Offering Memorandum
CANYON CAPITAL CLO 2012-1, LTD. CANYON CAPITAL CLO 2012-1, LLC
U.S.$ 3,000,000 Class X Senior Notes Due 2015 U.S.$ 200,000,000 Class A Senior Notes Due 2024 U.S.$ 41,000,000 Class B-1 Senior Notes Due 2024 U.S.$ 7,500,000 Class B-2 Senior Notes Due 2024 U.S.$ 24,000,000 Class C Deferrable Mezzanine Notes Due 2024 U.S.$ 14,500,000 Class D Deferrable Mezzanine Notes Due 2024 U.S.$ 14,000,000 Class E Deferrable Junior Notes Due 2024 U.S.$ 37,500,000 Subordinated Notes Due 2024
The Secured Notes will be secured by a portfolio of assets to be managed by Canyon Capital Advisors LLC, consisting primarily of senior secured loans, senior secured notes, second lien loans, senior secured bonds, senior unsecured loans and senior unsecured bonds. The attached term sheet (the "Term Sheet") and base offering memorandum (the "Base"), together with this introductory statement (this "Introductory Statement"), constitute the "Offering Memorandum." None of the Base, the Term Sheet or this Introductory Statement may be used to offer or sell Securities unless accompanied by all other components of the Offering Memorandum. Investing in the Securities involves risks. See "Risk Factors" beginning on page 34. Significant restrictions apply to the status of Securityholders and the transfer of Securities. See "Transfer Restrictions" beginning on page 122. The Securities have not been, and will not be, registered under the U.S. Securities Act or the securities laws of any state of the United States or any other relevant jurisdiction. Neither of the Issuers will be registered under the U.S. Investment Company Act in reliance on the exemption provided by Section 3(c)(7) thereof. The Securities will be offered and sold in transactions exempt from registration under the U.S. Securities Act (a) to persons that are both (i) Qualified Institutional Buyers (or, in the case of Subordinated Notes, Accredited Investors) and (ii) Qualified Purchasers (or in the case of Subordinated Notes, Knowledgeable Employees) or companies beneficially owned exclusively by Qualified Purchasers (or in the case of Subordinated Notes, Knowledgeable Employees) and (b) outside the United States to non-U.S. Persons in reliance on Regulation S. It is a condition of the issuance of the Securities that the Class X Notes and the Class A Notes be rated Aaa (sf) by Moody’s and AAA (sf) by S&P; the Class B-1 Notes be rated at least AA (sf) by S&P; the Class B-2 Notes be rated at least AA (sf) by S&P; the Class C Notes be rated at least A (sf) by S&P; the Class D Notes be rated at least BBB (sf) by S&P; and the Class E Notes be rated at least BB (sf) by S&P. The Subordinated Notes will not be rated. Application has been made to the Irish Stock Exchange Limited (the "Irish Stock Exchange") for the Securities (other than the Class X Notes) to be admitted to the Official List (the "Official List") and trading on its Global Exchange Market. This Offering Memorandum constitutes a listing particulars for the purpose of the application and has been approved by the Irish Stock Exchange. There can be no assurance that such listing will be granted or maintained. The Class X Notes will not be listed on any securities exchange. Morgan Stanley & Co. LLC expects to offer the Securities in individually negotiated transactions and to deliver the Securities to purchasers on or about the Closing Date. It is a condition of the issuance of the Securities that all of the Securities are issued concurrently. January 23, 2013 ______MORGAN STANLEY Sole Bookrunner TABLE OF CONTENTS
Important Notice Regarding The Securities...... xiii Available Information...... xv Forward-Looking Statements...... xvi
Term Sheet ...... 1 General Terms...... 1 The Collateral Assets ...... 8 Sales and Purchases ...... 11 Collateral Quality Tests ...... 16 Coverage Tests, Interest Diversion Test and Other Tests ...... 21 Priorities of Payment...... 24 Certain Transaction Parties ...... 29 Security Identifying Numbers...... 32 Listing and General Information...... 33 Legal Matters ...... 33
Base Offering Memorandum...... 34 Risk Factors...... 34 Description of Certain Terms of the Securities...... 63 The Indenture ...... 71 The Collateral Management Agreement ...... 81 Hedge Agreements...... 87 Certain Issuer Accounts ...... 88 ETB Subsidiary...... 91 Transaction Parties...... 92 Maturity and Prepayment Considerations...... 95 Plan of Distribution...... 96 Settlement and Clearing...... 98 U.S. Federal Income Tax Considerations ...... 102 Cayman Islands Tax Considerations...... 116 ERISA Considerations ...... 118 Transfer Restrictions...... 122 Glossary ...... 134 Index of Defined Terms ...... 180
Any non-English language text that is included within this document is for convenience purposes only and does not form part of this Offering Memorandum. New Hampshire
NOTICE TO RESIDENTS OF NEW HAMPSHIRE
FOR NEW HAMPSHIRE RESIDENTS ONLY: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (THE "RSA") WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
Australia
NOTICE TO RESIDENTS OF AUSTRALIA
No prospectus or other disclosure document (as defined in the Corporations Act 2001 of Australia ("Corporations Act")) in relation to the Securities has been, or will be, lodged with the Australian Securities and Investments Commission ("ASIC"), the Australian Securities Exchange operated by ASX Limited or any other regulatory body or agency in Australia. Accordingly:
(a) no offers for the issue or sale of the Securities may be made or invited in Australia (including an offer or invitation which is received by a person in Australia); and
(b) none of the final offering documents of the Securities nor any other draft, preliminary or definitive offering material, termsheet or advertisement relating to the Securities may be distributed or published in Australia, unless:
(i) the minimum aggregate consideration payable by each offeree is at least A$500,000 (or its equivalent in an alternate currency, and in either case, disregarding moneys lent by the offeror or its associates) or the offer otherwise does not require disclosure to investors under Parts 6D.2 or 7.9 of the Corporations Act;
(ii) the offer does not constitute an offer to a "retail client" for the purpose of section 761G of the Corporations Act;
(iii) such action complies with all applicable laws and regulations; and
(iv) such action does not require any document to be lodged with ASIC.
i ANY OFFER OF SECURITIES, INVITATION TO SUBSCRIBE FOR SECURITIES OR ISSUE OF SECURITIES IN AUSTRALIA THAT IS REGULATED BY THE CORPORATIONS ACT MUST CONSTITUTE AN EXCLUDED OFFER, EXCLUDED INVITATION, OR EXCLUDED ISSUE WITHIN THE MEANING GIVEN TO THOSE EXPRESSIONS IN THE CORPORATIONS ACT.
Austria
NOTICE TO RESIDENTS OF AUSTRIA
THIS OFFERING MEMORANDUM HAS BEEN CIRCULATED IN AUSTRIA FOR THE SOLE PURPOSE OF PROVIDING INFORMATION ABOUT THE SECURITIES TO A LIMITED NUMBER OF SOPHISTICATED INVESTORS IN AUSTRIA. THIS OFFERING MEMORANDUM IS MADE AVAILABLE ON THE CONDITION THAT IT IS SOLELY FOR THE USE OF THE RECIPIENT AS A SOPHISTICATED, POTENTIAL AND INDIVIDUALLY SELECTED INVESTOR AND MAY NOT BE PASSED ON TO ANY OTHER PERSON OR REPRODUCED IN WHOLE OR IN PART. THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE A PUBLIC OFFER (ÖFFENTLICHES ANGEBOT) IN AUSTRIA AND MUST NOT BE USED IN CONJUNCTION WITH A PUBLIC OFFERING IN AUSTRIA AND, THEREFORE, THE PROVISIONS OF THE INVESTMENT FUND ACT OF 1993 (INVESTMENTFONDSGESETZ 1993) DO NOT APPLY. CONSEQUENTLY, NO PUBLIC OFFERS OR PUBLIC SALES MAY BE MADE IN AUSTRIA IN RESPECT OF THE SECURITIES. THE SECURITIES ARE NOT REGISTERED IN AUSTRIA AND MAY NOT BENEFIT FROM TAX ADVANTAGES APPLICABLE TO REGISTERED SECURITIES. ALL PROSPECTIVE INVESTORS ARE URGED TO SEEK INDEPENDENT TAX ADVICE. THE INITIAL PURCHASER AND ITS RESPECTIVE AFFILIATES DO NOT GIVE TAX ADVICE.
ANMERKUNG FÜR EINWOHNER VON ÖSTERREICH
DIESER PROSPEKT IST IN ÖSTERREICH NUR ZU DEM ZWECK HERAUSGEGEBEN, UM EINER BESCHRÄNKTEN ANZAHL VON PROFESSIONELLEN MARKTTEILNEHMERN IN ÖSTERREICH INFORMATIONEN ÜBER DIE ANGEBOTENEN WERTPAPIERE ZU GEBEN. DIESER PROSPEKT WIRD UNTER DER BEDINGUNG ZUR VERFÜGUNG GESTELLT, DASS DIESER PROSPEKT AUSSCHLIESSLICH VOM EMPFÄNGER ALS EINEM PROFESSIONELLEN UND INDIVIDUELL AUSGESUCHTEN INVESTOR VERWENDET, NICHT AN IRGENDWELCHE ANDEREN PERSONEN WEITERGELEITET ODER TEILWEISE ODER VÖLLIG REPRODUZIERT WERDEN DARF. DIESER PROSPEKT STELLT KEIN ÖFFENTLICHES ANGEBOT IN ÖSTERREICH DAR, UND ER DARF AUCH NICHT IM ZUSAMMENHANG MIT EINEM ÖFFENTLICHEN ANGEBOT IN ÖSTERREICH VERWENDET WERDEN. DIE BESTIMMUNGEN DES INVESTMENTFONDSGESETZES 1993 FINDEN DAHER KEINE ANWENDUNG. FOLGLICH DÜRFEN IN ÖSTERREICH KEINE ÖFFENTLICHEN ANGEBOTE ODER VERKÄUFE DER ANGEBOTENEN WERTPAPIEREN GEMACHT WERDEN. DIE ANGEBOTENEN WERTPAPIERE SIND NICHT IN ÖSTERREICH ZUM ÖFFENTLICHEN ANGEBOT ZUGELASSEN UND ZIEHEN KEINEN NUTZEN AUS VORTEILHAFTEN STEUERREGELN, DIE AUF REGISTRIERTE WERTPAPIERE ANWENDBAR SIND. ALLE POTENTIELLEN INVESTOREN WERDEN DAHER DRINGEND AUFGEFORDERT, UNABHÄNGIGE STEUERBERATUNG EINZUHOLEN. DIE ERSTKÄUFER UND DIE MIT IHNEN VERBUNDENEN UNTERNEHMEN GEBEN KEINEN STEUERLICHEN RAT.
ii Cayman Islands NOTICE TO RESIDENTS OF THE CAYMAN ISLANDS No invitation may be made to the public in the Cayman Islands to subscribe for any of the Securities and this Offering Memorandum may not be given to any members of the public in the Cayman Islands. Cyprus
NOTICE TO RESIDENTS OF CYPRUS
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO THE PUBLIC IN CYPRUS OR TO ANYONE IN CYPRUS OTHER THAN A FIRM OFFERING INVESTMENT SERVICES, AN INSURANCE COMPANY OR AN UNDERTAKING FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
Denmark
NOTICE TO RESIDENTS OF DENMARK
THIS OFFERING MEMORANDUM HAS NOT BEEN FILED WITH OR APPROVED BY THE DANISH SECURITIES COUNCIL OR ANY OTHER REGULATORY AUTHORITY IN THE KINGDOM OF DENMARK.
European Economic Area
NOTICE TO RESIDENTS WITHIN THE EUROPEAN ECONOMIC AREA
THIS OFFERING MEMORANDUM IS ONLY DIRECTED AT PERSONS IN THE EUROPEAN ECONOMIC AREA ("EEA") WHO ARE "QUALIFIED INVESTORS" WITHIN THE MEANING OF ARTICLE 2(1)(E) OF DIRECTIVE 2003/71/EC, AS AMENDED, OR ARE PERSONS TO WHOM AN OFFER OF TRANSFERABLE SECURITIES MAY OTHERWISE BE MADE WITHOUT THE REQUIREMENT FOR AN APPROVED PROSPECTUS PURSUANT TO ARTICLE 3(2) OF THE PROSPECTUS DIRECTIVE.
THE SECURITIES WILL BE SUBJECT TO RESTRICTIONS ON TRANSFER WITHIN THE EEA AS SET FORTH BELOW.
EUROPEAN ECONOMIC AREA SELLING RESTRICTIONS
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State"), the Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the "Relevant Implementation Date") it has not made and will not make an offer of Securities which are the subject of the offering contemplated by this Offering Memorandum to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Securities to the public in that Relevant Member State:
iii (a) to any legal entity that is a "qualified investor" as defined in the Prospectus Directive;
(b) at any time to fewer than 100, or, if the Relevant Member State has implemented relevant provisions of the 2010 PD Amending Directive, 150 natural or legal persons (other than "qualified investors" as defined in the Prospectus Directive); or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Securities referred to in (a) to (c) above shall require the Issuers or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, (i) the expression an "offer of Securities to the public" in relation to any Securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Securities to be offered so as to enable an investor to decide to purchase or subscribe the Securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, (ii) the expression "Prospectus Directive" means Directive 2003/71/EC (as amended by the 2010 PD Amending Directive to the extent implemented in each Member State) and also includes any relevant implementing measures in each Relevant Member State and (iii) the expression "2010 PD Amending Directive" means Directive 2010/73/EU.
France
NOTICE TO RESIDENTS OF FRANCE
THIS OFFERING MEMORANDUM HAS NOT BEEN REGISTERED BY THE FRENCH COMMISSION DES OPÉRATIONS DE BOURSE AND THE SECURITIES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, TO THE PUBLIC IN THE REPUBLIC OF FRANCE. THIS OFFERING MEMORANDUM AND ANY OTHER OFFERING MATERIAL MAY NOT BE DISTRIBUTED TO THE PUBLIC IN THE REPUBLIC OF FRANCE. SUCH OFFERS, SALES AND DISTRIBUTIONS MAY ONLY BE MADE IN THE REPUBLIC OF FRANCE TO (I) QUALIFIED INVESTORS (INVESTISSEURS QUALIFIÉS) AND/OR (II) A RESTRICTED GROUP OF INVESTORS (CERCLE RESTREINT D’INVESTISSEURS), ALL AS DEFINED IN ARTICLE 6 OF ORDONNANCE NO 67-833 DATED 28TH SEPTEMBER, 1967 (AS AMENDED) AND DÉCRET NO.98-880 DATED 1ST OCTOBER, 1998.
INVESTORS IN FRANCE MAY ONLY PARTICIPATE IN THE ISSUE OF THE SECURITIES FOR THEIR OWN ACCOUNT IN ACCORDANCE WITH THE CONDITIONS SET OUT IN DÉCRET NO.98-880 DATED 1ST OCTOBER, 1998. THE SECURITIES MAY ONLY BE ISSUED, DIRECTLY OR INDIRECTLY, TO THE PUBLIC IN THE REPUBLIC OF FRANCE IN ACCORDANCE WITH ARTICLES 6 AND 7 OF ORDONNANCE NO 67-833 DATED 28TH SEPTEMBER, 1967 (AS AMENDED). WHERE THE ISSUE OF THE SECURITIES IS EFFECTED AS AN EXCEPTION TO THE RULES RELATING TO AN APPEL PUBLIC À L’ÉPARGNE IN FRANCE (PUBLIC OFFER RULES) BY WAY OF AN OFFER TO A RESTRICTED GROUP OF INVESTORS, SUCH INVESTORS MUST PROVIDE CERTIFICATION AS TO THEIR PERSONAL, PROFESSIONAL OR FAMILY RELATIONSHIP WITH A MEMBER OF THE MANAGEMENT OF THE ISSUER. PERSONS INTO WHOSE POSSESSION OFFERING MATERIAL COMES MUST INFORM THEMSELVES ABOUT AND OBSERVE SUCH RESTRICTIONS.
iv Germany
NOTICE REGARDING THE OFFERING IN GERMANY
THE SECURITIES WILL BE OFFERED OR SOLD OR PUBLICLY PROMOTED OR ADVERTISED IN GERMANY IN COMPLIANCE WITH THE PROVISIONS OF THE GERMAN SECURITIES PROSPECTUS ACT (WERTPAPIERPROSPEKTGESETZ) OR OF ANY OTHER LAWS APPLICABLE IN GERMANY GOVERNING THE ISSUE, OFFERING AND SALE OF SECURITIES. AS LONG AS THE SECURITIES HAVE A MINIMUM DENOMINATION OF AT LEAST THE EQUIVALENT OF EURO 100,000 THEY MAY BE OFFERED IN GERMANY. UPON REQUEST OF A GERMAN INVESTOR AND AS LONG AS NOT UNDULY EXPENSIVE OR BURDENSOME, THE ISSUER WILL MAKE AVAILABLE TO THE GERMAN INVESTORS AND PUBLISH IN THE ELECTRONIC EDITION OF THE FEDERAL GAZETTE (BUNDESANZEIGER) IN THE GERMAN LANGUAGE THE INFORMATION REQUIRED PURSUANT TO § 5(1) SENTENCE 1 IN CONNECTION WITH SENTENCE 2 OF THE GERMAN TAX INVESTMENT ACT (INVESTMENTSTEUERGESETZ). ALL PROSPECTIVE INVESTORS ARE URGED TO SEEK INDEPENDENT TAX ADVICE. THE INITIAL PURCHASER AND ITS AFFILIATES DO NOT GIVE TAX ADVICE.
HINWEIS BEZUEGLICH DES ANGEBOTS IN DEUTSCHLAND
DIE WERTPAPIERE WERDEN IM EINKLANG MIT DEN BESTIMMUNGEN DES WERTPAPIERPROSPEKTGESETZES ODER ALLER WEITEREN IN DEUTSCHLAND GELTENDEN GESETZLICHEN BESTIMMUNGEN ÜBER DIE BEGEBUNG, DAS ANGEBOT UND DEN VERKAUF VON WERTPAPIEREN ANGEBOTEN, VERKAUFT ODER ÖFFENTLICH BEWORBEN. SOWEIT DIE WERTPAPIERE EINE MINDESTSTÜCKELUNG MIT EINEM GEGENWERT VON EURO 50.000 HABEN, KÖNNEN SIE IN DEUTSCHLAND ANGEBOTEN WERDEN. AUF ANFRAGE UND SOLANGE NICHT UNVERHÄLTNISMÄSSIG TEUER ODER BESCHWERLICH MACHT DER EMITTENT DEN DEUTSCHEN ANLEGERN IN DEUTSCHER SPRACHE DIE ERFORDERLICHEN INFORMATIONEN GEMÄSS § 5 ABS. 1 SATZ 1 IN VERBINDUNG MIT SATZ 2 DES INVESTMENTSTEUERGESETZES IM ELEKTRONISCHEN BUNDESANZEIGER BEKANNT. POTENTIELLEN INVESTOREN WIRD DRINGEND EMPFOHLEN, UNABHÄNGIGE STEUERLICHE BERATUNG EINZUHOLEN. DIE ERSTKÄUFER UND DIE MIT IHNEN VERBUNDENEN UNTERNEHMEN GEBEN KEINEN STEUERLICHEN RAT.
Hong Kong
NOTICE TO RESIDENTS OF HONG KONG
This Offering Memorandum is being disseminated in Hong Kong by Morgan Stanley Asia Limited. This Offering Memorandum has not been registered with the Registrar of Companies in Hong Kong and its contents have not been reviewed by any regulatory authority in Hong Kong. Accordingly, (i) the Securities may not be offered, sold, transferred or delivered in Hong Kong by means of any document other than to persons who are "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and the Securities and Futures (Professional Investor) Rules made thereunder or in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of the Companies Ordinance; and (ii) no person may issue any invitation, advertisement or other document relating to the Securities whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except
v if permitted to do so under the applicable securities law of Hong Kong) other than with respect to the Securities which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules made thereunder.
India
NOTICE TO RESIDENTS OF INDIA
This Offering Memorandum has not been and will not be registered as a prospectus with the Registrar of Companies in India or with the Securities and Exchange Board of India. This Offering Memorandum or any other material relating to these Securities is for information purposes only and may not be circulated or distributed, directly or indirectly, to the public or any members of the public in India and in any event to not more than 50 persons in India. Further, persons into whose possession this Offering Memorandum comes are required to inform themselves about and to observe any such restrictions. Each prospective investor is advised to consult its advisors about the particular consequences to it of an investment in these Securities. Each prospective investor is also advised that any investment in these Securities by it is subject to the regulations prescribed by the Reserve Bank of India and the Foreign Exchange Management Act and any regulations framed thereunder.
Ireland
NOTICE TO RESIDENTS OF IRELAND
The Initial Purchaser represents, warrants and agrees that:
(i) it has not offered or sold and will not offer or sell any Securities to the public in Ireland prior to the publication of a prospectus in relation to the Securities, which has been approved by the Central Bank pursuant to the Prospectus (Directive 2003/71/EC) Regulations 2005, except in circumstances which do not require the publication of a prospectus pursuant to Article 3(2) of the Prospectus Directive;
(ii) to the extent applicable, it has complied with and will comply with all applicable provisions of the Irish Companies Acts 1963-2009;
(iii) to the extent applicable, it will not underwrite the issue of, place or otherwise act in Ireland in respect of the Securities, otherwise than in conformity with the provisions of the European Communities (Markets in Financial Instruments) Regulations 2007 (as amended), and it will conduct itself in accordance with any codes or rules of conduct and any conditions or requirements, or any other enactment, imposed or approved by the Central Bank with respect to anything done by it in relation to the Securities; and
(iv) to the extent applicable, it will not underwrite the issue of, place or otherwise act in Ireland in respect of the Securities, otherwise than in conformity with the provisions of the Market Abuse (Directive 2003/6/EC) Regulations 2005 and any rules issued by the Central Bank pursuant thereto.
vi Israel
NOTICE TO RESIDENTS OF ISRAEL
THE INITIAL PURCHASER HAS REPRESENTED AND AGREED WITH THE ISSUERS THAT (A) THIS OFFER OF SECURITIES IS INTENDED SOLELY FOR INSTITUTIONAL INVESTORS, AS LISTED IN THE FIRST SUPPLEMENT OF THE ISRAELI SECURITIES LAW, 1968; (B) NO PROSPECTUS HAS BEEN PREPARED OR FILED NOR WILL BE PREPARED OR FILED IN ISRAEL RELATING TO THE SECURITIES OFFERED HEREUNDER; AND (C) THEY WILL ONLY SELL THE SECURITIES TO AN ISRAELI INVESTOR WHO HAS REPRESENTED TO THE APPLICABLE INITIAL PURCHASER THAT (I) IT QUALIFIES AS AN INVESTOR LISTED IN THE FIRST SUPPLEMENT OF THE ISRAELI SECURITIES LAW, 1968; AND (II) IT IS PURCHASING THE SECURITIES FOR ITS OWN ACCOUNT AND NOT FOR DISTRIBUTION OR RESALE.
THE SECURITIES CANNOT BE RESOLD IN ISRAEL UNLESS AN EXEMPTION FROM THE ISRAELI PROSPECTUS REQUIREMENTS IS AVAILABLE.
Italy
NOTICE TO RESIDENTS OF ITALY
THE SALE OF THE SECURITIES HAS NOT BEEN CLEARED BY CONSOB (THE ITALIAN SECURITIES EXCHANGE COMMISSION) AND THE BANK OF ITALY PURSUANT TO ITALIAN SECURITIES LEGISLATION AND, ACCORDINGLY, NO SECURITIES MAY BE OFFERED, SOLD OR DELIVERED, NOR MAY COPIES OF THE OFFERING MEMORANDUM OR OF ANY OTHER DOCUMENT RELATING TO THE SECURITIES BE DISTRIBUTED IN THE REPUBLIC OF ITALY, EXCEPT:
(A) TO PROFESSIONAL INVESTORS ("INVESTITORI QUALIFICATI"), AS DEFINED IN ARTICLE 100, PARAGRAPH 1(A) OF LEGISLATIVE DECREE NO. 58, 24 FEBRUARY 1998 (THE "FINANCIAL SERVICES ACT"); AND ARTICLE 34-TER, PARAGRAPH 1(B) OF CONSOB REGULATION 11971, 14 MAY 1999 (THE "ISSUERS REGULATION"); OR
(B) IN CIRCUMSTANCES WHICH ARE EXEMPTED FROM THE RULES ON SOLICITATION OF INVESTMENTS PURSUANT TO ARTICLE 100 OF LEGISLATIVE DECREE NO. 58 OF 24 FEBRUARY 1998 (THE "FINANCIAL SERVICES ACT") AND ARTICLE 33, FIRST PARAGRAPH, OF CONSOB REGULATION NO. 11971 OF 14 MAY 1999, AS AMENDED.
ANY OFFER, SALE OR DELIVERY OF THE SECURITIES OR DISTRIBUTION OF COPIES OF THE OFFERING MEMORANDUM OR ANY OTHER DOCUMENT RELATING TO THE SECURITIES IN THE REPUBLIC OF ITALY UNDER (A) OR (B) ABOVE MUST BE:
(I) MADE BY AN INVESTMENT FIRM, BANK OR FINANCIAL INTERMEDIARY PERMITTED TO CONDUCT SUCH ACTIVITIES IN THE REPUBLIC OF ITALY IN ACCORDANCE WITH THE FINANCIAL SERVICES ACT AND LEGISLATIVE DECREE NO. 385 OF 1 SEPTEMBER, 1993 (THE "BANKING ACT") AND CONSOB REGULATION NO. 11522, 1 JULY 1998, AS AMENDED;
(II) IN COMPLIANCE WITH ARTICLE 129 OF THE BANKING ACT AND THE IMPLEMENTING GUIDELINES OF THE BANK OF ITALY PURSUANT TO
vii WHICH THE ISSUE OR THE OFFER OF SECURITIES IN THE REPUBLIC OF ITALY MAY NEED TO BE PRECEDED AND FOLLOWED BY AN APPROPRIATE NOTICE TO BE FILED WITH THE BANK OF ITALY DEPENDING, INTER ALIA, ON THE AGGREGATE VALUE OF THE SECURITIES ISSUED OR OFFERED IN THE REPUBLIC OF ITALY AND THEIR CHARACTERISTICS; AND
(III) IN ACCORDANCE WITH ANY OTHER APPLICABLE LAWS AND REGULATIONS, INCLUDING THE RULES APPLICABLE TO DISTRIBUTION OF UNITS OF INVESTMENT FUNDS (IF APPLICABLE).
FOR THE PURPOSES OF THIS PROVISION, THE EXPRESSION "OFFER OF SECURITIES TO THE PUBLIC" IN ITALY MEANS THE COMMUNICATION IN ANY FORM AND BY ANY MEANS OF SUFFICIENT INFORMATION ON THE TERMS OF THE OFFER AND THE SECURITIES TO BE OFFERED SO AS TO ENABLE AN INVESTOR TO DECIDE TO PURCHASE OR SUBSCRIBE THE SECURITIES, INCLUDING THE PLACEMENT THROUGH AUTHORIZED INTERMEDIARIES.
ANY INVESTOR PURCHASING THE SECURITIES IS SOLELY RESPONSIBLE FOR ENSURING THAT ANY OFFER OR RESALE OF THE SECURITIES BY SUCH INVESTOR OCCURS IN COMPLIANCE WITH APPLICABLE ITALIAN LAWS AND REGULATIONS. THE SECURITIES AND THE INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM ARE INTENDED ONLY FOR THE USE OF ITS RECIPIENT. NO PERSON RESIDENT OR LOCATED IN ITALY OTHER THAN THE ORIGINAL RECIPIENTS OF THIS OFFERING MEMORANDUM MAY RELY ON IT OR ITS CONTENT.
Japan
NOTICE TO RESIDENTS OF JAPAN
THE SECURITIES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE FINANCIAL INSTRUMENTS AND EXCHANGE ACT OF JAPAN (LAW NO. 25 OF 1948, AS AMENDED (THE "FIEL")) AND EACH OF THE INITIAL PURCHASER AND THE ISSUERS HAS AGREED THAT IT WILL NOT OFFER OR SELL ANY OF THE SECURITIES, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO, OR FOR THE BENEFIT OF, ANY RESIDENT OF JAPAN (WHICH TERM AS USED HEREIN MEANS ANY PERSON RESIDENT IN JAPAN, INCLUDING ANY CORPORATION OR OTHER ENTITY ORGANIZED UNDER THE LAWS OF JAPAN) OR TO OTHERS FOR REOFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO A RESIDENT OF JAPAN, EXCEPT PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF, AND OTHERWISE IN COMPLIANCE WITH, THE FIEL AND ANY OTHER APPLICABLE LAWS, REGULATIONS AND MINISTERIAL GUIDELINES AND REGULATIONS OF JAPAN.
Jersey
NOTICE TO RESIDENTS OF JERSEY
THE SECURITIES MAY NOT BE OFFERED TO, SOLD TO OR PURCHASED OR HELD BY PERSONS (OTHER THAN FINANCIAL INSTITUTIONS) RESIDENT FOR INCOME TAX PURPOSES IN JERSEY.
viii THE SECURITIES MAY ONLY BE ISSUED OR ALLOTTED EXCLUSIVELY TO:
(I) A PERSON WHOSE ORDINARY ACTIVITIES INVOLVE HIM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF HIS BUSINESS OR WHO IT IS REASONABLE TO EXPECT WILL ACQUIRE, HOLD, ARRANGE OR DISPOSE OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF HIS BUSINESS; OR
(II) A PERSON WHO HAS RECEIVED AND ACKNOWLEDGED A WARNING TO THE EFFECT THAT (A) THE SECURITIES ARE ONLY SUITABLE FOR ACQUISITION BY A PERSON WHO (I) HAS A SIGNIFICANTLY SUBSTANTIAL ASSET BASE SUCH AS WOULD ENABLE HIM TO SUSTAIN ANY LOSS THAT MIGHT BE INCURRED AS A RESULT OF ACQUIRING THE SECURITIES; AND (II) IS SUFFICIENTLY FINANCIALLY SOPHISTICATED TO BE REASONABLY EXPECTED TO KNOW THE RISKS INVOLVED IN ACQUIRING THE SECURITIES AND (B) NEITHER THE ISSUE OF THE SECURITIES NOR THE ACTIVITIES OF ANY FUNCTIONARY WITH REGARD TO THE ISSUE OF THE SECURITIES ARE SUBJECT TO ALL THE PROVISIONS OF THE FINANCIAL SERVICES (JERSEY) LAW 1998.
EACH PERSON WHO ACQUIRES SECURITIES WILL BE DEEMED, BY SUCH ACQUISITION, TO HAVE REPRESENTED THAT HE OR IT IS ONE OF THE FOREGOING PERSONS.
The Grand Duchy of Luxembourg
NOTICE TO RESIDENTS OF THE GRAND DUCHY OF LUXEMBOURG
The Securities may not be offered to the public in Luxembourg, except that they may be offered in Luxembourg in the following circumstances:
(a) in the period beginning on the date of publication of a prospectus in relation to those Securities which have been approved by the Commission de surveillance du secteur financier (CSSF) in Luxembourg or, where appropriate, approved in another relevant European Union Member State and notified to the CSSF, all in accordance with the Prospectus Directive and ending on the date which is 12 months after the date of such publication;
(b) at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
(c) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or
(d) at any time in any other circumstances which do not require the publication by the Issuers of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an "offer of Securities to the public" in relation to any Securities in Luxembourg means the communication in any form and by any means of sufficient information on the terms of the offer and the Securities to be offered so as to enable an investor to decide to purchase the Securities, as defined in the Law of 10 July 2005 on prospectuses for securities and
ix implementing Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (the "Prospectus Directive"), or any variation thereof or amendment thereto.
Netherlands
NOTICE TO RESIDENTS OF THE NETHERLANDS
THE SECURITIES MAY BE OFFERED, SOLD, TRANSFERRED OR DELIVERED IN OR FROM THE NETHERLANDS AS PART OF THEIR INITIAL DISTRIBUTION OR AT ANY TIME THEREAFTER, DIRECTLY OR INDIRECTLY, EXCLUSIVELY TO INDIVIDUALS OR ENTITIES, WHO OR WHICH TRADE OR INVEST IN SECURITIES IN THE CONDUCT OF A PROFESSION OR A BUSINESS WITHIN THE MEANING OF ARTICLE 1 OF THE REGULATION OF 9 OCTOBER 1990 ISSUED PURSUANT TO ARTICLE 14 OF THE ACT ON THE SUPERVISION OF INVESTMENT INSTITUTIONS (WET TOEZICHT BELEGGINGSIN-STELLINGEN), WHICH INCLUDES BANKS, PENSION FUNDS, INSURANCE COMPANIES, SECURITIES FIRMS, INVESTMENT INSTITUTIONS, CENTRAL GOVERNMENTS, LARGE INTERNATIONAL AND SUPRANATIONAL INSTITUTIONS AND OTHER COMPARABLE ENTITIES, INCLUDING TREASURIES AND FINANCE COMPANIES OF LARGE ENTERPRISES, WHICH TRADE OR INVEST IN SECURITIES IN THE CONDUCT OF A PROFESSION OR A BUSINESS.
New Zealand
NOTICE TO RESIDENTS OF NEW ZEALAND
THE INITIAL PURCHASER HAS REPRESENTED AND AGREED WITH THE ISSUERS THAT THE SECURITIES MAY NOT BE OFFERED, SOLD OR DELIVERED, DIRECTLY OR INDIRECTLY NOR MAY ANY OFFERING MEMORANDUM, ANY PRICING SUPPLEMENT OR ADVERTISEMENT IN RELATION TO ANY OFFER OF SECURITIES BE DISTRIBUTED IN NEW ZEALAND, OTHER THAN:
(A) TO PERSONS WHOSE PRINCIPAL BUSINESS IS THE INVESTMENT OF MONEY OR WHO, IN THE COURSE OF AND FOR THE PURPOSES OF THEIR BUSINESS, HABITUALLY INVEST MONEY, OR WHO IN ALL THE CIRCUMSTANCES CAN PROPERLY BE REGARDED AS HAVING BEEN SELECTED OTHER THAN AS MEMBERS OF THE PUBLIC; OR
(B) IN OTHER CIRCUMSTANCES WHERE THERE IS NO CONTRAVENTION OF THE SECURITIES ACT 1978 OF NEW ZEALAND.
Portugal
NOTICE TO RESIDENTS OF PORTUGAL
THE INITIAL PURCHASER HAS REPRESENTED AND AGREED WITH THE ISSUERS THAT: (I) IT HAS NOT ADVERTISED, OFFERED OR SOLD AND WILL NOT, DIRECTLY OR INDIRECTLY, ADVERTISE, OFFER OR SELL THE SECURITIES IN CIRCUMSTANCES WHICH COULD QUALIFY AS A PUBLIC OFFER OF SECURITIES PURSUANT TO THE PORTUGUESE SECURITIES CODE (CÓDIGO DOS VALORES MOBILIÁRIOS, THE "CVM") WHICH WOULD REQUIRE THE PUBLICATION BY THE ISSUER OF A PROSPECTUS UNDER THE PROSPECTUS DIRECTIVE OR IN CIRCUMSTANCES WHICH WOULD QUALIFY AS AN ISSUE OR PUBLIC
x PLACEMENT OF SECURITIES IN THE PORTUGUESE MARKET; (II) IT HAS NOT DISTRIBUTED OR CAUSED TO BE DISTRIBUTED TO THE PUBLIC IN THE REPUBLIC OF PORTUGAL THE OFFERING MEMORANDUM OR ANY OTHER OFFERING MATERIAL RELATING TO THE SECURITIES; (III) ALL APPLICABLE PROVISIONS OF THE CVM, ANY APPLICABLE COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (PORTUGUESE SECURITIES MARKET COMMISSION, THE "CMVM") REGULATIONS AND ALL APPLICABLE PROVISIONS OF THE DIRECTIVE 2003/71/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 4 NOVEMBER 2003/PROSPECTUS DIRECTIVE HAVE BEEN COMPLIED WITH REGARDING THE SECURITIES, IN ANY MATTERS INVOLVING THE REPUBLIC OF PORTUGAL.
Singapore
NOTICE TO RESIDENTS OF SINGAPORE
This Offering Memorandum is being disseminated in Singapore by Morgan Stanley Asia (Singapore) Plc. and has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Securities may not be circulated or distributed, nor may the Securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA"), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. The Securities are offered through Morgan Stanley Asia (Singapore) Plc, an entity regulated by the Monetary Authority of Singapore.
South Korea
NOTICE TO RESIDENTS OF KOREA
THE SECURITIES MAY NOT BE OFFERED, SOLD AND DELIVERED DIRECTLY OR INDIRECTLY, OR OFFERED OR SOLD TO ANY PERSON FOR REOFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN KOREA OR TO ANY RESIDENT OF KOREA EXCEPT PURSUANT TO THE APPLICABLE LAWS AND REGULATIONS OF KOREA, INCLUDING THE KOREA SECURITIES AND EXCHANGE ACT AND THE FOREIGN EXCHANGE TRANSACTION LAW AND THE DECREES AND REGULATIONS THEREUNDER. THE SECURITIES HAVE NOT BEEN REGISTERED WITH THE FINANCIAL SERVICES COMMISSION OF KOREA FOR PUBLIC OFFERING IN KOREA. FURTHERMORE, THE SECURITIES MAY NOT BE RESOLD TO KOREAN RESIDENTS UNLESS THE PURCHASER OF THE SECURITIES COMPLIES WITH ALL APPLICABLE REGULATORY REQUIREMENTS (INCLUDING BUT NOT LIMITED TO GOVERNMENT APPROVAL REQUIREMENTS UNDER THE FOREIGN EXCHANGE TRANSACTION LAW AND ITS SUBORDINATE DECREES AND REGULATIONS) IN CONNECTION WITH THE PURCHASE OF THE SECURITIES.
