MONTREAL, Sept. 28 /CNW Telbec/ - Global Diversified Investment Grade
Income Trust II ("Global DIGIT II") (TSX: GII.UN) announces that it has
entered into a standstill agreement with Silverstone Trust ("Silverstone") in
order to formalize arrangements between Global DIGIT II and Silverstone 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 II or Silverstone 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 II announced that it was suspending
distributions as it had been notified by Silverstone that Silverstone was
withholding payments to Global DIGIT II. On August 28, 2007, Global DIGIT II
further announced that it was suspending distributions and redemptions due to
insufficient resources resulting from Silverstone's liquidity problems and
inability to roll over its maturing commercial paper, and that any
restructuring of Silverstone's commercial paper may have an as yet
undetermined impact on the continuity and size of payments made to Global
DIGIT II under the financial contracts between Global DIGIT II and
Silverstone. Such financial contracts, together with the financial assets
related to them, constitute most of the assets of Global DIGIT II.
Silverstone 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
GLOBAL DIGIT II ANSWERS SOME QUESTIONS FREQUENTLY ASKED BY INVESTORS
See Appendix A.
About Global DIGIT II
Global DIGIT II provides an economic interest in an equity tranche of
credit default swap agreements in respect of portfolios of mortgage-backed
securities, asset-backed securities, structured finance securities, synthetic
corporate exposures and other fixed-income securities.
Silverstone 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 II. What is the connection?
A1. Global DIGIT II 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 Silverstone. Silverstone, in turn, has
entered into three mirror credit default swaps with a large international bank
("Bank"). Silverstone has also entered into a fourth swap with the Bank, in
respect of which, and in order to purchase the necessary collateral,
Silverstone issued asset-backed commercial paper.
Silverstone is one of the 22 third party structured asset backed
commercial paper trusts identified in the "Montreal Proposal". Since
mid-August, 2007, Silverstone has been unable to roll over its maturing
commercial paper. Following this inability to fund itself, Silverstone has not
repaid principal nor has it paid interest on its commercial paper. Silverstone
is conserving all of its financial resources in anticipation of a possible
restructuring which may emerge from the parties to the Montreal Proposal.
As a counterparty with Silverstone under the three swaps, Global DIGIT II
would ordinarily expect to continue to receive payments from Silverstone. In
the view of Silverstone, the terms of its financial arrangements with Global
DIGIT II allow it, in certain circumstances, to retain funds otherwise payable
to Global DIGIT and these circumstances are currently applicable. Global DIGIT
II 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 II.
Q2. Why do the financial statements of Global DIGIT II contain such a
large amount of debt?
A2. Under Canadian generally accepted accounting principles ("GAAP"), the
financial statements of Global DIGIT II are consolidated with the financial
statements of Silverstone, and therefore include all of Silverstone's debt,
including its outstanding commercial paper. Except for accounts payable and
similar liabilities, all of the debts shown on Global DIGIT II's consolidated
financial statements are debts of Silverstone.
Q3. Is Global DIGIT II liable for the debts of Silverstone?
A3. No, Global DIGIT II is not directly liable for the debts of
Silverstone (other than to guarantee Silverstone's obligations under the
mirror swaps). However, the legal position of Global DIGIT II as a creditor of
Silverstone and owner of collateral, and its effective ranking in relation to
other creditors of Silverstone, is still being discussed with Silverstone. It
is for this reason and to protect the rights of Global DIGIT II to amounts
held by Silverstone, that Global DIGIT II and Silverstone have entered into
the standstill agreement.
Q4. Have any credit defaults occurred in respect of reference obligations
to which Global DIGIT II is exposed under the swaps?
A4. Through its swaps, Global DIGIT II 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 II.
Q5. Are any payments to Global DIGIT II still being made under the swaps?
A5. Silverstone has stopped making payments under the swaps to Global
DIGIT II. However, the Bank is continuing to make payments to Silverstone
under the mirror swaps, as required, but such payments are not being remitted
to Global DIGIT II as they normally would be, but are rather being held in an
escrow account under the standstill agreement entered into between Global
DIGIT II and Silverstone.
Q6. If there have been no losses incurred under its swaps, why has
Silverstone stopped all payments to Global DIGIT II, and why are there no more
distributions or redemptions?
A6. Silverstone 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 Silverstone in respect of the mirror swaps
that Silverstone has with Global DIGIT II) pending a possible restructuring of
Silverstone. Global DIGIT II has advised Silverstone that in its view, Global
DIGIT II is entitled to receive these amounts. However, Global DIGIT II has
agreed to a standstill for the time being to allow the proposed restructuring
plan involving Silverstone and the other trusts identified in the Montreal
Proposal to be developed.
Q7. What is the trustee of Global DIGIT II doing to protect the rights of
the unitholders of Global DIGIT II?
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 Silverstone to resolve the situation. In order to protect the rights of
Global DIGIT II to amounts held by Silverstone, 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 Silverstone to
pursue its own restructuring plans (related to the Montreal Proposal) because
a successful and timely restructuring of Silverstone would be an effective
means to ensure that Global DIGIT II (and by extension, its unitholders) will
receive up to the amounts it claims to be entitled to receive. The standstill
between Silverstone and Global DIGIT II will not adversely affect the rights
of Global DIGIT II.
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 Silverstone is restructured.
Q9. What are the risks to Global DIGIT II in this situation?
A9. If the present situation continues, and there is no successful
restructuring of Silverstone's commercial paper, it is unlikely that it will
be possible to release to Global DIGIT II 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 II would
be entitled to receive, in its entirety, the balance of the collateral if
Silverstone was unable to pay its debtholders. In any event, a termination of
the swaps may result in a significant shortfall to Global DIGIT II and
possibly an elimination of payments that Global DIGIT II would otherwise
receive if the swaps were terminated in circumstances where Silverstone 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 shortfall.
Q10. What is the NAV of Global DIGIT II and how is it determined?
A10. As at August 31, 2007, the NAV was $1.16 per unit. The NAV is
calculated by National Bank of Canada, as administrative agent of Global DIGIT
II, 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 II, 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 Silverstone is
required to make to Global DIGIT II under the swaps nor does it reflect any
potential impairment in the value of the assets of Global DIGIT II from any
eventual restructuring of Silverstone 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 Silverstone'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
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 II and
Global Diversified Investment Grade Income Trust ("GDI"). What explains this
A11. The main difference between Global DIGIT II and GDI is that Global
DIGIT II has no first loss protection following the default in a reference
obligation in any of the three portfolios.
In GDI, a "first loss amount" absorbs the first losses of the portfolios
resulting from credit defaults in the underlying reference obligations: GDI
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 II and GDI were originally priced differently,
reflecting the different financial risks for investors. GDI was originally
priced between 1.5% to 2% above the Canada bond benchmark while Global DIGIT
II was priced between 4% to 4.5% above such benchmark.
Q12. If the turmoil in the asset-backed commercial paper market is
resolved, will distributions and redemptions resume for Global DIGIT II?
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 II, and will inform unitholders of any
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 Silverstone's commercial paper is restructured, what happens to
the swaps? Will Global DIGIT II's claims under the swaps and rights to
collateral still be adversely affected by the rights of Silverstone'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 at:
For further information:
For further information: François Rivard, (514) 879-6405,