FORM OF
CONVERTIBLE BOND HEDGE TRANSACTION
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BorgWarner
Inc.
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3850 Hamlin
Road
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Auburn Hills,
MI 48326
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Morgan Stanley
& Co. Incorporated
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as Agent for
Morgan Stanley & Co. International plc
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1585
Broadway
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4th
Floor
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New York, NY
10036
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Convertible
Bond Hedge Transaction
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99AH24L39
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April 6,
2009
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The purpose of
this communication (this “ Confirmation
”) is to set forth the terms and conditions of the
above-referenced transaction entered into on the Trade Date
specified below (the “ Transaction ”)
between Morgan Stanley & Co. International plc (“
Dealer ”) and BorgWarner Inc. (“
Counterparty ”). This communication constitutes a
“ Confirmation ” as referred to in the ISDA
Master Agreement specified below.
This Confirmation
is subject to, and incorporates, the definitions and provisions of
the 2006 ISDA Definitions (the “ 2006 Definitions
”) and the definitions and provisions of the 2002 ISDA Equity
Derivatives Definitions (the “ Equity Definitions
”, and together with the 2006 Definitions, the “
Definitions ”), in each case as published by the
International Swaps and Derivatives Association, Inc. (“
ISDA ”). In the event of any inconsistency between the
2006 Definitions and the Equity Definitions, the Equity Definitions
will govern. Certain defined terms used herein have the meanings
assigned to them in the Prospectus Supplement dated April 6,
2009 to the Prospectus dated March 4, 2008 (the “
Prospectus Supplement ”) and the Supplemental
Indenture, to be dated as of the closing date of the initial
issuance of the Convertible Securities described below, to the
Senior Indenture dated as of September 23, 1999 between
Counterparty and The Bank of New York Trust Company, N.A., as
trustee (together, the “ Indenture ”), each
relating to the USD325 million principal amount of 3.50%
convertible senior notes due April 15, 2012 (the “
Convertible Securities ”). In the event of any
inconsistency between the terms defined in the Indenture or defined
in the Prospectus Supplement and this Confirmation, this
Confirmation shall govern. For the avoidance of doubt, references
herein to provisions of the Indenture are based on the description
of the Convertible Securities set forth in the Prospectus
Supplement. If any relevant provisions of the Indenture differ in
any material respect from those described in the Prospectus
Supplement, the parties will, if appropriate, amend this
Confirmation in good faith to preserve the economic intent of the
parties. The parties further acknowledge that references to the
Indenture herein are references to the Indenture as in effect on
the date of its execution, and if the Indenture is amended,
modified or supplemented following its execution, any such
amendment, modification or supplement will be disregarded for
purposes of this Confirmation (other than for purposes of Section
8(b) below) unless the parties agree otherwise in writing. The
Transaction is subject to early unwind if the closing of the
Convertible Securities is not consummated for any reason, as set
forth below in Section 8(k).
1
Each party is
hereby advised, and each such party acknowledges, that the other
party has engaged in, or refrained from engaging in, substantial
financial transactions and has taken other material actions in
reliance upon the parties’ entry into the Transaction to
which this Confirmation relates on the terms and conditions set
forth below.
This Confirmation
evidences a complete and binding agreement between Dealer and
Counterparty as to the terms of the Transaction to which this
Confirmation relates. This Confirmation shall be subject to an
agreement (the “ Agreement ”) in the form of the
1992 ISDA Master Agreement (Multicurrency—Cross Border) as if
Dealer and Counterparty had executed an agreement in such form on
the date hereof (but without any Schedule except for (i) the
election of Loss and Second Method and US Dollars (“
USD ”) as the Termination Currency, (ii) the
replacement of the word “third” in the last line of
Section 5(a)(i) of the Agreement with the word
“second,” (iii) the election that the “Cross
Default” provisions of Section 5(a)(vi) of the Agreement
shall apply to Counterparty with a “Threshold Amount”
of USD25 million and (iv) such other elections as set
forth in this Confirmation.
All provisions
contained in, or incorporated by reference to, the Agreement will
govern this Confirmation except as expressly modified herein. In
the event of any inconsistency between this Confirmation and either
the Definitions or the Agreement, this Confirmation shall
govern.
The Transaction
hereunder shall be the sole Transaction under the Agreement. If
there exists any ISDA Master Agreement between Dealer and
Counterparty or any confirmation or other agreement between Dealer
and Counterparty pursuant to which an ISDA Master Agreement is
deemed to exist between Dealer and Counterparty, then
notwithstanding anything to the contrary in such ISDA Master
Agreement, such confirmation or agreement or any other agreement to
which Dealer and Counterparty are parties, the Transaction shall
not be considered a Transaction under, or otherwise governed by,
such existing or deemed ISDA Master Agreement.