Sweden
NOTICE TO RESIDENTS OF SWEDEN
THE INITIAL PURCHASER HAS REPRESENTED AND AGREED WITH THE ISSUERS THAT IT WILL NOT, DIRECTLY OR INDIRECTLY, OFFER FOR SUBSCRIPTION OR PURCHASE
xi OR ISSUE INVITATIONS TO SUBSCRIBE FOR OR BUY OR SELL SECURITIES OR DISTRIBUTE ANY DRAFT OR DEFINITIVE DOCUMENT IN RELATION TO ANY SUCH OFFER, INVITATION OR SALE IN SWEDEN EXCEPT IN COMPLIANCE WITH THE LAWS OF SWEDEN.
Switzerland
NOTICE TO RESIDENTS OF SWITZERLAND
THE INITIAL PURCHASER HAS REPRESENTED AND AGREED WITH THE ISSUERS THAT:
(A) THE SECURITIES MAY NOT AND WILL NOT BE PUBLICLY OFFERED, DISTRIBUTED OR REDISTRIBUTED IN THE SWISS CONFEDERATION ("SWITZERLAND"), AND NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER SOLICITATION FOR INVESTMENTS IN THE SECURITIES MAY BE COMMUNICATED OR DISTRIBUTED IN SWITZERLAND IN ANY WAY THAT COULD CONSTITUTE A PUBLIC OFFERING WITHIN THE MEANING OF ARTICLES 1156 OR 652A OF THE SWISS CODE OF OBLIGATIONS.
(B) NO APPLICATION FOR A LISTING OF THE SECURITIES WILL BE MADE ON ANY SWISS STOCK EXCHANGE OR OTHER SWISS REGULATED MARKET, AND THE OFFERING MEMORANDUM WILL NOT COMPLY WITH THE INFORMATION REQUIRED UNDER THE RELEVANT LISTING RULES.
Taiwan
NOTICE TO RESIDENTS OF TAIWAN
The Securities (as described in this Offering Memorandum) shall not be offered or sold in the Republic of China but may be made available for purchase by investors resident in the Republic of China from outside the Republic of China.
United Kingdom
NOTICE TO RESIDENTS OF THE UNITED KINGDOM
Each dealer (if any) appointed under this Offering Memorandum will be required to represent and agree that:
(a) in relation to any Securities which have a maturity of less than one year, (i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell any Securities other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Securities would otherwise constitute a contravention of Section 19 of the Financial Services and Markets Act 2000 (the "FSMA") by the Issuer;
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the
xii meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Securities in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Securities in, from or otherwise involving the United Kingdom.
STABILIZATION
IN CONNECTION WITH THE ISSUE OF THE SECURITIES, THE INITIAL PURCHASER (OR PERSONS ACTING ON BEHALF OF THE INITIAL PURCHASER) MAY OVER-ALLOT THE SECURITIES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE SECURITIES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE INITIAL PURCHASER (OR PERSONS ACTING ON BEHALF OF THE INITIAL PURCHASER) WILL UNDERTAKE STABILIZATION ACTION. ANY STABILIZATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE DISCLOSURE OF THE FINAL TERMS OF THE OFFER OF THE SECURITIES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN 30 DAYS AFTER THE ISSUE DATE OF THE SECURITIES.
IMPORTANT NOTICE REGARDING THE SECURITIES
THE SECURITIES REFERRED TO IN THIS OFFERING MEMORANDUM, AND THE ASSETS BACKING THEM, ARE SUBJECT TO MODIFICATION OR REVISION (INCLUDING THE POSSIBILITY THAT ONE OR MORE CLASSES OF THE SECURITIES MAY BE SPLIT, COMBINED OR ELIMINATED AT ANY TIME PRIOR TO THE ISSUANCE OF THE SECURITIES) AND ARE OFFERED ON A "WHEN, AS AND IF ISSUED" BASIS. EACH INVESTOR ACKNOWLEDGES THAT, WHEN IT IS CONSIDERING THE PURCHASE OF THE SECURITIES, A CONTRACT OF SALE WILL COME INTO BEING NO SOONER THAN THE DATE ON WHICH THE RELEVANT CLASS HAS BEEN PRICED AND THE INITIAL PURCHASER HAS CONFIRMED THE ALLOCATION OF SUCH SECURITIES TO BE MADE TO IT. ANY "INDICATIONS OF INTEREST" EXPRESSED BY AN INVESTOR, AND ANY "SOFT CIRCLES" GENERATED BY THE INITIAL PURCHASER, WILL NOT CREATE BINDING CONTRACTUAL OBLIGATIONS FOR ANY INVESTOR OR THE INITIAL PURCHASER.
AS A RESULT OF THE FOREGOING, AN INVESTOR MAY COMMIT TO PURCHASE ONE OR MORE CLASSES OF THE SECURITIES THAT HAVE CHARACTERISTICS THAT MAY CHANGE, AND EACH INVESTOR IS ADVISED THAT ALL OR A PORTION OF THE SECURITIES MAY NOT BE ISSUED WITH THE CHARACTERISTICS DESCRIBED IN THIS OFFERING MEMORANDUM. THE INITIAL PURCHASER’S OBLIGATION TO SELL SUCH SECURITIES TO ANY INVESTOR IS CONDITIONED ON THE SECURITIES HAVING THE CHARACTERISTICS DESCRIBED IN THIS OFFERING MEMORANDUM. IF THE INITIAL PURCHASER DETERMINES THAT SUCH CONDITION IS NOT SATISFIED IN ANY MATERIAL RESPECT, EACH INVESTOR WILL BE NOTIFIED, AND NONE OF THE ISSUERS NOR THE INITIAL PURCHASER WILL HAVE ANY OBLIGATION TO DELIVER ANY PORTION OF THE SECURITIES WHICH AN INVESTOR HAS COMMITTED TO PURCHASE, AND THERE WILL BE NO LIABILITY AMONG THE ISSUER, THE CO-ISSUER, THEIR RESPECTIVE AFFILIATES, THE INITIAL PURCHASER AND ANY INVESTOR AS A CONSEQUENCE OF SUCH NON-DELIVERY.
EACH RECIPIENT OF THIS OFFERING MEMORANDUM FROM THE INITIAL PURCHASER HAS REQUESTED THAT THE INITIAL PURCHASER PROVIDE TO IT
xiii INFORMATION IN CONNECTION WITH ITS CONSIDERATION OF THE PURCHASE OF CERTAIN SECURITIES. THIS OFFERING MEMORANDUM IS BEING PROVIDED TO INVESTORS FOR INFORMATIVE PURPOSES ONLY IN RESPONSE TO A SPECIFIC REQUEST. THE INITIAL PURCHASER MAY FROM TIME TO TIME PERFORM INVESTMENT BANKING SERVICES FOR, OR SOLICIT INVESTMENT BANKING BUSINESS FROM, ANY PERSON OR COMPANY NAMED IN THIS OFFERING MEMORANDUM OR ANY AFFILIATE THEREOF. THE INITIAL PURCHASER AND/OR ITS EMPLOYEES OR AFFILIATES MAY FROM TIME TO TIME HAVE A LONG OR SHORT POSITION IN ANY CONTRACT OR SECURITIES DISCUSSED IN THIS OFFERING MEMORANDUM.
THE INFORMATION CONTAINED HEREIN SUPERSEDES ANY PREVIOUS INFORMATION DELIVERED TO ANY INVESTOR AND MAY BE SUPERSEDED BY INFORMATION DELIVERED TO SUCH INVESTOR PRIOR TO THE TIME OF SALE.
THE COLLATERAL MANAGER, THE ISSUERS AND THE HOLDERS AND BENEFICIAL OWNERS OF THE SECURITIES (AND EACH OF THEIR RESPECTIVE EMPLOYEES, REPRESENTATIVES OR OTHER AGENTS) MAY DISCLOSE TO ANY AND ALL PERSONS, WITHOUT LIMITATION OF ANY KIND, THE UNITED STATES FEDERAL INCOME "TAX TREATMENT" AND "TAX STRUCTURE" (IN EACH CASE, WITHIN THE MEANING OF TREASURY REGULATION SECTION 1.6011-4 AND APPLICABLE U.S. STATE AND LOCAL LAW) OF THE TRANSACTIONS DESCRIBED IN THIS OFFERING MEMORANDUM AND ALL MATERIALS OF ANY KIND RELATED TO SUCH TAX TREATMENT OR TAX STRUCTURE (INCLUDING OPINIONS OR OTHER TAX ANALYSES) THAT ARE PROVIDED TO THEM RELATING TO SUCH TAX TREATMENT AND TAX STRUCTURE. FOR THIS PURPOSE, THE TAX TREATMENT OF A TRANSACTION IS THE PURPORTED OR CLAIMED U.S. FEDERAL INCOME OR STATE AND LOCAL TAX TREATMENT OF THE TRANSACTION, AND THE TAX STRUCTURE OF A TRANSACTION IS ANY FACT THAT MAY BE RELEVANT TO UNDERSTANDING THE PURPORTED OR CLAIMED U.S. FEDERAL OR STATE OR LOCAL INCOME TAX TREATMENT OF THE TRANSACTION.
This Offering Memorandum has been prepared by the Issuers solely for use in connection with the offering and the listing of the Securities described in this Offering Memorandum. The Issuers accept responsibility for the information contained in this Offering Memorandum.
To the best of the knowledge and belief of the Issuers (who have taken reasonable care to ensure that such is the case), the information contained in this Offering Memorandum is in accordance with the facts and does not omit anything likely to affect the import of such information.
Deutsche Bank Trust Company Americas, in each of its capacities, including but not limited to Trustee, LIBOR Calculation Agent, Paying Agent and Collateral Administrator, has not participated in the preparation of this Offering Memorandum and assumes no responsibility for its content.
No Person is authorized in connection with any offering made hereby to give any information or make any representation other than as contained in this Offering Memorandum and, if given or made, such information or representation must not be relied upon as having been authorized by the Issuers, the Initial Purchaser or the Collateral Manager.
This Offering Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, any of the Securities offered hereby by any Person in any jurisdiction in which it is unlawful for such Person to make such an offer or solicitation. Neither the delivery of this Offering Memorandum nor any sale made pursuant thereto shall under any circumstances imply that no change in the affairs of the Issuers
xiv has occurred or that the information contained in this Offering Memorandum is correct as of any date subsequent to the date of this Offering Memorandum. The Issuers and the Initial Purchaser reserve the right to reject any offer to purchase in whole or in part, for any reason, or to sell less than the stated initial amount of any Class of Securities offered.
EACH INVESTOR IN SECURITIES MUST COMPLY WITH ALL APPLICABLE LAWS AND REGULATIONS IN FORCE IN EACH JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS SUCH SECURITIES OR POSSESSES OR DISTRIBUTES THIS OFFERING MEMORANDUM, AND MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED FOR THE PURCHASE, OFFER OR SALE BY IT OF SUCH SECURITIES UNDER THE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTIONS TO WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND NONE OF THE ISSUERS, THE INITIAL PURCHASER OR THE COLLATERAL MANAGER SHALL HAVE ANY RESPONSIBILITY THEREFOR.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUERS AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
To permit compliance with Rule 144A under the U.S. Securities Act, the Issuers, in connection with the sale of the Securities, will be required to furnish, upon request of any Holder, to such Holder and a prospective purchaser designated by such Holder, the information required to be delivered under Rule 144A(d)(4) under the U.S. Securities Act if at the time of the request the Issuers are not reporting companies under Section 13 or Section 15(d) of the U.S. Exchange Act, or are exempt from reporting pursuant to Rule 12g3-2(b) under the U.S. Exchange Act. The Issuers are not expected to become reporting companies or to be exempt from reporting pursuant to Rule 12g3-2(b) under the U.S. Exchange Act.
IN THE EVENT THAT TRADING IN HEDGE AGREEMENTS WOULD RESULT IN THE ISSUER'S ACTIVITIES FALLING WITHIN THE DEFINITION OF A "COMMODITY POOL" UNDER THE COMMODITY EXCHANGE ACT, THE COLLATERAL MANAGER EXPECTS TO BE EXEMPT FROM REGISTRATION WITH THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") AS A COMMODITY POOL OPERATOR ("CPO") WITH RESPECT TO THE ISSUER PURSUANT TO CFTC RULE 4.13(a)(3). THEREFORE, UNLIKE A REGISTERED CPO, THE COLLATERAL MANAGER WOULD NOT BE REQUIRED TO DELIVER A CFTC DISCLOSURE DOCUMENT TO PROSPECTIVE INVESTORS, NOR WOULD IT BE REQUIRED TO PROVIDE INVESTORS WITH CERTIFIED ANNUAL REPORTS THAT SATISFY THE REQUIREMENTS OF CFTC RULES APPLICABLE TO REGISTERED CPOs.
xv FORWARD-LOOKING STATEMENTS
This Offering Memorandum contains forward-looking statements, which can be identified by words like "anticipate," "believe," "plan," "hope," "goal," "initiative," "expect," "future," "intend," "will," "could" and "should" and by similar expressions. Other information herein, including any estimated, targeted or assumed information and any projections, forecasts, estimates or similar statements, may also be deemed to be, or to contain, forward-looking statements. Prospective investors should not place undue reliance on forward-looking statements. Actual results could differ materially from those referenced in forward-looking statements for many reasons, including the risks described in "Risk Factors." Forward- looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying any forward-looking statements will not materialize or will vary significantly from actual results. Variations of assumptions and results may be material.
Without limiting the generality of the foregoing, the inclusion of forward-looking statements herein should not be regarded as a representation by any of the Transaction Parties or any of their respective Affiliates or any other person of the results that will actually be achieved by the Issuers or the Securities. None of the foregoing persons has any obligation to update or otherwise revise any forward- looking statements, including any revision to reflect changes in any economic conditions or any other circumstances arising after the date hereof relating to any assumptions or otherwise. Investors should not rely on forward-looking statements and do so at their own risk. Each investor in the Securities should conduct its own investigation and analysis of its prospective investment and consult its own investment, financial, legal, tax, accounting, regulatory and other applicable advisors.
xvi TERM SHEET
This Term Sheet sets forth specific details about the Issuers and other participants in the transaction, the Securities offered and the Collateral. The information in this Term Sheet is supplemental to, and in some cases, modifies related information in the Base and must be read in conjunction with the Base in order to understand the nature of the details described in this Term Sheet and limitations thereon. This Term Sheet does not purport to be a summary of all terms applicable to the Securities. Prospective investors should not rely solely on this Term Sheet and should read the entire Offering Memorandum.
GENERAL TERMS
Transaction Parties
The following are the "Transaction Parties." Additional information about the Transaction Parties can be found under "Certain Transaction Parties" in this Term Sheet and "Transaction Parties" in the Base.
Issuers The Senior Notes and the Mezzanine Notes (the "Co-Issued Securities") will be co-issued by Canyon Capital CLO 2012-1, Ltd., a Cayman Islands exempted company (the "Issuer") and Canyon Capital CLO 2012-1, LLC, a Delaware limited liability company (the "Co-Issuer" and, together with the Issuer, the "Issuers"). The Junior Notes and the Subordinated Notes (the "Issuer-Only Securities") will be issued solely by the Issuer. Collateral Manager Canyon Capital Advisors LLC ("Canyon" or the "Collateral Manager"). Trustee Deutsche Bank Trust Company Americas (the "Bank") will serve as "Trustee" and "Security Registrar," "Paying Agent," "Voting Rights Registrar," "Transfer Agent", "LIBOR Calculation Agent," "Intermediary" and "Collateral Administrator". Initial Purchaser Morgan Stanley & Co. LLC (the "Initial Purchaser"). Cayman Islands Service MaplesFS Limited (the "Administrator", "Share Trustee" Providers and "Registered Office Provider" ). Process Agent Corporation Service Company (the "Process Agent"). Irish Service Provider Maples and Calder (the "Irish Listing Agent").
1 Securities The following securities (each a "Security" or a "Note" and, collectively, the "Securities" or the "Notes") will be issued:
Priority Principal Ratings ERISA Restricted Class Designations Level Balance (U.S.$) Interest Rate1 (Moody’s/S&P) Status
"Class X Notes" Senior Notes; Rated Notes; Secured First2 3,000,000 LIBOR plus 1.00% Aaa (sf)/AAA (sf) Not ERISA Restricted Notes; Co-Issued Securities
"Class A Notes" Senior Notes; Rated Notes; Secured First2 200,000,000 LIBOR plus 1.45% Aaa (sf)/AAA (sf) Not ERISA Restricted Notes; Co-Issued Securities
"Class B-1 Senior Notes; Rated Notes; Secured Second3 41,000,000 LIBOR plus 1.95% NR/AA (sf) Not ERISA Restricted Notes" Notes; Co-Issued Securities
"Class B-2 Senior Notes; Rated Notes; Secured Second3 7,500,000 3.16% NR/AA (sf) Not ERISA Restricted Notes" Notes; Co-Issued Securities
"Class C Notes" Mezzanine Notes; Deferrable Notes; Third 24,000,000 LIBOR plus 2.80% NR/A (sf) Not ERISA Restricted Rated Notes; Secured Notes; Co- Issued Securities
"Class D Notes" Mezzanine Notes; Deferrable Notes; Fourth 14,500,000 LIBOR plus 4.30% NR/BBB (sf) Not ERISA Restricted Rated Notes; Secured Notes; Co- Issued Securities
"Class E Notes" Junior Notes; Deferrable Notes; Fifth 14,000,000 LIBOR plus 5.95% NR/BB (sf) ERISA Restricted Rated Notes; Secured Notes; Issuer- Only Securities
"Subordinated Subordinated Notes; Issuer-Only Sixth 37,500,000 4 NR/NR ERISA Restricted Notes" Securities
1 The "Index Maturity" for LIBOR will be 3 months. 2 Principal of the Class X Notes is payable during the Reinvestment Period after the first Payment Date as set forth in the Priorities of Payment. 3 The Class B-1 Notes and the Class B-2 Notes will rank pari passu as set forth herein and are collectively referred to as the "Class B Notes". 4 No stated rate of interest. On each Payment Date, the Subordinated Notes will receive excess distributions, if any, in the manner specified in the Priorities of Payment.
2 Applicable Dates
Closing Date On or about January 15, 2013 (the "Closing Date"). Payment Dates Distributions will be made under the Priorities of Payment on the 15th day of January, April, July and October of each year (or, if such day is not a Business Day, the next succeeding Business Day), commencing on April 15, 2013 (each a "Payment Date"); provided that the last Payment Date in respect of any Security will be the earliest of its Redemption Date, the Stated Maturity Date or the date it is otherwise paid in full. Determination Dates Determinations of amounts payable under the Priorities of Payment will be determined for each Payment Date on the last Business Day of the month immediately preceding such Payment Date (each, a "Determination Date"). Due Period The "Due Period" for each Payment Date will (a) begin on and include the Determination Date related to the preceding Payment Date (or, with respect to the first Payment Date, the Closing Date) and (b) end on but exclude the Determination Date related to such Payment Date (or, with respect to the Due Period immediately prior to the Stated Maturity Date or such date on which the Securities are paid in full, the day immediately preceding such Payment Date). Scheduled Effective Date The Effective Date is scheduled to occur no later than April 15, 2013 (or, if such date is not a Business Day, the next succeeding Business Day) (the "Scheduled Effective Date"). Reinvestment Period The Reinvestment Period will end no later than the close of business on the Payment Date in January, 2017 (the "Scheduled Reinvestment Period Termination Date"), provided that the Scheduled Reinvestment Period Termination Date will be included as part of the Reinvestment Period. Non-Call Period The period that begins on the Closing Date and ends immediately after the Payment Date in October, 2014 (the "Non-Call Period"). Stated Maturity Date The Payment Date in January, 2024 (the "Stated Maturity Date"); provided that the Stated Maturity Date of the Class X Notes shall be the Payment Date in January, 2015. Denominations; Form; Listing; Trading Authorized Denominations The "Authorized Denominations" are $250,000 with integral multiples of $1,000 in excess of such denomination.
3 Form Global Notes or, at the request of the purchaser, a Non- Clearing Agency Security, except that ERISA Restricted Securities purchased by Benefit Plan Investors and Controlling Persons after the Closing Date and any Securities purchased by Accredited Investors that are not also Qualified Institutional Buyers will be issued in the form of Non-Clearing Agency Securities, except that Controlling Persons acquiring ERISA Restricted Securities from other Controlling Persons that acquired such Securities on the Closing Date may, with the consent of the Issuer, hold an interest in a Global Note. A Purchaser of Non-Clearing Agency Securities will receive only a confirmation from the Security Registrar that its interest has been recorded in the Security Register, unless it requests delivery of a physical certificate. Listing and Trading Application has been made to the Irish Stock Exchange for the Securities (other than the Class X Notes) to be admitted to the Official List and trading on its Global Exchange Market. No assurances can be given that the listing of the Securities (other than the Class X Notes) will be obtained or, if obtained, maintained for the entire period that such Securities are outstanding. The Class X Notes will not be listed on any securities exchange. There is currently no market for the Securities and there can be no assurance that such a market will develop. Collateral Management Fees Senior Collateral Management The "Senior Collateral Management Fee" will equal 0.15% Fee per annum of the Fee Basis Amount at the beginning of the Due Period related to each Payment Date and will be payable on each Payment Date in accordance with the Collateral Management Agreement and the Priorities of Payment. Subordinated Collateral The "Subordinated Collateral Management Fee" will equal Management Fee 0.25% per annum of the Fee Basis Amount at the beginning of the Due Period related to each Payment Date and will be payable on each Payment Date in accordance with the Collateral Management Agreement and the Priorities of Payment. Incentive Management Fee The "Incentive Management Fee" will be a fee calculated as described under "Base Offering Memorandum – The Collateral Management Agreement," payable in accordance with the Priorities of Payment and will be equal to 20% of the Interest Proceeds and Principal Proceeds available for distribution to the Holders of Subordinated Notes under the Priorities of Payment on and after the Payment Date on which the Subordinated Notes issued on the Closing Date have received an Internal Rate of Return of at least 15% (calculated from the Closing Date to and including such Payment Date); provided that, with respect to the Payment Date on which the Subordinated Notes first receive an Internal Rate of Return of
4 at least 15%, such fee shall equal 20% of available Interest Proceeds and Principal Proceeds in excess of the amount required to achieve an Internal Rate of Return of 15% on the Subordinated Notes (calculated from the Closing Date to and including such Payment Date). Internal Rate of Return For purposes of the Incentive Management Fee, the "Internal Rate of Return" with respect to each Payment Date and the Subordinated Notes issued on the Closing Date, is the rate of return that would result in a net present value of zero calculated using Microsoft Excel's XIRR Function, assuming (i) the Aggregate Purchase Price of the Subordinated Notes issued on the Closing Date as the initial negative cash flow on the Closing Date and all payments on such Subordinated Notes on such and each prior Payment Date as positive cash flows, (ii) the initial date for calculation as of the Closing Date and (iii) that the number of days to each Payment Date from the Closing Date is calculated on the basis of the actual number of days in such period and a 365-day year. "Aggregate Purchase Price" means the aggregate gross proceeds of the sale of the Subordinated Notes set forth in the Collateral Management Agreement. Voting and Control Controlling Class The "Controlling Class" means the Class A Notes until the Class A Notes are repaid in full, and then the Highest-Ranking Class of Securities Outstanding; provided that the Class X Notes shall not constitute the Controlling Class at any time. Acceleration and Liquidation A Majority of the Controlling Class will have the right to unilaterally direct the acceleration of the Secured Notes following the occurrence and, in certain cases, during the continuance, of an Event of Default. The Secured Notes will automatically and immediately accelerate upon certain insolvency events of the Issuers. A Majority of the Controlling Class will have the right to direct the liquidation of the Collateral following an Event of Default set forth in clause (a), (b), (d) or (g) of the definition of such term and acceleration of the Secured Notes, and a Majority of all Classes of Secured Notes (voting separately by Class) will have the right to direct the liquidation of the Collateral following any Event of Default and acceleration of the Secured Notes. Redemptions Direction (the "Required Redemption Direction") by (a) a Majority of the Subordinated Notes or the Controlling Affected Class is required to effect an Optional Redemption as a result of a Tax Event, (b) a Majority of the Subordinated Notes and the Collateral Manager is required to effect a Refinancing, (c) a Majority of the Subordinated Notes may be given to effect any other Optional Redemption and (d) without limitation to clause (c), the Collateral Manager (without the
5 direction of any other person) may be given to effect an Optional Redemption if the Aggregate Principal Balance is less than 10% of the Effective Date Target Par Amount.
Refinancing Any Class or Classes of Secured Notes may be redeemed in whole, but not in part, on any Payment Date after the end of the Non-Call Period from Refinancing Proceeds at the direction of a Majority of Subordinated Notes and the Collateral Manager. The applicable Issuers shall redeem any Class or Classes of the Securities by obtaining a loan or loans in place of such Class or Classes of Securities or by issuing replacement securities, the terms of which loan(s) or issuance will be negotiated by the Collateral Manager on behalf of the applicable Issuers, from one or more financial institutions or purchasers (a refinancing provided pursuant to such loan or issuance, a "Refinancing") and to the extent and subject to the restrictions described herein. Targeted Amounts Closing Proceeds The Issuers expect the net proceeds from the issuance and sale of the Securities to equal approximately $329,437,750, after payment of applicable fees and expenses in connection with the structuring and offering of the Securities. $3,000,000 of the net proceeds of the issuance of the Securities, representing the initial principal amount of the Class X Notes, will be deposited into the Class X Notes Account and applied as Interest Proceeds on the first Payment Date. $462,750 of the net proceeds of the issuance of the Securities and an additional amount of approximately $635,000 consisting of interest on the Collateral Assets received prior to the Closing Date (collectively, the "Closing Date Interest Deposit Amount") will be deposited into the Closing Date Interest Account and may be designated by the Collateral Manager as Interest Proceeds and/or Principal Proceeds on or prior to the third Determination Date. All other Unused Proceeds will constitute Principal Proceeds. Closing Date Collateral Assets; As of the Closing Date, the Issuer is expected to have Ramp Up purchased (or entered into commitments to purchase) Collateral Assets having a principal balance of at least $259,850,000 (the "Closing Date Target Par"). As of the Effective Date, the Issuer expects to have purchased (or entered into commitments to purchase) Collateral Assets (without regard to prepayments, redemptions or maturities) having an Aggregate Principal Balance of at least $325,000,000 (the "Effective Date Target Par Amount").
6 The "Effective Date" will be the earlier of (a) the Scheduled Effective Date and (b) the date specified by the Collateral Manager on which the Issuer has purchased (or entered into commitments to purchase) Collateral Assets with an Aggregate Principal Balance (without regard to prepayments, redemptions or maturities) at least equal to the Effective Date Target Par Amount and all other requirements under the Indenture have been satisfied. Interim Targets Prior to the Effective Date, the Issuer will be subject to "Interim Targets" as set forth in the table below (as the same may be modified with Rating Agency Confirmation without a supplemental indenture). Interim Targets will be tested on or around March 15, 2013 (unless the Effective Date occurs prior to such date, in which case the Issuer will not be subject to Interim Targets): Maximum Moody’s WARF 2900 Minimum Moody’s Diversity Score 40 Minimum Aggregate Principal Balance $275,000,000 Minimum Moody’s WARR 43.0% Minimum Weighted Average Spread 3.5% On each date of testing the Interim Targets, the Collateral Manager shall provide to each Rating Agency (i) the weighted average Purchase Price of Collateral Assets as of such date and (ii) a report containing results with a comparison to the Interim Target levels set out above. If any Interim Targets are not satisfied, the Collateral Manager will submit to each Rating Agency a plan to acquire Collateral Assets so that on the Effective Date, the Aggregate Principal Balance (without regard to prepayments, redemptions or maturities) of all Collateral Assets owned by the Issuer is at least equal to the Effective Date Target Par Amount on the Effective Date and each applicable Collateral Quality Test and Coverage Test will be satisfied as of the Effective Date.
7 THE COLLATERAL ASSETS
The collateral assets (the "Collateral Assets") (x) consist of any and all property held by the Issuer (other than Eligible Investments, Equity Securities and cash), including securities and other obligations to be held by the Issuer that will be comprised primarily of senior secured, leveraged loans to primarily U.S. corporate borrowers and other assets and (y) are subject to, in each case, the Eligibility Criteria.
Eligibility Criteria
The Issuer may purchase a Collateral Asset only if, as of the date of the Issuer’s commitment to purchase such Collateral Asset (the "Trade Date"), such Collateral Asset meets the criteria specified below (collectively, the "Eligibility Criteria"):
Debt obligation It is a debt obligation (including, but not limited to, high-yield corporate bonds and interests in bank loans acquired by way of assignment or Participation Interest), that provides for a fixed amount of principal payable on scheduled payment dates and/or at maturity, has a stated maturity date on or before which final payment of principal shall be payable, and pays interest no less frequently than annually. Dollar denominated It is U.S. dollar-denominated and its payments are not by their terms payable by the related obligor in any other currency. Defaulted and current pay assets It is not (A) a Defaulted Asset or (B) a Current Pay Asset. Minimum rating (A) it has a Moody’s Rating of at least Caa3 and an S&P Rating of at least CCC-, which S&P Rating does not have a "p," "pi," "q," "t," "f," "r," or "sf" subscript or (B) it is unconditionally guaranteed as to the payment of principal and interest by the U.S. government or any agency thereof. Minimum obligor threshold The total indebtedness of its obligor under all loan agreements, indentures and other Underlying Instruments is not less than $250,000,000. Margin stock and equity It does not constitute (a) Margin Stock or (b) an Equity Security, and does not provide for mandatory or optional conversion into an Equity Security. Withholding tax It provides for payments (except for commitment fees and other similar fees (including, without limitation, certain payments on obligations or securities that include a participation in or that support a letter of credit) associated with Delayed Funding Assets and fees from a borrower under a Letter-of-Credit and other payments under Permitted Withholding Tax Assets) to the Issuer that are not subject to withholding tax (other than with respect to FATCA) imposed by any jurisdiction or U.S. insurance premium excise tax unless the related obligor is required to make "gross-up" payments to the Issuer that cover the full amount of any such taxes on an after-tax basis pursuant to the Underlying Instrument with respect thereto.
8 Eligibility It is eligible to be sold, assigned or participated to the Issuer and is eligible to be pledged, sold, assigned or participated by the Issuer. Non-credit related risk Its repayment is not subject to substantial non-credit related risk. Future advances No future advances or payment are required to be made by the Issuer except in the case of Delayed Funding Assets. Subparticipations It is not a participation in a Participation Interest. Step-down coupons It is not a Step-Down Coupon Asset. Zero-Coupon Asset It is not a Zero-Coupon Asset. PIKing Assets It is not a PIKing Asset. Offers It is not the subject of an Offer unless such Offer is for an obligation that satisfies the definition of Collateral Asset. Jurisdiction of obligor It is issued by an obligor Domiciled in an Eligible Country. Registered It is Registered. No I/Os or P/Os It is not an interest-only security or a principal-only security. Maturity It matures no later than the latest Stated Maturity Date (including as the result of an exchange or amendment consented to by the Collateral Manager). Leases It is not an operating lease or a finance lease. Structured finance assets It is not a Structured Finance Asset. Securities lending arrangements It is not acquired for the purpose of lending such obligation pursuant to a securities lending agreement. Synthetic Assets It is not a Synthetic Asset. Subordinated Loan It is not a Subordinated Loan. Counterparty Criteria The Counterparty Criteria is satisfied.
9 Portfolio Concentration Limits
On and after the Effective Date, with respect to a purchase of a Collateral Asset, each of the following limits (the "Portfolio Concentration Limits") must be satisfied or, if not satisfied, maintained or improved (after giving effect to the purchase) as of the Trade Date. Minimum (% of Collateral Collateral Type Principal Balance) (a) Senior Secured Loans (assuming Eligible Principal Investments 95 are Senior Secured Loans) ......
Maximum (% of Collateral Collateral Type Principal Balance) (b) Senior Secured Bonds, Senior Secured Notes, Senior Unsecured Bonds, Senior Unsecured Loans and Second Lien Loans...... 5 (c) DIP Collateral Assets ● In the aggregate...... 5 ● With respect to a single obligor (including its Affiliates) ..... 2
(d) PIKable Assets and Partial PIK Assets ...... 5 (e) Moody’s Rating lower than B3 (excluding Defaulted Assets and Current Pay Assets) ...... 5 (f) S&P Rating lower than B- (excluding Defaulted Assets and Current Pay Assets)...... 5 (g) Delayed Funding Assets...... 10 (h) Bridge Loans ...... 5 (i) Fixed Rate Assets...... 5 (j) Non-Quarterly Pay Assets...... ● In the aggregate...... 5 ● With respect to Collateral Assets that pay annually ...... 2 (k) Participation Interests...... 20 (l) Obligations of a single obligor (including its Affiliates)...... 2 However, the Senior Secured Loans of up to five obligors (including their Affiliates) may each represent 2.5% of the Collateral Principal Balance and Collateral Assets of a single obligor (including its Affiliates) that are not Senior Secured Loans may not represent more than 1% of the Collateral Principal Balance (m) Obligations in a single S&P Industry Classification...... 10 However, one S&P Industry Classification may represent up to 12%
10 Maximum (% of Collateral Collateral Type Principal Balance) of the Collateral Principal Balance and one other S&P Industry Classification may represent up to 15% of the Collateral Principal Balance (n) Obligations of entities Domiciled in Eligible Countries: Other than the United States...... 20 The United Kingdom...... 15 Canada...... 15 Any other Eligible Country (other than the United States, the United Kingdom or Canada) 5 All Moody’s Group I Countries ...... 20 All Moody’s Group II Countries...... 10 Any single Moody’s Group II Country or single Moody’s Group III Country...... 5 All Moody’s Group III Countries...... 7.5 All Moody’s Group IV Countries ...... 5 Any single Moody’s Group IV Country...... 3 Portugal, Italy, Ireland, Greece or Spain...... 0 (o) Cov-Lite Loans and any other assets (other than cash) that are not Senior Secured Loans, collectively ...... 45 (p) Permitted Withholding Tax Assets and Letters-of-Credit...... 5
SALES AND PURCHASES
Sales of Collateral Assets
Subject to the limitations contained in the immediately following four paragraphs, the Collateral Manager on behalf of the Issuer may sell, at any time: (a) any Credit Risk Asset, (b) any Permitted Withholding Tax Asset, (c) any Defaulted Asset, (d) any Equity Security or any asset held by an ETB Subsidiary (or the Issuer's entire interest in an ETB Subsidiary itself) and (e) any Credit Improved Asset or (f) any Collateral Asset not described in clauses (a) through (e) above if, after giving effect to such sale (each such sale described in this clause (f), a "Discretionary Sale"), the Aggregate Principal Balance of all Collateral Assets sold in a Discretionary Sale after the Effective Date in any 12 month period pursuant to this clause (f) is no greater than 25% of the Collateral Principal Balance as of the start of such 12 month period. Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of Default and receipt of notice from the Trustee of such Event of Default, whether during the Reinvestment Period or the Amortization Period, the Collateral Manager on behalf of the Issuer may not sell (a) any Credit Improved Asset or (b) any Collateral Asset in a Discretionary Sale.
The Collateral Manager may direct a Discretionary Sale during the Reinvestment Period only if the Collateral Manager on behalf of the Issuer will use commercially reasonable efforts to enter into
11 commitments on behalf of the Issuer to reinvest within 20 Business Days of the settlement of a Discretionary Sale all or a substantial portion of the Sale Proceeds (or, if less, the principal amount of the sold Collateral Asset) received therefrom.
The Collateral Manager may direct a sale of a Credit Improved Asset during the Reinvestment Period only if (x) the Collateral Manager on behalf of the Issuer will use commercially reasonable efforts to enter into commitments on behalf of the Issuer to reinvest within 45 Business Days of the settlement of a Credit Improved Asset all or a substantial portion of the Sale Proceeds (or, if less, the principal amount of the sold Collateral Asset) received therefrom or (y) the Collateral Manager reasonably believes that, after giving effect to the sale of such Credit Improved Asset and any subsequent reinvestment of Sale Proceeds received therefrom, the Effective Date Par Test will be satisfied.
The Collateral Manager will use commercially reasonable efforts to sell (i) each Equity Security that does not constitute Margin Stock no later than the later of (x) 36 months after the date of the Issuer’s acquisition thereof and (y) if such sale is prohibited by applicable law or an applicable contractual restriction, the earliest date on which such Equity Security is permitted to be sold under applicable law and not prohibited by an applicable contractual restriction and (ii) each Collateral Asset that constitutes Margin Stock no later than the later of (x) 45 days after the later of the date of the Issuer’s acquisition thereof and the date that such Collateral Asset became Margin Stock and (y) if such sale is prohibited by applicable law or an applicable contractual restriction, the earliest date on which such Margin Stock is permitted to be sold under applicable law and not prohibited by an applicable contractual restriction.
For the avoidance of doubt, if the Collateral Manager has committed to a sale of a Collateral Asset during the Reinvestment Period and has committed to purchase one or more replacement Collateral Assets during the Reinvestment Period, settlement of such sale and purchase may occur after the Reinvestment Period.
