e caps overview

7/30/2019 E CAPS Overview

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Lehman Brothers

Overview of E-CAPSSM

June 16, 2005

Presentation to:


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Table of ContentsAgenda

I. Preferred Securities from a Rating Agency Perspective

II. E-CAPSSM Overview


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Preferred Securities from a Rating Agency Perspective


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Moodys new framework for hybrid capital provides for 50% - 100% equity credit for preferred

securities if structured with more equity like features. Moodys applies no strict limit to the

amount of preferred securities allowed in the capital structure

S&P provides 100% equity credit for financials up to 25% of ATE

Lehman Brothers has developed E-CAPSSM - the first form of preferred securities which is both

tax deductible and achieves high equity credit from both S&P and Moodys

Lehman formally presented the structure to Moodys and has verbal confirmation of the Basket D

(75%) treatmenta formal letter is expected next week

S&P has confirmed that E-CAPSSM will receive 100% equity credit up to 25% of ATE

Lehman has received a will opinion from outside tax counsel

MetLife successfully priced $1.5bn in Perpetual NC-5 Fixed Rate and $600mm in Perpetual NC-

5 Floating Rate Preferred Stock; Lehman Brothers served as exclusive Structuring Advisor and

Joint Bookrunner on the transaction. Proceeds will be used to fund acquisition of Travelers Principal Financial Group priced $550mm in Perpetual NC-10yrs with an ARP back end in

year 10 and year 30; Lehman acted the sole structuring advisor and sole bookrunner. Proceeds

will be used to fund a stock repurchase

Market Reception

Tax-Efficiency

Equity Content

Preferred Securities OpportunityPreferred Securities from a Rating Agency Perspective

Important new developments are making preferred securities an increasingly important

part of many Companys capital structures

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Moodys Revised Approach to Equity Credit

Traditional Preferred Alternatives

Cumulative

Dividends

Basket A (0%) Basket B (25%) Basket C (50%) Basket D (75%) Basket E (100%)

Non-Cumulative

Dividends

Perpetual Maturity

Redemption Only with

Issuance of Preferredor Common Shares

Non-Cumulative

Dividends

Perpetual Maturity

Mandatory Deferral

Trigger (Non-

Cumulative)

Option 1:

Equity Capital

Replacement Feature

Non-Cumulative

Dividends

Perpetual Maturity

Non-Cumulative

Dividends

Perpetual Maturity

Option 1:

Equity Capital

Replacement Feature

Mandatory Deferral

Trigger (Non-

Cumulative)

and

and

Enhanced Preferred Alternatives

andand

Moodys significantly improved approach to equity credit has led many companies to

consider making preferred stock a permanent part of their capital structure

or

Option 2:

Redemption Only with

Issuance of Preferred

or Common Shares


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Life Insurance Mandatory Deferral Trigger

1. Risk Based Capital Ratio of Life Insurance Company

< 175%2

Capital Adequacy Test1

1. Consolidated Last Twelve Months Net Income $0;

and

2. Shareholders Equity4 declines by greater than 10%

for the most recent 8 Quarters;and

3. After the 6-month cure period (2 Quarters forward),

Shareholders Equity4 declines by greater than 10%

for the most recent 10 Quarters

Or

Net Income Test3

___________________________1. The Capital Adequacy Test (RBC) falls away if U.S. life insurance assets represent less than 25% of total consolidated assets.2. RBC Ratio based on U.S. life insurance subsidiaries representing more than 80% of regulated assets.3. For purposes of the Net Income Test, Moodys will permit a carve-out for any changes in U.S. GAAP accounting standards that cause Net Income or Shareholders Equity to decline. 4. Shareholders Equity is as reported o n GAAP financials less Accumulated Other Comprehensive Income (AOCI).

Lehman Brothers spent 6 weeks advising MetLife in developing a mandatory deferraltrigger which will be the standard for the Life Insurance sector

The levels for each

of these tests havebeen set

significantly out

of the money

MetLife must fail all

3 parts in order to

fail the Net Income

Test


Because of the equity-like features contained in the [MetLife] Preferred Stock, the security will receive Basket D analytic treatment on

Moodys Hybrid Debt-Equity continuum and the rating agency will count it as 75% equity and 25% debt for financial leverage calculations.

The dividends will be treated as presented under GAAP and incorporated into the fixed charge coverage ratio. Moodys, 6/1/2005

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Mandatory Deferral Trigger for Lehman Brothers

1. Net assets / tangible equity capital > 25x

Capitalization Test

1. Consolidated Last Twelve Months Net Income

$0;and

2. Tangible Equity declines by greater than 10%for the most recent 8 Quarters;and

3. After the 6-month cure period (2 Quarters

forward), Tangible Equity declines by greater

than 10% for the most recent 10 Quarters

Or

Net Income Test1

___________________________1. For purposes of the Net Income Test, Moodys will permit a carve-out for any changes in U.S. GAAP accounting standards that cause Net Income or Tangible Equity to decline.