The Transaction
constitutes a Share Option Transaction for purposes of the Equity
Definitions. The terms of the particular Transaction to which this
Confirmation relates are as follows:
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The closing
date of the initial issuance of the Convertible
Securities.
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Modified
American, as described under “Procedures for Exercise”
below.
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The Common
Stock of Counterparty, par value USD0.01 per share (Ticker Symbol:
“BWA”).
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The number of
Convertible Securities in denominations of USD1,000 principal
amount issued by Counterparty on the closing date for the initial
issuance of the Convertible Securities; provided that the
Number of Options shall be automatically increased as of the date
of exercise by Morgan Stanley & Co. Incorporated and Merrill
Lynch, Pierce, Fenner & Smith Incorporated of the
underwriters’ option pursuant to Section 2 of the
Underwriting Agreement dated as of April 6, 2009,
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2
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between
Counterparty and Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global
Markets Inc. and Deutsche Bank Securities Inc. as managers for the
underwriters party thereto (the “ Underwriting
Agreement ”) by the number of Convertible Securities in
denominations of USD1,000 principal amount issued pursuant to such
exercise (such Convertible Securities, the “ Additional
Convertible Securities ”). For the avoidance of doubt,
the Number of Options outstanding shall be reduced by each exercise
of Options hereunder.
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As of any date,
a number of Shares per Option equal to the “Conversion
Rate” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — General”), but without regard to
any adjustments to the Conversion Rate as set forth in the section
of the Indenture containing the provision described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Adjustment to Shares Delivered upon
Conversion upon Certain Corporate Transactions” (a “
Fundamental Change Adjustment ”) or a discretionary
adjustment as set forth in the section of the Indenture containing
the provisions described in the fifth to last paragraph in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Conversion Rate Adjustments” (
i.e. , the paragraph commencing with “We are permitted
to increase...”) (a “ Discretionary Adjustment
”).
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As of any date,
an amount in USD, rounded to the nearest cent (with 0.5 cents being
rounded upwards), equal to USD1,000 divided by the Option
Entitlement as of such date.
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As of any date,
the product of the Number of Options and the Option Entitlement and
the Applicable Percentage.
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USD24,553,750
(Premium per Option USD75.55); provided that if the Number
of Options is increased pursuant to the proviso to the definition
of “Number of Options” above, an additional Premium
equal to the product of the number of Options by which the Number
of Options is so increased and the Premium per Option shall be paid
on the Additional Premium Payment Date.
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Additional
Premium Payment Date:
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The closing
date for the purchase and sale of the Additional Convertible
Securities.
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3
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All Exchanges
located in the United States.
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Procedures for
Exercise:
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Potential Exercise Dates:
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Each
“Conversion Date” (as defined in the Indenture as
described in the Prospectus Supplement under “Description of
Notes — Conversion Rights — General”) occurring
during the Exercise Period for Convertible Securities each in
denominations of USD1,000 principal amount (such Convertible
Securities, the “ Relevant Convertible Securities
” for such Conversion Date).
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The period from
and excluding the Effective Date to and including the Expiration
Date.
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The earlier of
(i) the last day on which any Convertible Securities remain
outstanding and (ii) the second “Scheduled Trading
Day” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion”)
immediately preceding the “Maturity Date” (as defined
in the Indenture as described in the Prospectus Supplement under
“Description of Notes — General”).
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Automatic
Exercise on Conversion Dates:
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Applicable; and
means that on each Conversion Date, a number of Options equal to
the number of Relevant Convertible Securities for such Conversion
Date in denominations of USD1,000 principal amount shall be
automatically exercised, subject to “Notice of
Exercise” below.
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In respect of
any exercise of Options hereunder on any Conversion Date,
12:00 P.M., New York City time, on the Exchange Business Day
prior to the first “Scheduled Trading Day” of the
“Cash Settlement Averaging Period” (each as defined in
the Indenture as described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion” and, for the avoidance of doubt,
irrespective of whether Counterparty’s election of the
settlement method with respect to the Relevant Convertible
Securities includes any portion thereof to be delivered in cash)
relating to the Convertible Securities converted on the Conversion
Date occurring on the relevant Exercise Date; provided that
in the case of any exercise of Options hereunder in connection with
the conversion of any Relevant Convertible Securities on any
Conversion Date occurring during the Final Convertibility Period
(as defined below), the Notice Deadline shall be 12:00 P.M.,
New York City time, on the Exchange Business Day immediately
following such Conversion Date.
