Exhibit 10.4
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From: Merrill
Lynch Financial Markets, Inc.
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4 World
Financial Center 5 th FL
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New York, New
York 10080
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Attention:
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Corporate
Derivatives
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Telephone No.:
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(212)
449-6763
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Facsimile No.:
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(212)
738-1069
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May 2, 2007
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To: PREIT
Associates, L.P.
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Pennsylvania
Real Estate Investment Trust
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200 South Broad
Street
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Philadelphia,
PA 19102
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Attention:
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Robert
McCadden
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Telephone No.:
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(215)
454-1295
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Facsimile
No.:
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(215)
546-0240
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Re: Capped Call
Transaction
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Reference:
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Dear Sir/Madam:
The purpose of this letter agreement
(this “ Confirmation ”) is to confirm the terms
and conditions of the transaction entered into between Merrill
Lynch Financial Markets, Inc. (“ Dealer ”),with
Merrill Lynch, Pierce, Fenner & Smith Incorporated as its
agent (“ Agent ”), PREIT Associates, L.P.,
Delaware limited partnership (“ Counterparty ”),
and Pennsylvania Real Estate Investment Trust, an unincorporated
association in business trust form created under Pennsylvania law
pursuant to a Trust Agreement and the sole general partner of
Counterparty (“ Parent ”), on the Trade Date
specified below (the “ Transaction ”). This
Confirmation constitutes a “Confirmation” as referred
to in the ISDA Master Agreement specified below. This Confirmation
shall replace any previous letter and serve as the final
documentation for this Transaction. The Transaction is subject to
early unwind if the closing of the Exchangeable Notes referred to
below issued by Counterparty is not consummated for any reason, as
set forth in this Confirmation.
This Confirmation is subject to, and
incorporates, the definitions and provisions of the 2000 ISDA
Definitions (including the Annex thereto) (the “ 2000
Definitions ”) and the definitions and provisions of the
2002 ISDA Equity Derivatives Definitions (the “ Equity
Definitions ”, and together with the 2000 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 2000 Definitions and the Equity Definitions, the Equity
Definitions will govern. Certain defined terms used herein have the
meanings assigned to them in the Offering Memorandum dated
May 2, 2007 (the “ Offering Memorandum ”)
relating to the USD 250,000,000 principal amount of 4.00%
Exchangeable Senior Notes due 2027 (the “ Exchangeable
Notes ” and each USD 1,000 principal amount of
Exchangeable Notes, an “ Exchangeable Note ”)
issued by Counterparty pursuant to an Indenture to be dated
May 8, 2007 between Counterparty and U.S. Bank National
Association, as trustee (as in effect on the date of its execution,
the “ Indenture ”). In the event of any
inconsistency between the terms defined in the Offering Memorandum,
the Indenture and this Confirmation, this Confirmation shall
govern. The parties acknowledge that this Confirmation is entered
into on the date hereof with the understanding that
(i) definitions set forth in the Indenture which are also
defined herein by reference to the Indenture and (ii) sections
of the Indenture that are referred to herein will conform to the
descriptions thereof in the Offering Memorandum. If any such
definitions in the Indenture or any such sections of the Indenture
differ from the descriptions thereof in the Offering Memorandum,
the descriptions thereof in the Offering Memorandum will govern for
purposes of this Confirmation. The parties further acknowledge that
the Indenture section numbers used herein are based on the draft of
the Indenture last reviewed by Dealer as of the date of this
Confirmation, and if any such section numbers are changed in the
Indenture as executed, the parties will amend this Confirmation in
good
A -1
faith to preserve the intent of the parties. For
the avoidance of doubt, 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 following its execution,
any such amendment will be disregarded for purposes of this
Confirmation unless the parties agree otherwise in
writing.
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.
1. This Confirmation evidences a
complete and binding agreement between Dealer, Counterparty and
Parent 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
2002 ISDA Master Agreement (the “ ISDA Form ”)
as if Dealer, Counterparty and Parent had executed an agreement in
such form (without any Schedule but with the elections set forth in
this Confirmation). For the avoidance of doubt, the Transaction
shall be the only transaction under the Agreement.
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.
2. 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:
General Terms:
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Trade
Date:
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May 2,
2007
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Option
Style:
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“Modified
American,” as set forth under “Procedures for
Exercise” below.
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Option
Type:
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Call
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Buyer:
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Counterparty
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Seller:
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Dealer
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Shares:
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The common
stock of Parent, par value USD 1.00 per share (Exchange symbol
“PEI”).