If either the Issuer or the Collateral Manager has actual knowledge that the account in which the funded amount in respect of a Letter-of-Credit owned by the Issuer is held has ceased to be a Letter-of- Credit Eligible Account, the Issuer (or the Collateral Manager on its behalf) may sell such Letter-of- Credit within 60 days of the date on which the Issuer or the Collateral Manager obtained actual knowledge that such account ceased to be a Letter-of-Credit Eligible Account.
The Collateral Manager will sell Collateral Assets without regard to the preceding limitations in connection with the latest Stated Maturity Date and may sell Collateral Assets without regard to the preceding limitations in connection with an Optional Redemption. In addition, in connection with the latest Stated Maturity Date, the Collateral Manager will either sell its interest in any ETB Subsidiary or cause any ETB Subsidiary to sell all of its assets and dissolve.
Purchases of Collateral Assets
Pursuant to the terms of the Collateral Management Agreement, the Collateral Manager may, but will not be required to, invest Principal Proceeds in Collateral Assets. Principal Proceeds may be invested in Eligible Investments pending reinvestment.
No Collateral Asset may be purchased unless (a) the Secured Notes have not been accelerated (or, if an acceleration has occurred, such acceleration has been rescinded or annulled in accordance with the Indenture) and (b) each of the following conditions (the "Investment Criteria") is satisfied as of the applicable Trade Date, in each case, after giving effect to all previous and contemporaneous sales and purchases, based on outstanding orders, trade confirmations and executed assignments:
12 (i) such Collateral Asset satisfies the Eligibility Criteria;
(ii) if such Trade Date is after the Effective Date and during the Reinvestment Period:
(A) each Coverage Test will be satisfied, maintained or improved;
(B) except in connection with the reinvestment of Principal Proceeds of Defaulted Assets, Equity Securities and Credit Risk Assets, the S&P CDO Monitor Test will be satisfied, maintained or improved;
(C) each Collateral Quality Test (other than the S&P CDO Monitor Test) and the Portfolio Concentration Limits will be satisfied, maintained or improved;
(D) with respect to the use of Sale Proceeds of Discretionary Sales and Credit Improved Assets, (1) the Aggregate Principal Balance of all Collateral Assets (calculated immediately prior to the applicable Discretionary Sale or sale of a Credit Improved Asset) will be maintained or increased or (2) the Effective Date Par Test will be satisfied; and
(E) with respect to the use of Principal Proceeds of Defaulted Assets and Credit Risk Assets, either (1) the Aggregate Principal Balance of the Collateral Assets purchased with such Principal Proceeds will be greater than or equal to the aggregate amount of such Principal Proceeds, (2) the Aggregate Principal Balance of all Collateral Assets (calculated immediately prior to giving effect to the applicable sale of a Credit Risk Asset or Defaulted Asset or the receipt of other Principal Proceeds with respect to such Credit Risk Asset or Defaulted Asset, as applicable) will be maintained or increased or (3) the Effective Date Par Test will be satisfied;
(iii) if such Trade Date is during the Amortization Period:
(A) the purchase is made with Principal Proceeds of Credit Risk Assets satisfying one or more of the criteria referred to in clause (a) of the definition thereof and/or Prepaid Collateral Assets and such purchase does not cause the aggregate amount of Principal Proceeds of Credit Risk Assets satisfying one or more of the criteria referred to in clause (a) of the definition thereof and/or Prepaid Collateral Assets reinvested during the same Due Period to exceed the Reinvestment Percentage;
(B) the Restricted Trading Condition is not applicable;
(C) the Aggregate Principal Balance of all Collateral Assets purchased with Principal Proceeds of Credit Risk Assets will be greater than or equal to the Sale Proceeds of the Collateral Assets that were the source of such Principal Proceeds;
(D) the S&P Rating and the stated maturity of the Collateral Asset to be acquired at least equals the S&P Rating and does not mature later than the stated maturity of the Collateral Asset that was the source of such Principal Proceeds;
(E) the Moody's Weighted Average Rating Factor Test will be satisfied after giving effect to such trade;
13 (F) each Par Coverage Test is satisfied;
(G) each of the Weighted Average Life Test, the Weighted Average Coupon Test, the Weighted Average Spread Test, the S&P Weighted Average Recovery Rate Test and the Moody’s Weighted Average Recovery Rate Test will be satisfied, maintained or improved;
(H) the Aggregate Principal Balance of all Collateral Assets purchased with Principal Proceeds of Prepaid Collateral Assets will be greater than or equal to the Aggregate Principal Balance of the Collateral Assets that were the source of such Principal Proceeds;
(I) the Caa/CCC Excess is equal to zero; and
(J) the Portfolio Concentration Limits will be satisfied, maintained or improved.
During the Amortization Period, if the Collateral Manager elects to retain any Principal Proceeds described in clause (iii)(A) in the Principal Collection Subaccount for reinvestment pursuant to clause (J) of the Priority of Principal Proceeds on any Payment Date, the Collateral Manager shall use commercially reasonable efforts to reinvest such Principal Proceeds no later than 20 Business Days after the end of the Due Period for the immediately succeeding Payment Date, and if such Principal Proceeds are not reinvested prior to such time, such Principal Proceeds shall be applied in accordance with the Priority of Principal Proceeds (other than clause (J) thereof) on such succeeding Payment Date.
During the Reinvestment Period and the Amortization Period, the Collateral Manager may not affirmatively consent to an exchange or deemed acquisition by the Issuer through material amendment of a Collateral Asset that would have the effect of extending the maturity date of the asset to be held by the Issuer during such extended term unless the Collateral Manager reasonably believes that, after giving effect to any such exchange or amendment, the Weighted Average Life Test and each Par Coverage Test will be satisfied and the remaining Collateral Quality Tests (other than the Weighted Average Spread Test) will be satisfied or, if not satisfied, such Collateral Quality Tests (other than the Weighted Average Spread Test) will be maintained or improved, each as calculated by the Collateral Manager.
Notwithstanding any of the Investment Criteria restrictions described above, the Collateral Manager may instruct the Trustee to exchange a Defaulted Asset, prior to the end of the Reinvestment Period, for an Equity Security (a "Swapped Equity Security") so long as at the time of or in connection with such exchange, such Swapped Equity Security is issued by the same obligor as the Defaulted Asset (or an Affiliate of or successor to such obligor or an entity that succeeds to substantially all of the assets of such obligor); provided, that if the Issuer is also required to pay an amount for such Swapped Equity Security, the Issuer will only use Interest Proceeds to effect such payment and only for so long as, after giving effect to such purchase, there would be sufficient Interest Proceeds to pay all amounts required to be paid pursuant to the Priorities of Payment prior to distributions to Holders of the Subordinated Notes on the next succeeding Payment Date.
For purposes of calculating compliance with the Investment Criteria, the Collateral Manager may elect to execute one or more Trading Plans (with notice to the Collateral Administrator, which notice shall include the identity of all sales and purchases forming part of such Trading Plan). "Trading Plan" means, with respect to any proposed investment or investments, a plan under which compliance with the Investment Criteria will be evaluated after giving effect to all sales and purchases proposed to be entered into (on a traded basis) within the ten Business Days following the date of determination of such compliance (including, without limitation, sales or purchases substituted for sales or purchases originally
14 proposed during such period); provided that (x) the execution of a Trading Plan will not result in the averaging of the Purchase Price of a Collateral Asset or Collateral Assets purchased at separate times for purposes of determining whether any particular Collateral Asset is a Discount Asset, (y) no more than one Trading Plan may be effective on any date and (z) no Trading Plan may relate to sales and purchases of Collateral Assets with aggregate sale and purchase prices in excess of 5% of the Collateral Principal Balance. The time period during which any Trading Plan is in effect shall not include a Determination Date. In addition, if any Trading Plan commenced by the Collateral Manager is not successfully completed, the Collateral Manager will notify Moody's and Rating Agency Confirmation from S&P will be required before a subsequent Trading Plan may be commenced (and, following receipt of such Rating Agency Confirmation, any number of additional Trading Plans may be executed subject to the other limitations in this paragraph above).
In addition to any sales or purchases made in accordance with the terms described above, the Collateral Manager shall have the right to effect the sale of any Collateral Asset or purchase any Collateral Asset on behalf of the Issuer (provided that any such purchase must comply with the applicable tax requirements set forth in the Indenture) (x) that has been consented to in writing by the Holders of Securities evidencing a Majority of each Class of Securities, voting separately, and (y) of which each Rating Agency and the Trustee have been notified.
15 COLLATERAL QUALITY TESTS
The "Collateral Quality Tests" are the Weighted Average Spread Test, the Weighted Average Coupon Test, the Moody’s Diversity Score Test, the Moody’s Weighted Average Rating Factor Test, the Weighted Average Recovery Rate Test, the Weighted Average Life Test and the S&P CDO Monitor Test.
Weighted Average Spread Test...... The "Weighted Average Spread Test" is a test satisfied if both of the following are satisfied: ● The "Moody’s Weighted Average Spread Test," which is satisfied if the Weighted Average Spread of the portfolio is at least 2.50% (the "Minimum Weighted Average Spread"). ● The "S&P Weighted Average Spread Test," which is satisfied if the Weighted Average Spread of the portfolio is greater than or equal to the S&P Minimum WAS. The "S&P Minimum WAS" is the percentage corresponding to the option selected by the Collateral Manager from the following table from time to time with one Business Day’s prior notification to the Collateral Administrator and S&P (provided that such selection will not be effective unless after giving effect to such selection the S&P CDO Monitor Test will be satisfied): Option Percentage 1 2.50% 2 2.55% 3 2.60% 4 2.65% 5 2.70% 6 2.75% 7 2.80% 8 2.85% 9 2.90% 10 2.95% 11 3.00% 12 3.05% 13 3.10% 14 3.15% 15 3.20% 16 3.25%
16 17 3.30% 18 3.35% 19 3.40% 20 3.45% 21 3.50% 22 3.55% 23 3.60% 24 3.65% 25 3.70% 26 3.75% 27 3.80% 28 3.85% 29 3.90% 30 3.95% 31 4.00% 32 4.05% 33 4.10% 34 4.15% 35 4.20% 36 4.25% 37 4.30% 38 4.35% 39 4.40% 40 4.45% 41 4.50% 42 4.55% 43 4.60% 44 4.65% 45 4.70% 46 4.75% 47 4.80% 48 4.85% 49 4.90%
17 50 4.95% 51 5.00% 52 5.05% 53 5.10% 54 5.15% 55 5.20% 56 5.25% 57 5.30% 58 5.35% 59 5.40% 60 5.45% 61 5.50% 62 5.55% 63 5.60% 64 5.65% 65 5.70% 66 5.75% 67 5.80% 68 5.85% 69 5.90% 70 5.95% 71 6.00%
Weighted Average Coupon Test...... The "Weighted Average Coupon Test" is a test that is satisfied, as of any date of determination, if the Weighted Average Coupon equals or exceeds the Minimum Weighted Average Coupon.
"Minimum Weighted Average Coupon": 7.5%.
Moody’s Diversity Score Test...... The "Moody’s Diversity Score Test" is a test satisfied if the Moody’s Diversity Score of the portfolio is at least the minimum Moody’s Diversity Score in the applicable option under the Collateral Quality Matrix; provided that the Moody’s Diversity Score Test will not be satisfied if the Moody’s Diversity Score of the portfolio is less than 30. Moody’s Weighted Average Rating The "Moody’s Weighted Average Rating Factor Test"
18 Factor Test ...... is a test satisfied if the Moody’s WARF of the portfolio is lower than the lower of (i) the sum of (A) the applicable Maximum Moody’s Weighted Average Rating Factor plus (B) the Moody's WARF Modifier and (ii) 3100. Weighted Average Recovery Rate Test The "Weighted Average Recovery Rate Test" is a test ...... satisfied if both of the following are satisfied: ● The "Moody’s Weighted Average Recovery Rate Test," which is satisfied if the Moody’s WARR of the portfolio is greater than or equal to 43.0%. ● The "S&P Weighted Average Recovery Rate Test," which is satisfied if the S&P WARR of the portfolio for each Class of Rated Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class) is greater than or equal to the S&P Minimum WARR for such Class. Weighted Average Life Test...... The "Weighted Average Life Test" is a test satisfied if the Weighted Average Life of the portfolio is less than or equal to (A) 8.0 years minus (B)(1) the number of calendar quarters that have elapsed since the Closing Date divided by (2) four. S&P CDO Monitor Test ...... The "S&P CDO Monitor Test" is a test (a) satisfied as of any date of determination if, after taking into account a proposed acquisition or sale or other action with respect to a Collateral Asset other than a Defaulted Asset (the "Proposed Portfolio"), each Class Default Differential of the Proposed Portfolio is positive or (b) maintained or improved if each Class Default Differential of the Proposed Portfolio is equal to or greater, respectively, than the corresponding Class Default Differential of the portfolio prior to giving effect to such proposed acquisition, sale or other action (the "Current Portfolio").
19 Certain Definitions Related to the Collateral Quality Tests
Collateral Quality Matrix
The minimum Moody’s Diversity Score and maximum Moody’s WARF on each Measurement Date will be determined by reference to an option under the Collateral Quality Matrix. If the current Moody’s Diversity Score falls between any of the Moody’s Diversity Scores listed in the Collateral Quality Matrix, the Collateral Manager may interpolate linearly the Maximum Moody’s Weighted Average Rating Factor applicable to such Moody’s Diversity Score. On the Effective Date, the Collateral Manager will be required to elect its initial option and provide written notice thereof to the Collateral Administrator. Thereafter, with prior notice to the Collateral Administrator, the Collateral Manager may elect for a different option (including an interpolated option) to apply so long as the Collateral Assets comply with that different option at the time of the change.
The following is the "Collateral Quality Matrix":
Minimum Maximum Moody’s Moody’s Weighted Average Option Diversity Score Rating Factor 1 30 2,110 2 35 2,210 3 40 2,300 4 45 2,380 5 50 2,460 6 55 2,530 7 60 2,600 8 65 2,660 9 70 2,720 10 75 2,770 11 80 2,810
The "Moody’s WARF Modifier" as of any date of determination is equal to the sum of:
(a) the amount (not less than zero) equal to (i) the Moody’s WARR as of such date minus 43.0%; multiplied by (ii) 70; multiplied by (iii) 100; and
(b) the amount (not less than zero) equal to (i) the Weighted Average Spread as of such date (subject to a maximum percentage of 6.00%) minus 2.50%; multiplied by (ii) 3.0; multiplied by (iii) 10,000.
20 COVERAGE TESTS, INTEREST DIVERSION TEST AND OTHER TESTS
The "Coverage Tests" are the Senior Coverage Tests, the Mezzanine Coverage Tests, and the Junior Coverage Test specified below and the "Interest Diversion Test" is the Interest Diversion Test specified below. For the avoidance of doubt, the Class X Notes will not be included for the purposes of calculating any Par Coverage Test or the Interest Diversion Test.
First Test Date Minimum (%) "Senior Coverage Tests":
"Senior Interest Coverage Test" ...... Second Determination Date 100.0 Third Determination Date 120.0 "Senior Par Coverage Test" ...... Effective Date 120.8
"Mezzanine Coverage Tests":
"Class C Interest Coverage Test" ..... Second Determination Date 100.0 Third Determination Date 110.0
"Class C Par Coverage Test" ...... Effective Date 111.8
"Class D Interest Coverage Test" ..... Second Determination Date 100.0 Third Determination Date 105.0
"Class D Par Coverage Test" ...... Effective Date 107.2
"Junior Coverage Test":
"Class E Par Coverage Test" ...... Effective Date 104.0
"Interest Diversion Test"...... Effective Date 105.0
Certain Definitions Related to the Coverage Tests
A "Par Coverage Test" is a test that is satisfied if the Par Coverage Ratio for the related Tested Classes is at least the minimum percentage specified above.
21 The "Par Coverage Ratio" for any date of determination is a percentage equal to "A divided by B," where:
A = the Collateral Principal Balance as of such date of determination; and
B = the Aggregate Outstanding Amount of the Tested Classes.
Interest Diversion Test
The "Interest Diversion Test" for any date of determination is a test satisfied if the Par Coverage Ratio calculated for the Tested Classes is at least equal to the minimum percentage specified above.
Interest Coverage Tests
An "Interest Coverage Test" is a test that is satisfied if the Interest Coverage Ratio for the Tested Classes relating to such test is at least the minimum percentage specified above.
The "Interest Coverage Ratio" for any date of determination for the Tested Classes is equal to "A divided by B," where
A = the Interest Coverage Amount; and
B = the sum of (i) the Interest Distribution Amounts payable (or expected to be payable) on the Tested Classes relating to such test and (ii) all amounts payable with Interest Proceeds that are pari passu with such payments, in each case, on the Payment Date immediately following such date of determination under the Priorities of Payment.
The "Interest Coverage Amount" for any date of determination is:
(a) the amount of Interest Proceeds (excluding amounts (x) deposited in the Letter-of-Credit Reserve Account and (y) used to pay taxes and government fees and Issuer Expenses during the Due Period with respect to the immediately following Payment Date, but prior to such Payment Date) received or scheduled to be received during the Due Period with respect to the Payment Date immediately following such date of determination minus
(b) the amounts payable on the immediately following Payment Date, as set forth in clauses (A) through (D) of the Priority of Interest Payments (without duplication).
Additional Tests and Limits
First Test Date Minimum (%) Effective Date Par Test...... Effective Date 107.97 "Event of Default Trigger" ...... Effective Date 102.5
22 Effective Date Par Test
The "Effective Date Par Test" for any date of determination is a test that is satisfied if the Effective Date Par Ratio is at least equal to the percentage amount specified above.
The "Effective Date Par Ratio" for any date of determination is a percentage equal to "A divided by B," where:
A = the Collateral Principal Balance as of such date of determination; and
B = the Aggregate Outstanding Amount of the Senior Notes other than the Class X Notes, the Mezzanine Notes and the Class E Notes.
Event of Default Test
The "Event of Default Test" for any date of determination is a test that is satisfied if the Event of Default Ratio is at least equal to the Event of Default Trigger specified above.
The "Event of Default Ratio" for any date of determination is a percentage equal to "A divided by B," where:
A = the Collateral Principal Balance as of such date of determination; and
B = the Aggregate Outstanding Amount of the Class A Notes.
Additional Requirements
Maximum % of Collateral Principal Balance "Hedged Asset Maximum Percentage" 5
The "Current Pay Haircut Threshold Percentage" is 5% of the Collateral Principal Balance.
None of the Collateral Principal Balance has been (or may be) loaned pursuant to securities lending agreements.
"Petition Expense Amount": An aggregate sum (until the Securities are paid in full or until the Indenture is otherwise terminated, in which case it will equal zero) of $250,000.
23 PRIORITIES OF PAYMENT
On each Payment Date (other than Payment Dates on which the Acceleration Waterfall is applicable), the Trustee on behalf of the Issuer will apply Interest Proceeds (other than Interest Proceeds previously reinvested) to make the following distributions in the specified order (the "Priority of Interest Payments"):
(A) to the payment of any accrued and unpaid taxes, registered office fees and governmental fees owed by the Issuers (including annual government fees);
(B) to (1) first, the payment of accrued and unpaid Issuer Expenses in the order of priority set forth in the Issuer Expense Payment Sequence and (2) second, solely with respect to the Payment Date occurring in January of each year, a deposit to the Expense Reserve Account in an amount as may be directed to be deposited to the Expense Reserve Account by the Collateral Manager pursuant to the Indenture; provided, that the aggregate amount applied pursuant to subclauses (1) and (2) of this clause (B) shall not exceed the sum of (x) 0.025% per annum of the Aggregate Principal Balance of the Collateral Assets (measured as of the beginning of the Due Period preceding such Payment Date) and (y) $150,000 per annum (on a rolling four quarter basis) (such cap to be calculated with respect to each Payment Date on the basis of a 360 day year consisting of twelve 30-day months); provided, further, that the Petition Expense Amount may be applied pursuant to this clause (B) to the payment of Petition Expenses at the time that such Petition Expenses are incurred without regard to any cap and, if (but only after) the Petition Expense Amount is applied to the payment of Petition Expenses in full, additional Petition Expenses shall be paid together with other Issuer Expenses subject to the cap above;
(C) to the payment of any accrued and unpaid Senior Collateral Management Fees due on such Payment Date (including any unpaid Senior Collateral Management Fees due on any previous Payment Date), payable in accordance with the Collateral Management Agreement;
(D) to the payment, on a pro rata basis, of any amounts due to Hedge Counterparties under any Interest Rate Hedge, Timing Hedge or Asset Specific Hedge (other than for amounts due to any Hedge Counterparty with respect to (x) termination (or partial termination) of any Interest Rate Hedge, Timing Hedge or Asset Specific Hedge where the Hedge Counterparty is the sole affected party or the defaulting party or (y) upfront premium payments that the Issuer is required to pay in connection with entering into an Asset Specific Hedge);
(E) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class A Notes and the accrued and unpaid Interest Distribution Amount with respect to the Class X Notes, pro rata based on amounts due and (2) second, except on the first Payment Date, principal of the Class X Notes until the Class X Notes are paid in full;
(F) to the payment of the accrued and unpaid Interest Distribution Amount with respect to the Class B-1 Notes and the Class B-2 Notes, pro rata based on amounts due;
(G) if either Senior Coverage Test is not satisfied as of the related Determination Date, to make payments in accordance with the Note Payment Sequence to the extent required to satisfy such test or until the Senior Notes are paid in full; provided, that the Senior Interest Coverage Test will only apply on and after the second Determination Date;
(H) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class C Notes; and (2) second, any Deferred Interest on the Class C Notes (and interest thereon);
24 (I) if either the Class C Interest Coverage Test or the Class C Par Coverage Test is not satisfied as of the related Determination Date, to make payments in accordance with the Note Payment Sequence to the extent required to satisfy such test or until each Class of Senior Notes and the Class C Notes is paid in full; provided, that the Class C Interest Coverage Test will only apply on and after the second Determination Date;
(J) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class D Notes; and (2) second, any Deferred Interest on the Class D Notes (and interest thereon);
(K) if either the Class D Interest Coverage Test or the Class D Par Coverage Test is not satisfied as of the related Determination Date, to make payments in accordance with the Note Payment Sequence to the extent required to satisfy such test or until each Class of Senior Notes and Mezzanine Notes is paid in full; provided, that the Class D Interest Coverage Test will only apply on and after the second Determination Date;
(L) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount in respect of the Class E Notes and (2) second, any Deferred Interest on the Class E Notes (and interest thereon);
(M) if an Effective Date Confirmation Failure occurs and is continuing, the Trustee on behalf of the Issuer shall pursuant to one or both of the following options (at the direction of the Collateral Manager in its sole discretion): (1) if the Effective Date Moody’s Condition is not satisfied, transfer amounts to the Principal Collection Subaccount as Principal Proceeds to purchase Collateral Assets within 60 calendar days of such transfer in accordance with the Investment Criteria and/or (2) make payments in accordance with the Note Payment Sequence, in each case until each applicable rating is confirmed or the Rated Notes are paid in full;
(N) during the Reinvestment Period, if the Interest Diversion Test is not satisfied as of the related Determination Date, an amount equal to the lesser of (1) 50% of the remaining Interest Proceeds and (2) the amount required to satisfy such test, as instructed by the Collateral Manager, to the Principal Collection Subaccount to be treated as Principal Proceeds for the purchase of additional Collateral Assets or to the Principal Collection Subaccount for investment in Collateral Assets at a later date in accordance with the Investment Criteria or, after the Non-Call Period at the election of the Collateral Manager in its sole discretion, to make payments in accordance with the Note Payment Sequence until each of the Senior Notes, Mezzanine Notes and the Class E Notes are paid in full;
(O) if the Class E Par Coverage Test is not satisfied as of the related Determination Date, to make payments in accordance with the Note Payment Sequence to the extent required to satisfy such test or until each of the Senior Notes, the Mezzanine Notes and the Class E Notes are paid in full;
(P) at the election of the Collateral Manager with the written consent of a Majority of the Subordinated Notes, on any Payment Date during the Reinvestment Period, some or all of the amounts available for application under this clause (P), to the Principal Collection Subaccount to be treated as Principal Proceeds;
(Q) to the payment of any accrued and unpaid Subordinated Collateral Management Fees due to the Collateral Manager on such Payment Date;
(R) on the first Payment Date only, the remainder to the Interest Collection Subaccount to be treated as Interest Proceeds for distribution after the first Payment Date;
25 (S) to the payment of first, any accrued and unpaid Issuer Expenses, to the extent not paid pursuant to clause (B) above in accordance with the Issuer Expense Payment Sequence (but without regard to any applicable cap set forth therein); and second, solely with respect to the Payment Date occurring in January of each year, a further deposit to the Expense Reserve Account in an amount as may be directed to be deposited to the Expense Reserve Account by the Collateral Manager in its sole discretion pursuant to the Indenture;
(T) to the payment, on a pro rata basis, of any amounts due to Hedge Counterparties in connection with (x) termination (or partial termination) of any Interest Rate Hedge, Timing Hedge or Asset Specific Hedge where the Hedge Counterparty is the sole affected party or the defaulting party or (y) upfront premium payments that the Issuer is required to pay in connection with entering into an Asset Specific Hedge;
(U) until the amount of all payments in respect of the Subordinated Notes issued on the Closing Date (including amounts to be made on such Payment Date) achieves an Internal Rate of Return of 15%, to the Subordinated Notes; and
(V) (1) first, to the payment of any accrued and unpaid Incentive Management Fee and (2) second, any remaining amounts to the Subordinated Notes.
On each Payment Date (other than Payment Dates on which the Acceleration Waterfall is applicable), the Trustee on behalf of the Issuer will apply Principal Proceeds (other than (i) Principal Proceeds previously reinvested or which the Collateral Manager has committed to invest in accordance with the criteria set forth herein and (ii) Allocated Principal Proceeds, to the extent set forth in the definition of "Principal Proceeds") to make the following distributions in the specified order (the "Priority of Principal Payments" and, together with the Priority of Interest Payments and the Acceleration Waterfall (where applicable), the "Priorities of Payment"):
(A) to the payment of the amounts referred to in clauses (A) through (F) of the Priority of Interest Payments in the same manner and order of priority and subject to any applicable cap set forth therein, but only to the extent not paid in full thereunder;
(B) if any Senior Coverage Test or any Mezzanine Coverage Test is not satisfied as of the related Determination Date after giving effect to the application of Interest Proceeds pursuant to clauses (G), (I) or (K), as applicable, of the Priority of Interest Payments on such Payment Date, by applying Principal Proceeds to make payments in accordance with the Note Payment Sequence to the extent required to satisfy such test or until each Class of Senior Notes and Mezzanine Notes is paid in full; provided, that the Senior Interest Coverage Test, the Class C Interest Coverage Test and the Class D Interest Coverage Test will only apply on and after the second Determination Date;
(C) if a Special Redemption is directed by the Collateral Manager, by applying Principal Proceeds to make payments in accordance with the Note Payment Sequence, in the aggregate constituting an amount equal to the Special Redemption Amount;
(D) if an Effective Date Confirmation Failure occurs and is continuing, except to the extent that the Collateral Manager is permitted by the Indenture, and has elected to, purchase additional Collateral Assets with Interest Proceeds applied as Principal Proceeds pursuant to clause (M) of the Priority of Interest Proceeds and such application has caused each applicable rating to be confirmed, by applying Principal Proceeds to make payments in accordance with the Note Payment Sequence to the extent necessary for each applicable rating to be confirmed or until the Rated Notes are paid in full, after
26 giving effect to any application of Interest Proceeds pursuant to clause (M) of the Priority of Interest Payments;
(E) on any Redemption Date (other than a Redemption Date related to a Refinancing), by applying Principal Proceeds to make payments in accordance with the Note Payment Sequence, and then to payments under clauses (L) through (P) of this Priority of Principal Payments;
(F) during the Reinvestment Period only and to the extent not paid pursuant to the Priority of Interest Payments, to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class C Notes; and (2) second, any Deferred Interest on the Class C Notes (and interest thereon); provided, that after giving effect to such payments, each Coverage Test will be satisfied on a pro forma basis;
(G) during the Reinvestment Period only and to the extent not paid pursuant to the Priority of Interest Payments, to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class D Notes; and (2) second, any Deferred Interest on the Class D Notes (and interest thereon); provided, that, after giving effect to such payments, each Coverage Test will be satisfied on a pro forma basis;
(H) during the Reinvestment Period only and to the extent not paid pursuant to the Priority of Interest Payments, to the payment of (1) first, the accrued and unpaid Interest Distribution Amount with respect to the Class E Notes; and (2) second, any Deferred Interest on the Class E Notes (and interest thereon); provided, that, after giving effect to such payments, each Coverage Test will be satisfied on a pro forma basis;
(I) during the Reinvestment Period only, to the Principal Collection Subaccount to invest in Collateral Assets at a later date in accordance with the Investment Criteria;
(J) after the Reinvestment Period, at the election of the Collateral Manager in its sole discretion, to the extent of Principal Proceeds in respect of Credit Risk Assets and Prepaid Collateral Assets up to the Reinvestment Percentage thereof, to the purchase of Collateral Assets or to the Principal Collection Subaccount for investment in Collateral Assets at a later date in accordance with the Investment Criteria;
(K) after the Reinvestment Period, to make payments in accordance with the Note Payment Sequence after giving effect to the Priority of Interest Payments;
(L) after the Reinvestment Period, to the payment of any accrued and unpaid Subordinated Collateral Management Fees due to the Collateral Manager on such Payment Date;
(M) after the Reinvestment Period, to the payment (1) first, of Issuer Expenses in accordance with the Issuer Expense Payment Sequence to the extent not paid pursuant to clauses (B) and (S) of the Priority of Interest Payments or clause (A) above on such Payment Date (but without regard to any applicable cap set forth therein); (2) second, on a pro rata basis, to any accrued and unpaid amounts due under any Interest Rate Hedges that are not paid pursuant to clause (D) of the Priority of Interest Payments or clause (A) above because they constitute termination payments where the Hedge Counterparty is the sole defaulting party or the sole affected party or under clause (T) of the Priority of Interest Payments;
(N) after the Reinvestment Period, to the payment, on a pro rata basis, of any amounts payable by the Issuer under any Asset Specific Hedge, Timing Hedge or Interest Rate Hedge to the extent
27 not paid pursuant to the Priority of Interest Payments on such Payment Date or clauses (A) and (M) above;
(O) after the Reinvestment Period, until the amount of all payments in respect of the Subordinated Notes issued on the Closing Date (including amounts to be made on such Payment Date) achieves an Internal Rate of Return of 15%, to the Subordinated Notes; and
(P) (1) first, to the payment of any accrued and unpaid Incentive Management Fee and (2) second, any remaining amounts to the Subordinated Notes.
Notwithstanding anything herein to the contrary (including, without limitation, the Priority of Interest Payments and the Priority of Principal Payments), if acceleration of the Secured Notes has occurred following an Event of Default and such acceleration has not been rescinded or annulled in accordance with the Indenture, then on each Payment Date thereafter, the Trustee will disburse all Principal Proceeds, Interest Proceeds and any other cash on deposit in the Payment Account in accordance with the following priority (the "Acceleration Waterfall"):
(i) to the payment of the accrued and unpaid amounts set forth in clauses (A) through (D) of the Priority of Interest Payments in the specified order of priority and subject to any applicable cap set forth therein;
(ii) to the payment of (a) first, any accrued and unpaid Interest Distribution Amount with respect to the Highest-Ranking Class (in the case of the Class B Notes, pro rata among the Class B-1 Notes and the Class B-2 Notes based on amounts due) and (b) second, principal (including Deferred Interest) of the Highest-Ranking Class (in the case of the Class B Notes, pro rata among the Class B-1 Notes and the Class B-2 Notes based on their respective Aggregate Outstanding Amounts) until paid in full, repeating such process until all Secured Notes are paid in full;
(iii) to the payment of any accrued and unpaid Subordinated Collateral Management Fees due to the Collateral Manager on such Payment Date (including any amounts previously deferred in accordance with the Collateral Management Agreement);
(iv) to the payment of any accrued and unpaid Issuer Expenses not paid pursuant to clause (i) above in accordance with the Issuer Expense Payment Sequence (but without regard to any applicable cap set forth therein);
(v) to the payment, on a pro rata basis, of any accrued and unpaid termination payments where the Hedge Counterparty is the defaulting party or sole affected party under the related Hedge Agreement;
(vi) until the amount of all payments in respect of the Subordinated Notes issued on the Closing Date (including amounts to be made on such Payment Date) achieves an Internal Rate of Return of 15%, to the Subordinated Notes; and
(vii) (1) first, to the payment of any accrued and unpaid Incentive Management Fee and (2) second, any remaining amounts to the Subordinated Notes.
28 CERTAIN TRANSACTION PARTIES
The Issuers
The Issuer was incorporated on September 13, 2012 in the Cayman Islands and is subject to the Companies Law (2012 Revision) (the "Companies Law") with registration number 271695 and may be contacted at its principal office (telephone: +1 (345) 945-7099). On the Closing Date the directors of the Issuer will be Chris Watler and Dianne Farjallah, who are employees of the Administrator and may be contacted at the principal office of the Issuer.
The Co-Issuer was formed on December 7, 2012 in the State of Delaware pursuant to the Limited Liability Act of the State of Delaware with the file number 121308757, and its operations are governed by that statute. The Co-Issuer may be contacted at its registered office (telephone: 302-738-6680). The Co- Issuer's address is set forth on the back inside cover of the Offering Memorandum. The manager of the Co-Issuer is Donald Puglisi, the MBNA America Professor Emeritus at the University of Delaware, and may be contacted at the registered office of the Co-Issuer.
Notices and demands to or upon the Issuer in respect of the Securities and the Indenture may be served at the office of the Process Agent.
The Collateral Manager
The information appearing in this section has been prepared by the Collateral Manager and has not been independently verified by any other Transaction Party. Accordingly, notwithstanding anything to the contrary herein, no such other Transaction Party assumes any responsibility for the accuracy, completeness or applicability of such information.
General
Certain advisory and administrative functions with respect to the Collateral will be performed by the Collateral Manager under the Collateral Management Agreement to be entered into between the Issuer and the Collateral Manager.
Collateral Manager
The Collateral Manager is Canyon Capital Advisors LLC ("Canyon"), a Delaware limited liability company, registered as an investment advisor with the SEC. The Collateral Manager maintains broad-based contacts in the domestic and international debt and equity capital markets and an extensive network within the high yield, leveraged buy-out, venture capital and special situation investment communities.
The Collateral Manager and its affiliates are money management firms headquartered in the United States in Los Angeles, California. Canyon also maintains an office in New York, New York. Additionally, Canyon Capital Advisors (Europe) Limited, a Canyon affiliate incorporated under the laws of England and Wales (registered number 05886261), maintains an office in London and is registered with the Financial Services Authority of the United Kingdom. Canyon employees may work from these as well as other locations from time to time on behalf of the Issuer.
Canyon provides a number of individual and institutional clients with a variety of investment management services, focusing on investment objectives similar to those of the Issuer and real estate investment and development activities. Prior performance is no guarantee of future success.
29 The predecessors to Canyon, CPI Securities, L.P. and Canyon Capital Management, L.P., were formed in 1990 and 1993, respectively. Canyon is registered as an investment advisor with the SEC. A copy of Canyon’s Form ADV, Part 2A and 2B is available at no charge to prospective and current holders of Securities. A free copy may be obtained by sending a written request that includes a delivery address (for either electronic or United States mail) to Investor Relations at Canyon Capital Advisors LLC, 2000 Avenue of the Stars, 11th Floor, Los Angeles, California 90067, [email protected] (e-mail), 310- 272-1997 (facsimile), 310-272-1200 (telephone). A free copy of Canyon’s Form ADV, Part 1 and Part 2A may be obtained at www.adviserinfo.sec.gov.
In October 2006, Canyon, together with Range Capital LLC (controlled by Nathan Sandler), formed ICE Canyon LLC, an investment advisor focused on international credit strategies. ICE Canyon LLC is registered as an investment advisor with the SEC and currently manages several funds and, from time to time, separate accounts.
In late 2005, Canyon and Black Canyon Capital LLC (controlled by Michael Hooks and Mark Lanigan) formed Black Canyon Management LLC to manage Black Canyon Direct Investment Fund, L.P., a direct investment fund.
As of the date of this Offering Memorandum, the Collateral Manager and its affiliates (including Black Canyon Capital LLC and ICE Canyon LLC) had approximately 216 full time employees (excluding temporary personnel), of whom 103 were investment professionals.
Key Personnel
The principals of the Collateral Manager are Joshua S. Friedman, Mitchell R. Julis and K. Robert Turner. Messrs. Friedman and Julis control the Collateral Manager and are primarily responsible for the investment activities of the Issuer as well as Canyon’s research strategy and firm management. Mr. Turner directs Canyon’s real estate investments through Canyon Capital Realty Advisors LLC ("CCRA"), an affiliate of Canyon, and is not involved in the management of the Issuer. The Collateral Manager is controlled by Canyon Partners, LLC.
Joshua S. Friedman (age 56) is Co-Founder, Co-Chairman, and Co-Chief Executive Officer of Canyon Partners, LLC. Mr. Friedman is a graduate of Harvard College (B.A., summa cum laude, Phi Beta Kappa, Physics), Oxford University (M.A., honors, Politics and Economics, Marshall Scholar), Harvard Law School (J.D., magna cum laude), and Harvard Business School (M.B.A., Baker Scholar). Prior to forming Canyon, Mr. Friedman was Director of Capital Markets for High Yield and Private Placements at Drexel Burnham Lambert. Prior to working at Drexel, he worked in the Mergers and Acquisitions Department of Goldman Sachs in New York. Mr. Friedman is also a director and trustee of a number of nonprofit and charitable organizations.