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Notwithstanding
anything to the contrary in the Equity Definitions, Dealer shall
have no obligation to make any payment or delivery in respect of
any exercise of Options hereunder unless Counterparty notifies
Dealer in writing prior to 12:00 P.M., New York City time, on
the Notice Deadline in respect of such exercise of (i) the
number of Options being exercised on such Exercise Date,
(ii) the scheduled settlement date under the Indenture for the
Convertible Securities converted on the Conversion Date
corresponding to such Exercise Date, (iii) whether such
Relevant Convertible Securities will be settled by Counterparty by
delivery of cash, Shares or a combination of cash and Shares and,
if such a combination, the applicable “Specified Dollar
Amount” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion”) and
(iv) the first “Scheduled Trading Day” of the
“Cash Settlement Averaging Period” (each as defined in
the Indenture as described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion”); provided that in the
case of any exercise of Options hereunder in connection with the
conversion of any Relevant Convertible Securities on any Conversion
Date occurring during the Final Convertibility Period, the contents
of such notice shall be as set forth in clause (i) above and,
in the case of any exercise of Options hereunder in connection with
the conversion of any Relevant Convertible Securities occurring on
or after December 15, 2011, Counterparty shall notify Dealer
of the settlement method and the applicable “Specified Dollar
Amount” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion”) as
provided in “Notice of Specified Dollar Amount for
Conversions during the Final Convertibility Period” below.
Counterparty acknowledges its responsibilities under applicable
securities laws, and in particular Section 9 and
Section 10(b) of the Exchange Act (as defined below) and the
rules and regulations thereunder, in respect of any election of a
settlement method with respect to the Convertible Securities. For
the avoidance of doubt, if Counterparty fails to give such notice
when due in respect of any exercise of Options hereunder,
Dealer’s obligation to make any payment or delivery in
respect of such exercise shall be permanently extinguished, and
late notice shall not cure such failure; provided that
notwithstanding the foregoing, such notice (and the related
exercise of Options) shall be effective if given after the Notice
Deadline, but prior to (x) in the case of the Final
Convertibility Period, 5:00 P.M., New York City time, on
the
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Scheduled
Trading Day immediately preceding the relevant Settlement Date and
(y) in all other cases, 5:00 P.M., New York City time, on the
fifth Exchange Business Day following the Notice Deadline, in which
event, except in the case of the Final Convertibility Period, the
Calculation Agent shall have the right to adjust the Delivery
Obligation as appropriate to reflect the additional costs
(including, but not limited to, hedging mismatches and market
losses) and expenses incurred by Dealer in connection with its
hedging activities (including the unwinding of any hedge position)
as a result of Dealer not having received such notice on or prior
to the Notice Deadline.
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Notice of
Specified Dollar Amount for Conversions during the Final
Convertibility Period:
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Counterparty
shall notify Dealer in writing before 5:00 P.M., New York City
time, on the “Scheduled Trading Day” (as defined in the
Indenture as described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion”) immediately prior to
December 15, 2011 of the election by the Counterparty, in
accordance with the provision of the Indenture described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion,” of the
settlement method and, if applicable, the “Specified Dollar
Amount” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion”)
applicable to the Relevant Convertible Securities with a Conversion
Date occurring on or after December 15, 2011 and ending on,
and including, the second “Scheduled Trading Day”
immediately preceding the “Maturity Date” (as defined
in the Indenture as described in the Prospectus Supplement under
“Description of Notes — General”) (the “
Final Convertibility Period ”). If Counterparty fails
timely to provide such notice, Counterparty shall be deemed to have
notified Dealer of combination settlement with a “Specified
Dollar Amount” (as defined in the Indenture as described in
the Prospectus Supplement under “Description of Notes —
Conversion Rights — Settlement upon Conversion”) of
USD1,000. Counterparty agrees that it shall settle any Relevant
Convertible Securities with a Conversion Date occurring during the
Final Convertibility Period in the same manner as provided in the
Notice of Specified Dollar Amount for Conversions during the Final
Convertibility Period it provides or is deemed to have provided
hereunder.
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6
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Dealer’s
Telephone Number and Telex and/or Facsimile Number and Contact
Details for purpose of Giving Notice:
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As specified in
Section 6(b) below.