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Number of
Options:
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83,333.50;
provided that if Dealer, as representative of the Initial
Purchasers (as defined in the Purchase Agreement referred to
below), exercises the option to purchase additional Exchangeable
Notes pursuant to Section 1 of the Purchase Agreement, the Number
of Options hereunder shall be automatically increased, effective
upon payment by Counterparty of the Additional Premium on the
Additional Premium Payment Date, by the Applicable Percentage
times the number of Exchangeable Notes in denominations of
USD 1,000 principal amount issued pursuant to such exercise (such
Exchangeable Notes, the “ Additional Exchangeable
Notes ”). The Number of Options shall be reduced by the
Applicable Percentage times the number of Exchangeable Notes
exchanged by Counterparty. In no event will the Number of Options
be less than zero.
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Option
Entitlement:
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As of any date,
a number equal to the Applicable Exchange Rate as of such date (as
defined in the Indenture, but without regard to any adjustments to
the Applicable Exchange Rate pursuant to Section 13.05(g) or
Section 13.11 of the Indenture or pursuant to the Registration
Rights Agreement (as defined in the Indenture)), for each
Exchangeable Note.
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Number of
Shares:
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The product of
the Number of Options and the Option Entitlement.
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Applicable
Percentage:
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33.3334%
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Strike
Price:
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USD 54.64 per
Option
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Cap
Price:
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USD 63.74 per
Option
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Payment of
Premium:
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Notwithstanding
anything to the contrary in the Equity Definitions, Parent shall
pay Seller the Premium on the Premium Payment Date.
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Premium:
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USD 3,645,840;
provided that if the Number of Options is increased pursuant to the
proviso to the definition of “Number of Options” above,
Counterparty shall pay on the Additional Premium Payment Date an
additional Premium (the “ Additional Premium ”)
equal to the product of the number of Options by which the Number
of Options is so increased and USD 43.75.
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Premium Payment
Date:
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May 8,
2007
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Additional
Premium Payment Date:
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The closing
date for the purchase and sale of the Additional Exchangeable
Notes.
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Exchange:
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The New York
Stock Exchange
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Related
Exchange:
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All
Exchanges
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Procedures for Exercise:
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Exercise
Period(s):
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Notwithstanding
anything to the contrary in the Equity Definitions, an Exercise
Period shall occur with respect to an Option hereunder only if such
Option is an Exercisable Option (as defined below) and the Exercise
Period shall be, in respect of any Exercisable Option, the period
commencing on, and including, the relevant Exchange Date and ending
on, and including, the Expiration Date.
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Exchange
Date:
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With respect to
any exchange of Exchangeable Notes, the date on which the Holder
(as such term is defined in the Indenture) of such Exchangeable
Notes satisfies all of the requirements for exchange thereof as set
forth in Section 13.02 of the Indenture.
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Exercisable
Options:
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Upon the
occurrence of an Exchange Date, a number of Options equal to the
Applicable Percentage times the number of Exchangeable Notes
exchanged on such Exchange Date shall become Exercisable Options
hereunder; provided that (i) Exchangeable Notes surrendered
for exchange prior to March 1, 2012 or (ii)
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Exchangeable
Notes surrendered for exchange in connection with a transaction
described in clause (1) of the definition of Designated Event (as
such term is defined in the Indenture) pursuant to Section 13.11 of
the Indenture (a “ Make Whole Exchange ”), in
each case shall not cause any Options hereunder to become
Exercisable Options and, in lieu thereof, Section 9(n) shall
apply.
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Expiration
Time:
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The Valuation
Time
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Expiration
Date:
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The Scheduled
Trading Day immediately preceding June 1, 2012, subject to earlier
exercise.
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Multiple
Exercise:
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Applicable, as
described under Exercisable Options above.
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Automatic
Exercise:
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Applicable; and
means that in respect of an Exercise Period, a number of Options
not previously exercised hereunder equal to the number of
Exercisable Options shall be deemed to be exercised on the final
day of such Exercise Period for such Exercisable Options;
provided that such Options shall be deemed exercised only to
the extent that Counterparty has provided a Notice of Exercise to
Dealer.
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Notice of
Exercise:
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Notwithstanding
anything to the contrary in the Equity Definitions, in order to
exercise any Exercisable Options, Counterparty must notify Dealer
on or prior to 5:00 p.m. (New York City time) on the Expiration
Date and need only specify the number of such Exercisable
Options.