The levels for

each of these tests

have been set

significantly out

of the money

The Company must

fail all 3 parts in

order to fail the

Net Income Test


We have modified the Mandatory Deferral Trigger that Moodys approved for investment

grade life companies to include both a profitability and a leverage test, which areapplicable to Lehman Brothers

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E-CAPSSM Overview


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Investors

Parent forms LLC and Trust

Parent will form a limited liability company (the LLC) and contribute

proceeds equal to 5% of total capital, including LLC Preferred, for the

managing member interest, which will be invested in high quality, short-

term third-party assets.(1) Parent will also cause a Delaware Trust to be

formed.

LLC on-loans E-CAPSSM proceeds to Parent

The LLC will on-loan proceeds from the E-CAPSSM offering in the form of

Junior Subordinated Notes with a 30-year maturity to Parent. Interest

payments on the Junior Subordinated Notes will fund the E-CAPSSM

distribution payments.

Reinvestment at Maturity

At the initial maturity of the Junior Subordinated Notes in Year 30, the

LLC can reinvest the proceeds from the redemption of the Junior

Subordinated Notes in another 30 year long-dated junior subordinated loan

on similar terms to Parent or to other affiliates. After year 60, the proceeds

will be reinvested in short-term, high quality assets.

Structure Overview

Structure Overview

1

2

3

E-CAPSSM Overview

___________________________1. Assets will be A-1/P-1 CP paper, or other similar short-term assets.

Limited

Liability Company

Parent

Trust

1

Third Party

Assets

LLCMan

agingMemberInterest(5%)

LLC PreferredSecurities

JuniorSubordinated

Notes

EquityProceeds

2

E-CAPSSM

5%

The E-CAPSSM structure is relatively simple and will be easily understood by investors

Proceeds

Proceeds

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E-CAPSSM vs. Trust Preferred

Trust Preferred Securities E-CAPSSM

Issuer Delaware Business Trust owned by Parent Delaware Business Trust owned by Parent that invests in

LLC Preferred

Taxation Treated as grantor trustignored for tax

purposes

Trust: sameallows Form 1099 reporting for investors

LLC: treated as partnership for tax purposes

Accounting Trust deconsolidated under FIN 46

Junior subordinated debt on balance sheet

LLC and Trust likely deconsolidated under FIN 46

Junior subordinated debt on balance sheet

Maturity 3049 years Perpetual

Assets of Issuer Junior subordinated debt of Parent

No reinvestment

Junior subordinated debt of Parent

5% invested in Eligible Third Party Assets (i.e., CP)

At maturity of debt, LLC must reinvest in similar debt of

Parent and affiliates or third party assets

Payments Cumulative

Deferrable for 20 periods at Issuers option

All deferred payments must be repaid at

the end of the 20 quarters

Optionally deferrable at Issuers option for 20 quarters at

which Parent must use reasonable efforts to issue

common stock to fund distribution

Mandatorily deferrable if certain financial metrics are

breached In the event of a mandatory deferral, Parent is

immediately required to make reasonable efforts to issue

common stock to fund distributions on the Note

If payments are deferred for 28 quarters (either optionally

or mandatorily) because Parent cannot issue common,

investors will have right to liquidate LLC.

Subordination Subordinated to senior and subordinated debt

holders. Pari Passu with trade creditors.

Subordinated to senior debt, subordinated debt and

existing Trust Preferred. Pari Passu with trade creditors.

E-CAPSSM has many similar features to Trust Preferred with equity credit enhancements

E-CAPSSM Overview

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E-CAPSSM will be treated as partnership interests in LLC.

Parent will be entitled to deductions on interest payments

made on the Junior Subordinated Notes held by the LLC.

E-CAPSSM holders will be allocated interest income equal

to the distribution rate on the LLC Preferred Securities.

Tax Treatment

Tax and Accounting

Accounting

LLC deconsolidated under FIN 46

On consolidated basis, Parent issues 30-year

junior subordinated debt

Payments on junior subordinated debt reflected as

interest expense in the income statement

Can obtain FAS 133 accounting on any swaps

and/or interest rate hedges

Corporate

LLC and Trust will need to be added to Parents shelf in

order to do a registered transaction.

Alternatively, E-CAPSSM can be sold as 144A

Investors

Limited

Liability Company

Parent

Trust

1

Third Party

Assets

LLCM

anagingMemberInterest(5%)

LLC Preferred

Securities

Junior

SubordinatedNotes

EquityProceeds

2

E-CAPSSM

5%

Proceeds

Proceeds

E-CAPSSM Overview

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