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Settlement
Date:
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In respect of
an Exercise Date occurring on a Conversion Date, the settlement
date for the cash and Shares (if any) to be delivered in respect of
the Relevant Convertible Securities converted on such Conversion
Date pursuant to the section of the Indenture containing the
provisions described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion”; provided that the
Settlement Date will not be prior to the latest of (i) the date
that is one Settlement Cycle following the final day of the
relevant Cash Settlement Averaging Period (as modified herein),
(ii) the Exchange Business Day immediately following the date
on which Counterparty gives notice to Dealer of such Settlement
Date prior to 5:00 P.M., New York City time and (iii) the
Exchange Business Day immediately following the date Counterparty
provides the Notice of Delivery Obligation prior to
12:00 P.M., New York City time.
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Delivery
Obligation:
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In lieu of the
obligations set forth in Sections 8.1 and 9.1 of the Equity
Definitions, and subject to “Notice of Exercise” above,
in respect of an Exercise Date occurring on a Conversion Date,
Dealer will deliver to Counterparty, on the related Settlement
Date, a number of Shares and/or amount of cash in USD equal to the
product of (i) the Applicable Percentage and (ii) the
aggregate number of Shares (and cash in lieu of fractional Shares)
that Counterparty would be obligated to deliver to the holder(s) of
the Relevant Convertible Securities converted on such Conversion
Date pursuant to the section of the Indenture containing the
provisions described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion” and/or the aggregate amount of
cash, if any, in excess of USD1,000 per Convertible Security (in
denominations of USD1,000) that Counterparty would be obligated to
deliver to holder(s) pursuant to the section of the Indenture
containing the provisions described in the Prospectus Supplement
under “Description of Notes — Conversion Rights —
Settlement upon Conversion” and cash in lieu of fractional
Shares, if any, as if Counterparty had elected to satisfy its
conversion obligation in respect of such Relevant Convertible
Securities by the Convertible Security Settlement Method,
notwithstanding any different actual election by Counterparty with
respect to the settlement of such
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Relevant
Convertible Securities (the “ Convertible Obligation
”); provided that such obligation shall be determined
excluding any Shares and/or cash that Counterparty is obligated to
deliver to holder(s) of the Relevant Convertible Securities as a
result of any adjustments to the Conversion Rate pursuant to a
Fundamental Change Adjustment or a Discretionary Adjustment.
Notwithstanding the foregoing, in all events the Delivery
Obligation shall be capped so that the value of the Delivery
Obligation does not exceed the Applicable Percentage of the value
of the Convertible Obligation (with the Convertible Obligation
determined based on the actual settlement method elected by
Counterparty with respect to such Relevant Convertible Securities
instead of the Convertible Security Settlement Method and with the
value of any Shares included in either the Delivery Obligation or
such Convertible Obligation determined by the Calculation Agent
using the VWAP Price on the last day of the relevant Cash
Settlement Averaging Period (as modified herein)).
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Convertible
Security Settlement Method:
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For any
Relevant Convertible Securities, if Counterparty has notified
Dealer in the related Notice of Exercise (or in the Notice of
Specified Dollar Amount for Conversions during the Final
Convertibility Period, as the case may be) that it has elected (or
been deemed to have elected) to satisfy its conversion obligation
in respect of such Relevant Convertible Securities in cash or in a
combination of cash and Shares in accordance with the section of
the Indenture containing the provisions described in the Prospectus
Supplement under “Description of Notes — Conversion
Rights — Settlement upon Conversion” (a “ Cash
Election ”) with a “Specified Dollar Amount”
(as defined in the Indenture as described in the Prospectus
Supplement under “Description of Notes — Conversion
Rights — Settlement upon Conversion”) of at least
USD1,000, the Convertible Security Settlement Method shall be the
settlement method actually so elected or deemed to have been
elected by Counterparty in the related Notice of Exercise or the
related Notice of Specified Dollar Amount, as the case may be, in
respect of such Relevant Convertible Securities; otherwise, the
Convertible Security Settlement Method shall (i) assume
Counterparty had made a Cash Election with respect to such Relevant
Convertible Securities with a “Specified Dollar Amount”
(as defined in the Indenture as described in the Prospectus
Supplement under “Description of Notes — Conversion
Rights — Settlement upon Conversion”) of USD1,000 per
Relevant Convertible Security and (ii) be calculated as if the
relevant “Cash Settlement Averaging Period” consisted
of 80 “Trading Days” (each, as defined in the Indenture
as described in the
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Prospectus
Supplement under “Description of Notes — Conversion
Rights — Settlement upon Conversion”) commencing on
(x) the third “Scheduled Trading Day” (as defined
in the Indenture as described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion”) after the Conversion Date for
conversions occurring prior to the Final Convertibility Period or
(y) the 82nd “Scheduled Trading Day” (as defined
in the Indenture as described in the Prospectus Supplement under
“Description of Notes — Conversion Rights —
Settlement upon Conversion”) prior to the “Maturity
Date” (as defined in the Indenture as described in the
Prospectus Supplement under “Description of Notes —
General”) for conversions occurring during the Final
Convertibility Period.