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Settlement
Averaging Period:
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For any
Exercisable Option, if Counterparty has, on or following March 1,
2012, delivered a Notice of Exercise to Dealer with respect to such
Exercisable Option with an Exchange Date occurring on or following
March 1, 2012, the 50 (fifty) consecutive Valid Days commencing on,
and including, the 52nd Scheduled Valid Day immediately prior to
June 1, 2012.
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Valuation
Time:
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At the close of
trading of the regular trading session on the Exchange;
provided that if the principal trading session is extended,
the Calculation Agent shall determine the Valuation Time in its
reasonable discretion.
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Market
Disruption Event:
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Notwithstanding
anything to the contrary in the Equity Definitions, as defined in
the Indenture.
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Settlement Terms:
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Settlement
Method Election:
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Applicable, and
means that (i) Counterparty may elect Cash Settlement in part and
Net Share Settlement in part and (ii) the percentage of Exercisable
Options to which Cash Settlement applies (the “ Cash
Settlement Percentage ”) shall be the same for all
Exercisable
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Options and
shall be specified by Counterparty when it makes its election;
provided that Counterparty may not elect Cash Settlement,
whether in whole or in part, in respect of any Options hereunder,
and Cash Settlement shall not apply notwithstanding any notice
delivered by Counterparty, unless Counterparty represents and
warrants to Dealer in writing (which may be part of the Cash
Settlement election notice) on the Cash Settlement election date
that, as of such date, none of the Company and its officers and
directors is aware of any material non-public information with
respect to itself or the Shares.
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The definition
of “Settlement Method Election” in Section 7.1 of the
Equity Definitions is hereby amended by (i) inserting “or Net
Share Settlement” after “Cash Settlement” in the
sixth line, (ii) deleting the words “or Physical
Settlement” in the sixth and seventh lines, (iii) deleting
the words “oral telephonic notice if practicable, and
otherwise” from the phrase in the last parenthesis of the
first sentence, (iv) deleting the phrase “and the Electing
Party will execute and deliver to the other party or, if
applicable, such agent, a written confirmation confirming the
substance of any telephonic notice within one Scheduled Trading Day
of that notice” in the second sentence and (v) deleting the
third sentence of Section 7.1.
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Electing
Party:
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Counterparty
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Settlement
Method Election Date:
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The Scheduled
Valid Day immediately preceding the Settlement Averaging
Period
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Default
Settlement Method:
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Net Share
Settlement
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Net Share
Settlement:
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If applicable,
Dealer will deliver to Counterparty, on the relevant Settlement
Date, a number of Shares equal to the Net Shares in respect of any
Exercisable Option exercised or deemed exercised hereunder. In no
event will the Net Shares be less than zero.
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Net
Shares:
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In respect of
any Exercisable Option exercised or deemed exercised, a number of
Shares equal to the product of (x) 100% minus the Cash
Settlement Percentage and (y) (i) the Option Entitlement multiplied
by (ii) the sum of the quotients, for each Valid Day during the
Settlement Averaging Period of (A) (1) the amount by which the Cap
Price exceeds the Strike Price, if the Relevant Price on such Valid
Day is equal to or greater than the Cap Price; (2) the amount by
which such Relevant Price exceeds the Strike Price, if such
Relevant Price is greater than the Strike Price but less than the
Cap Price or (3) zero, if such Relevant Price is less than or equal
to the Strike Price; divided by (B) such Relevant Price,
divided by (iii) the number of Valid Days in such Settlement
Averaging Period.
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Dealer will
deliver cash in lieu of any fractional Shares to be delivered with
respect to any Net Shares valued at the Relevant Price for the last
Valid Day of the Settlement Averaging Period.
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Settlement
Date:
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For any
Exercisable Option, the date Shares will be delivered with respect
to the Exchangeable Notes related to such Exercisable Options,
under the terms of the Indenture.
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Other
Applicable Provisions in Respect of Net Share
Settlement:
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The provisions
of Sections 9.1(c), 9.8, 9.9, 9.11, 9.12 and 10.5 of the Equity
Definitions will be applicable, except that all references in such
provisions to “Physically-settled” shall be read as
references to “Net Share Settled”. “ Net Share
Settled ” in relation to any Option means that Net Share
Settlement is applicable to that Option.
