EX-99 2 ex-1.txt EXHIBIT 1 EXHIBIT 1 ENGLISH TRANSLATION FOR INFORMATION PURPOSES ONLY Morgan Stanley MORGAN STANLEY & CO. INTERNATIONAL LIMITED 25 CABOT SQUARE CANARY WHARF LONDON E14 4QA, ENGLAND March 22, 2004 Equity Swap Transaction CAJA DE AHORROS Y PENSIONES DE BARCELONA - LA CAIXA AVENIDA DIAGONAL 621-629 08028 BARCELONA, SPA -------------------------------------------------------------------------------- Dear Sir/Madam: The purpose of this letter agreement (this "Confirmation") is to confirm the terns and conditions of the Transaction entered into between Morgan Stanley & Co. International Limited ("MSIL") and you as counterparty ("Counterparty" and together with MSIL, the "Parties") on the Trade Date specified below (the "Transaction"). This Confirmation constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 2000 ISDA Definitions (other than Articles 10 through 17) (the "Swap Definitions") and in the 2002 ISDA Equity Derivatives Definitions (the "Equity Definitions", and together with the Swap Definitions, the "Definitions"), in each case as published by the International Swaps and Derivatives Association, Inc. ("ISDA") are incorporated into this Confirmation. In the event of any inconsistency between the Swap Definitions and the Equity Definitions, the Equity Definitions will govern. In the event of any inconsistency between either set of Definitions and this Confirmation, this Confirmation will govern. Any reference to a currency shall have the meaning contained in the 1998 ISDA FX and Currency Option Definitions, as published by ISDA. 1. This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of 23 December, 1997, as amended and supplemented from time to time (the "Agreement"), between the Parties. All provisions in the Agreement govern this Confirmation except as expressly modified below. 2. The terms of the particular Transaction to which this Confirmation relates are as follows: General Terms: Trade Date: March 19, 2004 Effective Date. March 24, 2004 Termination Date: May 2, 2005 Settlement Currency: EUR Party A: Morgan Stanley & Co. International Limited ("MSRL") Party B: Caja de Ahorros y Pensiones de Barcelona ("La Caixa") Shares: TELEFONICA SA (Scdol "5732524") Number of Shares ("N") 37,500,000 (subject to adjustment following partial early termination) Exchange: Mercado Continuo Currency Business Day: TARGET Settlement Day Financial place for the Purpose of determining Business Day: TARGET Calculation Agent: MSIL acting in good faith and in a commercially reasonable manner. If the other party objects, by notice, to a determination made by the Calculation Agent within three Exchange Business Days of notice of that determination, the parties shall negotiate in good faith during a maximum period of five Exchange Business Days, commencing on the date of receipt of the objection notice, to agree on a determination. Falling such agreement, Party A and Party B will, on a best efforts basis, designate, within one Exchange Business Day from expiry of the above five Exchange Business Day period, a mutually acceptable independent leading dealer in options on the Share (the Substitute Calculation Agent). If they are unable to agree on the Substitute Calculation Agent, each of the parties shall promptly choose an independent leading dealer in options on the Share and instruct the parties so chosen to designate, within one Exchange Business Day from the date on which both independent leading dealers are chosen, a third independent leading dealer in options on the Share (the Substitute Calculation Agent). The determination of the Substitute Calculation Agent shall be binding upon the parties in the absence of manifest error. The costs of the Substitute Calculation Agent shall be borne equally by the Party A and Party B. 2 Reference Price ("RP"): EUR 12.39. Settlement Method: Physical Delivery or Cash Settlement at the option of Party B. Party B must notify its choice to Party A not later than 1 month prior to the Termination Date. In the absence of notification, Cash Settlement Method shall prevail. If Party B elects Cash Settlement, Party A will charge a Commission as defined below. (A) Physical Delivery Method: (i) On the Termination Date, Party B shall deliver to Party A the Number of Shares against payment by Party A of the Current Market Price ("CMP") as agreed between the parties multiplied by the Number of Shares. (a) Sections 9.4 and 9.8 of the Equity Definitions shall apply and the Termination Date shall be deemed to be the << Settlement Date >> as defined in Section 9.4. (b) Sections 9.9, 9.11 and 9.12 of the Equity Definitions shall also be applicable. (c) Failure to Deliver: Applicable. (d) Valuation Date: three Business Days before the Termination Date. (iii) The First Equity Amount Payer will pay on the Settlement Date the First Equity Amount determined in accordance with the