Mitchell R. Julis (age 57) is Co-Founder, Co-Chairman, and Co-Chief Executive Officer of Canyon Partners, LLC. Mr. Julis is a graduate of the Woodrow Wilson School at Princeton University (B.A., magna cum laude, Phi Beta Kappa), Harvard Law School (J.D., magna cum laude), and Harvard Business School (M.B.A., honors). Prior to forming Canyon, Mr. Julis directed a group of professionals responsible for a portfolio of distressed and special situation securities at Drexel Burnham Lambert. Prior to working at Drexel, he was a bankruptcy and creditors’ rights attorney at Wachtell, Lipton, Rosen & Katz in New York. Mr. Julis has authored a number of articles published in law journals and other periodicals on the subject of bankruptcy and distressed credit investing.
30 The Collateral Manager also draws on the expertise and credit analysis skills of other senior Canyon professionals, as needed, for the benefit of the Issuer. The employees of Canyon will devote varying portions of their business time and attention to the affairs of the Issuer and other funds and accounts with respect to which Canyon acts as an investment advisor. None of the Collateral Manager nor any of its principals or employees is required to devote full time to managing the Issuer. Investors will have no direct interest in the Collateral Manager or Canyon’s other businesses.
31 SECURITY IDENTIFYING NUMBERS
Identifying numbers for the Securities are set forth below.
CUSIP CUSIP ISIN (Reg S) ISIN (144A) (Reg S) (144A)
Class X Notes G1833DAA3 13875VAA4 USG1833DAA30 US13875VAA44
Class A Notes G1833DAB1 13875VAB2 USG1833DAB13 US13875VAB27 Class B-1 Notes G1833DAC9 13875VAC0 USG1833DAC95 US13875VAC00 Class B-2 Notes G1833DAF2 13875VAL0 USG1833DAF27 US13875VAL09 Class C Notes G1833DAD7 13875VAD8 USG1833DAD78 US13875VAD82 Class D Notes G1833DAE5 13875VAE6 USG1833DAE51 US13875VAE65 Class E Notes G1790AAA0 13875WAA2 USG1790AAA00 US13875WAA27 Subordinated G1790AAB8 13875WAB0 USG1790AAB82 US13875WAB00 Notes
Common CUSIP (Non- Code Clearing Agency ISIN (Accredited (144A) Securities) Investor) (Reg S)
Class X Notes USG1833DAA30 13875VAF3 N/A Class A Notes USG1833DAB13 13875VAG1 N/A Class B-1 Notes USG1833DAC95 13875VAH9 N/A Class B-2 Notes USG1833DAF27 13875VAM8 N/A Class C Notes USG1833DAD78 13875VAJ5 N/A Class D Notes USG1833DAE51 13875VAK2 N/A Class E Notes USG1790AAA00 13875WAD6 N/A Subordinated USG1790AAB82 13875WAC8 US13875WAC82 Notes
32 LISTING AND GENERAL INFORMATION
(1) Application has been made to the Irish Stock Exchange for the Securities (other than the Class X Notes) to be admitted to the Official List and trading on its Global Exchange Market. There can be no assurance that such listing will be obtained or maintained. The Class X Notes will not be listed on any securities exchange.
(2) Other than as described herein, since the date of incorporation or formation, as applicable, of the Issuers, neither of the Issuers has commenced operations and no annual accounts or reports have been prepared as of the date hereof. The Issuer does not intend to publish annual reports and accounts and it is not required to do so under Cayman Islands law. Pursuant to the Indenture, monthly reports and payment date reports that provide information with respect to the Collateral and the Securities will be available to Securityholders and may be obtained from the Trustee.
(3) Neither of the Issuers is involved, or has been involved since incorporation or formation, as applicable, in any governmental, litigation or arbitration proceedings relating to claims on amounts that may have a significant effect on the financial positions of the Issuers, nor, so far as either of the Issuers is aware, is any such governmental, litigation or arbitration proceedings involving it pending or threatened.
(4) So long as any Securities are outstanding, paper copies of the Indenture and the Memorandum and Articles of Association of the Issuer and the Certificate of Formation and Limited Liability Company Agreement of the Co-Issuer will be available for inspection at the offices of the Trustee or the Issuer or Co-Issuer, respectively.
(5) The issuance of the Securities was authorized by the board of directors of the Issuer and the issuance of the Co-Issued Securities was authorized by the manager of the Co-Issuer on or prior to the Closing Date.
(6) The cost of obtaining the listing of the Securities on the Irish Stock Exchange is expected to be approximately €14,190.
(7) The Irish listing agent is acting solely in its capacity as listing agent for the Issuer (and not on its own behalf) in connection with the application for admission of the Securities to the Official List of the Irish Stock Exchange or to trading on the Irish Stock Exchange.
(8) Neither Moody’s nor S&P is established in the European Union and neither has applied to be registered under Regulation (EC) No. 1060/2009.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon for the Issuers and the Initial Purchaser by Ashurst LLP. Certain matters with respect to Cayman Islands corporate law and tax law will be passed upon for the Issuer by Maples and Calder. Certain legal matters will be passed upon for the Collateral Manager by Sidley Austin LLP.
33 BASE OFFERING MEMORANDUM
The information in this Base may be supplemented, and in some cases modified, by related information in the Term Sheet. If there is any inconsistency between this Base and the Term Sheet, the Term Sheet will control.
RISK FACTORS
An investment in the Securities involves certain risks. Prospective investors should carefully consider the following factors, in addition to the matters set forth elsewhere in the Offering Memorandum, prior to investing in any Securities.
Risk Factors Relating to the Securities
Poor General Economic Conditions and Poor Conditions in the Loan Markets. Beginning in 2007, the United States experienced an economic recession, and numerous other economies around the world have also suffered from general economic slowdown. The sub-prime mortgage crisis commencing in 2007, the collapse of Lehman Brothers Holdings, Inc., the conservatorship of Fannie Mae and Freddie Mac by the United States government and numerous other negative economic events created a severe recession in the United States and this and other factors, in turn, contributed to recessions in much of the industrialized world. While there has been some improvement in the United States economy, economic growth remains slow and continued growth remains highly uncertain. Market conditions in the capital markets and the housing market remain severely impaired. In addition, unemployment remains high, placing continued downward pressure on the United States economy. The performance of the Issuer’s assets and, consequently, the performance of the Issuer and the value of the Securities, will depend in part on general economic conditions. There can be no assurance that these conditions will improve or, if they do improve, that they will not deteriorate again.
Some leading global financial institutions have been forced into mergers with other financial institutions, have been partially or fully nationalized or have gone bankrupt or insolvent. The bankruptcy or insolvency of a major financial institution may have an adverse effect on the Issuer and the Securities. In addition, the bankruptcy or insolvency of one or more additional financial institutions may trigger additional crises in the global credit markets and overall economy which could have a significant adverse effect on the Issuer and the Securities.
Several nations, particularly within the European Union, are currently suffering from significant economic distress. There can be no assurance as to the resolution of the economic problems in those countries, nor as to whether such problems will spread to other countries or otherwise negatively affect economies or markets. A debt default by a sovereign nation or other potential consequences of these economic problems may trigger additional crises in the global credit markets and overall economy which could have a significant adverse effect on the Issuer and the Securities. In addition, obligors on Collateral Assets may be organized in, or otherwise Domiciled in, certain of such countries or other countries that may begin to suffer economic distress and the uncertainty and market instability in such country may increase the likelihood of default by such obligor. In the event of its insolvency, any such obligor, by virtue of being organized in such a jurisdiction or having a substantial percentage of its revenues or assets in such a jurisdiction, may be more likely to be subject to bankruptcy or insolvency proceedings in such jurisdiction at the same time as such jurisdiction is itself potentially unstable.
The leveraged loan markets and the high yield bond markets have been severely impacted by the economic conditions of the past several years. The financial markets (including the leveraged loan markets and the high yield bond markets) have experienced a severe liquidity crisis, and continue to experience limited liquidity. The liquidity crisis has resulted in, among other things, substantial volatility
34 in the prices of leveraged loans and high yield bonds. There exist significant additional risks for the Issuer and investors as a result of the current liquidity crisis. Those risks include, among others, (i) the likelihood that the Issuer will find it harder to sell any of its Collateral Assets in the secondary market, thus rendering it more difficult to dispose of Credit Risk Assets, Credit Improved Assets or Defaulted Assets, (ii) the possibility that the price at which Collateral Assets can be sold by the Issuer will have deteriorated from their effective purchase price and (iii) the increased illiquidity of the Securities. These additional risks may severely affect the returns on the Securities to investors.
The liquidity crisis has also severely affected the primary market for leveraged loans. Compared to historical norms, the volume of new leveraged loans issued in the past several years has been very low. The lack of new loans may make it more difficult for the Collateral Manager to acquire Collateral Assets that it considers appropriate for the Issuer’s portfolio and that otherwise satisfy the eligibility criteria described herein. If the Collateral Manager cannot make appropriate investments for the Issuer in a timely manner, it may choose to repay part or all of the Secured Notes and, even if it does not, the returns on the Securities may be substantially impaired.
During periods of economic distress, defaults and delinquencies by leveraged loan obligors generally increase. Leveraged loan defaults and delinquencies have been higher in the last several years than the historical average. While default rates and recoveries have recently marginally improved, there can be no assurance that such improvement will continue or that such default rates will not increase. The liquidity crisis has resulted in greater scrutiny of lending standards and a general reduction in the availability of loans and has, consequently, severely limited the ability of underlying obligors to obtain new financing.
Many leveraged loans have balloon or bullet payments and, if a loan obligor cannot generate sufficient cash flow or obtain new financing before any such payment becomes due, it is likely to default in its payment obligations under the loan. Such a default will generally result in acceleration of the loan or a restructuring of the debt. Restructuring of loans can be a lengthy and costly process and there can be no certainty as to the outcome of restructuring negotiations. To the extent that a loan is collateralized, an acceleration of such loan may result in liquidation of underlying collateral and there can be no assurance that such collateral can be liquidated at a price sufficient to repay the related loan.
Significant numbers of obligors on loans may face the need to refinance their debt over the next few years, and significant numbers of collateralized loan obligation transactions (historically an important source of funding for loans) have reached or are close to reaching the end of their reinvestment periods or the final maturities of their own debt. As a result, there could be significant pressure on the ability of obligors on loans to refinance their debt over the next few years unless a significant volume of new collateralized loan obligation transactions or other sources of funding develop. If such sources of funding do not develop, significant defaults in Collateral Assets could occur.
In periods of economic distress, the Issuer's recovery is likely to be lower than it would be under more favorable economic and market conditions. In general, increasing defaults by obligors of Collateral Assets may require the Collateral Manager to sell distressed assets in unfavorable market conditions, may limit the Issuer's access to cash flow from its assets, may result in failure of one or more Par Coverage Tests and may ultimately result in an Event of Default and reduced returns on the Securities.
Limited Liquidity. There is currently no market for any of the Securities. Although the Initial Purchaser may from time to time attempt to make a market in one or more Classes of the Securities, the Initial Purchaser is under no obligation to do so, a market may fail to develop despite some degree of market-making activities and the Initial Purchaser may discontinue market-making activities at any time without prior notice. In the absence of any market-making activity by the Initial Purchaser, a secondary market for the Securities is unlikely to develop. If a secondary market does develop for the Securities,
35 there can be no assurance that it will provide the Holders of the Securities with liquidity of investment or that it will continue for the life of the Securities. In recent years, there has been significant fluctuation in the marketability of securitization securities, including CLO notes. Additionally, some potential buyers of such notes now view securitization products as an inappropriate investment or are prohibited by regulatory restrictions or investment policies from purchasing such products, thereby reducing the number of potential buyers and/or potentially affecting liquidity in the secondary market. Consequently, an investor in the Securities must be prepared to hold its investment in the Securities until the Stated Maturity Date. The Securities are not, and will not be, registered under the U.S. Securities Act or any state securities law or any securities law of any other applicable jurisdiction. Although one or more Classes of Securities may be listed on the Irish Stock Exchange, such listing does not guarantee liquidity of investment or that an active secondary market for such Securities will develop.
No Ongoing Responsibility. The Initial Purchaser will have no obligation to monitor the performance of the Collateral Assets or the actions of the Collateral Manager or the Issuer and will have no authority to advise the Collateral Manager or the Issuer or to direct their actions, which will be solely the responsibility of the Collateral Manager and/or the Issuer, as the case may be. If the Initial Purchaser acts as Hedge Counterparty or Selling Institution or owns Securities, it will have no responsibility to consider the interests of any Holders of Securities in actions it takes in such capacities. While the Initial Purchaser may own Securities at any time, it may sell at any time any Securities that it purchases.
Restrictions on Transfers of Securities. The Securities are subject to certain transfer restrictions and can only be transferred to certain transferees, as described under "Transfer Restrictions." Transfer restrictions may limit liquidity.
Status; Limited Recourse. The Securities will be limited recourse obligations of the Issuer and the Co-Issued Securities will be nonrecourse obligations of the Co-Issuer. Payments on the Securities will be payable solely from the Collateral in accordance with the Priorities of Payment. None of the Transaction Parties or any of their respective agents or Affiliates or any other Person or entity (other than the Issuers) will be obligated to make payments on the Securities. Consequently, Holders of the Securities must rely solely on distributions on the Collateral for payments on the Securities. If such distributions are insufficient to make payments on the Securities, no other assets will be available for payment of the deficiency and all claims in respect of the Securities will be extinguished and will not thereafter revive. The Subordinated Notes will not be secured by the Collateral, and as such will rank behind all of the secured creditors, whether known or unknown, of the Issuer.
Suitability of an Investment in Securities. None of the Transaction Parties nor any of their respective agents or Affiliates makes any representation as to the accounting, capital, tax and other regulatory and legal consequences to investors of ownership of the Securities and no purchaser may rely on any such party for a determination of the accounting, capital, tax and other regulatory and legal consequences to such purchaser of ownership of the Securities. Each purchaser of Securities, by its purchase thereof, will be deemed to have represented to the Issuers and the Initial Purchaser, among other things, that such purchaser has consulted with its own financial, accounting, legal and tax advisors regarding investment in the Securities as such purchaser has deemed necessary and that the investment by such purchaser is within its powers and authority, is permissible under applicable laws governing such purchase, has been duly authorized by it and complies with applicable securities laws and other laws. The Initial Purchaser will generally require that purchasers of Securities that are ERISA Restricted make similar representations in writing.
Subordination. Each Class of Securities (other than the Highest-Ranking Class) is subordinated to Higher-Ranking Classes (and principal of the Class X Notes will be paid during the Reinvestment Period in circumstances where principal of the Class A Notes will not be so paid to the extent set forth in the Priorities of Payment), and all Classes of Securities are subordinated to the payment of certain fees
36 and expenses to the extent provided under the Priorities of Payment. To the extent that any interest is not paid on any Deferrable Notes on any Payment Date, such amounts will be deferred and will bear interest at the applicable interest rate, and the failure to pay such amounts will not be an Event of Default under the Indenture. In addition, amounts otherwise available to make payments on Lower-Ranking Classes are subject to diversion to pay interest on and/or principal of Secured Notes under the Priorities of Payment. See "Description of Certain Terms of the Securities." Notwithstanding anything described herein to the contrary, if acceleration of the Secured Notes occurs following an Event of Default and such acceleration has not been rescinded or annulled in accordance with the Indenture, no payments of interest on and principal of any Lower-Ranking Classes will be made until each Higher-Ranking Class has been paid in full. To the extent that any losses are suffered, such losses will be borne by the Securities in reverse Order of Priority, commencing with the Subordinated Notes.
Limited Funds Available to the Issuer to Pay its Operating Expenses. The funds available to the Issuer to pay certain fees and expenses of the Trustee, the Collateral Administrator and the Administrator and for payment of the Issuer’s other accrued and unpaid Issuer Expenses are limited as described in "Term Sheet— Priorities of Payment". In the event that such funds are not sufficient to pay the expenses incurred by the Issuer, the ability of the Issuer to operate effectively may be impaired, and it may not be able to defend or prosecute legal proceedings that may be brought against it or that it might otherwise bring to protect the interests of the Issuer. In addition, service providers who are not paid in full, including the Administrator which provides the directors to the Issuer, have the right to resign. This could lead to the Issuer being in default under the Companies Law and potentially being struck from the register and dissolved.
Historical Performance of LIBOR. The Interest Rate on each Class of Secured Notes (other than the Class B-2 Notes) is based upon LIBOR and therefore may fluctuate from one Interest Accrual Period to another in response to changes in LIBOR. Over the past three years, LIBOR has experienced high volatility. The historical performance of LIBOR should not be taken as an indication of future performance during the term of the Secured Notes. Changes in the levels of LIBOR will affect the amount of interest payable on the Secured Notes, the distributions on the Subordinated Notes and the trading price of the Securities, but it is impossible to predict whether such levels will rise or fall.
Third Party Litigation. The Issuer’s investment activities subject it to the normal risks of becoming involved in litigation by third parties. This risk would be somewhat greater if the Issuer were to exercise control or significant influence over a company’s direction. The expense of defending against claims by third parties and paying any amounts pursuant to settlements or judgments would generally be borne by the Issuer and would reduce the funds available for distribution and the Issuer’s net assets.
Leveraged Nature of the Securities. The Subordinated Notes represent highly leveraged investments in the Collateral Assets. Therefore, the market value of Subordinated Notes is anticipated to be significantly affected by, among other things, changes in the market value of the Collateral Assets; distributions, defaults, recoveries, capital gains, capital losses, prepayments on Collateral Assets; and the availability, prices and interest rates of assets available for reinvestment. Accordingly, a significant portion (and in some circumstances all) of the investment made by Holders of the Subordinated Notes may not be repaid. Other Classes of Securities, especially lower-ranking Classes, may be subject to similar risks and exposed to losses due to the leveraged nature of their investments in the Collateral. The proceeds from the issuance of Securities on the Closing Date, net of certain fees and expenses, will be less than the initial aggregate principal amount of the Securities. Consequently, the liquidation proceeds of the Collateral available for distribution to the Subordinated Notes are expected to be less than the initial investment if the Collateral were liquidated on the Closing Date.
37 Control of Remedies; Exercise of Rights Generally. The Controlling Class will be entitled to direct certain actions and control certain decisions (including with respect to certain remedies following an Event of Default) to be exercised under the Indenture and the Collateral Management Agreement. See "The Indenture—Events of Default" and "The Collateral Management Agreement." However, the Controlling Class does not have the right to unilaterally direct the liquidation of the Collateral following an Event of Default other than an Event of Default under clause (a), (b), (d) or (g) of the definition of such term. Remedies pursued by the Controlling Class could be adverse to the interests of the Holders of other Classes. The Controlling Class will have no obligation to consider any possible adverse effect on such other interests in electing to pursue any remedy.
Many rights under the transaction documents relating to the Securities may only be exercised by Holders of one or more than one Class of Securities or Holders of a portion of any Class of Securities. The exercise of such rights could be adverse to Holders of Securities that do not have the ability to exercise such rights, and the failure to exercise a right because Holders of a Class or a portion of a Class must act in concert with one or more other Classes to exercise such right and insufficient Holders are willing to do so could also be adverse to Holders of one or more Classes of Securities or Holders of a portion of any Class of Securities. When exercising its rights under the transaction documents relating to the Securities, a Holder has no obligation to take into account the effect on other Holders.
The Voting and Consent Rights May be Assigned to Third Parties. Any Holder of Securities may assign its Voting Rights to one or more assignees pursuant to agreements entered into between such Holder and the assignees. Under the Indenture, Holders will be prohibited from assigning Voting Rights to a person that has no right to cashflows from the applicable Securities (directly or indirectly) or retaining Voting Rights when such Holders have no remaining right to cashflows from the applicable Securities (directly or indirectly). However, there can be no assurance that such prohibition will not be violated. If the Voting Rights of a Majority of such Class (or, in connection with certain matters, less than a Majority of such Class) are assigned to such assignees, the Holders of such Class (including any Holders that did not assign such rights to such assignees) will not have the ability to direct any votes or consents with respect to matters requiring the vote or consent of the Holders of such Class without the consent of such assignees. Any Voting Rights assignee may be entitled to exercise the Voting Rights assigned to it in its sole discretion and may exercise such rights or refrain from exercising such rights in a manner that is contrary to the best interests of the Holders of the Class. Purchasers of Securities will not be informed whether the Voting Rights with respect to any Securities have been assigned.
Redemption. If any Coverage Test is not satisfied as of any applicable Determination Date or an Effective Date Confirmation Failure occurs and is continuing, amounts that otherwise would have been used to pay interest on Lower-Ranking Classes or to make distributions on the Subordinated Notes on any Payment Date will be diverted to pay principal of Higher-Ranking Classes, to the extent required under the Priorities of Payment. During the Reinvestment Period, if the Interest Diversion Test is not satisfied as of any applicable Determination Date, Interest Proceeds may, after the Non-Call Period, at the election of the Collateral Manager in its sole discretion be used to pay principal of Secured Notes under the Priorities of Payment. If the Class E Par Coverage Test is not satisfied as of any Determination Date, Interest Proceeds will be diverted and will be used to pay principal of the Securities under the Priorities of Payment. Any such diversion could result in insufficient Interest Proceeds or Principal Proceeds to pay interest on Deferrable Notes or to make distributions on the Subordinated Notes.
In the event of a Special Redemption, Principal Proceeds equal to the Special Redemption Amount will be used to pay principal of Secured Notes (including Deferred Interest, if any) as set forth under the Priorities of Payment and the Reinvestment Period will terminate.
The Issuer will redeem the Secured Notes (including in part by full Class in the case of a Refinancing) in an Optional Redemption upon receipt of the Required Redemption Direction, subject to
38 certain conditions. An Optional Redemption could require the Collateral Manager (except in the case of a Refinancing) to liquidate positions more rapidly than might otherwise be desirable, which could adversely affect the amount of redemption proceeds. There can be no assurance that, following an Optional Redemption, available funds would permit any distribution on the Subordinated Notes.
The Indenture provides that any Class of Secured Notes may be redeemed in whole, but not in part, on any Payment Date after the Non-Call Period from Refinancing Proceeds subject to the satisfaction of certain requirements. See "Description of Certain Terms of the Securities—Redemption— Optional Redemption." Accordingly, a more junior Class of Securities may be redeemed in whole from Refinancing Proceeds even if a more senior Class of Securities remains outstanding. Holders of Securities that are refinanced (or otherwise optionally redeemed) may not be able to reinvest the proceeds of such redeemed Securities in assets with comparable interest rates or maturity.
Any Mandatory Redemption, Special Redemption or Optional Redemption may, at a time when reinvestments that offer the same level of return are not available, cause the Holders of Secured Notes to receive principal payments earlier than anticipated and, reduce yields on the Subordinated Notes. In addition, to the extent that Principal Proceeds are used in such redemptions, the amount of Principal Proceeds that would otherwise be available for reinvestment will be reduced, which will adversely affect returns on the Subordinated Notes. See "Description of Certain Terms of the Securities ― Redemption."
The Issuers may Modify the Indenture by Supplemental Indentures, and Some Supplemental Indentures do not Require the Consent of Securityholders. The Indenture provides that the Issuers and the Trustee may enter into supplemental indentures to modify various provisions of the Indenture, in some cases without the consent of any Securityholders. Supplemental indentures executed without the direct consent of Securityholders in most situations allow a specified percentage of Securityholders of a Class to object to the proposed supplemental indentures. No Securityholder objection right, however, is given to supplement the Indenture to facilitate a Refinancing or the issuance of Additional Subordinated Notes, to issue replacement securities or undertake loans in a Refinancing or to facilitate compliance with U.S. tax laws (including by imposing remedies or penalties upon a Securityholder to ensure compliance with Sections 1471 through 1474 of the United States Internal Revenue Code of 1986, as amended (commonly known and defined herein as "FATCA") and the regulations promulgated thereunder (including any regulations enacted after the Closing Date). Any of these amendments to the Indenture may have a material adverse effect on a Securityholder, including, with respect to an amendment with respect to FATCA, Securityholders who have delivered the applicable Holder FATCA Information. In addition, certain supplemental indentures require the consent of the Holders of the Class A Notes (so long as the Class A Notes are Outstanding) regardless of whether the Class A Notes are materially and adversely affected thereby, but either do not require the consent of the Holders of any other Class of Securities or do not require such consent from the Holders of another Class of Securities unless the Holders of such other Class are materially and adversely affected by such supplemental indenture. The interests of the Holders of the Class A Notes may not be aligned with the interests of the Holders of other Classes of Securities in connection with any such amendment and such Holders of the Class A Notes will not have any duty to consider the interests of other Holders. See "Description of Certain Terms of the Securities—The Indenture—Amendment of the Indenture".
Early Termination of the Reinvestment Period. The Reinvestment Period may terminate early if any of the following occur: (a) acceleration following an Event of Default, (b) an Optional Redemption (other than pursuant to a Refinancing) or (c) the occurrence of a Special Redemption. Early termination of the Reinvestment Period could adversely affect the return to the Subordinated Notes and may also cause the Holders of Secured Notes to receive principal payments earlier than anticipated and at a time when reinvestments that offer the same level of return may not be available.
39 Additional Issuances of Subordinated Notes May Have the Effect of Preventing the Failure of the Coverage Tests and the Occurrence of an Event of Default. Upon delivery of the required direction, the Issuer may issue and sell Additional Subordinated Notes, and use the net proceeds to purchase additional Collateral Assets or for other purposes permitted under the Indenture if the conditions for such additional issuance described under "The Indenture—Additional Issuance" are met. Any such additional issuance may be made with only the consent of a Majority of the Subordinated Notes and the Collateral Manager (in its sole discretion) and, if the Additional Issuance Threshold Test is not satisfied, a Majority of the Class A Notes (so long as the Class A Notes are Outstanding). The use of such issuance proceeds as Principal Proceeds may have the effect of causing a Coverage Test that was otherwise failing to be cured or to modify the effect of events that would otherwise give rise to an Event of Default and permit the Controlling Class to exercise remedies under the Indenture.
Stated Maturity Date; Average Life and Prepayment Considerations. The average life of each Class of Secured Notes is expected to be shorter than the number of years until the Stated Maturity Date. The average life of each Class of Secured Notes may vary due to various factors including prepayments, the timing and amount of sales, actual default rates and recoveries, the frequency of tender or exchange offers, the ability of the Collateral Manager to promptly invest in Collateral Assets and the occurrence of any Optional Redemption or principal payments due to a Mandatory Redemption, Special Redemption or failure of the Interest Diversion Test. Retirement of the Collateral Assets prior to their respective final maturities will depend, among other things, on the financial condition of the issuers of the underlying Collateral Assets and the respective characteristics of such Collateral Assets, including the existence and frequency of exercise of any optional redemption, mandatory redemption or sinking fund features, prepayments of principal, the prevailing level of interest rates and redemption prices. Any of these considerations could cause the Holders of Secured Notes to receive payments of principal earlier than expected. See "Maturity and Prepayment Considerations."
Projections, Forecasts and Estimates. Estimates of the average lives of the Secured Notes, together with any projections, forecasts and estimates provided to prospective purchasers of the Secured Notes, are forward-looking statements. Projections are necessarily speculative in nature, and it should be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. Accordingly, actual results will vary from the projections, and such variations may be material. Some important factors that could cause actual results to differ materially from those in any forward-looking statements include changes in interest rates, exchange rates and default and recovery rates; market, financial or legal uncertainties; the timing of acquisitions of Collateral Assets; differences in the actual allocation of Collateral Assets among asset categories from those assumed; mismatches between the timing of accrual and receipt of Interest Proceeds from the Collateral Assets and the effectiveness of any Hedge Agreements. None of the Transaction Parties or any of their respective Affiliates has any obligation to update or otherwise revise any projections, forecasts or estimates, including any revisions to reflect changes in economic conditions or other circumstances arising after the date of this Offering Memorandum or to reflect the occurrence of unanticipated events. Investors should not rely on forward-looking statements and do so at their own risk. Each investor in the Securities should conduct its own investigation and analysis of its prospective investment and consult its own investment, financial, legal, tax, accounting, regulatory and other applicable advisors.
Beneficial Owners of Global Notes. Holders of beneficial interests in any Global Notes will not be considered Holders of such Securities under the Indenture. After payment of any interest, principal or other amount to DTC, neither the Issuer nor the Co-Issuer will have any responsibility or liability for the payment of such amount by DTC or to any holder of a beneficial interest in a Security. Further, beneficial owners may experience delays in payments as upon receipt of such payments, DTC will be required to credit them to the accounts of its participants which thereafter will be required to credit them
40 to the accounts of the applicable owners of the Securities either directly or indirectly through indirect participants.
DTC or its nominee will be the sole holder of each Global Note, and therefore owners of beneficial interests in a Global Note must rely on the procedures of DTC (and if such Person is not a participant in DTC on the procedures of the participant through which such Person holds such interest) with respect to the exercise of voting and consent rights of a Holder of Securities.
Lack of Operating History. The Issuers are recently formed entities and have no prior performance history for a prospective investor to consider in making its decision to invest in the Securities.
Past Performance of Collateral Manager Not Indicative. The past performance of any portfolio or investment vehicle managed by the Collateral Manager, its Affiliates or its current personnel at prior places of employment may not be indicative of the results that the Issuer may be able to achieve with the Collateral. Similarly, the past performance of the Collateral Manager, its Affiliates and its current personnel at a prior place of employment over a particular period may not be indicative of the results that may occur in future periods. Furthermore, the nature of, and risks associated with, and strategies guiding, the Issuer’s investments may differ substantially from those investments and strategies undertaken by the Collateral Manager, its Affiliates and its personnel in connection with such other portfolios or investment vehicles. There can be no assurance that the Issuer’s investments will perform as well as such past investments, that the Issuer will be able to avoid losses or that the Issuer will be able to make investments similar to such past investments or that the Issuer will invest in accordance with the investment strategy described herein. In addition, such past investments may have been made utilizing a capital structure, fee arrangements and an asset mix that are different from the anticipated capital structure, fee arrangements and/or asset mix of the Issuer. Moreover, because the investment criteria that govern investments in the Issuer’s portfolio do not govern the investments and investment strategies of the Collateral Manager or its Affiliates or personnel generally, the Issuer’s portfolio, and the results it yields, are not directly comparable with, and may differ substantially from, other portfolios and investment vehicles advised by the Collateral Manager, its Affiliates and its current personnel.
Ratings Not Necessarily Indicative of Quality; Actions of any Rating Agency can adversely affect the market value or liquidity of the Securities. The ratings assigned to the Rated Notes by the Rating Agencies are not necessarily indicative of the quality of the Rated Notes. Credit ratings only represent the Rating Agencies' opinions of credit quality and are not a recommendation to buy, sell or hold assets. They do not purport to assess market, regulatory or other risks that are relevant to the assessment of the quality of an asset. Credit ratings may not accurately assess credit risk and may be reduced or withdrawn at any time.
The Rating Agencies may change their published ratings criteria or methodologies for securities such as the Secured Notes at any time in the future. Further, the Rating Agencies may retroactively apply any such new standards to the ratings of the Secured Notes. Any such action could result in a substantial lowering (or even withdrawal) of any rating assigned to any Secured Note, despite the fact that such Secured Note might still be performing fully to the specifications set forth for such Secured Note in this Offering Memorandum and the transaction documents. Additionally, any Rating Agency may, at any time and without any change in its published ratings criteria or methodology, lower or withdraw any rating assigned by it to any Class of Secured Notes. If any rating initially assigned to any Secured Note is subsequently lowered or withdrawn for any reason, Holders of the Securities may not be able to resell their Securities without a substantial discount. Any reduction or withdrawal to the ratings on any Class of Secured Notes may significantly reduce the value and/or liquidity of the Securities and may adversely affect the Issuer's ability to make certain changes to the composition of the Collateral Assets.
41 Either Rating Agency may revise or withdraw its ratings of the applicable Secured Notes as a result of a failure by the responsible party to provide it with information requested by such Rating Agency or comply with any of its obligations contained in the engagement letter with such Rating Agency, including the posting of information provided to the Rating Agency on a website that is accessible by rating agencies that were not hired in connection with the issuance of the Secured Notes as described under "Regulatory and Other Risk Factors—Rating by Unsolicited Rating Agencies Under Rule 17g-5." Any such revision or withdrawal of a rating as a result of such a failure might adversely affect the liquidity and/or value of the Securities and, for regulated entities, could affect the status of the Secured Notes as a legal investment or the capital treatment of the Secured Notes.
Petitions for Bankruptcy. The Indenture will provide that no Holder or beneficial owner of a Security may institute against, or join any other Person in instituting against, either of the Issuers or any ETB Subsidiary any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings, or other proceedings under Cayman Islands law, United States federal or state bankruptcy law or similar laws of any jurisdiction until the date which is one year (or, if longer, the applicable preference period then in effect) plus one day after the payment in full of all Securities. In addition, each Holder or beneficial owner of Securities will be permitted under the Indenture to enforce this restriction against any other Holder or beneficial owner of Securities. However, there can be no assurance that such restriction will be enforced or respected by a bankruptcy court or any other court. In that event, the bankruptcy, reorganization, arrangement, insolvency, moratorium, liquidation or similar proceeding would have a material adverse effect on the Issuer and beneficial owners of Securities including, without limitation, as a result of the uncertainty of the priority of payments determined pursuant to such proceeding, the delay in distributing Interest Proceeds and Principal Proceeds as a result of the institution of such proceeding and the cost of such proceeding. If any such proceeding is commenced against it, the Issuer or the Co-Issuer, as applicable, will be required under the Indenture to object to it (provided that such obligation is subject to the availability of funds therefor) and the related Petition Expenses will be paid as Issuer Expenses. The Petition Expense Amount may be allocated to the costs incurred by the Issuer in connection with such objection, is a material amount and may be paid from Interest Proceeds and Principal Proceeds at any time.
Risk Factors Related to the Collateral
Nature of Collateral Assets. The Collateral will consist primarily of interests in non-investment grade loans and may also include high-yield corporate bonds, all of which are subject to liquidity, market value, credit, interest rate, reinvestment and certain other risks. A portion of the Collateral may consist of Second Lien Loans, Senior Unsecured Loans and Senior Unsecured Bonds. There can be no assurance that the Collateral Manager will correctly evaluate the nature and magnitude of the various factors that could affect the value of and return on the Collateral Assets and purchase Collateral Assets that generate high returns for the Issuer. It is anticipated that the Collateral generally will be subject to greater risks than investment grade corporate obligations. These risks could be exacerbated to the extent that the portfolio is concentrated in one or more particular types of Collateral Assets.
Prices of the Collateral Assets may be volatile and will generally fluctuate due to a variety of factors that are inherently difficult to predict, including but not limited to changes in interest rates, prevailing credit spreads, general economic conditions, financial market conditions, economic or political events, developments or trends in any particular industry, and the financial condition of the issuers of the Collateral Assets. Additionally, loans and interests in loans have significant liquidity and market value risks since they are not generally traded in organized exchange markets but are traded by banks and other institutional investors engaged in loan syndications. Because loans are privately syndicated and loan agreements are privately negotiated and customized, loans are not purchased or sold as easily as publicly traded securities. In addition, historically the trading volume in the loan market has been small relative to the high-yield debt securities market.
42 The market for high-yield debt securities, in particular, has experienced periods of price volatility and reduced liquidity. High-yield debt securities are generally unsecured, may be subordinated to other obligations of the related issuer and generally have greater credit, insolvency and liquidity risk than is typically associated with investment grade obligations. Depending upon market conditions, there may be a very limited market for high-yield debt securities. High-yield debt securities and non-investment grade loans are often issued in connection with leveraged acquisitions or recapitalizations in which the issuers incur a substantially higher amount of indebtedness than the level at which they had previously operated. The lower rating of high-yield debt securities and non-investment grade loans reflects a greater possibility that adverse changes in the financial condition of the obligor or general economic conditions (including, for example, a substantial period of rising interest rates or declining earnings or disruptions in the financial markets) or both may impair the ability of the obligor to make payments of principal and interest.
High-yield debt securities and leveraged loans have historically experienced greater default rates than has been the case for investment grade securities and loans. There can be no assurance as to the levels of defaults and/or recoveries that may be experienced on the Collateral Assets. Collateral Assets included in the Collateral may include Discount Assets, Credit Risk Assets and DIP Collateral Assets. Such Collateral Assets may be subject to a higher risk of becoming Defaulted Assets than other Collateral Assets. The ultimate amount of defaults and timing of the recoveries may diminish the expected returns to all Securities and substantially diminish the expected returns to the Subordinated Notes and the most subordinated classes of other Securities.
A non-investment grade loan or debt obligation or an interest in a non-investment grade loan is generally considered speculative in nature and may become a Defaulted Asset for a variety of reasons. Upon any Collateral Asset becoming a Defaulted Asset, such Defaulted Asset may become subject to either substantial workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants with respect to such Defaulted Asset. In addition, such negotiations or restructuring may be quite extensive and protracted over time, and therefore may result in substantial uncertainty with respect to the ultimate recovery on such Defaulted Asset. The liquidity for Defaulted Assets may be limited, and to the extent that Defaulted Assets are sold, it is highly unlikely that the proceeds from such sale will be equal to the amount of unpaid principal and interest thereon. Furthermore, there can be no assurance that the ultimate recovery on any Defaulted Asset will be at least equal to either the minimum recovery rate assumed by either Rating Agency in rating any Class of Securities or any recovery rate used in connection with any analysis of the Securities offered hereby that may have been prepared by the Initial Purchaser for or at the direction of holders of any Securities offered hereby. Non-investment grade corporate bonds and leveraged loans have historically experienced greater default rates than investment grade bonds and loans. There can be no assurance as to the levels of defaults and recoveries that may be experienced on the Collateral Assets.