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Cash
Settlement:
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If applicable,
settlement shall occur in accordance with Section 8.1 of the Equity
Definitions and the modifications provided in this Confirmation,
except that Cash Settlement Payment Date shall be the Settlement
Date as if Net Share Settlement had applied to such Exercisable
Options.
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Option Cash
Settlement Amount:
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For each
Exercisable Option exercised or deemed exercised hereunder, an
amount equal to the product of (x) the Cash Settlement Percentage
and (y) (i) the Option Entitlement multiplied by (ii) the sum of,
for each Valid Day during the Settlement Averaging Period, the
quotient of the Strike Price Differential for such day and the
number of Valid Days in such Settlement Averaging
Period.
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Strike Price
Differential:
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For each day
during the Settlement Averaging Period, the lesser of:
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(i) the greater
of (a) the Reference Price minus the Strike Price and (b)
zero; and
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(ii) the Cap
Price minus the Strike Price.
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Valid
Day:
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means
“Trading Day” as defined in the Indenture.
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Scheduled Valid
Day:
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A day that is
scheduled to be a Valid Day.
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Relevant
Price:
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On any Valid
Day, the per Share volume-weighted average price as displayed under
the heading “Bloomberg VWAP” on Bloomberg page
“PEI <equity> AQR” (or its equivalent successor
if such page is unavailable) in respect of the period from the
scheduled opening time of the Exchange to the Scheduled Closing
Time of the Exchange on such Valid Day (or if such volume-weighted
average price is unavailable, the
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market value of
one Share on such Valid Day, as determined, using a volume-weighted
average method, by the Calculation Agent).
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Settlement
Currency:
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USD
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Representation
and Agreement:
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Notwithstanding
Section 9.11 of the Equity Definitions, the parties acknowledge
that any Shares delivered to Counterparty pursuant to Net Share
Settlement above shall be, upon delivery, subject to restrictions
and limitations arising from Counterparty’s status under
applicable securities laws and the Pennsylvania Real Estate
Investment Trust Trust Agreement, as amended and restated as of
December 16, 1997, as further amended from time to time (the
“ Trust Agreement ”).
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3. Additional Terms Applicable to
the Transaction:
Adjustments Applicable to the
Transaction:
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Potential
Adjustment Events:
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Notwithstanding
Section 11.2(e) of the Equity Definitions, a “Potential
Adjustment Event” means an occurrence of any event or
condition, as set forth in Section 13.05 of the Indenture, that
would result in an adjustment to the Exchange Rate of the
Exchangeable Notes; provided that in no event shall there be
any adjustment hereunder as a result of an adjustment to the
Exchange Rate pursuant to the third paragraph of Section 13.05(g)
or Section 13.11 of the Indenture or pursuant to the Registration
Rights Agreement (as defined in the Indenture).
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Method of
Adjustment:
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Calculation
Agent Adjustment, which means, notwithstanding anything to the
contrary in the Equity Definitions, upon any adjustment to the
Exchange Rate of the Exchangeable Notes pursuant to the Indenture
(other than pursuant to the third paragraph of Section 13.05(g) or
Section 13.11 of the Indenture or pursuant to the Registration
Rights Agreement (as defined in the Indenture)), (i) the
Calculation Agent shall make a corresponding adjustment to any of
the Strike Price, Number of Options and the Option Entitlement and
(ii) the Calculation Agent may, in its sole discretion, make any
adjustment consistent with the Calculation Agent Adjustment set
forth in Section 11.2(c) of the Equity Definitions to the Cap Price
or any other variable relevant to the exercise, settlement or
payment for the Transaction (other than the Strike Price) to
preserve the fair value of the Options to Dealer after taking into
account such Potential Adjustment Event; provided further
that in no event shall the Cap Price be less than the Strike
Price.
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Extraordinary Events:
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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
described in clauses (i), (ii) or (iii) of the last paragraph of
Section 13.05(g) of the Indenture.
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Tender
Offers:
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Applicable;
provided that notwithstanding Section 12.1(d) of the Equity
Definitions, a “Tender Offer” means the occurrence of
any event or condition set forth in Section 13.05(e) of the
Indenture.