following; First Equity Amount Payer: Party B. Equity Notional Reset: Not applicable. Settlement Date: The Termination Date, subject to adjustment in accordance with the Following Business Day Convention. First Equity Amount: If, on the Valuation Date, the Calculation Agent determines that the Current Market Price is greater than the Reference Price, then the First Equity Amount Payer shall pay the following amount: (CMP - RP) x N (ii) The Second Equity Amount Payer will pay on the Settlement Date the Second Equity Amount determined in accordance with the following: Second Equity Amount Payer: Party A. Equity Notional Reset: Not applicable. Settlement Date: The Termination Date, subject to adjustment in accordance 3 with the Following Business Day Convention. Second Equity Amount: If, on the Valuation Date, the Calculation Agent determines that the Current Market Price is lower than the Reference Price, then the Second Equity Amount Payer shall pay the following amount: (RP - CMP) x N (B) Cash Settlement Method: (i) Purchase Averaging Period: The 12 Days period ending on the third Business Day before the Termination Date. Before the beginning of this period, Parry A has the right to adjust this period in case the liquidity of the Shares has changed so that it does not need to purchase more than 10% of the Assumed Average Daily Volume of the Shares on any day during this period. Assumed Average Daily Volume: The average daily volume for the Shares over a period of one month prior to a purchase during the Purchase Averaging Period. Settlement Price ("SP"): The average price at which Party A acting in a commercially reasonable manner buys the Number of Shares in the market during the Purchase Averaging Period. Each daily average price will equal the Volume Weighted Average Price ("VWAP") as quoted on Bloomberg page AQR X for that day. Commission: 0,05% x Notional Amount Averaging Date Market Disruption: Postponement. Valuation Date: The last day of the Purchase Averaging Period. (ii) The First Equity Amount Payer will pay on the Cash Settlement Payment Date the First Equity Amount determined in accordance with the following: First Equity Amount Payer: Party B. Equity Notional Reset: Not applicable. Cash Settlement Payment Date: The Termination Date, subject to adjustment in accordance with the Following Business Day Convention. 4 First Equity Amount: If, on the Valuation Date, the Calculation Agent determines that the Settlement Price is greater than the Reference Price, then the First Equity Amount Payer shall pay the following amount: (SP -RP) x N (iii) The Second Equity Amount Payer will pay on the Cash Settlement Payment Date the Second Equity Amount determined in accordance with the following: Second Equity Amount Payer: Party A. Equity Notional Reset: Not applicable. Cash Settlement Payment Date: The Termination Date, subject to adjustment in accordance with the Following Business Day Convention. Second Equity Amount: If, on the Valuation Date, the Calculation Agent determines that the Settlement Price is lower than the Reference Price, then the Second Equity Amount Payer shall pay the following amount: (RP-SP) x N Floating Amount: The Floating Amount Payer pays on the Floating Payment Date a Floating Amount determined in accordance with the following: Floating Amount Payer: Party A. Notional Amount: 464,625,000 Euros. Floating Payment Dates: The 24th day of each month from, and including 24 April 2004, to and including the Termination Date, subject to adjustment in accordance with the Following Business Day Convention. Floating Rate Option: EUR-EONIA The average of the overnight daily EONIA for each Calculation Period (first day included, last day excluded). For non-Business Days, the fixing used shall be that of the prior Business Day. The average is calculated as follows: AVG = OvernightEONIAdaily fixings --------------------------- Numberofdays Designated Maturity: Average EONIA. 5 Floating rate for initial Calculation Period: To be determined on the day prior to the last day of the initial Calculation Period. Spread: -0.40%. Day Count Fraction: Actual/360. Reset Dates: The first day of each Calculation Period. Financial Place for Business Days for the purpose of determining the Floating Rate: TARGET Settlement Day. If Cash Settlement Method applies, Party B will pay to Party A at the Floating Payment Date the daily cost of financing of purchasing the Shares during the Purchase Averaging Period. The cost of financing will be calculated on the basis of the EONIA, of the number of shares bought at each date during the Purchasing Averaging Period and of the price of the purchases. The Dividend Amount Payer pays on the Dividend Payment Date a Dividend Amount determined in accordance with the following: Dividend Amount Payer: Party B. Dividend Amount: An amount equal to the product of the Ex Amount