?
A5. MMAI has stopped making payments under the swaps to Global DIGIT.
However, the Bank is continuing to make payments to MMAI under the
mirror swaps, as required, but such payments are not being remitted
to Global DIGIT as they normally would be, but are rather being held
in an escrow account under the standstill agreement entered into
between Global DIGIT and MMAI.
Q6. If there have been no losses incurred under its swaps, why has MMAI
stopped all payments to Global DIGIT, and why are there no more
distributions or redemptions?
A6. MMAI has stopped all payments of principal and interest owed by it to
its debtholders and is conserving all of its assets (including the
payments being made by the Bank to MMAI in respect of the mirror
swaps that MMAI has with Global DIGIT) pending a possible
restructuring of MMAI. Global DIGIT has advised MMAI that in its
view, Global DIGIT is entitled to receive these amounts. However,
Global DIGIT has agreed to a standstill for the time being to allow
the proposed restructuring plan involving MMAI and the other trusts
identified in the Montreal Proposal to be developed.
Q7. What is the trustee of Global DIGIT doing to protect the rights of
the unitholders of Global DIGIT?
A7. The trustee must act in the best interests of the unitholders and are
reviewing with their advisors various alternatives. The trustee has
engaged external legal counsel, and such counsel is pursuing
discussions with counsel to MMAI to resolve the situation. In order
to protect the rights of Global DIGIT to amounts held by MMAI, the
parties have entered into the standstill agreement pursuant to which
all such amounts have been placed into an escrow account.
In the view of the trustee, it is appropriate to allow MMAI to pursue
its own restructuring plans (related to the Montreal Proposal)
because a successful and timely restructuring of MMAI would be an
effective means to ensure that Global DIGIT (and by extension, its
unitholders) will receive up to the amounts it claims to be entitled
to receive. The standstill between MMAI and Global DIGIT will not
adversely affect the rights of Global DIGIT.
Q8. When will the situation be resolved?
A8. It is too early to determine when the situation will be resolved. It
is quite likely that a resolution of the situation will not occur
before the outstanding commercial paper of MMAI is restructured.
Q9. What are the risks to Global DIGIT in this situation?
A9. If the present situation continues, and there is no successful
restructuring of MMAI's commercial paper, it is unlikely that it will
be possible to release to Global DIGIT the collateral, or the
proceeds from the sale of collateral, unless the swaps are
terminated. Even in such a case however, it has not yet been
determined whether or not Global DIGIT would be entitled to receive,
in its entirety, the balance of the collateral if MMAI was unable to
pay its debtholders. In any event, a termination of the swaps may
result in a significant shortfall to Global DIGIT and possibly an
elimination of payments that Global DIGIT would otherwise receive if
the swaps were terminated in circumstances where MMAI was able to pay
interest and principal on its debt. At the present time, it is not
possible to determine either the likelihood or size of such
Q10. What is the NAV of Global DIGIT and how is it determined?
A10. As at August 31, 2007, the NAV was $7.92 per unit. The NAV is
calculated by National Bank of Canada, as administrative agent of
Global DIGIT, as of the last business day of each month and approved
by the trustee before its publication.
The NAV on a particular date is equal to the aggregate value of the
assets of Global DIGIT, less the aggregate value of its liabilities,
calculated in conformity with GAAP. The NAV does not reflect any
eventual write-down resulting from the interruption of payments that
MMAI is required to make to Global DIGIT under the swaps nor does it
reflect any potential impairment in the value of the assets of
Global DIGIT from any eventual restructuring of MMAI debts, because
it is not possible at present to determine if, when and to what
extent such payments will resume or the effect of any restructuring
on MMAI's debts.
The major component of the NAV is the mark-to-market value of the
swaps. This is obtained from an indicative price provided by the
Bank in relation to a notional amount of $1 million; such price
represents an indication of the price that the Bank may pay or
charge, as the case may be, as of the time and date specified. This
is determined by the Bank in its sole and absolute discretion.
The swaps are not traded on any market, being privately negotiated
contracts between the parties thereto. Furthermore, the swaps relate
to the securitization of other securities, which makes it more
difficult to evaluate.
The process of valuing investments such as the swaps for which no
published market exists is subject to inherent uncertainties and the
resulting values may differ from values that would have applied had
a public market existed for the investments and may differ from the
prices at which the investments may be sold.
Q11. There is a significant difference in the NAVs of Global DIGIT and
Global Diversified Investment Grade Income Trust II ("GDII"). What
explains this gap?
A11. The main difference between Global DIGIT and GDII is that GDII has
no first loss protection following the default of a reference
obligation in any of the three portfolios.
In Global DIGIT, a "first loss amount" absorbs the first losses of
the portfolios resulting from credit defaults in the underlying
reference obligations: Global DIGIT unitholders therefore do not
suffer a loss following a credit default in a reference obligation
until the "first loss amount" is completely exhausted.
Furthermore, Global DIGIT and GDII were originally priced
differently, reflecting the different financial risks for investors.
Global DIGIT was originally priced between 1.5% to 2% above the
Canada bond benchmark while GDII was priced between 4% to 4.5% above
Q12. If the turmoil in the asset-backed commercial paper market is
resolved, will distributions and redemptions resume for Global
A12. The main objective of the trustee is to achieve a resumption of
distributions, but the way such objective will be achieved may
depend on how this market is ultimately restructured, which is not
known at this point. The trustee is closely monitoring the situation
to protect the interests of the unitholders of Global DIGIT, and
will inform unitholders of any developments.
Q13. When and if distributions and redemptions resume, will they be at
the same level as before?
A13. This will also largely depend on how the asset-backed commercial
paper market is ultimately restructured, which is not known, and no
predictions or assumptions can be made at this point.
Q14. If MMAI's commercial paper is restructured, what happens to the
swaps? Will Global DIGIT's claims under the swaps and rights to
collateral still be adversely affected by the rights of MMAI's
A14. This will also depend on how the asset-backed commercial paper
market is ultimately restructured, which is not known, and no
predictions or no assumptions can be made at this point.
Q15. When will we know if the "Montreal Proposal" is accepted?
A15. The "Montreal Proposal" includes a standstill period of 60 days
which ends October 15. A committee and various sub-committees have
been formed and are addressing the issues. We note that the Investor
Committee which represents a significant majority of all investors
in this asset backed commercial paper has recently advised the
market that it is seeking an extension of the standstill created
under the Montreal Proposal.
Unitholders can follow developments on the website of Ernst & Young
For further information:
For further information: François Rivard, (514) 879-6405,