In addition to default frequency, recovery rate and market price volatility, leveraged loans may experience volatility in the spread that is paid on such leveraged loans. Such spreads will vary based on a variety of factors, including, but not limited to, the level of supply and demand in the leveraged loan market, general economic conditions, levels of relative liquidity for leveraged loans, the actual and perceived level of credit risk in the leveraged loan market, regulatory changes, changes in credit ratings and the methodology used by credit rating agencies in assigning credit ratings, and such other factors that may affect pricing in the leveraged loan market. Since leveraged loans may generally be prepaid at any time without penalty, the obligors of such leveraged loans would be expected to prepay or refinance such leveraged loans if alternative financing were available at a lower cost. For example, if the credit ratings of an obligor were upgraded, the obligor were recapitalized or if credit spreads were declining for leveraged loans, such obligor would likely seek to refinance at a lower credit spread. The rates at which
43 Collateral Assets may prepay or refinance and the level of credit spreads for leveraged loans in the future are subject to numerous factors and are difficult to predict. Declining credit spreads in the leveraged loan market and increasing rates of prepayments and refinancings will likely result in a reduction of portfolio yield and interest collections on the Collateral Assets, which would have an adverse effect on the amount available for distributions on Securities, beginning with the most junior Class of Securities then Outstanding.
Second Lien Loans, Senior Unsecured Loans and Senior Unsecured Bonds. The Collateral may include Second Lien Loans, Senior Unsecured Loans and Senior Unsecured Bonds. In addition to the risks associated with loans in general described under "—Nature of Collateral Assets," these types of Collateral Assets are subject to additional risks.
Second Lien Loans are subordinate in right of payment with respect to liquidation to one or more senior secured loans of the related borrower and therefore are subject to additional risks that the cash flows of the related borrower and the property securing a Second Lien Loan may be insufficient to make the scheduled payments after giving effect to any senior secured loans of the related obligor. The subordination of Second Lien Loans is also expected to cause Second Lien Loans to be more illiquid investments than senior secured loans.
Senior Unsecured Loans and Senior Unsecured Bonds are not secured obligations and do not have the benefit of a pledge of specified property. The absence of a security interest may make Senior Unsecured Loans and Senior Unsecured Bonds more illiquid investments than Senior Secured Loans, Second Lien Loans or Senior Secured Bonds and is likely to result in a lower recovery following a default on such Collateral Asset.
Acquisition of Credit Risk Assets and Equity Securities. The Collateral Manager is permitted to purchase Credit Risk Assets and, in certain circumstances, may swap a Defaulted Asset for an Equity Security. These assets may expose the Issuer and Securityholders to a variety of risks, including liquidity risk and increased credit risk and, in the case of Swapped Equity Securities, may increase the average life of any or all Classes of Securities.
Covenant-lite Loans. The transaction documents permit a significant portion of the Collateral Principal Balance, and, in certain circumstances, all of the Collateral Principal Balance, to consist of Cov- Lite Loans, as set forth in the Term Sheet. Cov-Lite Loans typically do not have Maintenance Covenants. Ownership of Cov-Lite Loans may expose the Issuer to different risks, including with respect to liquidity, price volatility and ability to restructure loans, than is the case with loans that have Maintenance Covenants.
Interest Rate Risk. There may be an interest rate or basis mismatch between the Securities and the Collateral Assets. In addition, Floating Rate Assets may adjust more or less frequently, on different dates and based on different indices, than the interest rates on Secured Notes and, because the Class B-2 Notes bear interest at a fixed rate, there will be a basis mismatch between the Class B-2 Notes and the Floating Rate Assets, which will constitute all or substantially all of the Collateral Assets. As a result of such mismatches, an increase in the level of LIBOR or any other applicable floating rate index could adversely impact the Issuer’s ability to make payments on the Securities.
Subject to the limitations described under "Regulatory and other Risk Factors— Legislative and Regulatory Developments," the Issuer may, but is not required to, enter into one or more Hedge Agreements and/or modify existing Hedge Agreements from time to time for the purpose of mitigating some of these mismatches. However, there can be no assurance that the Issuer will be able to enter into a Hedge Agreement (or modify an existing agreement) at a time that the Collateral Manager believes it would be desirable to do so or that any hedge will fully cover differences in the interest collections
44 resulting from such mismatches or that a counterparty will fully perform its obligations. Moreover, Hedge Agreements are subject to early termination, including as a result of a failure by the Hedge Counterparty to perform its obligations or a downgrade in ratings of its credit ratings. Early termination, even if the Issuer is not at fault, may require the Issuer to make a termination payment and entry into a replacement hedge may require a payment by the Issuer and/or may have terms less favorable to the Issuer. Any such payments would reduce the amount of proceeds available for payments on the Securities.
Limited Information about the Collateral Assets. The Holders of the Securities will not have any right to inspect any records relating to the Collateral Assets. The Issuer and the Collateral Manager will not be required to provide the Holders of the Securities with financial or other information (which may include material non-public information) it receives pursuant to the Collateral Assets and related documents. The Collateral Manager also will not disclose to any of these parties the contents of any notice it receives pursuant to the Collateral Assets or related documents, except as may be required under the Indenture or the Collateral Management Agreement. Furthermore, if such information is disclosed, the Collateral Manager may demand that any Persons receiving such information execute confidentiality agreements before being provided with the information. In addition, periodic reports provided to the Holders may not be audited.
Reinvestment Risk. The amount of Collateral Assets purchased on the Closing Date and the amount and timing of purchases of Collateral Assets after the Closing Date will affect the cash flows available to make payments on, and the return to the Holders of, the Securities. Reduced liquidity and relatively lower volumes of trading in certain Collateral Assets, in addition to restrictions on investment under the Indenture, could result in periods of time during which the Issuer is not able to fully invest its available cash in Collateral Assets or during which the assets available for investment will not be of comparable quality. It is unlikely that the Issuer’s available cash will be invested fully in Collateral Assets at any time. The longer the period of investment in Eligible Investments (including cash), the greater the adverse impact may be on the aggregate amount of Interest Proceeds available for distribution by the Issuer. The associated reinvestment risk on the Collateral Assets will be borne by the Holders of the Securities in reverse Order of Priority, beginning with the Subordinated Notes. Although the Collateral Manager may mitigate this risk to some degree during the Reinvestment Period by declaring a Special Redemption, the Collateral Manager is not required to do so. Any Special Redemption will result in early deleveraging of the Issuer and may result in a lower yield on the Subordinated Notes.
The level of earnings on reinvestments will depend on the availability of investments determined by the Collateral Manager to be appropriate investments by the Issuer and the interest rates thereon. The need to satisfy the Investment Criteria and identify acceptable investments may require the purchase of Collateral Assets having lower yields than those Collateral Assets previously acquired by the Issuer as Collateral Assets mature, prepay or are sold or require temporary investment in Eligible Investments. In addition, obligors on the Collateral Assets may be more likely to exercise any rights they may have to redeem or refinance such obligations when interest rates or spreads are declining. Any decrease in the yield on the Collateral Assets will reduce the amounts available for distribution on the Securities.
Illiquidity of Collateral Assets. Many of the Collateral Assets purchased by the Issuer will have no, or only a limited, trading market. Indenture restrictions and the illiquidity of Collateral Assets may restrict the Issuer's ability to dispose of Collateral Assets in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. Illiquid Collateral Assets may trade at a discount from comparable, more liquid obligations and the prices realized from their sale may be less than the Issuer's original purchase price and what may be considered the fair market value of such obligations. Certain Collateral Assets may not be freely transferable due to contractual restrictions on resale and, in the case of privately placed obligations, the laws of the applicable jurisdiction.
45 Credit Ratings of Debt Obligations. A credit rating of a debt obligation represents the applicable rating agency’s opinion regarding credit quality and is not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Therefore, credit ratings may not fully reflect the true risks of an investment. In addition, rating agencies may fail to make timely changes in credit ratings in response to subsequent events so that an issuer’s current financial condition may be better or worse than a rating indicates. Consequently, credit ratings of the Collateral Assets will be used by the Collateral Manager only as a preliminary indicator of investment quality. Investments in non-investment grade and comparable unrated obligations will be more dependent on the Collateral Manager’s credit analysis than would be the case with investments in investment-grade obligations.
There can be no assurance that any change in rating methodology by either Rating Agency will have no material adverse effect on the ability of the Issuer to reinvest in new Collateral Assets or to make payments of interest and principal on the Secured Notes and distributions on the Subordinated Notes. The ratings assigned to Collateral Assets by any rating agency are subject to change at any time due to changes in rating agency methodology, changes in economic conditions, changes in the loan markets, changes in the creditworthiness of the underlying obligors and a variety of other factors. If Collateral Assets are downgraded, the Collateral Manager may be forced to sell such Collateral Assets in unfavorable circumstances and one or more Par Coverage Tests may be caused to fail, resulting in amortization of one or more classes of Secured Notes. Reduced credit ratings may also impair the ability of underlying obligors to obtain financing and may lead to an increase in defaults with respect to Collateral Assets. If a significant number of leveraged loans or high yield bonds are downgraded at or around the same time, the Collateral Manager may also have difficulty obtaining new Collateral Assets that it deems suitable investments for the Issuer.
Prepayment of Loans. Loans are generally prepayable in whole or in part at any time at the option of the obligor. Prepayments on loans may be caused by a variety of factors that are often difficult to predict. Loans purchased at a price greater than par may experience a capital loss as a result of a prepayment. In addition, Principal Proceeds received upon such a prepayment are subject to reinvestment risk. There is no assurance that the Issuer will be able to invest in assets with comparable interest rates that satisfy the Investment Criteria or the length of any delays before such investments may be made. In addition, prepayments will reduce the amount of Interest Proceeds available, and the earlier a prepayment occurs in an Interest Accrual Period, the greater the effect, which in extreme scenarios could result in insufficient Interest Proceeds being available to make payments of interest on the Secured Notes and distributions on the Subordinated Notes.
Ability of the Issuer to Acquire Collateral Assets that Satisfy the Investment Criteria subject to Market Conditions. A portion of the initial Collateral Assets is expected to be purchased after the Closing Date as described herein. The ability of the Issuer to acquire an initial portfolio of Collateral Assets that satisfies the Investment Criteria at the projected prices, ratings, rates of interest and any other applicable characteristics will be subject to market conditions and availability of such Collateral Assets. Any inability of the Issuer to acquire Collateral Assets that satisfy the Investment Criteria specified herein may adversely affect the timing and amount of payments received by the Holders of Securities and the yield to maturity of the Secured Notes and the distributions on the Subordinated Notes. There is no assurance that the Issuer will be able to acquire Collateral Assets that satisfy the Investment Criteria. In the event that all or a portion of the Collateral Assets cannot be acquired either at the projected prices, rates of interest or timing of acquisition thereof, the expected cash flows to the Subordinated Notes and amounts available for reinvestment in additional portfolio assets will be impaired.
Assignments and Participations; Letters-of-Credit. The Issuer may acquire interests in loans by way of assignment or participation. As described in more detail below, holders of participation interests are subject to additional risks not applicable to a holder of a direct interest in a loan.
46 Assignments and participations are sold without recourse to the assignor or participating entity, respectively, and generally with the benefit of minimal or no representations or warranties about the underlying loan, the borrowers, the documentation of the loans or any collateral securing the loans.
The purchaser of an interest in a loan by assignment typically succeeds to all the rights and obligations of the assigning lender and becomes a lender under the loan agreement with respect to that loan. As a purchaser of an assignment, the Issuer generally will have the same voting rights as other lenders under the applicable loan agreement, including the right to vote to waive enforcement of breaches of covenants or to enforce compliance by the borrower with the terms of the loan agreement, and the right to set-off claims against the borrower and to have recourse to collateral supporting the loan. Assignments are, however, arranged through private negotiations between assignees and assignors and, in certain cases, the rights and obligations acquired by the assignee may differ from, and be more limited than, those held by the assignor.
Participations in a lender's portion of a loan typically result in a contractual relationship only with such lender, not with the borrower. In the case of a participation, the Issuer will generally have the right to receive payments of principal, interest and any fees to which it is entitled only from such lender and only upon receipt by such lender of such payments from the borrower. By holding a participation in a loan, the Issuer generally will have no right to enforce compliance by the borrower with the terms of the loan agreement and the Issuer may not directly benefit from the collateral supporting the loan in which it has purchased the participation. As a result, the Issuer will assume the credit risk of both the borrower and such lender (which lender will remain the legal owner of record of the applicable loan). In the event of the insolvency of such lender, the Issuer, by owning a participation, may be treated as a general unsecured creditor of such lender, and may not benefit from any set-off between such lender and the borrower. In addition, the Issuer may purchase a participation from a lender that does not itself retain any beneficial interest in any portion of the applicable loan and, therefore, may have limited interest in monitoring the terms of the loan agreement and the continuing creditworthiness of the borrower. When the Issuer holds a participation in a loan it will not have the right to vote under the applicable loan agreement with respect to every matter that arises, and it is expected that each lender that participates an interest in its loan will reserve the right to administer the loan as it sees fit and, subject to the terms of the applicable participation agreement, to amend the documentation evidencing such loan in all respects. Lenders voting in connection with such matters may have interests different from those of the Issuer and may fail to consider the interests of the Issuer in connection with their votes.
Under a Letter-of-Credit, the Issuer will be required to pre-fund its entire potential funding obligation to an agent bank or other intermediary. While amounts so pre-funded are required to be deposited into a Letter-of-Credit Eligible Account, the Issuer will be subject to the credit risk of the agent bank or intermediary to which it provides its funds.
Risks Associated with Termination of Hedge Agreements. Generally, the Issuer should be able to reduce the notional amount of any Hedge Agreement in connection with payments of principal of any Class of Secured Notes or the sale, prepayment in full or default of a related Collateral Asset. In the case of such notional amount reduction or any early termination of any Hedge Agreement, the Issuer may be required to make a payment to a Hedge Counterparty, and any amounts that would be required to be paid by the Issuer to enter into replacement Hedge Agreements will reduce amounts available for payments on the Securities. There can be no assurance that the remaining payments on the Collateral would be sufficient to make payments of interest and principal on the Secured Notes.
Bankruptcy of a Hedge Counterparty. The Issuer may terminate a Hedge Agreement upon the occurrence of certain events of default or termination events thereunder with respect to the Hedge Counterparty. In the event that the Issuer terminates a Hedge Agreement upon the occurrence of a bankruptcy of the applicable Hedge Counterparty, there can be no assurance that termination amounts due
47 and payable to the Hedge Counterparty from the Issuer would be subordinated to payments made to the Holders of the Securities as required under the Priorities of Payment. Recent decisions in U.S. bankruptcy proceedings have held that subordination provisions similar to those set forth in the Priorities of Payment may be unenforceable with respect to a bankrupt Hedge Counterparty. In addition, upon the occurrence of a bankruptcy of a Hedge Counterparty, if the Issuer fails to terminate the applicable Hedge Agreement in a timely manner, such Hedge Agreement could be assumed by the bankruptcy estate of such Hedge Counterparty and the Issuer could be required to continue making payments to such Hedge Counterparty, even if such Hedge Counterparty failed to perform its obligations under the applicable Hedge Agreement prior to its assumption. In either case, amounts available for payments to Holders of Securities could be reduced.
General Market and Credit Risks of Debt Securities. Debt portfolios are subject to credit and interest rate risks. Financial strength and solvency of an issuer are the primary factors influencing credit risk. In addition, lack or inadequacy of collateral or credit enhancement for a debt instrument may affect its credit risk. Credit risk may change over the life of an instrument and securities and other debt instruments that are rated by rating agencies are often reviewed and may be subject to downgrade. Interest rate changes may affect the value of a debt instrument indirectly (especially in the case of Fixed Rate Assets) or directly (especially in the case of Floating Rate Assets). In general, rising interest rates will negatively impact the price of a Fixed Rate Asset and falling interest rates will have a positive effect on price. Floating Rate Assets may react to interest rate changes in a similar manner depending on the characteristics of the reset terms, including the index chosen, frequency of reset and reset caps or floors, among other factors. Interest rate sensitivity is generally more pronounced and less predictable in instruments with uncertain payment or prepayment schedules.
Fraud. A concern in purchasing Collateral Assets is the possibility of material misrepresentation or omission on the part of the borrower. Such inaccuracy or incompleteness may adversely affect the valuation of the Collateral Assets, or may adversely affect the ability of the Issuer to perfect or effectuate a lien on the collateral securing the Collateral Assets. The Issuer will rely upon the accuracy and completeness of representations made by borrowers to the extent reasonable, but cannot guarantee such accuracy or completeness. Under certain circumstances in connection with a bankruptcy proceeding involving the borrower, payments or other distributions to the Issuer may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance or a preferential payment.
Third Party Appraisal Risk. A portion of the Collateral Assets may consist of asset-based loans that are based primarily on the value of underlying collateral rather than on a borrower's operating cash flows. Third party appraisals of assets are generally required or obtained in connection with the acquisition of an asset-based loan. There is no assurance that any valuation of collateral performed in connection with the origination of any asset-based loan actually reflects an amount that would be realized upon a current sale of the related assets. Moreover, such a valuation is not necessarily indicative of the value of the assets at any time after the date of the valuation. Future values may depend upon a variety of factors, including the economic success of the business, local and general competitive and economic conditions, obsolescence or nonperformance of collateral, as well as the overall credit of the borrower. In the event of a default by a particular borrower, there may well be factors present that reduce the value of the assets that secure the asset-based loan. The value of the collateral securing an asset-based loan of a borrower in liquidation generally will be less than the value of such collateral when used as part of an operating business in good standing. As a result, there is no assurance that the value of the collateral securing any asset-based Collateral Assets will equal or exceed the amount of the obligation at any time.
Dependence on Collateral Manager and Key Personnel. Because the composition of the Collateral Assets will vary over time, the performance of the Collateral Assets depends heavily on the skills of the Collateral Manager in analyzing, selecting and managing the Collateral Assets. As a result,
48 the Issuer will be highly dependent on the financial and managerial experience of the investment professionals employed by the Collateral Manager who are assigned to select and manage the Collateral Assets and perform the other obligations of the Collateral Manager under the Collateral Management Agreement. There is no assurance that such persons will continue to be employed by the Collateral Manager or involved in investment activities of the Issuer. The Issuer is not a direct beneficiary of employment arrangements between the Collateral Manager and its employees, which arrangements are in any event subject to change without notice to, or the consent of, the Issuer. The loss of any such persons could have a material adverse effect on the Collateral. Furthermore, the Collateral Manager may hire replacement employees or re-assign its existing employees that may not have the same level of experience in selecting and managing loans and high-yield debt securities and performing such other obligations as the persons they replace. Any such change in personnel performing such obligations may have an adverse effect on the Collateral and the Issuer’s ability to make payments on the Securities.
The Collateral Manager may resign or be removed subject to certain conditions. There can be no assurance that any successor manager would have the same level of skill in performing the obligations of the Collateral Manager, in which event payments on the Securities could be reduced or delayed. See "The Collateral Management Agreement."
Purchase of Collateral Assets through One or More Subsidiaries. Some of the Collateral Assets and Equity Securities may be held by an ETB Subsidiary. The Issuer's ability to realize the economic benefits of its indirect ownership of these assets depends on the ability of the ETB Subsidiaries to make payments and other distributions to the Issuer. In the event that any ETB Subsidiary is unable for any reason to make such payments or other distributions to the Issuer, the Issuer may not be able to realize the full economic benefits of the assets held by such ETB Subsidiary. In addition, the Issuer will generally be responsible for the taxes and costs associated with ETB Subsidiaries.
Risk Factors Related to Certain Conflicts of Interest
Various potential and actual conflicts of interest may arise from the overall advisory, investment and other activities of the Collateral Manager, its Affiliates and their respective clients, and of the Initial Purchaser and its Affiliates. Certain conflicts of interest may also arise from the activities of the Rating Agencies in connection with the transaction. The following briefly summarizes some of these conflicts, but is not intended to be an exhaustive list of all such conflicts or their potential consequences.
Conflicts of Interest Relating to the Collateral Manager.
As the Collateral Manager and its affiliates currently sponsor other private investment funds, partnerships, and companies and act as the investment advisor to a number of managed accounts, and trade on behalf of themselves and their affiliates, conflicts of interest may arise among the Issuer, the Collateral Manager and its affiliates, and the trading accounts they manage for others or as a result of some other securities investment activity or business in which one or more of them may be engaged. The Collateral Manager may also have a conflict of interest in rendering advice to the Issuer because its benefit from managing other accounts may exceed its benefit from managing the Issuer's account and, therefore, may provide an incentive to favor such other accounts. Moreover, if the Collateral Manager makes investment decisions for other accounts at or about the same time it make decisions for the Issuer’s account, the issuer may be competing with such other accounts for the same or similar positions.
The Collateral Manager is not obligated by contract to buy, sell or recommend for the Issuer any security or other investment that might be bought, sold or recommended for other clients or for the Collateral Manager’s own or related persons’ account, but the Collateral Manager will endeavor to fairly allocate the investment opportunity or dispose of the investment in the event of an actual conflict.
49 The Collateral Management Agreement provides that the Collateral Manager may not cause the Issuer to acquire any investment to be included in the Collateral from the Collateral Manager, any of its affiliates or any account or portfolio for which the Collateral Manager or any of its affiliates serves as investment advisor as principal or to sell any such investment to the Collateral Manager, any of its affiliates or any account or portfolio for which the Collateral Manager or any of its affiliates serves as investment advisor as principal, unless in each case (i) such purchase or sale complies with applicable laws, including the U.S. Investment Advisers Act, and (ii) such purchase or sale is conducted on an arm's-length basis and on terms no less favorable to the Issuer than would be the case if such person were not so affiliated.
The Collateral Manager and its affiliates are authorized under the Collateral Management Agreement to effect cross transactions for the Issuer's account. The Collateral Manager or an affiliate may act as broker for both the Issuer and the other party to the transaction. In such cross transactions the Collateral Manager has a potential conflicting division of loyalties and responsibilities regarding both parties to the transaction and the Collateral Manager or any of its affiliates may receive commissions from both parties to such transaction.
The Collateral Manager is not precluded from causing the Issuer to invest in the securities issued by companies represented in the investment portfolios of other partnerships managed by the Collateral Manager or its principals, affiliates or advisory clients. Any such purchases (or sales) will not be on a "principal-to-principal" basis and will only be offered where the Collateral Manager is satisfied that the Issuer's interests are not unfairly prejudiced.
Although the Collateral Manager or one of its affiliates may at times be a holder of the Securities, and the Collateral Manager or one of its affiliates intends to purchase 20% of the Subordinated Notes issued on the Closing Date, its interests and incentives will not necessarily be completely aligned with those of the other holders of the Securities (or of the holders of any particular Class of the Securities).
The Collateral Manager may discuss the composition of the Collateral and related information with one or more holders of Securities or other stakeholders in the Issuer prior to or after the Closing Date and there can be no assurance that such discussions will not influence the Collateral Manager's actions.
Initial Purchaser Conflicts of Interest. Various potential and actual conflicts of interest may arise as a result of the investment banking, commercial banking, asset management, financing and financial advisory services and products provided by the Initial Purchaser and its Affiliates to the Issuer, the Trustee, the Collateral Manager, the issuers of the Collateral Assets and others, as well as in connection with the investment, trading and brokerage activities of the Initial Purchaser and its Affiliates. The Initial Purchaser or its Affiliates may from time to time hold Securities for investment, trading or other purposes, and may sell at any time any Securities held by them. The Initial Purchaser and its Affiliates will have the right to vote the Securities that they hold. The interests and incentives of the Initial Purchaser or its Affiliates will not necessarily be aligned with those of the other Holders. Additionally, the Initial Purchaser or its Affiliates may, on either their own or their clients’ behalf, invest or take long or short positions in the Securities, which may be different from the position taken by Holders of the Securities. Any such short position will increase in value if the Securities decrease in value. The Initial Purchaser and its Affiliates are not obligated to consider the interests of the Holders of the Securities or any effect that such positions could have on them.
The Initial Purchaser or its Affiliates may, on their own behalf or on behalf of clients, act as Hedge Counterparty or Selling Institution. The position of the Initial Purchaser, its Affiliates or its clients in such a derivative transaction may increase in value if the Securities default or decrease in value. In conducting such activities, the Initial Purchaser and its Affiliates are under no obligation to consider the interests of Holders of the Securities or the impact of any such activities on the Holders.
50 The Initial Purchaser and any of its Affiliates will act in their own commercial interests in these various capacities without regard to whether their interests conflict with those of the Holders of Securities or any other party. None of the Initial Purchaser or its Affiliates take any responsibility for, and have no obligations to potential investors or other third parties in respect of, the Issuers.
The Issuer’s purchase of Collateral Assets prior to the Closing Date has been financed by an affiliate of the Initial Purchaser, together with certain entities with respect to which the Collateral Manager or its affiliates act as investment manager and certain other parties, pursuant to a warehouse financing facility. A portion of the proceeds of the offering of the Securities will be paid to such affiliate of the Initial Purchaser to repay the warehouse financing facility. The existence of this warehouse financing facility may give the Initial Purchaser the incentive to close the issuance of the Securities in conditions that are not optimal.
In addition, the Issuer may have purchased or sold prior to the Closing Date, and may purchase or sell after the Closing Date, Collateral Assets from, to or through one or more of the Initial Purchaser or its Affiliates (including purchases of Collateral Assets in anticipation of the Closing Date at a price equal to the purchase price paid by the Initial Purchaser or its Affiliate plus a fee). Certain Eligible Investments may be issued, managed or underwritten by one or more of the Initial Purchaser or its Affiliates. One or more of the Initial Purchaser or its Affiliates may provide investment banking, commercial banking, asset management, financing and financial advisory services and products to the Collateral Manager, its Affiliates, and funds managed by the Collateral Manager and its Affiliates, and purchase, hold and sell, both for their respective accounts or for the account of their respective clients, on a principal or agency basis, loans, securities, and other obligations and financial instruments of the Collateral Manager, its Affiliates, and funds managed by the Collateral Manager and its Affiliates. As a result of such transactions or arrangements, one or more of the Initial Purchaser or its Affiliates may have interests adverse to those of the Issuer and Holders of the Securities. The Initial Purchaser is not obligated to consider the interests of the Holders of the Securities or any effect that such positions could have on them.
The Initial Purchaser and its Affiliates may have underwritten or be acting as agent, counterparty or lender in respect of certain of the Collateral Assets, may have ongoing relationships (including, without limitation, the provision of investment banking, commercial banking and advisory services or engaging in securities or derivatives transactions) with issuers whose debt obligations constitute Collateral Assets and may own either equity securities or debt obligations (including the debt obligations that constitute Collateral Assets) issued by such issuers. The Initial Purchaser and its Affiliates may also have ongoing relationships (including, without limitation, the provision of investment banking, commercial banking and advisory services or engaging in securities or derivatives transactions) with purchasers of the Securities or the Collateral Manager. The Initial Purchaser and its Affiliates and clients may also invest in debt obligations that have interests different from or adverse to the debt obligations that constitute Collateral Assets. From time to time the Issuer may purchase, enter into, terminate or sell Collateral Assets from or through the Initial Purchaser or any of its Affiliates.
In addition, certain "private side" and "walled off" areas of the Initial Purchaser or its Affiliates may have access to material non-public information regarding the Collateral Assets or the issuers whose debt obligations constitute Collateral Assets. These areas have not participated in the preparation of this Offering Memorandum, nor have they provided any material non-public information to any employee of the Initial Purchaser involved in the preparation of this Offering Memorandum.
The Initial Purchaser will be entitled to be paid certain fees in connection with the structuring and offering of the Securities from the proceeds of the issuance of the Securities. The Initial Purchaser may forego a portion of or otherwise choose to accept a reduced amount of such fees for any reason. Whether any such amount will be foregone or reduced may depend on the terms of the Securities issued on the Closing Date (including, without limitation, the Interest Rates and purchase prices), the purchase price of the Collateral Assets and other terms of the transaction.
51 The Rating Agencies may have certain conflicts of interest. S&P and Moody's have been hired by the Issuer to provide their ratings on the Secured Notes (and in the case of Moody's, the Class X Notes and the Class A Notes only). Either Rating Agency may have a conflict of interest where, as is the case with the ratings of the Secured Notes (or in the case of Moody's, the Class X Notes and the Class A Notes only) (with the exception of unsolicited ratings), the issuer of a security pays the fee charged by the rating agency for its rating services.
Regulatory and Other Risk Factors
Insolvency Considerations Under U.S. Federal Bankruptcy Law. Various laws enacted for the protection of debtors or creditors may apply to the Collateral Assets under U.S. federal bankruptcy law. If a court were to find that the obligor of a Collateral Asset did not receive fair consideration or reasonably equivalent value for incurring the indebtedness constituting the Collateral Asset and, after giving effect to such indebtedness, the obligor (i) was insolvent, (ii) was engaged in a business for which its remaining assets constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could invalidate, in whole or in part, the indebtedness as a fraudulent conveyance, subordinate the indebtedness to existing or future creditors of the obligor or recover amounts previously paid by the obligor in satisfaction of the indebtedness. There can be no assurance as to what standard a court would apply in order to determine whether the obligor was "insolvent." In addition, in the event of the insolvency of an obligor of a Collateral Asset, payments made on the Collateral Asset could be subject to avoidance as a "preference" if made within a certain period of time (which may be as long as one year and one day) before insolvency.
A U.S. bankruptcy court would be able to recapture payments that are determined to be "avoidable" (whether as a preference or otherwise) either from the initial recipient (such as the Issuer) or from subsequent transferees of such payments (such as the holders of the Securities). To the extent that any such payments are recaptured from the Issuer, the resulting loss will be borne by the Holders of the Securities beginning with the Subordinated Notes as the most junior Class. A court in a bankruptcy or insolvency proceeding would be able to direct the recapture of payments from a Holder of Securities only to the extent that it has jurisdiction over the holder or its assets. Moreover, it is likely that avoidable payments could not be recaptured directly from a Holder that has given value in exchange for its Securities, in good faith and without knowledge that the payments were avoidable. Nevertheless, since there is no judicial precedent relating to a structured transaction such as the Securities, there can be no assurance that a Holder of Securities will be able to avoid recapture on this or any other basis.
Liens arising by operation of law may impair the Issuer's recovery on a Collateral Asset. Federal or state law may grant liens on the collateral (if any) securing a Collateral Asset that have priority over the Trustee's security interest. An example of a lien arising under federal or state law is a tax or other government lien on property of an obligor. To the extent a lien having priority over the Trustee's security interest exists with respect to the collateral related to any Collateral Asset, the Trustee's security interest in the asset will be subordinate to such lien. If the creditor holding such lien exercises its remedies, it is possible that, after such creditor is repaid, sufficient cash proceeds from the underlying collateral will not be available to pay the outstanding principal amount of such Collateral Asset.
Lender Liability Considerations and Equitable Subordination. A number of judicial decisions in the United States and some non-U.S. jurisdictions have upheld the right of borrowers to sue lending institutions and others on the basis of various evolving legal theories. Generally, lender liability is founded upon the premise that a lender has violated a duty (whether implied or contractual) of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower that creates a fiduciary duty owed to the borrower or its other creditors or shareholders.
52 In some cases, courts have subordinated the claim of a lender against a borrower to claims of other creditors of the borrower when the lending institution is found to have engaged in unfair, inequitable or fraudulent conduct. Because of the nature of certain of the Collateral Assets, the Issuer could be subject to claims from creditors of a Collateral Asset obligor that the Issuer’s claim under the Collateral Asset should be equitably subordinated.
Insolvency Considerations With Respect to Collateral Assets of Non-U.S. Issuers. Collateral Assets consisting of obligations of non-U.S. obligors may be subject to various laws enacted in their home countries for the protection of debtors or creditors, which could adversely affect the Issuer’s ability to recover amounts owed. These insolvency considerations will differ depending on the country in which each obligor is located and may differ depending on whether the obligor is a non-sovereign or a sovereign entity.
U.S. Investment Company Act. Neither of the Issuers nor the pool of Collateral Assets has registered with the SEC as an investment company pursuant to the U.S. Investment Company Act, in reliance on an exemption from registration and no-action positions available for non-U.S. issuers (a) whose outstanding securities owned by any "U.S. person" (as defined in Regulation S) (each, a "U.S. Person") are owned exclusively by Qualified Purchasers and Knowledgeable Employees and (b) that do not make a public offering of their securities in the United States. Accordingly, investors in the Securities will not be accorded the protections of the U.S. Investment Company Act. Counsel for the Issuers will opine, in connection with the sale of the Securities, that neither of the Issuers is, as of the Closing Date, an investment company required to be registered under the U.S. Investment Company Act (assuming, for the purposes of such opinion, the accuracy and completeness of all representations and warranties made or deemed to be made by investors in the Securities). No opinion or no-action position has been requested of the SEC.
If the SEC or a court of competent jurisdiction were to find that either of the Issuers is required, but had failed, to register in violation of the U.S. Investment Company Act, possible consequences include, but are not limited to, the following: (i) the SEC could apply to a district court to enjoin the violation; (ii) Securityholders could sue the Issuer or the Co-Issuer, as the case may be, and recover any damages caused by the violation of the registration requirement of the U.S. Investment Company Act; and (iii) any contract to which the Issuer or the Co-Issuer is a party that is made in, or whose performance involves a, violation of the U.S. Investment Company Act would be unenforceable by any party to the contract unless a court were to find that under the circumstances enforcement would produce a more equitable result than nonenforcement and would not be inconsistent with the purposes of the U.S. Investment Company Act. Should the Issuer or the Co-Issuer be subjected to any or all of the foregoing, there would be a material adverse effect on such entity and the Securities.
Legislative and Regulatory Developments. The recent turmoil in the global credit markets has created significant political support for additional legislation and regulation. Although the content and scope of new legislation or other regulatory developments remains uncertain, new legislation and regulation has occurred as a result. For example, the United States Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which will fundamentally overhaul the regulatory scheme for the financial markets in the United States. In addition, numerous United States federal agencies have proposed or enacted new or revised rules relating to financial markets. There have also been several recent legislative and regulatory initiatives in Europe and elsewhere in the world that relate to the financial markets. The effect of all of these recent regulatory changes is uncertain at this time and could, among other results, increase costs to the Issuers and/or the Collateral Manager, lead to the Issuer’s inability to purchase additional Collateral Assets or have unforeseen legal consequences on the Issuer or the Collateral Manager or have other material adverse effects on the Issuers or the Securityholders.
53 Recently adopted CFTC rules under the Dodd-Frank Act will include "swaps" along with "commodities" as contracts which if traded by an entity may cause that entity to fall within the definition of a "commodity pool" under the U.S. Commodity Exchange Act and the related collateral manager to fall within the definition of a CPO. Regulation of the Issuer as a commodity pool and/or regulation of the Collateral Manager as a CPO with respect to the Issuer could cause the Issuer to be subject to extensive registration and reporting requirements that may involve material costs to the Issuer. The Issuer will not be permitted to enter into a Hedge Agreement unless it obtains (i) an opinion of counsel that such Hedge Agreement will not cause the Collateral Manager or the Trustee to register as a CPO with the CFTC with respect to the Issuer, (ii) the prior written consent of a Majority of the Subordinated Notes, (iii) the prior written consent of the Controlling Class and (iv) Rating Agency Confirmation from each Rating Agency. While limited exemptions from these registration requirements may be available, the conditions of such an exemption may constrain the extent to which the Issuer may be able to enter into Hedge Agreements. In particular, the limits imposed by such exemptions may prevent the Issuer from entering into a Hedge Agreement that the Collateral Manager believes would be advisable or result in the Issuer incurring financial risks that would have been hedged absent such limits.
In addition, proposed changes to Regulation AB under the U.S. Securities Act have the potential to impose new disclosure requirements that could restrict the use of this Offering Memorandum or require the publication of a new offering memorandum in connection with the issuance and sale of any Additional Subordinated Notes. No assurance can be made that the United States federal government, any U.S. regulatory body or any non-U.S. government or regulatory body will not continue to take further legislative or regulatory action in response to the economic crisis or otherwise, and the effect of such actions, if any, cannot be known or predicted.
Article 122a and Similar Requirements. On December 31, 2010, the Committee of European Banking Supervisors ("CEBS") published its final guidelines on the implementation of Article 122a of the Capital Requirements Directive ("Article 122a"). Generally, Article 122a imposes certain standards on securitization transactions that may be acquired by credit institutions within the European Union. Article 122a imposes a penal capital charge on credit institutions within the European Union which invest in securitization transactions that do not comply with a risk retention requirement on the sponsor, originator or original lender in a securitization transaction of 5% of the net economic exposure of the entire transaction. Although Article 122a applies to CLO transactions, the parties to this transaction do not intend to comply with the requirements of Article 122a and, consequently, the Securities will generally not be a suitable investment for European credit institutions. Similar requirements are or are expected to be imposed on European investment companies, European insurance companies and certain investment funds. Although these similar requirements apply to CLO transactions, the parties to this transaction also do not intend to comply with such similar requirements and, consequently, the Securities will generally not be suitable investments for European investment companies, European insurance companies and certain investment funds. This lack of suitability will impair the marketability and liquidity of the Securities.