and the Number of Shares. Only if the Cash Settlement Method is applied and if a dividend is paid during the Purchase Averaging Period, Party A will pay back to Party B 100% of the gross dividend on the Number of Shares, which have been bought by Party A at the moment of the actual payment date of the Dividends. Dividend Payment Date: The third Business Day following the actual payment date of the dividends. Dividend Period: Means, in respect of the Dividend Amount Payer, a period from, and excluding, the Trade Date, to, but including the Termination Date. Reinvestment of Dividends: Not applicable. Early Termination: Party B has the right, under normal market conditions and except during a period of 15 business days before the actual date of a dividend payment, to ask for the total or partial early termination of the Transaction (the "Request"), specifying the selected Settlement Method. In the event that Physical Delivery is selected, the early termination date shall be the 4th Business Day following the receipt of the Request. In the event Cash Settlement is selected, the Calculation Agent will determine the early termination date (which will depend on the liquidity and volatility of the Shares at the time of the Request), and the definition of Purchase Averaging Period will be construed accordingly. In addition, the Calculation Agent will determine the cash amounts to be paid by Party A or Party B depending on the 6 Settlement Method. In case of a partial early termination, all the clauses included in this Confirmation will continue in force, except for the Number of Shares that must be diminished by the successive shares affected by partial early terminations. In case of a total or partial early termination: (a) (i) In case of a total early termination, Party A will pay Party B on the Early Termination Date a Floating Amount determined in accordance with the following: N x RP x (EONIA-0.40%) x (D/30) D = Number of days passed from the last Floating Payment Date. (ii) In case of a partial early termination, Party A will pay Party B on the next following Floating Payment Date (EONIA - 0.40%), on the original Notional Amount from the last Floating Payment Date (included) up to the early termination date (excluded) and (EONIA - 0.40%) on the new Notional Amount from the early termination date (included) up to the next Floating Payment Date (excluded). (b) In case of Cash Settlement Method, if the Settlement Price was higher than the Reference Price on the Early Termination Date, Party B will pay Party A the following amount: (SP-RP) x Number of Shares the subject of early termination (c) In case of Cash Settlement Method, if the Settlement Price was lower than the Reference Price on the Early Termination Date, Party A will pay Party B the following amount: (RP - SP) x Number of Shares the subject of early termination (d) In case of Physical Delivery Method, Party B will deliver to Party A the Number of Shares the subject of early termination against payment of the Current Market Price. If the Current Market Price was higher than the Reference Price on the Early Termination Date, Party B will pay to Party A the following amount: (CMP -RP) x Number of Shares the subject of early termination (e) In case of Physical Delivery Method, Party B will deliver to Party A the Number of Shares the subject of early termination against payment of the Current Market Price. If the Current Market Price was lower than the Reference Price on the Early Termination Date, Party A will pay Party B, the following amount: (RP - CMP) x Number of Shares the subject of early termination Prorogation: Automatic for additional periods of one year, subject to the right for either party to re-negotiate any terms 7 of the Transaction. Forty days prior to the Valuation Date, any Party may request the other Party not to postpone the Termination Date of the Transaction. After receiving this request, both Parties agree to negotiate in good faith to accommodate such request. Should the parties not reach an agreement, the Transaction shall terminate on the schedule Termination Date without any penalties. Adjustments: Notwithstanding anything to the contrary in the Agreement or elsewhere in this Confirmation, MSIL, shall be the Calculation Agent with respect to Merger Events, Tender Offers and Potential Adjustment Events. (i) Potential Adjustment Events: Adjusted as discussed between the parties, but failing agreement Calculation Agent Adjustment will prevail. (ii) Consequences of Merger Events and Tender Offers: (a) Share-for-Share: Adjusted as discussed between the parties, but failing agreement Modified Calculation Agent Adjustment will prevail. (b) Share-for-Other: Adjusted as discussed between the parties, but failing agreement Modified Calculation Agent Adjustment will prevail. (c) Share-for-Combined: Adjusted as discussed between the