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Notice of
Delivery Obligation:
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No later than
the second Exchange Business Day immediately following the last day
of the relevant Cash Settlement Averaging Period (as modified
herein), Counterparty shall give Dealer notice of the final number
of Shares and/or cash comprising the Convertible Obligation;
provided that, with respect to any Exercise Date occurring
during the Final Convertibility Period, Counterparty may provide
Dealer with a single notice of an aggregate number of Shares and/or
cash comprising the Convertible Obligations for all Exercise Dates
occurring in such period (it being understood, for the avoidance of
doubt, that the requirement of Counterparty to deliver such notice
shall not limit Counterparty’s obligations with respect to
Notice of Exercise or Notice of Specified Dollar Amount for
Conversions during the Final Convertibility Period.
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Other
Applicable Provisions:
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To the extent
Dealer is obligated to deliver Shares hereunder, the provisions of
Sections 9.1(c), 9.8, 9.9, 9.10, 9.11 (except that the
Representation and Agreement contained in Section 9.11 of the
Equity Definitions shall be modified by excluding any
representations therein relating to restrictions, obligations,
limitations or requirements under applicable securities laws
arising as a result of the fact that Counterparty is the Issuer of
the Shares) and 9.12 of the Equity Definitions will be applicable
as if “Physical Settlement” applied to the
Transaction.
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Method of
Adjustment:
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Notwithstanding
Section 11.2 of the Equity Definitions, upon the occurrence of
any event or condition set forth in the sections of the Indenture
containing the provisions described in the Prospectus Supplement
under “Description of Notes — Conversion Rights —
Conversion Rate Adjustments” other than any event or
condition that would result in a Fundamental Change Adjustment or
a
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9
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Discretionary
Adjustment or a Merger Event (as defined below) (each an “
Adjustment Event ”), the Calculation Agent shall make
the corresponding adjustment in respect of any one or more of the
Number of Options, the Option Entitlement and any other variable
relevant to the exercise, settlement, payment or other terms of the
Transaction, to the extent an analogous adjustment is made under
the Indenture. Promptly upon the occurrence of any Adjustment Event
Counterparty shall notify the Calculation Agent of such Adjustment
Event; and once the adjustments to be made to the terms of the
Indenture and the Convertible Securities in respect of such
Adjustment Event have been determined, Counterparty shall promptly
notify the Calculation Agent in writing of the details of such
adjustments. The Calculation Agent shall, promptly after receiving
such notice, make any corresponding adjustments to the terms of the
Transaction and promptly notify Dealer and Counterparty
thereof.
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Merger
Events:
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Notwithstanding
Section 12.1(b) of the Equity Definitions, a “Merger
Event” means the occurrence of any event or condition set
forth in the section of the Indenture containing the provisions
described in the eighth to last paragraph in the Prospectus
Supplement under “Description of Notes — Conversion
Rights — Conversion Rate Adjustments” ( i.e. ,
the paragraph commencing with “In the event of: any
reclassification...”).
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Consequences of
Merger Events:
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Notwithstanding
Section 12.2 of the Equity Definitions, upon the occurrence of
a Merger Event, the Calculation Agent shall make the corresponding
adjustment in respect of any adjustment under the Indenture to any
one or more of the nature of the Shares, the Number of Options, the
Option Entitlement and any other variable relevant to the exercise,
settlement, payment or other terms of the Transaction, to the
extent an analogous adjustment is made under the Indenture in
respect of such Merger Event; provided that such adjustment
shall be made without regard to any adjustment to the Conversion
Rate pursuant to a Fundamental Change Adjustment or a Discretionary
Adjustment; and provided further that if, with respect to a
Merger Event, the consideration for the Shares includes (or, at the
option of a holder of Shares, may include) shares (or depositary
receipts with respect to shares) of an entity or person not
organized under the laws of the United States, any State thereof or
the District of Columbia, Cancellation and Payment (Calculation
Agent Determination) shall apply.
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Notice of
Merger Consideration and Consequences:
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Upon the
occurrence of a Merger Event that causes the Shares to be converted
into the right to receive more than a single type of consideration
(determined based in part upon any form of stockholder election),
Counterparty shall reasonably promptly (but in any event on or
prior to the relevant merger date) notify the Calculation
Age
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