Prevention of Money Laundering and Terrorism. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the "USA PATRIOT Act" ), signed into law on and effective as of October 26, 2001, requires that financial institutions, a term that includes banks, broker dealers and investment companies, establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the Treasury to prescribe regulations in connection with anti money laundering policies of financial institutions. The U.S. Federal Reserve Board, the Treasury and the SEC are currently studying what types of investment vehicles should be required to adopt anti money laundering procedures, and it is unclear at this time whether such procedures will apply to pooled investment vehicles such as the Issuers. Future rules and regulations regarding money laundering or proceeds of crime could regulate the Issuer or
54 the Co-Issuer. It is possible that there could be promulgated legislation or regulations that would require the Issuer, the Co-Issuer, the Initial Purchaser, the Collateral Manager or other service providers to the Issuers, in connection with the establishment of anti money laundering procedures, to share information with governmental authorities with respect to investors in the Securities. Such legislation and/or regulations could require the Issuers to implement additional restrictions on the transfer of the Securities. The Issuers reserve the right to request such information as is necessary to verify the identity of investors in the Securities, and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by Financial Crimes Enforcement Network and/or the SEC.
The Administrator is, and the Issuer may be, subject to the Cayman Islands Money Laundering Regulations (2010 Revision) ("Regulations"). The Regulations apply to anyone conducting "relevant financial business" in or from the Cayman Islands intending to form a business relationship or carry out a one-off transaction. The Regulations require a financial service provider to maintain certain anti-money laundering procedures including those for the purposes of verifying the identity and source of funds of an "applicant for business"; e.g. an investor. Except in certain circumstances, including where an entity is regulated by a recognised overseas regulatory authority and/or listed on a recognised stock exchange in an approved jurisdiction, the Administrator will likely be required to verify each investor's identity and the source of the payment used by such investor for purchasing the Notes in a manner similar to the obligations imposed under the laws of other major financial centers. In addition, if any person resident in the Cayman Islands knows or suspects, or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct, or is involved with terrorism or terrorist property, and the information for that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the person will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority of the Cayman Islands ("FRA"), pursuant to the Proceeds of Crime Law, 2008 of the Cayman Islands ("PCL"), if the disclosure relates to criminal conduct or money laundering, or (ii) a police officer of the rank of constable or higher, or the FRA, pursuant to the Terrorism Law (2011 Revision) of the Cayman Islands, if the disclosure relates to involvement with terrorism or terrorist financing and property. If the Issuer were determined by the Cayman Islands authorities to be in violation of the PCL, the Terrorism Law or Regulations, the Issuer could be subject to substantial criminal penalties. The Issuer may be subject to similar restrictions in other jurisdictions. Such a violation could materially adversely affect the timing and amount of payments by the Issuer to the holders of the Notes.
In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of the Securities and the subscription monies relating thereto may be refused.
Possible Withdrawal of Ratings upon Failure to Comply with Rule 17g-5 under the Exchange Act. On June 2, 2010, certain amendments to Rule 17g-5 ("Rule 17g-5") under the Securities Exchange Act of 1934, as amended, promulgated by the SEC became effective. Amended Rule 17g-5 requires each rating agency providing a rating of a structured finance product such as this transaction paid for by the "arranger" (defined as the issuer, the underwriter or the sponsor) to obtain an undertaking from the arranger to (i) create a password protected website (the "17g-5 Website"), (ii) post on the 17g-5 Website all information provided to the rating agency in connection with the initial rating of the Rated Notes and all information provided to the rating agency in connection with the surveillance of such rating, in each case, contemporaneous with the provision of such information to the applicable rating agency and (iii) provide access to the 17g-5 Website to other rating agencies that have made certain certifications to the arranger regarding their use of the information. In this transaction, the "arranger" will be the Issuer.
If the arranger does not comply with its undertakings to any Rating Agency with respect to this transaction, such Rating Agency may withdraw its ratings of the applicable Rated Notes. A withdrawal of
55 ratings by any Rating Agency may adversely affect the price, liquidity and transferability of the Rated Notes and may adversely affect any beneficial owner that relies on ratings of securities for regulatory or other compliance purposes.
Rating by Unsolicited Rating Agencies Under Rule 17g-5. Under Rule 17g-5, rating agencies other than S&P and Moody’s that provide the requisite certifications described above may issue unsolicited ratings of the Rated Notes which may be lower and, in some cases, significantly lower than the ratings provided by Moody’s and S&P. The unsolicited ratings may be issued prior to, on or after the Closing Date and will not be reflected herein. Issuance of any unsolicited rating will not affect the issuance of the Securities. Such unsolicited ratings could have a material adverse effect on the price and liquidity of the Rated Notes and, for regulated entities, could adversely affect the value of the Rated Notes as a legal investment or the capital treatment of the Rated Notes.
The SEC may determine that one or both of S&P and Moody’s no longer qualifies as a nationally recognized statistical rating organization (an "NRSRO") for purposes of the federal securities laws and that determination may also have an adverse effect on the market prices and liquidity of the Rated Notes.
U.S. Securities Act Considerations. The offering of the Securities will not be registered under the U.S. Securities Act or under any other federal or state securities laws or securities laws of any other applicable jurisdiction. These registrations provide investors with certain protections, including ongoing filing requirements, potential review by regulators and certain disclosure requirements. Because the Issuers and the offering of the Securities will not be registered under the U.S. Securities Act or such other laws, many of the requirements attendant to such registration processes will not apply.
Recent Developments with Respect to LIBOR. Recent information has called into question the integrity of the process for determining LIBOR, and the full implications of such information is unknown at this time. While the Issuer's assets and liabilities are naturally hedged as the substantial majority of the interest payments due on the Issuer's assets are expected to be calculated based upon LIBOR and the Secured Notes (other than the Class B-2 Notes) pay interest based upon LIBOR, an inaccurate LIBOR setting could have adverse effects on the Issuer and/or the holders of the Secured Notes. For example, holders of the Secured Notes (other than the Class B-2 Notes) would receive lower dollar amounts as interest payments if LIBOR was artificially lower than a properly functioning market would otherwise set LIBOR. Other negative consequences of the perceived inaccuracy of LIBOR could include fewer loans utilizing LIBOR as an index for interest payments and/or erratic swings in LIBOR, both of which could result in interest rate mismatches between the Issuer's assets and its liabilities and expose the Issuer to cash shortfalls. Furthermore, questions surrounding the integrity of the process for determining LIBOR may have other unforeseen consequences, including potential litigation against banks and/or obligors on loans, which could result in a material and adverse effect on the Issuer or the Holders of the Securities. Investors should consider these recent developments when making their investment decision with respect to the Securities.
Tax Consequences to the Issuer. Upon the issuance of the Securities, Sidley Austin LLP will deliver an opinion generally to the effect that, under current law, assuming compliance with the Indenture (and certain other documents) and based upon certain factual representations made by the Issuer and/or the Collateral Manager, and assuming the correctness of all opinions and advice of counsel that permit the Issuer to take or fail to take any action under the transaction documents based upon such opinions or advice, although the matter is not free from doubt, the Issuer will not be treated as engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes. The opinion of Sidley Austin LLP will be based on certain factual assumptions, covenants and representations as to the Issuer's contemplated activities. The Issuer intends to conduct its affairs in accordance with such assumptions and representations. However, you should be aware that the opinion referred to above will be predicated upon the Collateral Manager's compliance with certain tax restrictions set out in the
56 Indenture and the Collateral Management Agreement (the "Investment Guidelines"), which are intended to prevent the Issuer from engaging in activities which could give rise to a trade or business within the United States. Although the Collateral Manager has generally undertaken to comply with the Investment Guidelines, the Collateral Manager is permitted to depart from the Investment Guidelines if it obtains written advice from nationally recognized tax counsel that the departure will not cause the Issuer to be treated as engaged in a trade or business within the United States. There can be no assurance that any such opinion or advice of tax counsel will be consistent with Sidley Austin LLP's current views and opinion standards, and any such departures would not be covered by the opinion of Sidley Austin LLP referred to above. Furthermore, the Collateral Manager is not obligated to monitor (or, in some cases, to conform the Issuer's activities in order to comply with) changes in law that could affect whether the Issuer is treated as engaged in a U.S. trade or business. The Collateral Manager might act in accordance with the Investment Guidelines notwithstanding the issuance of new decisions by the courts, new legislation or official guidance (regardless of whether such new interpretation, legislation or guidance would either merely increase the risk that the Issuer would be, or actually cause the Issuer to be, engaged in a U.S. trade or business). In addition, although the Collateral Manager can be removed for cause, violations of the Investment Guidelines may not constitute "cause". Such violations generally will not constitute "cause" if they do not, and cannot reasonably be expected to have, a material adverse effect on the holders of the Securities. It is not certain that a violation of the Investment Guidelines that causes an increase in the risk that the Issuer will be engaged in a trade or business in the United States for U.S. federal income tax (without actually having that effect) will be treated as reasonably being expected to have such a material adverse effect.
In addition, the opinion of Sidley Austin LLP and any such other advice or opinions are not binding on the IRS or the courts, and no ruling will be sought from the IRS regarding this, or any other, aspect of the U.S. federal income tax treatment of the Issuer. Accordingly, in the absence of authority on point, the U.S. federal income tax treatment of the Issuer is not entirely free from doubt, and there can be no assurance that positions contrary to those stated in the opinion of Sidley Austin LLP or any such other advice or opinions may not be asserted successfully by the IRS.
If the IRS were to characterize successfully the Issuer as engaged in a U.S. trade or business, among other consequences, the Issuer would be subject to net income taxation in the United States on its income (and possibly on a gross basis) that was effectively connected with such business (as well as the branch profits tax). The levying of such taxes could materially affect the Issuer's financial ability to make payments on the Securities.
To reduce the risk that the Issuer will be engaged in a trade or business in the United States, in certain circumstances set forth in the Indenture, certain assets in a workout, bankruptcy or restructuring or similar transaction may be owned by one or more ETB Subsidiaries wholly-owned by the Issuer. Income on such securities or obligations will be subject to U.S. federal income tax, and possibly state and local tax, at regular corporate rates and distributions by such subsidiaries to the Issuer (or, in the case of non- U.S. ETB Subsidiaries, amounts distributed to the ETB Subsidiary) attributable to such income may also be subject to U.S. withholding tax.
Changes in tax law could result in the imposition of U.S. withholding taxes, but there will be no gross-up by the Issuer. Payments on the Collateral Assets (except for commitment fees and other similar fees associated with Delayed Funding Assets) are required not to be subject to withholding tax when the Collateral Assets are acquired by the Issuer unless the obligor thereof is required to make payments of additional amounts (so called "gross-up payments") that cover the full amount of such withholding tax on an after-tax basis. Special rules exist with respect to Letters-of-Credit. See "Certain Issuer Accounts – Letter-of-Credit Reserve Account." In the case of debt obligations issued by U.S. obligors after July 18, 1984, interest payments thereon are generally exempt under current United States tax law from the
57 imposition of United States federal income withholding tax. See "U.S. Federal Income Tax Considerations—Information Reporting and Backup Withholding."
With respect to Collateral Assets that are not subject to withholding tax at the time of acquisition by the Issuer, however, there can be no assurance that the payments on such Collateral Assets will not become subject to U.S. or other withholding tax as a result of a change in any applicable law, treaty, rule or regulation or interpretation thereof or other causes, possibly with retroactive effect. If any withholding tax is or becomes applicable to payments on the Collateral Assets and such tax is not fully offset by "gross-up payments", such withholding tax will reduce the amounts available to make payments on the Securities. There can be no assurance that the remaining payments on the Collateral Assets will be sufficient to make payments on the Securities.
Withholding tax is not currently imposed by the Cayman Islands on payments of interest or principal on the Secured Notes or distributions on the Subordinated Notes. There can be no assurance, however, that the law will not change. In the event that any withholding tax is imposed on payments of interest or principal on any of the Secured Notes or distributions on the Subordinated Notes, the holders of the Securities will not be entitled to receive grossed-up amounts to compensate for such withholding tax.
Changes in law may have tax consequences for the Issuer or holders of the Securities. Changes in laws, regulations, rulings and decisions currently in effect may have tax consequences for the Issuer or holders of Securities. There have been recent legislative proposals that were not enacted that proposed to treat a foreign corporation as a domestic corporation subject to U.S. federal income taxation if the foreign corporation's assets consisted primarily of assets managed on behalf of investors and decisions as to the management of those assets were made within the United States. If legislation with similar provisions were to be enacted and were to apply to the Issuer, then depending on the specific terms of those provisions, such a change in law could have a material adverse effect on the Issuer's ability to make payments on the Securities and could constitute a Tax Event that would permit a tax redemption.
Holders may be subject to withholding or forced sale for failure to provide certain tax information.
Recently enacted U.S. tax legislation ("FATCA") imposes a 30% withholding tax on certain payments of U.S. source income and gross proceeds from the sale of property that produces certain U.S. source income to certain non-United States persons that are "foreign financial institutions," such as the Issuer, unless certain conditions are satisfied. Generally, the withholding tax is phased in over several years and applies to payments of U.S. source income made on or after January 1, 2014, to certain gross proceeds on or after January 1, 2017 and certain other "passthru payments" (described below) no earlier than January 1, 2017. As a general matter, FATCA withholding tax (which is not expected to be refundable with respect to the Issuer) will not be imposed if (i) the payment is made with respect to an obligation outstanding on or prior to December 31, 2012 (that has not been modified after January 1, 2013 and treated as reissued for U.S. federal income tax purposes) (a "Grandfathered Obligation"), or (ii) the Issuer (and each foreign withholding agent (if any) in the chain of custody of payments made to the Issuer) enters into an agreement (an "FFI Agreement") with the U.S. Internal Revenue Service (the "IRS") that requires the Issuer to satisfy certain withholding tax and information reporting requirements regarding its U.S. holders. For this purpose, the term "obligation" does not include obligations that lack a definitive expiration or term (such as savings or demand deposits) or equities. Debt obligations of U.S. obligors held by the Issuer generally should be grandfathered if such obligations are outstanding as of (and not modified after) December 31, 2012 (even if the Issuer purchases the obligations after December 31, 2012) and debt obligations of non-U.S. obligors are expected to be grandfathered if such obligations are outstanding six months after the adoption of final regulations addressing withholding on passthru payments.
58 The Issuer expects to enter into an FFI Agreement. Accordingly, the Issuer will be obligated to comply with certain withholding tax obligations imposed on payments made to certain foreign financial institutions that fail to enter into an FFI Agreement and to Recalcitrant Holders. As such, the Issuer or the Trustee on its behalf will be obligated to withhold tax at a 30 percent rate on certain "passthru payments" made to Recalcitrant Holders. Such withholding would begin no earlier than January 1, 2017. Preliminary guidance that was not included in the proposed regulations suggested that a payment on a Note will be treated as a passthru payment to the extent of (i) the amount (if any) of the payment that is treated as U.S. source payments plus (ii) the remainder of the payment multiplied by a ratio equal to the Issuer's average U.S. assets to its average total assets, determined as of specified testing dates. U.S. assets likely will be defined broadly for purposes of this determination. Proposed rules do not contain the above formulation and it is unclear if the final rule for withholding with respect to the non-U.S. source portion of payments described in (ii) above will adopt this assets-based approach. Further, recent guidance indicates that an obligation that does not produce U.S. source payments will be grandfathered if the obligation is outstanding six months after the adoption of final regulations addressing withholding on passthru payments. Because such regulations have yet to be adopted and payments on the Notes are expected to be comprised solely of non-U.S. source payments, the Notes (other than Subordinated Notes and any other Class of Notes recharacterized as equity in the Issuer for U.S. federal income tax purposes) should not be subject to FATCA withholding tax since such securities should be treated as Grandfathered Obligations. The Subordinated Notes (and any other Class of Notes recharacterized as equity in the Issuer for U.S. federal income tax purposes) are not eligible for grandfathering because they represent equity in the Issuer. See "U.S. Federal Income Tax Considerations—Recent U.S. Tax Legislation."
The Issuer is permitted to enter into a supplemental indenture without the consent of holders to provide for the issuance of new Securities of a Class of Securities or the creation of sub-classes of such Class of Securities (in each case, with new identifiers) if it or the Trustee determines that one or more beneficial owners of such Class of Securities is a Recalcitrant Holder. The intent of such a supplemental indenture would be to allow holders of such Class that are not Recalcitrant Holders to take an interest in such new Note(s) or sub-class(es) in order to isolate the identity of the Recalcitrant Holder(s) and lessen the likelihood that holders, other than any applicable Recalcitrant Holder(s), would be subject to withholding due to the failure of a Recalcitrant Holder to provide the Issuer with Holder FATCA Information. However, there can be no assurance that any such supplemental indenture will be entered into or, if it is, that it will have the effect of eliminating or reducing withholding on any holder's Securities caused by a Recalcitrant Holder.
If the Issuer fails to enter into an FFI Agreement or its FFI Agreement is invalidated by the IRS (because it failed to comply with the terms of such agreement or because such holders of the Securities failed to comply with its requests for identifying information, or for any other reason), it could be subject to a material amount of withholding that would substantially reduce the amount of cash available to pay all its holders, and such withholding may be allocated disproportionately to a particular class of holders (including holders that have provided the Issuer with all requested information) and there will be no "gross up" (or any other additional amount) payable by way of compensation to the holders for the deducted amounts. In addition, if the Issuer becomes subject to withholding on account of its inability to comply with the new reporting requirements, which inability is attributable to a holder's non-compliance with the Issuer's requests for certification and identifying information, the Issuer may, at its option, cause the forced transfer of Securities (including some held by compliant holders) and such transfers may be for less than the fair market value of such Securities.
Under the Indenture, each holder or beneficial owner of a Note agrees to (i) provide the Issuer and any applicable Intermediary with the Holder FATCA Information and (ii) permit the Issuer, the Collateral Manager, an Intermediary and the Trustee (on behalf of the Issuer) to (x) share such information with the IRS, (y) compel or effect the sale of Securities held by any such holder that fails to comply with the
59 foregoing requirement and (z) make other amendments to the Indenture to enable the Issuer to comply with FATCA.
The Cayman Islands Government has been in discussions with the US Treasury with respect to the Cayman Islands entering into an intergovernmental agreement (an "IGA") between the US and the Cayman Islands. If such IGA is entered into, the Issuer may not be required to enter an agreement with the IRS to avoid withholding under FATCA, but could instead choose to comply with Cayman Islands legislation that would be implemented to give effect to such IGA. In that event the Issuer would be subject to modified FATCA requirements.
Possible tax effect of supplemental indentures. The Issuers may, for certain specified purposes, enter into supplemental indentures, some of which may be entered into without the consent of any holders of Securities and without requiring the Issuer to specifically consider the federal income tax consequences of such supplemental indenture. Thus, there is no specific requirement that such supplemental indentures will not adversely affect whether the Issuer is treated as engaged in a U.S. trade or business or the characterization of the Securities (as debt or equity) for federal income tax purposes.
Recent legislation subjects certain U.S. investors to additional reporting requirements. A U.S. Holder that is an individual and holds certain foreign financial assets must file new IRS Form 8938 to report the ownership of such assets if the total value of those assets exceeds the applicable threshold amounts. The threshold varies depending on whether the individual lives in the United States or files a joint income tax return with a spouse. For example, an unmarried U.S. Holder living in the United States is required to file Form 8938 if the total value of all specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. U.S. Holders in other situations have the same or a greater threshold. In general, specified foreign financial assets include debt or equity interests (that are not regularly traded on an established securities market) issued by foreign financial institutions (such as the Issuer), and any interest in a foreign entity that is not a financial institution, including any stock or security, and any financial instrument or contract held for investment that has an issuer or counterparty that is not a U.S. person. Proposed regulations also would require certain domestic entities that are formed, or availed of, for purposes of holding, directly or indirectly, specified foreign financial assets to file IRS Form 8938. In addition, certain non-resident alien individuals may be required to file Form 8938, notwithstanding the availability of any special treatment under an income tax treaty.
Taxpayers who fail to make the required disclosure with respect to any taxable year are subject to a penalty of $10,000 for such taxable year, which may be increased up to $50,000 for a continuing failure to file the form after being notified by the IRS. In addition, the failure to file Form 8938 will extend the statute of limitations for a taxpayer's entire related income tax return (and not just the portion of the return that relates to the omission) until at least three years after the date on which the Form 8938 is filed.
All U.S. Holders are urged to consult with their own tax advisors with respect to whether a Note is a foreign financial asset that (if the applicable threshold were met) would be subject to this rule.
Tax Characterization of the Securities. The Issuer has agreed and, by its acceptance of a Secured Note, each holder will be deemed to have agreed, to treat the Secured Notes as debt of the Issuer for U.S. federal income tax purposes, except as otherwise required by applicable law and for certain limited purposes (as described in "U.S. Federal Income Tax Considerations"). Upon the issuance of the Securities, Ashurst LLP will deliver an opinion generally to the effect that, assuming compliance with the Indenture (and certain other documents), and based on certain factual representations made by the Issuer and/or the Collateral Manager, the Class X Notes, the Class A Notes, the Class B Notes, the Class C Notes and the Class D Notes will, and the Class E Notes should, be characterized as debt of the Issuer for U.S. federal income tax purposes. The determination of whether a Note will be treated as debt for U.S.
60 federal income tax purposes is based on the facts and circumstances existing at the time the Note is issued. The opinion of Ashurst LLP will be based on current law and certain representations and assumptions. Prospective investors should be aware that opinions of counsel are not binding on the IRS, and there can be no assurance that the IRS will not seek to characterize as something other than indebtedness any particular Class or Classes of the Secured Notes.
The Issuer has agreed and, by its acceptance of a Subordinated Note, each holder will be deemed to have agreed, to treat such Subordinated Note as equity in the Issuer for U.S. federal income tax purposes, except as otherwise required by applicable law. No opinion will be delivered regarding the U.S. federal income tax treatment of the Subordinated Notes.
State and local taxes may reduce a holder's anticipated return on the Securities. In addition to the federal income tax consequences described in "U.S. Federal Income Tax Considerations" and "ERISA Considerations" herein, potential investors should consider the state and local income tax consequences of the acquisition, ownership, and disposition of the Securities. State and local income tax law may differ substantially from the corresponding federal law, and this Offering Memorandum does not purport to describe any aspect of the income tax laws of any state or local jurisdiction. Therefore, potential investors should consult their own tax advisors with respect to the various state or local tax consequences of an investment in the Securities.
Certain U.S. investors may be subject to additional reporting requirements. U.S. holders who acquire Subordinated Notes may be required file a Form 926 with the IRS and to supply certain additional information to the IRS. In the event a U.S. holder fails to file any such required form, the U.S. holder could be subject to a penalty equal to 10% of the gross amount paid for the Subordinated Notes, subject to a maximum penalty of $100,000 (except in cases involving intentional disregard). Recently enacted legislation may add additional reporting requirements. Purchasers of Subordinated Notes are urged to consult their tax advisors regarding these reporting requirements.
A U.S. holder of the Subordinated Notes that is deemed for U.S. federal income tax purposes to own 10% or more of the combined voting power or value of the equity of the Issuer may also be required to file an information return on Form 5471.
Payments on the Securities are not required to be grossed up for tax withheld. The Issuer expects that payments on the Securities will ordinarily not be subject to any withholding tax in the Cayman Islands, the United States or any other jurisdiction. See "Certain U.S. Federal Income Tax Considerations" and "Cayman Islands Tax Considerations". In the event that withholding or deduction of any taxes from payments on the Securities is required by law in any jurisdiction or in connection with FATCA (including a voluntary agreement entered into with the IRS), neither of the Issuers shall be under any obligation to make any additional payments in respect of such withholding or deduction.
ERISA Considerations. Transfers of the Securities may be subject to certain restrictions, and purchasers and transferees may be required to make (or deemed to have made) certain representations, in each case with respect to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended, Section 4975 of the U.S. Internal Revenue Code, as amended, and substantially similar non- U.S., federal, state and local laws. See "ERISA Considerations" and "Transfer Restrictions."
Participation on Creditors’ Committees. The Issuer may participate on committees formed by creditors to negotiate the management of financially troubled companies that may or may not be in bankruptcy or the Issuer may seek to negotiate directly with the debtors with respect to restructuring issues. By participating on such committees, the Issuer may be deemed to have duties to other creditors represented by the committees, which might thereby expose the Issuer to liability to such other creditors who disagree with the Issuer’s actions. The Collateral Manager may participate on creditors' committees
61 on behalf of itself, its affiliates and other clients and investment vehicles managed by the Collateral Manager and its affiliates, including the Issuer, which participation may create conflicts of interest.
International Investing. A portion of the Collateral Assets may consist of obligations of corporations and sovereign entities organized in Canada or other non-U.S. countries. Investing outside of the United States may involve greater risks than investing within the United States. These risks may include less publicly available information, varying levels of governmental regulation and supervision, the difficulty of enforcing legal rights in a non-U.S. jurisdiction, and uncertainties as to the status, interpretation and application of laws. Moreover, non-U.S. companies may not be subject to accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies.
Generally, there is less governmental supervision and regulation of exchanges, brokers and issuers in many non-U.S. countries. For example, there may be no comparable provisions under such laws to insider trading and similar investor protection securities laws that apply with respect to securities transactions consummated in the United States.
Non-U.S. markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions. Settlement problems or intermediary counterparty failures could cause the Issuer to miss investment opportunities or to delay disposition of a Collateral Asset, which could result either in losses due to subsequent declines in the market value of such Collateral Asset or default by the Issuer due to lack of proceeds for a related purchase. Transaction costs of buying and selling non-U.S. securities, such as brokerage, tax and custody costs, may also be higher. Furthermore, non-U.S. financial markets, while generally growing in volume, have, for the most part, substantially less volume than U.S. markets, and securities of many non-U.S. companies are less liquid and their prices more volatile than securities of comparable U.S. companies.
In many non-U.S. countries there is the possibility of expropriation, nationalization or confiscatory taxation, limitations on the convertibility of currency or the removal of securities, property or other assets of the Issuer, political, economic or social instability or adverse diplomatic developments, each of which could have an adverse effect on the Issuer’s investments in such non-U.S. countries. The economies of individual non-U.S. countries may also differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, volatility of currency exchange rates, depreciation, capital reinvestment, resource self-sufficiency and balance of payments position.
62 DESCRIPTION OF CERTAIN TERMS OF THE SECURITIES
The Securities will be issued pursuant to the Indenture and will be offered on the terms described in the Offering Memorandum.
The following summary describes certain provisions of the Securities and the Indenture, but does not purport to be complete and is subject to, and it is qualified in its entirety by reference to, the provisions of the Indenture. The information in this summary may be modified, and will be supplemented by related information in the Term Sheet and must be read in conjunction with the Term Sheet in order to understand the nature of the details described herein and limitations thereon.
Status and Security
The Securities will be limited recourse obligations of the Issuer and the Co-Issued Securities will be nonrecourse obligations of the Co-Issuer. The Secured Notes will be secured by the Collateral and the Subordinated Notes will not be secured by the Collateral.
The "Collateral" will consist of all property of the Issuer, whether owned on the Closing Date or thereafter acquired and wherever located, including, without limitation (a) the Collateral Assets and any Equity Securities received in connection with the Collateral Assets; (b) the Accounts; (c) Eligible Investments; (d) the Issuer’s rights under the Collateral Management Agreement, any Hedge Agreements, the Collateral Administration Agreement, the Account Control Agreement among the Issuer, the Trustee and Deutsche Bank Trust Company Americas as securities intermediary (the "Securities Intermediary"), dated as of the Closing Date, as amended from time to time (the "Account Control Agreement") and the Closing Date certifications and agreements dated as of the Closing Date; (e) all cash delivered to the Trustee; (f) the Issuer's equity interest in any ETB Subsidiary and the Issuer's rights under any agreement with any ETB Subsidiary; (g) all other assets of the Issuer pledged to the Trustee pursuant to the Indenture and (h) all proceeds of the foregoing; provided that the Issuer will not pledge the Excepted Property.
Payments on the Securities will be made in accordance with the Priorities of Payment from and to the extent of the proceeds of the Collateral and to the extent that such amounts are insufficient to meet payments due in respect of any Securities, the Issuers will have no obligation to pay such deficiency and all claims in respect of such Securities will be extinguished and will not thereafter revive.
Certain expenses of the Issuers will be senior in right of payment to some or all Classes of Securities to the extent provided in the Priorities of Payment.
Subject to the Priorities of Payment, interest and, sometimes, principal, on Higher-Ranking Classes will be paid prior to interest or principal being paid on Lower-Ranking Classes. Under certain circumstances, pursuant to the Priorities of Payment, all or a portion of the Interest Proceeds that might otherwise be available for distribution to Lower-Ranking Classes may be retained as Principal Proceeds to be invested in Collateral Assets or applied to pay principal of Secured Notes. Except as otherwise described in the Priorities of Payment, principal on Higher-Ranking Classes will be paid in full prior to payment of principal on Lower-Ranking Classes. The Subordinated Notes are subordinated to all payments on Higher-Ranking Classes and all fees and expenses of the Issuers.
63 Interest
The Secured Notes will bear interest on their Aggregate Outstanding Amounts from and including the Closing Date at the applicable Interest Rate. Any payments of interest on a Class of Secured Notes and distributions on the Subordinated Notes will be made on a pro rata basis among the Holders of such Class (in the case of the Secured Notes, according to the accrued and unpaid interest payable to each Holder) and payments of interest on the Class B-1 Notes and the Class B-2 Notes will be made pro rata between such Classes (according to accrued and unpaid interest due in respect of each such Class).
The "Interest Accrual Period" is the period from and including the Closing Date to but excluding the first Payment Date and each succeeding period from and including a Payment Date to but excluding the next Payment Date until the latest Stated Maturity Date (unless the Securities are redeemed earlier); provided that, for purposes of determining any Interest Accrual Period, in the case of the Class B- 2 Notes, the Payment Date shall be assumed to be the 15th day of the relevant month (irrespective of whether such day is a Business Day).
Interest on the Secured Notes (other than the Class B-2 Notes) will be calculated on the basis of the actual number of days elapsed in the applicable Interest Accrual Period divided by 360. Interest on the Class B-2 Notes will be calculated on the basis of a 360 day year consisting of twelve 30 day months.
Unless it is the Controlling Class, to the extent that funds are not available on any Payment Date to pay the full amount of interest on any Deferrable Notes, such unpaid interest will not be due and payable on such Payment Date (and failure to pay such interest will not be an Event of Default), will be deferred and will be added to the principal amount thereof (in each case, the amount of any such deferral, the "Deferred Interest"). To the extent lawful and enforceable, Deferred Interest will bear interest at the applicable Interest Rate until paid.
An Event of Default will occur if any interest due and payable in respect of any Class of Secured Notes that is a Non-Deferrable Class is not punctually paid or duly provided for on the applicable Payment Date and such default continues for three Business Days (or, in the case of a default in payment resulting solely from an administrative error or omission by the Trustee, any Paying Agent or the Security Registrar, such default continues for a period of three Business Days after the Trustee receives written notice or has actual knowledge of such administrative error or omission). To the extent lawful and enforceable, interest on Defaulted Interest will accrue at a per annum rate equal to the applicable Interest Rate.
The Subordinated Notes will receive on each Payment Date that portion of excess Interest Proceeds (if any) payable to that Class in accordance with the Priorities of Payment. The unavailability of excess Interest Proceeds to make distributions on Subordinated Notes on any Payment Date will not be an Event of Default under the Indenture.
So long as any Secured Notes are outstanding, the Issuer will have an independent calculation agent for purposes of determining LIBOR for each Interest Accrual Period. This LIBOR Calculation Agent will cause notice of the applicable Interest Rates and Interest Distribution Amounts for each Interest Accrual Period and the related Payment Date (other than with respect to the Class B-2 Notes) to be communicated to Euroclear, Clearstream and each Paying Agent. The determination of such Interest Rates and the Interest Distribution Amounts by the LIBOR Calculation Agent will (in the absence of manifest error) be final and binding upon all parties (including the beneficial owners of the Securities). If the LIBOR Calculation Agent resigns, is removed by the Issuer or fails to determine the Interest Rate for any Class of Secured Notes (other than the Class B-2 Notes) for any Interest Accrual Period, the Issuer
64 will promptly appoint a replacement LIBOR Calculation Agent that does not control, is not controlled by or under common control with the Issuer, the Collateral Manager or their respective Affiliates.
Principal
On the Stated Maturity Date, the Outstanding Secured Notes will mature at par and the Outstanding Subordinated Notes will be entitled to receive remaining Principal Proceeds (if any) in accordance with the Priorities of Payment. During the Reinvestment Period, principal will be payable on the Secured Notes only as provided in the Priorities of Payment, including on any Payment Date on which a Mandatory Redemption, Special Redemption or Optional Redemption occurs and may be paid at the sole discretion of the Collateral Manager during the Reinvestment Period (but after the Non-Call Period) if permitted under the Priorities of Payment because the Interest Diversion Test is not satisfied as of the related Payment Date. Principal of the Class X Notes will be paid from Interest Proceeds and Principal Proceeds on each Payment Date other than the first Payment Date to the extent set forth in the Priorities of Payment. During the Amortization Period, Principal Proceeds will be payable on the Secured Notes in accordance with the Priorities of Payment on each Payment Date.
Any payments of principal on a Class of Securities will be made on a pro rata basis among the Holders of such Class according to the respective unpaid principal amounts thereof outstanding immediately prior to such payment and payments of principal of the Class B-1 Notes and the Class B-2 Notes will be made pro rata between such Classes according to the respective unpaid principal amounts of each such Class outstanding immediately prior to such payment.
On any Redemption Date, any Payment Date on which only Subordinated Notes are outstanding and on the latest Stated Maturity Date (unless the Subordinated Notes have been previously redeemed), excess Principal Proceeds payable pursuant to the Priorities of Payment will be paid to the Holders of the Subordinated Notes.
Redemptions
Optional Redemption
Subject to certain conditions described herein, upon receipt of a Required Redemption Direction, the Issuer will redeem the Secured Notes (in whole and not in part, except in the case of a Refinancing by Class as described below) (a "Secured Notes Redemption") and/or the Subordinated Notes, in each case, at their respective Redemption Prices on the Payment Date specified in such Required Redemption Direction (the "Redemption Date") (any such optional redemption, an "Optional Redemption").
To effect a Secured Notes Redemption (other than pursuant to a Refinancing), the Collateral Manager will direct the sale of Collateral Assets and the termination or sale of any Hedge Agreements. No Optional Redemption (other than pursuant to a Refinancing) will occur unless (a) at least ten Business Days before the scheduled Redemption Date, the Collateral Manager has certified to the Trustee that the Issuer has entered into one or more Redemption Agreements to sell, not later than the Business Day immediately preceding the scheduled Redemption Date in immediately available funds, all or part of the Collateral at a sale price at least equal to an amount sufficient, together with all other funds expected to be available on such Redemption Date, to pay the sum of (x) the Redemption Prices of the Secured Notes and (y) all Issuer Expenses (including amounts reserved to meet any post-redemption fees and expenses and regardless of any cap on Issuer Expenses specified in the Priorities of Payment) and other fees and expenses payable under the Priorities of Payment including, without limitation, any amounts due to the Hedge Counterparties; or (b) prior to selling any Collateral, the Collateral Manager has certified to the Trustee that the aggregate sum of expected Sale Proceeds from the sale of Eligible Investments, Collateral
65 Assets, termination payments with respect to any Hedge Agreements and all other funds expected to be available on such Redemption Date, shall equal or exceed the sum of (x) the Redemption Prices of the Secured Notes and (y) all Issuer Expenses (including amounts reserved to meet any post-redemption fees and expenses and regardless of any cap on Issuer Expenses specified in the Priorities of Payment) and other fees and expenses payable under the Priorities of Payment including, without limitation, any amounts due to the Hedge Counterparties.
On any Payment Date on which only Subordinated Notes remain outstanding (or simultaneously with the redemption in full of the Secured Notes), the Issuer shall redeem any remaining Subordinated Notes at their Redemption Price (each, also an "Optional Redemption") upon receipt of the applicable Required Redemption Direction (which direction may, but is not required to be, given in connection with a direction for a Secured Notes Redemption). To effect an Optional Redemption of the Subordinated Notes, the Collateral Manager will direct the sale of Collateral Assets and the termination or sale of any Hedge Agreements. Such Optional Redemption may not occur unless the expected proceeds available for distribution on the proposed Redemption Date would be at least sufficient to pay all Issuer Expenses (regardless of any cap on Issuer Expenses specified in the Priorities of Payment) and other fees and expenses payable under the Priorities of Payment.
Any Class or Classes of Secured Notes may be redeemed in whole, but not in part, on any Payment Date after the Non-Call Period from Refinancing Proceeds upon the delivery of a Required Redemption Direction from a Majority of the Subordinated Notes and the Collateral Manager to the Issuer (with a copy to the Trustee and the Rating Agencies) (also an "Optional Redemption"). The Issuer shall redeem such Class or Classes of Secured Notes on the applicable Redemption Date following receipt of such Required Redemption Direction by obtaining a Refinancing.