parties, but failing agreement Modified Calculation Agent Adjustment will prevail. Nationalisation or Insolvency or Delisting: Cancellation and Payment. Additional Disruption Events: (a) Change in Law: Applicable (b) Failure to Deliver: Not Applicable (c) Insolvency Filing: Not Applicable (d) Hedging Disruption: Applicable Hedging Party: MSIL (e) Loss of Stock Borrow: Applicable. Maximum Stock Loan Rate: 0.88% affecting at least 50% of the Number of Shares the subject of this Transaction. Party A will inform Party B when the Maximum Stock Loan Rate is affecting at least 10% of the Number of Shares the subject of this Transaction. Hedging Party: MSIL. 8 (f) Increased Cost of Stock Borrow: Not Applicable (g) Increased Cost of Hedging: Not Applicable Determining Party (Merger Events, Tender Offers and Additional Disruption Events: MSIL Where a Change in Law or Hedging Disruption or Loss of Stock Borrow has occurred as a result of which Party A decides to terminate the Transaction, Party A will pay Party B an indemnity equal to the following: 0.40% x Notional Amount x D where 'D' equals the number of days from Trade Date to Early Termination Date. Non-Reliance: Each party to this Transaction represents to the other that: (a) it is entering into this Transaction as principal (and not as agent or in any other capacity); (b) neither the other party nor any of its Affiliates or agents are acting as a fiduciary for it; (c) it is not relying upon any representations except those expressly set forth herein or in the ISDA Master Agreement (including this Confirmation); (d) it has consulted with its own legal, regulatory, tax, business, investments, financial, and accounting advisors to the extent that it has deemed necessary, and it has made its own investments, hedging and trading decisions based upon its own judgment and upon any advice from such advisors as it has deemed necessary and not upon any view expressed by the other party or any of its Affiliates or agents; and (e) it is entering into this Transaction with a full understanding of the terms, conditions and risks thereof and it is capable of and willing to assume such risks. Agreements and Acknowledgements Regarding Hedging Activities: Applicable Additional Acknowledgements: Applicable 9 3. Account Details: Account for payments to MSIL: Banque Paribas Paris (PARBFRPP) A/C MSIL 4427IX For further credit to Customer Account 06178BD9 Account for payments to Counterparty: To be provided by Counterparty 4. MSIL is not qualified to provide legal, accounting or tax advice and does not purport to provide such advice in this Confirmation. The Counterparty is not relying upon this Confirmation as providing legal, accounting or tax advice, as it is intended solely for the purpose of confirming an agreed transaction between the Counterparty and MSIL. MSIL recommends that clients always confer with their own legal, accounting and tax counsel when signing any Confirmation. Disclosures Party A and Party B represent and undertake that they have made and will make all applicable disclosures relevant to this Transaction. 5. Governing law: the laws of England (without reference to choice of law doctrine). 6. Collateral: The obligations of the parties ate subject to credit support requirements. The parties agree that any amounts delivered by one party to the other in order to secure obligations under this Transaction will be deemed to be held in accordance with and subject to the terms of an agreement in the form of an English law Credit Support Annex (the "Credit Support Agreement") which will constitute a Credit Support Document under the ISDA Master Agreement executed between the parties, as if we had executed an agreement in such form with the following elections on the Trade Date of this Transaction: Threshold: Zero Minimum Transfer Amount: EUR 125,000,000 Should any of the parties be downgraded below investment grade, by either S&P or Moody's, then the Minimum Transfer Amount in relation to such party will be reduced to zero. Eligible Collateral: EUR Cash Interest Rate: EONIA For the avoidance of doubt, following a partial or full termination of the Transaction, the exposure of the Transaction will go down, which will be reflected in a partial or full return of Eligible Collateral. 10 7. If, in the case of (i) a partial or full early termination or (ii) scheduled termination on the Termination Date, Party B has elected Cash Settlement Method and consequently Purchase Averaging Period applies, Party A will advise Party B on a daily basis of the Number of Shams that have been bought in relation to such Transaction. Confirmed as of the date first written above: CAJA DE AHORROS Y PENSIONES DE MORGAN STANLEY & CO. INTERNATIONAL BARCELONA LIMITED /s/ Mr. Antonio Brufau Niubo /s/ Roy Martins By: Mr. Antonio Brufau Niubo By: Roy Martins Its: Director General Its: Executive 11