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Consequence of
Merger Events/ Tender Offers:
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Notwithstanding
Sections 12.2 and 12.3 of the Equity Definitions, upon the
occurrence of a Merger Event or a Tender Offer:
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(i) the
Calculation Agent shall make a corresponding adjustment in respect
of any adjustment under the Indenture to any one or more of the
nature of the Shares, Strike Price, Number of Options and the
Option Entitlement; provided, however, that such adjustment
shall be made without regard to any adjustment to the Exchange Rate
for the issuance of additional shares as set forth in the third
paragraph of Section 13.05(g) or Section 13.11 of the Indenture or
pursuant to the Registration Rights Agreement (as defined in the
Indenture); and
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(ii) the
Calculation Agent may, in its sole discretion, make any adjustment
consistent with the Modified Calculation Agent Adjustment set forth
in Section 12.2(e) or 12.3(d) of the Equity Definitions, as
applicable, to the Cap Price or any other variable relevant to the
exercise, settlement or payment for the Transaction (other than the
Strike Price); provided that in no event shall the Cap Price
be less than the Strike Price;
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provided that, with respect to a Merger Event, if the
consideration for the Shares includes (or, at the option of a
holder of Shares, may include) 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; and provided further that,
for the avoidance of doubt, adjustments shall be made pursuant to
the provisions of subparagraphs (i) and (ii) above regardless of
whether any Merger Event or Tender Offer gives rise to a Make Whole
Exchange.
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Nationalization, Insolvency or
Delisting:
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Cancellation
and Payment (Calculation Agent Determination); provided
that, in addition to the provisions of Section 12.6(a)(iii) of the
Equity Definitions, it will also constitute a Delisting if the
Exchange is located in the United States and the Shares
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are not
immediately re-listed, re-traded or re-quoted on any of the New
York Stock Exchange, the American Stock Exchange, the NASDAQ Global
Select Market or the NASDAQ Global Market (or their respective
successors); if the Shares are immediately re-listed, re-traded or
re-quoted on any of the New York Stock Exchange, the American Stock
Exchange, the NASDAQ Global Select Market or the NASDAQ Global
Market (or their respective successors), such exchange or quotation
system shall thereafter be deemed to be the Exchange.
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Additional
Disruption Events:
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Change
in Law:
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Applicable
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Failure to Deliver
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Applicable
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Hedging Disruption:
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Applicable
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Increased Cost of Hedging:
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Applicable
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Hedging
Party:
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For all
applicable Additional Disruption Events, Dealer.
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Determining Party:
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For all
applicable Additional Disruption Events, Dealer.
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Non-Reliance:
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Applicable
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Additional
Termination Events:
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If any event of
default resulting in acceleration under the terms of the
Exchangeable Notes, as set forth in Section 6.01 of the Indenture,
shall occur with respect to Counterparty, then such event shall
constitute an Additional Termination Event applicable to the
Transaction with respect to which Counterparty shall be deemed to
be the sole Affected Party and the Transaction shall be the sole
Affected Transaction.
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If any
provision of the Indenture or the Exchangeable Notes is amended,
modified, supplemented or waived without the written consent of
Dealer, Counterparty shall provide Dealer and the Calculation Agent
with notice thereof on or prior to the effective date thereof and,
if the Calculation Agent determines that such amendment,
modification, supplement or waiver has a material effect on the
Transaction or Dealer’s ability to hedge all or a portion
(“ Affected Portion ”) of the Transaction, in
each case determined in its reasonable judgment, then such event
(an “ Amendment Event ”) shall constitute an
Additional Termination Event, in which case (x) the sole Affected
Transaction shall consist of a transaction identical to the
Transaction except that Number of Options for such Affected
Transaction shall equal the Affected Portion and Counterparty shall
be deemed the sole Affected Party and (y) the Transaction shall
remain in full force and effect, except that the Number of Options
subject to the Transaction immediately prior to such amendment,
modification, supplement or waiver shall be reduced by the Affected
Portion.
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If any
Exchangeable Notes are repurchased (whether in connection with a
put of Exchangeable Notes by holders thereof pursuant to the terms
of the Indenture as a result of a fundamental change, howsoever
defined, or for any other reason) by Counterparty or any of its
subsidiaries or if Counterparty gives notice to Dealer that it
intends to repurchase any Exchangeable Notes, then Counterparty may
notify Dealer that it wishes to designate an Early Termination Date
with respect to the portion of the Transaction relating to the
number of Exchangeable Notes that cease to be outstanding in
connection with or as a result of such repurchase and the parties
shall negotiate in good faith and in a commercially reasonable
manner the timing, pricing and other terms of such designation. For
the avoidance of doubt, no such designation shall be made if, after
such negot
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