The Issuer will obtain a Refinancing of less than all Classes of Secured Notes only if the Collateral Manager determines as evidenced by a direction to the Trustee that: (i) the Rating Agency Confirmation has been satisfied with respect to any remaining Rated Notes that are not the subject of the Refinancing; (ii) the Refinancing Proceeds (together with Interest Proceeds available in accordance with the Priorities of Payment to pay the accrued interest portion of the applicable Redemption Price) will be at least sufficient to pay the Redemption Price of the Class or Classes of Secured Notes subject to Refinancing plus an amount equal to the expenses related to and incurred in connection with such Refinancing; (iii) the aggregate principal amount of any replacement loans or securities providing the Refinancing is equal to the Aggregate Outstanding Amount of the Securities being redeemed with the proceeds of such replacement loans or securities; (iv) the stated maturity of the loans or securities providing the Refinancing is no earlier than the Stated Maturity Date of the Securities being refinanced; (v) the Refinancing Proceeds will be used (to the extent necessary) to redeem the applicable Secured Notes; (vi) the agreements relating to the Refinancing contain limited-recourse and non-petition provisions equivalent to those applicable to the Secured Notes being redeemed, as set forth in the Indenture; (vii) the loans or securities providing the Refinancing are not senior in priority of payment to, and do not have greater voting rights, consent rights, redemption rights or other rights than, the Class of Securities being redeemed; and (viii) the loans or securities providing the Refinancing have a lower stated interest rate than the Securities being redeemed with the proceeds of such replacement loans or securities.
In addition to the foregoing restrictions, no replacement Class of Secured Notes will be issued in connection with a Refinancing of less than all Classes of Secured Notes unless the Issuer causes to be delivered to the Trustee an opinion of counsel to the effect that the issuance of such notes would not affect the U.S. Federal income tax treatment of the Secured Notes then Outstanding (including any resulting deemed exchange under Section 1001 of the Code).
66 In the case of a Refinancing upon a redemption of all Classes of Secured Notes, the Issuer shall obtain such Refinancing only if (i) the Refinancing Proceeds and all other available funds will be at least sufficient to redeem simultaneously the Secured Notes, in whole but not in part, and to pay the other amounts included in the aggregate Redemption Price and all accrued and unpaid Issuer Expenses (regardless of any cap on the Issuer Expenses), including the reasonable fees, costs, charges and expenses incurred by the Trustee and the Collateral Administrator (including reasonable attorneys' fees and expenses) in connection with such Refinancing, (ii) the Refinancing Proceeds are used (to the extent necessary) to make such redemption and (iii) the agreements relating to the Refinancing contain limited recourse and non-petition provisions equivalent to those applicable to the Secured Notes being redeemed, as set forth in the Indenture.
In connection with any Refinancing, both of the Class B-1 Notes and the Class B-2 Notes may be replaced with replacement loans or securities that are fixed rate obligations or floating rate obligations and such replacement loans or securities may be issued as a single class or multiple separate classes of any aggregate principal amount totaling the Aggregate Outstanding Amount of the Class B Notes.
Refinancing Proceeds will not constitute Interest Proceeds or Principal Proceeds but will be applied, after payment of expenses in connection with such Refinancing, directly on the related Redemption Date pursuant to the Indenture to redeem the Secured Notes being refinanced without regard to the Priorities of Payment; provided, that to the extent that any Refinancing Proceeds are not applied to pay expenses in connection with the Refinancing or to redeem the Securities being refinanced, such Refinancing Proceeds will be treated as Principal Proceeds.
The Holders of the Subordinated Notes will not have any cause of action against any of the Issuers, the Collateral Manager or the Trustee for any failure to obtain a Refinancing. In the event that a Refinancing is obtained meeting the requirements for a Refinancing as specified in the Indenture and described above as certified by the Collateral Manager, the Issuer and the Trustee shall amend the Indenture, at the cost of the Issuer, to the extent necessary to reflect the terms of the Refinancing and no further consent for such amendments shall be required from the Holders of Securities other than the Majority of the Subordinated Notes (to the extent the Subordinated Notes have directed such Refinancing).
Notice of an Optional Redemption will be given to the Securityholders and each Rating Agency; however, failure to give such notice to any Securityholder selected for redemption or any defect in the notice will not impair or affect the validity of the redemption of any other Securities. Certificated Non- Clearing Agency Securities must be surrendered (at the place specified in the notice of Optional Redemption) prior to payment of the applicable Redemption Price.
The Issuer may withdraw any notice of an Optional Redemption (i) up to the fourth Business Day prior to the proposed Redemption Date by written notice to the Trustee if the Collateral Manager is unable to make the certification required for the Optional Redemption or (ii) no later than the tenth Business Day (or, if earlier, the date specified in a Required Redemption Direction) prior to the Redemption Date set forth in a Required Redemption Direction by notice to the Trustee and the Collateral Manager. If the Optional Redemption is cancelled, the Collateral Manager may, in its discretion, invest all or a portion of the liquidation proceeds in accordance with the Investment Criteria.
Subject to satisfaction of the foregoing conditions, the Securities to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after the Redemption Date (unless the Issuer shall default in the payment of the Redemption Price and accrued interest) all the Secured Notes redeemed on such Redemption Date shall cease to bear interest on the Redemption Date.
67 If any Secured Note called for redemption pursuant to an Optional Redemption shall not be paid when it becomes due and payable, the principal thereof shall, until paid, bear interest from the Redemption Date at the applicable Interest Rate for each successive Interest Accrual Period such Secured Note remains Outstanding; provided that the reason for such non-payment is not the fault of the Holder of such Secured Note.
Mandatory Redemption
Interest Proceeds and, to the extent Interest Proceeds are insufficient for such purpose, Principal Proceeds (x) will be applied to pay principal on the Secured Notes under the Priorities of Payment if any Coverage Test is not satisfied as of any applicable Determination Date; provided that only Interest Proceeds will be applied if the Class E Par Coverage Test is not satisfied and (y) may be applied, at the discretion of the Collateral Manager, to pay principal on the Rated Notes under the Priorities of Payment if an Effective Date Confirmation Failure has occurred or if the Interest Diversion Test is not satisfied (any such payment of principal, a "Mandatory Redemption").
Special Redemption
If, at any time during the Reinvestment Period, the Collateral Manager, at its discretion, notifies the Trustee of a Special Redemption, the Special Redemption Amount will be applied to pay principal of the Secured Notes, in accordance with the Priorities of Payment. Upon the occurrence of a Special Redemption, the Reinvestment Period will terminate.
Assumptions
Certain assumptions will be made in connection with calculations under the Indenture, including the following:
(a) Portfolio Concentration Limits. For purposes of calculating all Portfolio Concentration Limits, in both the numerator and the denominator of any component of the Portfolio Concentration Limits, Defaulted Assets will be treated as having a principal balance equal to zero.
(b) Interest Coverage Tests. The principal amount of each Class of Securities to be paid on any Payment Date pursuant to the Priorities of Payment due to the failure of any Interest Coverage Test will be the amount that, assuming it had been used to pay principal of that Class (including Deferred Interest, if any) on the immediately preceding Payment Date, would have caused such test to be satisfied for the current Determination Date.
(c) Par Coverage Tests and Other Tests. The principal amount of any Class of Secured Notes to be redeemed on any Payment Date because any Par Coverage Test or Interest Diversion Test, as applicable, (each, a "Test") is not satisfied as of the related Determination Date, will be the amount that, if it had been applied to make payments on each Class of Secured Notes (including Deferred Interest, if any) in accordance with the Priorities of Payment on the immediately preceding Payment Date, would have caused such Test to be satisfied for the current Determination Date.
In determining the amount of any principal payments required to satisfy any Test, the Aggregate Outstanding Amount of Securities for purposes of each clause in the Priorities of Payment shall give effect to the application of Interest Proceeds and Principal Proceeds to be used for principal payments pursuant to all prior clauses in the Priorities of Payment:
68 (i) during the Reinvestment Period, the Aggregate Outstanding Amount of Securities for purposes of each clause in (A) the Priority of Interest Payments shall give effect to the application of Interest Proceeds for principal payments pursuant to all prior clauses in the Priority of Interest Payments and then (B) the Priority of Principal Payments shall give effect to the application of first, Interest Proceeds as described in the preceding clause (i)(A) and second any Principal Proceeds for principal payments pursuant to all prior clauses in the Priority of Principal Payments; and
(ii) after the Reinvestment Period, (A) the Collateral Principal Balance shall not include any Principal Proceeds to be distributed on such Payment Date; (B)(1) all Principal Proceeds shall be deemed to have been applied in accordance with the Priority of Principal Payments, and then (2) for purposes of each clause in the Priority of Interest Payments, the Aggregate Outstanding Amount of Securities shall give effect to the application, first, of Principal Proceeds and, second, of any Interest Proceeds for principal payments pursuant to all prior clauses in the Priority of Interest Payments, and then (C) for purposes of each clause in the Priority of Principal Payments, the Aggregate Outstanding Amount shall give effect to the application of, first, Principal Proceeds, second, Interest Proceeds as described in the preceding clause (B)(2) and, third, any Principal Proceeds (without duplication) for principal payments pursuant to all prior clauses in the Priority of Principal Payments.
In addition to the foregoing, on each Payment Date, (a) the aggregate amount of Interest Proceeds to be applied pursuant to the Priority of Interest Payments for principal payments on Secured Notes to satisfy any Test shall be determined after giving effect to the application of any Interest Proceeds for principal payments pursuant to an earlier clause in the Priority of Interest Payments; and (b) the aggregate amount of Principal Proceeds to be applied pursuant to the Priority of Principal Payments to make principal payments on Secured Notes to satisfy any Test shall be determined after giving effect to the application of (i) Interest Proceeds for principal payments pursuant to the Priority of Interest Payments on such Payment Date and (ii) Principal Proceeds pursuant to an earlier clause in the Priority of Principal Payments.
Rating of the Securities
General
It is a condition of the issuance of the Securities that the Rated Notes receive at least the ratings indicated in the Term Sheet. In addition, the Issuer may, but is not required to, obtain a rating from one or more Rating Agencies with respect to any other Class of Securities. A security rating is not a recommendation to buy, sell or hold securities and is subject to withdrawal at any time. There is no assurance that a rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by the assigning Rating Agency if in its judgment circumstances in the future so warrant.
The ratings of the Rated Notes address the likelihood of full and ultimate payment to Holders of the Rated Notes of all distributions of stated interest and the ultimate payment in full of the principal amount of each such Class not later than its respective Stated Maturity Date (or, in the case of S&P's ratings of the Class X Notes, the Class A Notes and the Class B Notes, the likelihood of timely payment of stated interest to the Holders of each such Class and the ultimate payment in full of the principal amount of each such Class not later than its respective Stated Maturity Date). The ratings assigned to the Rated Notes of each Class by either Rating Agency are based upon its assessment of the probability that the Collateral Assets will provide sufficient funds to pay the Rated Notes of such Class (based upon the Interest Rate and principal balance or face amount, as applicable, of such Class), based largely upon such Rating Agency's statistical analysis of historical default rates on debt securities with various ratings, the terms of the Indenture, the asset and interest coverage required for the Rated Notes (which is achieved
69 through the subordination of the Subordinated Notes and certain Classes of Rated Notes as described herein), and the Portfolio Concentration Limits and the Collateral Quality Tests, each of which must be satisfied, maintained or improved in order to reinvest in additional Collateral Assets, only to the extent described herein and set forth in the Indenture.
In addition to their respective quantitative tests, the ratings of each Rating Agency take into account qualitative features of a transaction, including the legal structure and the risks associated with such structure, such Rating Agency's view as to the quality of the participants in the transaction and other factors that it deems relevant.
Effective Date Rating Agency Confirmation
The Collateral Manager (on behalf of the Issuer) will request S&P and, if the Effective Date Moody’s Condition is not satisfied, Moody’s, to confirm their initial ratings (as set forth herein) of the Rated Notes on the Effective Date. If the Collateral Manager has been informed by S&P, in writing, and, unless the Effective Date Moody's Condition has been satisfied, Moody’s, that such confirmation of the rating set forth herein will not be obtained by the first Determination Date following the Effective Date, an "Effective Date Confirmation Failure" occurs.
Within 20 Business Days of the Effective Date, the Collateral Manager (on behalf of the Issuer) shall (i) cause the Collateral Administrator to compile and make available to Moody's a report (the "Moody's Effective Date Report") determined as of the Effective Date, containing (A) the information required in a monthly report under the Indenture and (B) a calculation indicating whether the Issuer has purchased or entered into commitments to purchase Collateral Assets which, as of the Effective Date, have an Aggregate Principal Balance (without regard to prepayments, redemptions or maturities) at least equal to the Effective Date Target Par Amount and (ii) provide to the Collateral Administrator (upon its execution of an acknowledgement letter) an accountants' agreed upon procedures report (the "Accountants' Report") recalculating and comparing the following items in the Moody's Effective Date Report: (A) the issuer, coupon/spread, stated maturity, Moody's Rating, Moody's Default Probability Rating, Moody's industry classification, country of Domicile and S&P Rating with respect to each Collateral Asset as of the Effective Date and the information provided by the Issuer with respect to every other asset included in the Collateral, by reference to such sources as shall be specified therein, (B) as of the Effective Date, the level of compliance with (1) the Coverage Tests, (2) the Portfolio Concentration Limits, (3) the required result of the calculation set forth in clause (i)(B) above and (4) the Collateral Quality Test (excluding the S&P CDO Monitor Test) (the items in this clause (ii)(B), collectively, the "Moody's Specified Tested Items"); and (C) specifying the procedures undertaken by them to review data and computations relating to such Accountants' Report. If (x) the Issuer provides the Accountants' Report to the Collateral Administrator (upon its execution of an acknowledgement letter) with the results of the Moody's Specified Tested Items, and (y) the Issuer causes the Collateral Administrator to provide to Moody's the Moody's Effective Date Report and the Moody's Effective Date Report confirms satisfaction of, and does not indicate the failure of any component of, the Moody's Specified Tested Items, then the "Effective Date Moody's Condition" shall be deemed to have been satisfied. For the avoidance of doubt, the Moody's Effective Date Report shall not include or refer to the Accountants' Report.
If an Effective Date Confirmation Failure is continuing on the first Determination Date following the Effective Date, the Issuer will take actions permitted under the Priorities of Payment or, otherwise under the Indenture, with the objective of obtaining the confirmation described above.
Neither the Trustee nor the Collateral Administrator shall deliver under any circumstances (other than as compelled by applicable law), and without regard to any other provision of the Indenture, to any
70 Holder, S&P, Moody’s or other rating agency any letter, statement or report received from the firm of accountants, and neither the Trustee nor the Collateral Administrator shall have any liability or responsibility for taking or omitting to take any such action.
THE INDENTURE
The Securities will be issued pursuant to an indenture to be entered into by the Issuers and the Trustee on the Closing Date (the "Indenture"). The following description of the Indenture is qualified in all respects by reference to the actual terms of the Indenture.
Events of Default
An "Event of Default" is defined in the Indenture as:
(a) a default in the payment of any interest on any Non-Deferrable Class when the same becomes due and payable, which default continues for a period of three or more Business Days (or, in the case of a default in payment resulting solely from an administrative error or omission by the Trustee, any Paying Agent or the Security Registrar, such default continues for a period of three or more Business Days after the Trustee receives written notice or has actual knowledge of such administrative error or omission);
(b) a default in the payment of any principal amount when the same becomes due and payable, on (i) any Class of Securities at the Stated Maturity Date or (ii) any Class of Secured Notes on a Redemption Date therefor (or, in the case of such payment default resulting solely from an administrative error or omission by the Trustee, any Paying Agent or the Security Registrar, such default continues for a period of three or more Business Days after the Trustee receives written notice or has actual knowledge of such administrative error or omission);
(c) unless legally required or permitted to withhold such amounts, the failure on any Payment Date to disburse amounts available in the Payment Account in accordance with the Priorities of Payment (other than as provided in clauses (a) and (b) above), which failure (x) is not remedied by the earlier of (i) the Payment Date after the first Determination Date following a trust officer of the Trustee receiving written notice or obtaining actual knowledge of such failure and (ii) the fourth Payment Date following such failure and (y) is the result of the failure to disburse at least $1,000 in the aggregate on such Payment Date;
(d) on any Determination Date after the Effective Date, the Event of Default Test is not satisfied;
(e) either of the Issuers or the pool of collateral becomes an investment company required to be registered under the U.S. Investment Company Act;
(f) except as otherwise provided in this definition of Event of Default, (i) a default in the performance, or breach, of any covenant or other agreement of either of the Issuers in the Indenture (not including a failure to meet the Portfolio Concentration Limits, any Collateral Quality Test, any Coverage Test, the Interest Diversion Test or the Effective Date Par Test) and such default or breach (x) has a material adverse impact on the Securities and (y) has continued for a period of 30 days after notice is given by registered or certified mail or overnight courier to the Issuer and the Trustee by the Collateral Manager or to the Issuer, the Collateral Manager and the Trustee by the Controlling Party in accordance with the Indenture specifying such default or breach, requiring it to be remedied and stating that such notice is a notice of default under the Indenture, or (ii) the failure of any representation or warranty of
71 either of the Issuers made in the Indenture or in any certificate or other writing delivered pursuant thereto or in connection therewith to be correct in all material respects when made and such failure (x) has a material adverse impact on the Securities and (y) continues for a period of 30 days after notice is given by registered or certified mail or overnight courier to the Issuer and the Trustee by the Collateral Manager or to the Issuer, the Collateral Manager and the Trustee by the Controlling Party in accordance with the Indenture specifying such failure, requiring it to be remedied and stating that such notice is a notice of default under the Indenture; or
(g) certain events of bankruptcy, insolvency, receivership or reorganization of either of the Issuers subject to the applicable cure period set forth in the Indenture.
If an Event of Default specified in (x) clauses (b) or (f)(ii) above has occurred and has not been waived or (y) clauses (a), (c), (d), (e) or (f)(i) above has occurred and is continuing, and, in each case of (x) and (y), such Event of Default has not been waived in accordance with the Indenture, then the Trustee may (and, upon the written direction of a Majority of the Controlling Class, will) by notice to the Issuer (with a copy to the Collateral Manager) declare the principal of the Secured Notes to be immediately due and payable. Upon any such declaration, all accrued Interest Distribution Amounts on and principal of the Securities will become immediately due and payable and the Reinvestment Period will terminate. In the case of an Event of Default described in clause (g) above, such an acceleration will occur automatically. Declaration of acceleration may be rescinded by a Majority of the Controlling Class prior to liquidation of the Collateral, to the extent permitted under the Indenture.
If an Event of Default has occurred and is continuing, the Trustee will retain the Collateral and not liquidate the Collateral, and the Trustee will collect all payments in respect of the Collateral and continue making payments and deposits and maintain all accounts in respect of the Collateral in accordance with the applicable Priorities of Payment, except if acceleration of the Secured Notes has occurred and:
(i) the Trustee determines in the manner provided for in the Indenture that the anticipated proceeds of a sale or liquidation of the Collateral (after deducting the reasonable expenses of such sale or liquidation) would be sufficient to discharge in full the amounts then due and unpaid on the Secured Notes for principal and interest (including any Defaulted Interest and Deferred Interest) and any amounts payable to any Hedge Counterparty (including any termination payments), any unpaid Issuer Expenses and any other fees and expenses of the Issuers (including, for the avoidance of doubt, any accrued and unpaid Collateral Management Fees), and a Majority of the Controlling Class agrees in writing with such determination;
(ii) with respect to an Event of Default under clause (a), (b), (d), or (g) of the definition of such term, a Majority of the Controlling Class directs the sale and liquidation of the Collateral in accordance with the Indenture; or
(iii) a Majority of each Class of Secured Notes (voting separately by Class) direct the sale and liquidation of the Collateral in accordance with the Indenture; provided, however, that, notwithstanding the foregoing, the Collateral Manager, on behalf of the Issuer, may direct the Trustee to, and the Trustee will in the manner directed, deliver assets in connection with the terms of any contractual arrangement entered into prior to the occurrence of an Event of Default and accept any Offer or tender offer made to all holders of any Collateral Asset at a price equal to or greater than its par amount plus accrued interest; provided, further, that the Issuer must continue to hold funds on deposit in any reserve account to the extent required to meet future payment obligations.
72 For the avoidance of doubt, notwithstanding the foregoing, the Collateral Manager may continue to sell Collateral Assets following an Event of Default to the extent set forth under the heading "Term Sheet – Sales and Purchases – Sales of Collateral Assets" unless and until the conditions set forth in clause (i), (ii) or (iii) above have occurred and are continuing.
The Controlling Party will have the right, following the occurrence and during the continuance of an Event of Default, to cause the institution of and direct the Trustee (with a copy to the Collateral Manager) as to the time, method and place of conducting any proceedings for any remedy available to the Trustee, but only if (i) such direction will not conflict with any applicable rule of law or the Indenture (including the limitations relating to liquidation of the Collateral described above), and (ii) the Trustee determines that such action will not involve it in liability or expense (unless the Trustee has received indemnity reasonably satisfactory to it against any such liability or expense).
In accordance with the Indenture, the Trustee will have no obligation to exercise or to honor any of the rights or powers vested in it by the Indenture at the request or direction of any of the Holders of Securities, unless such Holders of Securities have provided to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might reasonably be incurred by the Trustee in compliance with such request or direction. Prior to the time a judgment or decree for payment of amounts due has been obtained by the Trustee, the Controlling Party may waive any past Event of Default and its consequences, except (x) a payment default with respect to the payment of principal on any Security or the payment of interest on any Non-Deferrable Class or (y) an Event of Default in respect of (i) a breach of covenant or provision of the Indenture that cannot be modified or amended without the waiver or consent of 100% of any Class materially and adversely affected thereby or (ii) a bankruptcy or insolvency event.
No Securityholder will have any right to institute any proceedings, judicial or otherwise, with respect to the Indenture, the appointment of a receiver or trustee or any other remedy under the Indenture, unless an Event of Default has occurred and:
● such Holder previously has given to the Trustee written notice of an Event of Default;
● the Holders of not less than 25% of the Aggregate Outstanding Amount of the Controlling Class have made a written request to the Trustee to institute such proceedings in respect of such Event of Default in its own name as Trustee and such Holders have offered the Trustee indemnity against the costs, expenses and liabilities to be incurred in compliance with such request, reasonably satisfactory to the Trustee;
● the Trustee, for 30 days after its receipt of such notice, request and offer of indemnity, has failed to institute any such proceeding; and
● no direction inconsistent with such request has been given to the Trustee during such 30-day period by the Controlling Party.
No one or more Holders will have any right to affect, disturb or prejudice the rights of any other Holders of Securities of the same Class or to obtain or to seek to obtain priority or preference over any other Holders of Securities of the same Class or to enforce any right under the Indenture, except in the manner therein provided and for the equal and ratable benefit of all the Holders of Securities of the same Class subject to and in accordance with the Indenture and the Priorities of Payment.
73 Notwithstanding anything above to the contrary, Holders and beneficial owners of Securities may enforce the obligations of other Holders and beneficial owners described under "—No Petitions for Bankruptcy" below in the manner described therein.
Amendment of the Indenture
The Indenture may be amended, subject to the terms described below.
The Indenture may be amended through a supplemental indenture for any of the following purposes:
(a) subject to Rating Agency Confirmation from S&P and the provisions described in the next to last paragraph under this heading "—Amendment of the Indenture", with the consent of the Collateral Manager but without the consent of the Holders of any Class for any of the following purposes:
(i) to evidence the succession of another Person to either of the Issuers under the Indenture and to permit Issuers to be incorporated or organized in other jurisdictions otherwise permitted by the Indenture;
(ii) to add to the covenants of either of the Issuers or the Trustee for the benefit of Holders or to surrender any right or power conferred by the Indenture on either of the Issuers;
(iii) to convey, transfer, assign, mortgage or pledge any property to or with the Trustee, or add to the conditions, limitations or restrictions on the authorized aggregate principal amount, authentication and delivery of the Securities;
(iv) to evidence and provide for the acceptance of appointment by a successor Trustee or co-trustees;
(v) to provide for and/or facilitate the issuance of Additional Subordinated Notes to the extent permitted by, and in accordance with, the Indenture;
(vi) to improve the Trustee’s security interest in the Collateral or to more fully reflect the Trustee’s rights or security interest therein or to subject to the lien of the Indenture any additional property;
(vii) to reduce the permitted Authorized Denominations;
(viii) (x) to take any action necessary or advisable to prevent the Issuer, any ETB Subsidiary or the Trustee from being subject to (or otherwise minimize) withholding or other taxes, fees or assessments or to prevent the Issuer from being treated as engaged in a United States trade or business or otherwise being subjected to United States federal, state or local income tax on a net income tax basis (and to minimize any such tax imposed on the Co-Issuer); (y) to take any action necessary or advisable to allow the Issuer to comply with FATCA (including the terms of a voluntary agreement entered into with a taxing authority) or any rules or regulations promulgated thereunder (including providing for remedies against, or imposing penalties upon, Securityholders who fail to deliver the Holder FATCA Information); and (z) to (A) issue a new Global Note or Global Notes in respect of, or issue one or more new sub-classes of, any Class of Securities to the extent that the Issuer or the Trustee determines that one or more beneficial owners of Securities of such Class are Recalcitrant Holders; provided that any sub- class of a Class of Securities issued pursuant to this clause (z) shall be issued on identical terms as
74 the existing Securities of such Class and (B) provide for procedures under which beneficial owners of such Class that are not Recalcitrant Holders may take an interest in such new Global Note(s) or sub-class(es);
(ix) to take any action necessary or advisable to prevent either of the Issuers or the pool of Collateral from being required to register under the U.S. Investment Company Act;
(x) subject to continued exemption from registration of the Securities under the U.S. Securities Act and of either of the Issuers or the pool of Collateral under the U.S. Investment Company Act, to make such changes as necessary or advisable to facilitate Securities to be listed on an exchange or to maintain such listing, including the Irish Stock Exchange (including appointment of any agents of either of the Issuers in connection therewith);
(xi) to modify the provisions governing the delivery of Collateral Assets and the representations and warranties concerning the Collateral to conform to applicable law;
(xii) otherwise to correct any ambiguities, errors, defects or inconsistencies in the Indenture or between any provision of the Indenture and this Offering Memorandum with respect to the Securities;
(xiii) to amend, modify or otherwise accommodate changes to administrative procedures for Rating Agency Confirmation (but not the circumstances under which Rating Agency Confirmation is required);
(xiv) to modify the restrictions on and procedures for resale and other transfer of Securities in accordance with any change in any applicable law or regulation (or the interpretation thereof) or to enable the Issuers to rely upon any less restrictive exemption from registration under the U.S. Securities Act or the U.S. Investment Company Act or to remove restrictions on resale and transfer to the extent not required thereunder, in each case as evidenced by an opinion of counsel;
(xv) to facilitate hedging transactions;
(xvi) to modify the procedures in the Indenture relating to compliance with Rule 17g-5 of the U.S Exchange Act or to permit compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, as applicable to the Issuers, the Collateral Manager or the Securities, or any rules or regulations thereunder or to reduce costs to the Issuer as a result thereof;
(xvii) to make changes necessary to issue replacement securities or undertake loans in connection with a Refinancing;
(xviii) to modify any provision to facilitate an exchange of one security for another security of the same issuer that has substantially identical terms except transfer restrictions, including to effect any serial designation relating to the exchange;
(xix) to accommodate the issuance of any Securities in book-entry form through the facilities of DTC or otherwise; and
(xx) to facilitate the issuance of combination notes or other similar securities.
75 (b) subject to Rating Agency Confirmation from Moody’s and the provisions described in the next to last paragraph under the heading "—Amendment of the Indenture", with the written consent of the Collateral Manager and a Majority of the Class A Notes (so long as the Class A Notes remain Outstanding), but without the consent of the Holders of any other Class, to amend the Interim Targets and the Moody’s Rating Schedules and any related definitions;
(c) subject to Rating Agency Confirmation from S&P and the provisions described in the next to last paragraph under the heading "—Amendment of the Indenture", with the written consent of the Collateral Manager and a Majority of the Class A Notes (so long as the Class A Notes remain Outstanding), but without the consent of the Holders of any other Class, to amend the S&P Rating Schedules and any related definitions;
(d) subject to Rating Agency Confirmation from the applicable Rating Agency and the provisions described in the next to last paragraph under the heading "—Amendment of the Indenture", with the written consent of the Collateral Manager and a Majority of the Class A Notes (so long as the Class A Notes remain Outstanding), but without the consent of the Holders of any other Class, to (x) conform to changes in Rating Agency methodology, including, without limitation, (y) to amend any Collateral Quality Test, in each case, including any related definitions; provided, in the case of clause (y) only, that (i) such amendment is not to the Weighted Average Life Test, including any related definitions, (ii) such amendment is made in response to a change in Rating Agency criteria and (iii) no Class is materially adversely affected thereby (as evidenced by an officer's certificate of the Collateral Manager (which may rely upon a certificate executed by an investment banking firm or other independent expert familiar with the market for the Securities as to the economic effect)); and
(e) subject to (w) Rating Agency Confirmation from S&P, (x) consent of the Collateral Manager, (y) consent of a Majority of the Class A Notes (so long as the Class A Notes are Outstanding) and (z) consent of a Majority of each Class of Securities other than the Class A Notes (voting separately) unless such Class is not materially adversely affected thereby (as evidenced by an officer's certificate of the Collateral Manager (which may rely upon a certificate executed by an investment banking firm or other independent expert familiar with the market for the Securities as to the economic effect)) (provided that any modification or amendment to the Weighted Average Life Test, including any related definition, will be deemed to materially adversely affect each Class of Securities), to add any provisions to, or change in any manner or eliminate any of the provisions of, the Indenture or modify in any manner the rights of the Holders of the Securities of such Class under the Indenture; provided, however, that (1) Rating Agency Confirmation from S&P, (2) consent of the Collateral Manager, (3) consent of 100% of the Holders of the Class A Notes (so long as the Class A Notes are Outstanding) and (4) consent of 100% of the Holders of each Class of Securities other than the Class A Notes (voting separately) unless such Class is not materially adversely affected thereby (as evidenced by an officer's certificate of the Collateral Manager (which may rely upon a certificate executed by an investment banking firm or other independent expert familiar with the market for the Securities as to the economic effect)) will be required for any such supplemental indenture that would:
(i) with respect to any Class, (a) change the Stated Maturity Date, the due date of any payment, the termination date of the Non-Call Period, the provisions of the Indenture relating to the application of Interest Proceeds or Principal Proceeds or the place where or the currency in which payment is made; (b) reduce its principal amount, Interest Rate (if any) or Redemption Price; or (c) impair the right to institute suit for the enforcement of any such payment;
(ii) reduce the percentage of or any Class whose consent is required for any purpose under the Indenture;
76 (iii) materially impair or materially adversely affect the Collateral except as not prohibited in the Indenture;
(iv) except as permitted by the Indenture, permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture with respect to any part of the Collateral, terminate the lien under the Indenture on any property at any time subject thereto, or deprive any secured party of the security afforded by the lien of the Indenture;
(v) modify the definition of the term "Outstanding," "Holder" or "Securityholder" or the Priorities of Payment (including, without limitation, the Acceleration Waterfall) set forth in the Indenture; or
(vi) modify any of the provisions of the Indenture in such a manner as to (A) alter the conditions that must be satisfied in order to redeem the Securities affecting the rights of Holders with respect to redemption of any such Securities or (B) alter the conditions that must be satisfied in order to issue Additional Subordinated Notes.
For the avoidance of doubt, any amendment or modification to the Portfolio Concentration Limits, Collateral Quality Tests, the definition of Eligible Investment, the definition of Collateral Assets (including the definition of Eligibility Criteria) and/or the Investment Criteria shall be viewed as materially and adversely affecting all Classes of Notes.
(f) Notwithstanding anything to the contrary in clauses (a) through (e) above, no determination of whether any Holder of any Class or any Hedge Counterparty is materially and adversely affected by a supplemental indenture and no consent of any of the foregoing shall be required in connection with any Refinancing or the issuance of Additional Subordinated Notes.
The Indenture may not be amended through a supplemental indenture without consent of any Hedge Counterparty that would be materially adversely affected thereby. Unless the consent of the Collateral Manager is otherwise required and received, the Collateral Manager will not be bound by a supplemental indenture unless it receives a copy thereof. The Indenture may not be amended without the consent of the Collateral Manager if such amendment would adversely affect the Collateral Manager (including, without limitation, any amendment or supplement that would (i) increase the duties or liabilities of, or adversely change the economic consequences to, the Collateral Manager, (ii) modify restrictions on sales or acquisitions of Collateral Assets, (iii) expand or restrict the Collateral Manager’s discretion, (iv) affect the amount or priority of any fees payable to the Collateral Manager or (v) otherwise adversely affect the Collateral Manager). Unless the Collateral Administrator is the same Person as the Trustee, the Collateral Administrator will not be bound by a supplemental indenture unless it receives a copy thereof. The Indenture may not be amended without the consent of the Collateral Administrator if such amendment would adversely affect the Collateral Administrator (including, without limitation, any amendment or supplement that would (i) increase the duties or liabilities of, or adversely change the economic consequences to, the Collateral Administrator or (ii) expand or restrict the Collateral Administrator’s discretion).
Not later than 20 Business Days prior to the execution of any proposed supplemental indenture (except to the extent any such Person agrees to a shorter period or waives such notice), the Trustee shall provide to the Holders, the Collateral Manager, any Hedge Counterparty and, if any Class of Rated Notes is Outstanding, each Rating Agency, a copy of a proposed form of supplemental indenture to be entered into pursuant to clauses (a) through (e) above. If consent of the Holders is required and the required percentage of Holders of any Class has consented to such supplemental indenture, such notice requirement with respect to such Class shall be deemed to be satisfied.
77 In the case of any supplemental indenture entered into under clause (a) above (other than subclauses (a)(v), (viii) and (xvii) for which the following shall not apply), if, for so long as the Class A Notes are Outstanding, the Holders of at least 20% of the Aggregate Outstanding Amount of the Class A Notes provide written notice to the Issuer and the Trustee that such Holders will be materially and adversely affected by any such proposed supplemental indenture (which notice shall set forth the basis on which such Holder or Holders are materially and adversely affected thereby) within 15 Business Days of the mailing of such supplemental indenture by the Trustee, as provided above, the Issuers and the Trustee shall not enter into such supplemental indenture, unless such Holders later agree or withdraw such objection (it being understood that, in the absence of any such notice, such supplemental indenture may be entered into). Unless the Trustee and the Issuer are so notified, the interests of such Holders shall be deemed to not be materially and adversely affected by such proposed amendment for all purposes. Such determination shall be conclusive and binding on all present and future Holders.
In the case of any supplemental indenture entered into under clauses (a) through (d) above (other than subclauses (a)(v), (viii), (ix) and (xvii) for which the following shall not apply), if the Holders of at least 50% of the Aggregate Outstanding Amount of the Securities of any Class other than the Class A Notes provide written notice to the Issuer and the Trustee that such Holders will be materially and adversely affected by any such proposed supplemental indenture (which notice shall set forth the basis on which such Holder or Holders are materially and adversely affected thereby) within 15 Business Days of the mailing of such supplemental indenture by the Trustee, as provided above, the Issuers and the Trustee shall not enter into such supplemental indenture, unless such Holders later agree or withdraw such objection (it being understood that, in the absence of any such notice, such supplemental indenture may be entered into). Unless the Trustee and the Issuer are so notified, the interests of such Holders shall be deemed to not be materially and adversely affected by such proposed amendment for all purposes. Such determination shall be conclusive and binding on all present and future Holders.
In executing or accepting the additional trusts created by any supplemental indenture permitted by the Indenture or the modifications thereby of the trusts created by the Indenture, the Trustee shall be entitled to rely upon an opinion of counsel stating that the execution of such supplemental indenture is authorized and permitted by the Indenture and that all conditions precedent thereto have been satisfied. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under the Indenture or otherwise.
Additional Issuance
The Issuer may issue additional Subordinated Notes (any such securities collectively, the "Additional Subordinated Notes"), with the written consent of (i) a Majority of the Subordinated Notes, (ii) the Collateral Manager (in its sole discretion) and (iii) if the Additional Issuance Threshold Test is not satisfied, a Majority of the Class A Notes (so long as the Class A Notes are Outstanding). The proceeds of the sale of any Additional Subordinated Notes may be used as Principal Proceeds or Interest Proceeds, as designated by the Collateral Manager in its sole discretion (on behalf of the Issuer).
Any Additional Subordinated Notes issued will be offered first to Holders of the Subordinated Notes for a period of not less than 30 days, and then (to the extent not fully subscribed for by the Holders of the Subordinated Notes) to potential new investors generally.
All fees and expenses incurred in connection with the issuance of any Additional Subordinated Notes shall be paid solely from the proceeds of the issuance of such Additional Subordinated Notes.
78 Notices
Notices to the Holders of the Securities will be sufficient if in writing and mailed, first class postage prepaid, to each Holder, as the case may be, of any event, as affected by such event at its respective address appearing in the Security Register, not earlier than the earliest date and not later than the latest date prescribed for the giving of such notice. DTC or its nominee will be deemed the owner of all Global Notes for purposes of any notices under the Indenture, and owners of beneficial interests in Global Notes will not be deemed the Holders of any Securities for the purposes of receiving any notices. The Issuers expect that DTC or its nominee, upon receipt of any notice, will deliver the notice to its participants in accordance with its customary procedures. So long as any Class of Securities is listed on the Irish Stock Exchange (or any other stock exchange) and the guidelines of such exchange so require, all notices to the Holders will also be delivered to the Irish Listing Agent (for forwarding to the Irish Stock Exchange or other stock exchange if required by the applicable listing guidelines).
Voting Rights
The Indenture will provide that with respect to any exercise of Voting Rights regarding a Global Note (including with respect to remedies, supplemental indentures and Optional Redemption), a beneficial owner that provides certification of ownership in the form required under the Indenture or a similar form provided by the Trustee (each, a "Certifying Holder") and demonstrates to the satisfaction of the Voting Rights Registrar that the Holder has not acted on its behalf with respect to the same action will be permitted to direct the Voting Rights Registrar as if it were the Holder of the related Securities. The Voting Rights Registrar will not be required to take any action that it determines might involve it in liability unless it has been provided with indemnity reasonably satisfactory to it.
Securities of different Classes that are entitled to vote on, consent to, object to or provide any notice with respect to a matter and that are pari passu in right of payment of interest (or, in the case of the Subordinated Notes, payment of Interest Proceeds) will constitute a single Class for purposes of such vote, consent, objection or notice.
Payment
Payments on any Global Note shall be payable by wire transfer in immediately available funds to a Dollar account maintained by DTC or its nominee or, if a wire transfer cannot be effected, by a Dollar check in immediately available funds delivered to DTC or its nominee. Payments on the Non-Clearing Agency Securities shall be made by wire transfer in immediately available funds to a Dollar account maintained by the Holder or as otherwise directed by the Holder, or its nominee, provided, that the Holder thereof shall have provided wiring instructions to the Trustee on or before the date that is fifteen days (whether or not a Business Day) prior to the applicable Payment Date (the "Record Date"). The Issuer or Co-Issuer, as applicable, expects that DTC or its nominee, upon receipt of any payment of any of the principal amount of and interest on a Global Note held by DTC or its nominee, will immediately credit the applicable participants’ accounts with payments in amounts proportionate to the respective beneficial interests in such Global Note as shown on the records of DTC or its nominee. The Issuer or Co-Issuer, as applicable, also expects that payments by participants to owners of beneficial interests in such Global Note held through participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of the participants. Upon final payment thereof, the Holder of a Non-Clearing Agency Security represented by a certificate shall present and surrender such certificate as directed by the Trustee; provided, however, that if there is delivered to the Issuers and the Trustee such security or indemnity as may be required by them to save each of them harmless and an undertaking to surrender such certificate, then, in the absence of notice to the Issuers or
79 the Trustee that the applicable Security has been acquired by a Protected Purchaser (as defined in Article 8 of the Uniform Commercial Code), such final payment shall be made without presentation or surrender.
None of the Transaction Parties or any of their respective Affiliates or agents will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in Global Notes or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests.
Any funds deposited with the Trustee or any Paying Agent in trust for the payment on any Securities and remaining unclaimed for two years after such amounts have become due and payable shall be paid to the Issuer pursuant to the Indenture and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Issuer for payment of such amounts and all liability of the Trustee or such Paying Agent with respect to such trust funds (but only to the extent of the amounts so paid to the Issuer) shall thereupon cease.
Consolidation, Merger or Transfer of Collateral
Except under the limited circumstances set forth in the Indenture, neither of the Issuers may consolidate with, merge into, or transfer or convey all or substantially all of its assets to, any other corporation, partnership, trust or other Person or entity unless permitted by law.
No Petitions for Bankruptcy
The Indenture will provide that no Holder or beneficial owner of a Security may institute against, or join any other Person in instituting against, either of the Issuers or any ETB Subsidiary any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings, or other proceedings under Cayman Islands law, United States federal or state bankruptcy law or similar laws of any jurisdiction until the date which is one year (or, if longer, the applicable preference period then in effect) plus one day after the payment in full of all Securities.
The Indenture will provide that the foregoing restrictions are a material inducement for each Holder and beneficial owner of the Securities to acquire such Securities and for the Issuer, the Co-Issuer and the Collateral Manager to enter into the Indenture (in the case of the Issuer and the Co-Issuer) and the other applicable transaction documents and are an essential term of the Indenture. Any Holder or beneficial owner of a Security, the Collateral Manager or either of the Issuers may seek and obtain specific performance of such restrictions (including injunctive relief), including, without limitation, in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings, or other proceedings under Cayman Islands law, United States federal or state bankruptcy law or similar laws of any jurisdiction.
The Indenture will require the Issuer and the Co-Issuer to promptly object to the institution of any such proceeding against it and to take all necessary or advisable steps to cause the dismissal of any such proceeding; provided that such obligation shall be subject to the availability of funds therefor. The costs and expenses (including, without limitation, fees and expenses of counsel to the Issuer or the Co-Issuer, as applicable) incurred by the Issuer or the Co-Issuer in connection with its obligations described in the immediately preceding sentence ("Petition Expenses") will be payable in accordance with the Priorities of Payment as Issuer Expenses, allocated first to the Petition Expense Amount, and then subject to the cap as set forth in the Priorities of Payment.
80 Satisfaction and Discharge of the Indenture
The Indenture will be discharged with respect to the Collateral upon, among other things, delivery to the Security Registrar for cancellation of all of the Securities or, subject to certain conditions, deposit with the Paying Agent of funds sufficient for the payment or redemption thereof and the payment by the Issuers of all other amounts due under the Indenture; provided that, upon the final distribution of all proceeds of the liquidation of all of the Collateral Assets, the Equity Securities and the Eligible Investments effected under the Indenture following an Event of Default and acceleration of the Secured Notes, the foregoing requirements shall be deemed satisfied for the purposes of discharging the Indenture.
Governing Law
The Indenture, the Collateral Management Agreement, the Collateral Administration Agreement, each Hedge Agreement and the Securities will be construed in accordance with and governed by the law of the State of New York.
THE COLLATERAL MANAGEMENT AGREEMENT
General
Certain advisory and administrative functions with respect to the Collateral Assets will be performed by the Collateral Manager under the Collateral Management Agreement. Pursuant to the terms of the Collateral Management Agreement, the Collateral Manager will supervise and direct the investment and reinvestment of the Collateral Assets in accordance with the Collateral Management Agreement and the Indenture. In particular, the Collateral Manager will select, on behalf of the Issuer and in accordance with the Investment Criteria and the other requirements set forth in the Indenture, and in accordance with the provisions of the Collateral Management Agreement, the portfolio of Collateral Assets and Eligible Investments and will instruct the Trustee with respect to, among other matters, any disposition of a Collateral Asset or Eligible Investment, the acquisition of additional or substitute Collateral Assets and Eligible Investments, the exercise of remedies with respect to Collateral Assets and other actions pursuant to the terms of the Indenture.
The Collateral Manager will be required under the Collateral Management Agreement to acquire Collateral Assets in accordance with the "Investment Guidelines." The Investment Guidelines are set forth as Annex A to the Collateral Management Agreement. Accordingly, although a particular prospective investment may satisfy the definition of Collateral Asset, it may be ineligible for purchase by the Issuer and the Collateral Manager as a result of these limitations and restrictions. The Collateral Manager makes no representation or warranty as to whether the Investment Guidelines are sufficient for such purpose.
No amendment or modification to any material terms of the Collateral Management Agreement may be made without the prior written consent of a Majority of the Subordinated Notes (excluding any Subordinated Notes owned or beneficially owned by the Collateral Manager and/or its affiliates) and the receipt of Rating Agency Confirmation from each Rating Agency.
The Collateral Manager shall comply with the Investment Guidelines unless with respect to a particular transaction, the Collateral Manager acting on behalf of the Issuer shall have received documented advice of counsel of nationally recognized standing, experienced in such matters, that under the relevant facts and circumstances with respect to such transaction, the acquisition, ownership or sale of the Collateral Asset, or the activity, will not cause the Issuer to be treated as engaged in a trade or
81 business within the United States for U.S. federal income tax purposes or otherwise subject the Issuer to U.S. federal income tax on a net income basis.
The Indenture and the Collateral Management Agreement will place significant restrictions on the Collateral Manager's ability to buy and sell Collateral Assets, and the Collateral Manager is required to comply with the restrictions contained in the Indenture and the Collateral Management Agreement. Accordingly, during certain periods or in certain specified circumstances, the Collateral Manager may be unable to buy or sell securities or to take other actions which it might consider in the best interests of the Issuer and the holders of the Securities, as a result of the restrictions set forth in the Indenture and the Collateral Management Agreement.
In its capacity as an investment adviser and asset manager, the Collateral Manager engages in other business and furnishes investment management and advisory services to other entities whose investment policies may be similar to those followed by the Collateral Manager on behalf of the Issuer as required by the Indenture. The Collateral Manager will be free, in its sole discretion, to make recommendations or effect transactions on behalf of itself or for others, which may be the same as or different from those it makes or effects with respect to the Collateral. In addition, the Collateral Manager may, from time to time, cause or direct other entities to buy or sell, or recommend to other entities the buying and selling of, securities of the same or of a different kind or class of the same issuer as securities which are part of the Collateral which the Collateral Manager directs to be purchased or sold on behalf of the Issuer. Accordingly, conflicts may arise regarding the allocation of investment opportunities among the Issuer and the other entities, and situations may occur where the Issuer could be disadvantaged because of the investment activities conducted by the Collateral Manager for the other entities. See "Base Offering Memorandum—Risk Factors— Risk Factors Related to Certain Conflicts of Interest—Conflicts of Interest Relating to the Collateral Manager."
The Collateral Management Agreement provides that the Collateral Manager may not cause the Issuer to acquire any investment to be included in the Collateral from the Collateral Manager, any of its affiliates or any account or portfolio for which the Collateral Manager or any of its affiliates serves as investment advisor as principal or agent or to sell any such investment to the Collateral Manager, any of its affiliates or any account or portfolio for which the Collateral Manager or any of its affiliates serves as investment advisor as principal or agent, unless in each case (i) such purchase or sale complies with applicable laws, including the Investment Advisers Act, as amended, and (ii) such purchase or sale is conducted on an arm's-length basis and on terms no less favorable to the Issuer than would be the case if such person were not so affiliated.
Under the terms of the Collateral Management Agreement, the Collateral Manager and its affiliates will also be authorized to execute agency cross transactions (collectively, "Cross Transactions") for the Issuer's account. Cross Transactions include transactions where the Collateral Manager or an affiliate of the Collateral Manager acts as broker for both the Issuer and the other party to the transaction. In such a Cross Transaction, the Collateral Manager has a potentially conflicting division of loyalties and responsibilities regarding both parties to the transaction and the Collateral Manager or any of its affiliates may receive commissions from both parties to such transaction. Under the terms of the Collateral Management Agreement, the Collateral Manager is authorized to execute any Cross Transactions within the scope of the Collateral Manager's duties as provided in the Collateral Management Agreement. The Issuer may at any time after the Closing Date (upon the request of (i) a Majority of the Controlling Class (excluding any Securities owned by the Collateral Manager and/or its affiliates) or (ii) a Majority of the Subordinated Notes (excluding any Subordinated Notes owned by the Collateral Manager and/or its affiliates)), without penalty, terminate, effective upon delivery to the Collateral Manager of written notice of such termination from the Issuer, the Collateral Manager's authority to execute Cross Transactions.
82 Standard of Liability of Collateral Manager; Indemnification
The Collateral Management Agreement provides that the Collateral Manager shall perform its obligations and make determinations with reasonable care and in good faith, in a manner generally consistent with practices and policies customarily followed by, and using a degree of skill and attention no less than that generally exercised by, institutional managers of national standing relating to assets of the nature and character of the Collateral for clients having similar investment objectives and restrictions and no less than that which the Collateral Manager exercises with respect to comparable assets that it manages for itself and its affiliates and for others having similar investment objectives and restrictions. To the extent not inconsistent with the foregoing, the Collateral Management Agreement provides that the Collateral Manager shall follow its customary standards, policies and procedures.
The Collateral Management Agreement provides that the Collateral Manager will not be responsible under the Collateral Management Agreement or under the Indenture other than to perform the obligations described therein and, subject to such standard of care, shall not be responsible for any action of the Issuer or the Trustee in declining to follow any direction of the Collateral Manager.
The Collateral Management Agreement further provides that the Collateral Manager and its members, managers, officers and employees shall not be liable to the Issuer, the Trustee, any holder of a Security or any other Person for (x) any actions taken or omitted to be taken by the Collateral Manager at the direction of the Issuer, the Trustee or any holder of a Security in accordance with the terms of the Indenture, or (y) any error of judgment, mistake of law, or for any loss arising out of any Collateral Asset, or for any other act or omission in the performance of its obligations under the Collateral Management Agreement or under the Indenture, except:
(i) by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence, reckless disregard or breach of fiduciary duty by the Collateral Manager in the performance of its duties thereunder and under the Indenture; or
(ii) with respect to any information concerning the Collateral Manager set forth herein in the sections entitled "Base Offering Memorandum—Risk Factors—Risk Factors Related to Certain Conflicts of Interest—Conflicts of Interest Relating to the Collateral Manager" and "Term Sheet—Certain Transaction Parties—The Collateral Manager" to the extent such information taken together, as of the date hereof and as of the Closing Date, contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The exceptions described in (i) and (ii) above are collectively referred to herein as "Collateral Manager Breaches".
The Collateral Management Agreement provides that to the fullest extent permitted by applicable law, the Collateral Manager shall indemnify the Issuer and its managers, directors, officers, shareholders, members and agents (each such Person being an "Issuer Indemnitee") for, among other things, any and all expenses, losses, damages, liabilities, demands, charges, judgments, fines, costs, amounts paid in settlement and attorneys' fees incurred in investigating, preparing any action, claim, suit, inquiry, proceeding or investigation or any appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or commission, whether pending or merely threatened, including interest on any of the foregoing (collectively, the "Liabilities") suffered by any such Issuer Indemnitee by virtue of any acts or omissions or alleged acts or omissions constituting a Collateral Manager Breach.
83 The Collateral Management Agreement provides that to the fullest extent permitted by applicable law, the Issuer shall indemnify the Collateral Manager and its members, managers, officers and employees (each such person being a "Collateral Manager Indemnitee") for any Liabilities, whether or not any Collateral Manager Indemnitee is or may be a party to any action, claim, suit, inquiry, proceeding or investigation or any appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or commission described in the definition of Liabilities above, suffered by virtue of any acts or omissions or alleged acts or omissions arising out of or in connection with the Collateral Management Agreement or the Indenture; provided, that no Collateral Manager Indemnitee shall be indemnified for any Liabilities it incurs as a result of a Collateral Manager Breach as determined by a final adjudication (after all appeals and the expiration of time to appeal) of a court of competent jurisdiction.
Compensation
As compensation for the performance of its obligations as Collateral Manager under the Collateral Management Agreement, the Collateral Manager will receive a fee, subject to the provisions of the Indenture, payable in arrears on each Payment Date, equal to the sum of (i) 0.15% per annum of the Fee Basis Amount at the beginning of the Due Period related to such Payment Date (the "Senior Collateral Management Fee"); plus (ii) 0.25% per annum of the Fee Basis Amount at the beginning of the Due Period related to such Payment Date (the "Subordinated Collateral Management Fee").
The Collateral Manager will also be entitled to receive an incentive management fee (the "Incentive Management Fee" and, together with the Senior Collateral Management Fee and the Subordinated Collateral Management Fee, the "Collateral Management Fees") equal to 20% of the Interest Proceeds and Principal Proceeds available for distribution to the Holders of Subordinated Notes under the Priorities of Payment on or after the Payment Date on which the Subordinated Notes issued on the Closing Date have received an Internal Rate of Return of at least 15% (calculated from the Closing Date to and including such Payment Date); provided that, with respect to the Payment Date on which the Subordinated Notes first receive an Internal Rate of Return of at least 15%, such fee shall equal 20% of available Interest Proceeds and Principal Proceeds in excess of the amount required to achieve an Internal Rate of Return of 15% on the Subordinated Notes (calculated from the Closing Date to and including such Payment Date).
Each of the Senior Collateral Management Fee, Subordinated Collateral Management Fee and Incentive Management Fee shall be payable subject to and in accordance with the Priorities of Payment. The Senior Collateral Management Fee and the Subordinated Collateral Management Fee will be calculated on the basis of a 360-day year consisting of twelve 30-day months. If on any Payment Date there are insufficient funds to pay the Senior Collateral Management Fee or the Subordinated Collateral Management Fee then due in full, the amount not so paid will be deferred (without interest) and will be payable on such later Payment Date on which any funds are available therefor, as set forth in the Priorities of Payment.
Removal, Termination and Replacement of the Collateral Manager
If the Collateral Management Agreement is terminated for any reason or the entity then serving as Collateral Manager resigns or is removed, the Senior Collateral Management Fee and Subordinated Collateral Management Fee owing to such entity will be prorated for any partial periods between Payment Dates and such prorated amount will be due and payable on Payment Dates following the date of such termination, resignation or removal, subject to the Priorities of Payment.
84 The Collateral Manager may resign at any time upon 30 days' prior written notice to the Issuer, the Trustee and the Rating Agencies, subject to the appointment of a successor as described herein.
The Collateral Manager may be removed for cause upon 10 days' prior written notice by the Issuer or the Trustee to the Collateral Manager at the direction of (x) a Majority of the Controlling Class (excluding any Notes owned by the Collateral Manager and/or its affiliates) or (y) a Majority of the Subordinated Notes (excluding any Subordinated Notes owned by the Collateral Manager and/or its affiliates). For purposes of determining "cause" with respect to removal of the Collateral Manager by the Issuer, such term shall mean any one of the following events:
(i) the Collateral Manager shall violate, in any respect, any provision of the Collateral Management Agreement or the Indenture applicable to it or (to the extent the Collateral Manager is acting on behalf of the Issuer) to the Issuer, which violation either (A) has a material adverse effect on any of the holders of Securities and has not been cured (if capable of being cured) within 30 days of the Collateral Manager becoming aware of, or receiving notice from the Issuer or the Trustee of, such breach or (B) causes an Event of Default to occur under the Indenture;
(ii) the failure of any representation, warranty, certification or statement made or delivered by the Collateral Manager in or pursuant to the Collateral Management Agreement or the Indenture to be correct in any material respect when made, which failure either (A) has a material adverse effect on any of the holders of any of the Securities and is not corrected by the Collateral Manager within 30 days of the Collateral Manager becoming aware of, or receiving notice from the Issuer or the Trustee of, such failure or (B) causes an Event of Default to occur under the Indenture;
(iii) the Collateral Manager is wound up or dissolved or there is appointed over it or a substantial part of its assets a receiver, administrator, administrative receiver, trustee or similar officer; or the Collateral Manager (A) ceases to be able to, or admits in writing its inability to, pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, its creditors generally; (B) applies for or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Collateral Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Collateral Manager and continue undismissed for 60 days, or any such appointment is ordered by a court or regulatory body having jurisdiction; (C) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, or similar law, or authorizes such application or consent, or proceedings to such end are instituted against the Collateral Manager without such authorization, application or consent and remain undismissed for 60 days or result in adjudication of bankruptcy or insolvency or the issuance of an order for relief; or (D) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order (if contested in good faith) remains undismissed for 60 days;
(iv) (A) the occurrence of an act by the Collateral Manager that constitutes fraud or criminal activity in the performance of its obligations under the Collateral Management Agreement or the Indenture, or (B) the indictment of the Collateral Manager or any Principal for a criminal offense materially related to its management of collateral or investments or its investment advisory activities and (i) in the case of an indictment of the Collateral Manager, such indictment remains undismissed for 30 days or (ii) in the case of an indictment of a principal of the Collateral Manager, such indictment has not been dismissed or such principal has not resigned or has not been removed from the management of the Issuer or been terminated by the Collateral Manager, in each case, within 30 days of such indictment, or
85 (C) the Collateral Manager or any of its principals is convicted of, or adjudged liable in a civil suit for, a violation of the U.S. Securities Act or any other United States Federal securities law or any rules or regulations thereunder; "Principal" shall mean any of Joshua Friedman or Mitchell Julius; provided that, should any of the foregoing cease to be employed by the Collateral Manager, “Principal” shall include the person replacing such Principal, if any, of whom the Collateral Manager notifies the Trustee; or
(v) the occurrence of an Event of Default that results primarily from an act or omission by the Collateral Manager in respect of its duties under the Indenture and the Collateral Management Agreement.
No removal or resignation of the Collateral Manager will be effective unless and until:
(i) (A) if the Collateral Manager is removed for cause, the successor Collateral Manager has been proposed by a Majority of the Class of Notes that caused such removal (the "Removing Class") and approved in writing by a Majority of the Controlling Class or a Majority of the Subordinated Notes (whichever did not cause such removal) (the "Non-Removing Class"); provided that if a Majority of the Non-Removing Class does not so approve such successor Collateral Manager, a Majority of the Non- Removing Class may, within 30 days of delivery of notice of the proposed successor Collateral Manager to it, propose a different successor Collateral Manager to the Removing Class and such new proposed successor Collateral Manager shall be subject to the written approval of a Majority of the Removing Class; (B) if the Collateral Manager resigns, the successor Collateral Manager has been proposed by a Majority of the Controlling Class or a Majority of the Subordinated Notes (as applicable, the "Proposing Class") and approved in writing by a Majority of the Subordinated Notes or a Majority of the Controlling Class (whichever is not the Proposing Class) (the "Approval Class"); provided that if a Majority of the Approval Class does not so approve such successor Collateral Manager, a Majority of the Approval Class may, within 30 days of delivery of notice of the proposed successor Collateral Manager to it, propose a different successor Collateral Manager to the Proposing Class and such new proposed successor Collateral Manager shall be subject to the written approval of a Majority of the Proposing Class and (C) if a successor Collateral Manager has not been appointed within, in the case of a resignation of the Collateral Manager, 120 days following the date of the notice of resignation of the Collateral Manager or, in the case of a removal of the Collateral Manager for cause, 45 days following the date of notice of the removal, any of a Majority of the Controlling Class, a Majority of the Subordinated Notes and/or the Collateral Manager may, subject to the restrictions set forth in the Collateral Management Agreement, thereafter petition any court of competent jurisdiction for the appointment of a successor Collateral Manager without the approval of the Issuer, the Trustee, the Holders of the Controlling Class, the Holders of the Subordinated Notes or the Rating Agencies. For purposes of this clause (i), (w) any Securities owned or beneficially owned by the Collateral Manager and/or its affiliates shall be excluded, (x) no approval may be unreasonably withheld, (y) except with regard to clause (C) above, appointment of any successor Collateral Manager is subject to Rating Agency Confirmation and (z) notwithstanding the provisions of this paragraph to the contrary, the Collateral Manager may delegate or assign its responsibilities to an affiliate that is a direct or indirect majority owned and controlled subsidiary of the Collateral Manager, using the services of substantially the same investment management team as the Collateral Manager, and
(ii) the successor Collateral Manager appointed pursuant to clause (i) above has agreed in writing to assume all of the Collateral Manager's duties and obligations pursuant to the Collateral Management Agreement and the Indenture.
Upon any resignation or removal of the Collateral Manager, any successor that is appointed must be an institution that (i) has demonstrated an ability to professionally and competently perform duties similar to those imposed upon the Collateral Manager, (ii) is legally qualified and has the capacity to act
86 as Collateral Manager, (iii) will not cause the Issuer or the Co-Issuer or the pool of Collateral to become required to register as an "investment company" under the provisions of the Investment Company Act and (iv) will not cause the Issuer to be taxed on a net income basis in any jurisdiction.
Notwithstanding the occurrence of a resignation or removal of the Collateral Manager or the vote of Securityholders to permit any proposed replacement Collateral Manager and the taking of all permitted actions with respect thereto by the Securityholders, the Collateral Manager shall continue to manage the investments of the Issuer in the ordinary course of business until such resignation or removal has become effective in accordance with the terms of the Collateral Management Agreement, and the obligation of the Issuer to pay fees and expenses to the Collateral Manager shall continue during such period.
The Collateral Manager may not assign its rights or delegate any of its duties or responsibilities under the Collateral Management Agreement or the Indenture without (i) the prior written consent of the Issuer and the holders of a Majority of each Class of Securities (excluding, in each case, any Securities owned by the Collateral Manager and/or its affiliates) and (ii) the receipt of a Rating Agency Confirmation from each Rating Agency; provided that the Collateral Manager may delegate or assign its responsibilities to an affiliate that is a direct or indirect majority owned or controlled subsidiary of the Collateral Manager, using the services of substantially the same investment management team as the Collateral Manager; provided, further, that such delegation or assignment shall not relieve the Collateral Manager of its responsibilities under the Collateral Management Agreement unless and until such responsibilities have been assumed by a successor; provided, further, that the Collateral Manager shall provide notice of such delegation or assignment to each Rating Agency.
HEDGE AGREEMENTS
The Issuer will not be permitted to enter into a Hedge Agreement unless it obtains (i) an opinion of counsel that such Hedge Agreement will not cause the Collateral Manager or the Trustee to register as a CPO with the CFTC with respect to the Issuer, (ii) the prior written consent of a Majority of the Subordinated Notes, (iii) the prior written consent of a Majority of the Controlling Class and (iv) Rating Agency Confirmation from each Rating Agency. Subject to the foregoing, the Issuer may enter into Interest Rate Hedges, Asset Specific Hedges or Timing Hedges (each, a "Hedge Agreement"). Under the terms of the Hedge Agreements, upon the failure of the related Hedge Counterparty to have the minimum debt or counterparty ratings specified in the related Hedge Agreement, such Hedge Counterparty (at its own expense) will be required, within the lesser of the minimum time periods specified in such Hedge Agreement, to take one or more of certain required actions, which are expected to include transferring all of its rights and obligations to a replacement Hedge Counterparty that has, or obtaining a guarantor that has, the minimum debt or counterparty rating specified in such Hedge Agreement and/or posting collateral to the Issuer in an amount specified in such Hedge Agreement, in each case as set forth in such Hedge Agreement.
The Issuer will be required to obtain Rating Agency Confirmation prior to the amendment of any Hedge Agreement, the termination of any Interest Rate Hedge or the termination of any Asset Specific Hedge or Timing Hedge if the Issuer would be required to make a termination payment.
The Issuer may enter into interest rate hedges ("Interest Rate Hedges") to address the interest rate risk on the Collateral Assets and to address mismatches between the interest earned on the Collateral Assets and the scheduled interest on the Secured Notes. Interest Rate Hedges may include interest rate caps (where the Issuer purchases the right to receive payments based on a notional amount to the extent LIBOR exceeds a certain fixed interest rate), interest rate swaps (where the Issuer will agree to pay a certain fixed interest rate and receive LIBOR based on a notional amount or vice versa), cancelable interest rate swaps (interest rate swaps for which the Issuer, with Rating Agency Confirmation, has the
87 right to cancel all or a portion of such swap with no termination payment due) and interest rate floors (where the Issuer purchases the right to receive payments based on a notional amount to the extent LIBOR is less than a certain fixed interest rate). The term "Interest Rate Hedge" does not include any Asset Specific Hedge or Timing Hedge.
The Issuer may enter into one or more timing hedges or cashflow hedges ("Timing Hedges") in order to manage potential mismatches between the timing of receipts of interest on the Collateral Assets and the timing of interest payments due on the Secured Notes in accordance with the Priorities of Payment. Under a Timing Hedge, the Issuer would receive a payment or payments from the related counterparty on a certain date or dates in exchange for the Issuer’s obligation to make payments to such counterparty on one or more Payment Dates to the extent funds are available for such purpose pursuant to the Priorities of Payment.
The Issuer may enter into one or more asset specific hedges ("Asset Specific Hedge") in order to manage potential interest rate or other mismatches with respect to specific Collateral Assets. Any Fixed Rate Asset that is subject to an Asset Specific Hedge (each, a "Hedged Asset") will be deemed under the Indenture to be a Floating Rate Asset bearing interest at a floating rate equal to the implied spread over LIBOR receivable by the Issuer pursuant to the Asset Specific Hedge, but only to the extent that the Aggregate Principal Balance of all Hedged Assets does not exceed the Hedged Asset Maximum Percentage.
Any upfront premium payment that the Issuer is required to pay in connection with entering into an Asset Specific Hedge will be paid solely to the extent funds are available for such purpose under clause (T) of the Priority of Interest Payments. On each scheduled payment date for any Asset Specific Hedge, the Collateral Manager (on behalf of the Issuer) may direct the Trustee to disburse Interest Proceeds received with respect to the related Hedged Asset for payment of any amounts due and payable to the related Hedge Counterparty on such payment date (other than termination payments payable pursuant to the Priorities of Payment). On each scheduled payment date for any Timing Hedge, the Collateral Manager (on behalf of the Issuer) may direct the Trustee to disburse Interest Proceeds from the Interest Collection Subaccount for payment of any amounts due and payable to the related Hedge Counterparty on such payment date (other than termination payments payable pursuant to the Priorities of Payments). Any amounts received from the Hedge Counterparty under an Asset Specific Hedge (other than upfront premium payments) or Timing Hedge will be deposited in the Interest Collection Subaccount as Interest Proceeds.
Any Hedge Agreement will be required to (x) contain appropriate limited recourse and non- petition provisions equivalent to those contained in the Indenture with respect to the Securities and (y) provide that any amounts payable to the related Hedge Counterparty thereunder will be subject to the Priorities of Payment (including, without limitation, the Acceleration Waterfall).
CERTAIN ISSUER ACCOUNTS
The Trustee will establish and maintain the segregated Accounts specified in the definition of "Account" for the benefit of the secured parties under the Indenture, which may include the following:
Unused Proceeds Account
On the Closing Date, that portion of the net proceeds from the issuance of Securities designated for investment in Collateral Assets after the Closing Date ("Unused Proceeds") will be deposited into the "Unused Proceeds Account." Unused Proceeds remaining in the Unused Proceeds Account on the
88 Business Day preceding the third Payment Date will be transferred to the Principal Collection Subaccount.
Collection Account
All distributions on and proceeds of the Collateral Assets and any amounts received under any Hedge Agreement will be deposited to the "Collection Account" comprised of the "Interest Collection Subaccount" and the "Principal Collection Subaccount" and will be available, together with reinvestment earnings thereon, for distribution under the Priorities of Payment and for the acquisition of Collateral Assets as described herein.
Payment Account
Funds will be transferred to the "Payment Account" on the Business Day prior to each Payment Date for distribution in accordance with the Priorities of Payment.
Expense Reserve Account
On the Closing Date, funds may be deposited into the "Expense Reserve Account" to pay organizational expenses and expenses related to the offering of the Securities. In addition, in accordance with the Priorities of Payment the Collateral Manager, in its sole discretion, may direct a further deposit to the Expense Reserve Account to pay for ongoing expenses of the Issuer.
Closing Date Interest Account
On the Closing Date, the Closing Date Interest Deposit Amount (if any) will be deposited into the "Closing Date Interest Account." All or a portion of such funds may be used by the Issuer to purchase Collateral Assets or may be designated as Interest Proceeds by the Collateral Manager for distribution on the first, second and/or third Payment Date. Amounts remaining in the Closing Date Interest Account after the third Payment Date will be transferred to the Principal Collection Subaccount as Principal Proceeds.
Contingent Payment Reserve Account
Upon the purchase of any Delayed Funding Asset that requires future payments by the Issuer without requiring collateral to be posted by the Issuer, the Collateral Manager will direct that Principal Proceeds (which may be Unused Proceeds) be deposited and maintained in the "Contingent Payment Reserve Account" such that the Sufficient Reserve Requirement is satisfied. Such funds will be treated as part of the purchase price for the Delayed Funding Assets, and Eligible Investments in such account will not be treated as Eligible Investments for purposes of the Indenture.
Upon the sale, maturity, termination or prepayment of a Delayed Funding Asset, funds in the Contingent Payment Reserve Account may be transferred to the Principal Collection Subaccount and treated as Principal Proceeds at the direction of the Collateral Manager to the extent it would not cause a breach of the Sufficient Reserve Requirement.
All interest and other income from investments on deposit in the Contingent Payment Reserve Account will be deposited in the Interest Collection Subaccount. Any gain realized from such investments will be credited to the Interest Collection Subaccount, and any loss resulting from such investments will be charged to the Interest Collection Subaccount.
89 Interest Reserve Account
The "Interest Reserve Account" will be used to manage certain interest payments on Non- Quarterly Pay Assets. To the extent that the Issuer owns any Collateral Assets (other than a PIKing Asset) that by their terms pay cash interest less frequently than quarterly, but no less frequently than annually ("Non-Quarterly Pay Assets"), the Collateral Manager may, in its sole discretion, select Non- Quarterly Pay Assets (such Non-Quarterly Pay Assets, the "Selected Non-Quarterly Pay Assets") and apply the Interest Proceeds received with respect to such Selected Non-Quarterly Pay Assets as follows as follows: (i) 50% of any scheduled distribution of interest received during such Due Period will be deposited to the Interest Collection Subaccount for application as Interest Proceeds in accordance with the Priorities of Payment on the immediately following Payment Date and (ii) the remaining 50% of such scheduled distribution of interest will be deposited to the Interest Reserve Account and will remain on deposit in the Interest Reserve Account until the last day of the immediately following Due Period, at which time such amount will be withdrawn for deposit to the Interest Collection Subaccount for application as Interest Proceeds in accordance with the Priorities of Payment on the related Payment Date; provided that Interest Proceeds received with respect to Selected Non-Quarterly Pay Assets that pay interest annually will be deposited into the Interest Reserve Account as follows: (i) 25% of any scheduled distribution of interest received during such Due Period will be deposited to the Interest Collection Subaccount for application as Interest Proceeds in accordance with the Priorities of Payment on the immediately following Payment Date and (ii) the remaining 75% of such scheduled distribution of interest will be deposited to the Interest Reserve Account and will remain on deposit in the Interest Reserve Account until the last day of each of the three following Due Periods, at which time 25% of such scheduled distribution of interest will be withdrawn for deposit to the Interest Collection Subaccount for application as Interest Proceeds in accordance with the Priorities of Payment on each related Payment Date.
Notwithstanding anything in the foregoing to the contrary, (a) on any Determination Date, the Collateral Manager (on behalf of the Issuer) may, in its sole discretion, direct the Trustee to transfer any funds on deposit in the Interest Reserve Account to the Interest Collection Subaccount for application as Interest Proceeds on the related Payment Date, and (b) on the Determination Date related to the Payment Date on which the Secured Notes are paid in full, any funds remaining on deposit in the Interest Reserve Account will be transferred to the Interest Collection Subaccount for application as Interest Proceeds in accordance with the Priorities of Payment on such Payment Date, and the Interest Reserve Account will be closed.
Class X Notes Account
An amount equal to the initial principal amount of the Class X Notes will be deposited in the "Class X Notes Account" on the Closing Date.
On the Determination Date relating to the first Payment Date, all amounts on deposit in the Class X Notes Account will, to the extent necessary to make all payments through clause (P) of the Priority of Interest Payments (as determined in accordance with the Indenture on the related Determination Date), be withdrawn and deposited into the Payment Account and treated as Interest Proceeds. Any remaining amounts will, at the sole discretion and option of the Collateral Manager, be either (x) withdrawn and deposited into the Interest Collection Subaccount to be treated as Interest Proceeds or (y) withdrawn and deposited into the Principal Collection Subaccount to be treated as Principal Proceeds.
90 Custodial Account
All property delivered to the Trustee pursuant to the Indenture shall immediately upon receipt be deposited in the "Custodial Account". The only permitted withdrawal from or application of property on deposit in the Custodial Account shall be in accordance with the provisions of the Indenture.
Hedge Collateral Account
All collateral received from a Hedge Counterparty under a Hedge Agreement shall immediately upon receipt be deposited in the "Hedge Collateral Account". The only permitted withdrawal from or application of funds or property on deposit in the Hedge Collateral Account shall be in accordance with the provisions of the Indenture, an Issuer Order and the related Hedge Agreement, including for application to obligations of a Hedge Counterparty to the Issuer under a Hedge Agreement if such Hedge Agreement becomes subject to early termination, or to the related Hedge Counterparty when and as required by the Hedge Agreement.
Letter-of-Credit Reserve Account
The Trustee will deposit in the "Letter-of-Credit Reserve Account" an amount equal to the withholding tax payable in respect of fees received in relation to an Excluded Letter-of-Credit. The only permitted withdrawal from or application of funds or property on deposit in the Letter-of-Credit Reserve Account will be (i) to pay any withholding tax payable in respect of fees received in relation to an Excluded Letter-of-Credit, (ii) in respect of any Excluded Letter-of-Credit in relation to which the Issuer (or the Collateral Manager on its behalf) has received an opinion of nationally recognized tax counsel to the effect that payments with respect to such facility are not subject to withholding tax (U.S. or non-U.S.), to transfer the applicable reserved amount to the Principal Collection Subaccount as Principal Proceeds, (iii) from time to time in respect of any amounts deposited into the Letter-of-Credit Reserve Account in error or (iv) on the latest Stated Maturity Date or on a Redemption Date in connection with an Optional Redemption (other than pursuant to a Refinancing), in relation to which the Issuer (or the Collateral Manager on its behalf) has received an opinion of nationally recognized tax counsel to the effect that payments with respect to such facility are not subject to withholding tax (U.S. or non-U.S.).
Investment of Amounts in Issuer’s Accounts
Amounts deposited into an Account (other than the Letter-of-Credit Reserve Account) during a Due Period and amounts received in prior Due Periods and retained in such Account will be invested by the Trustee in Eligible Investments as directed by the Collateral Manager with stated maturities no later than the earlier of the Business Day immediately preceding the next Payment Date (or, in the case of Eligible Investments issued by the Bank, on such Payment Date) and 60 days following the date of acquisition by the Issuer.
ETB SUBSIDIARY
In the event that the Issuer acquires certain assets in a workout, bankruptcy or restructuring or similar transaction, the Issuer may set up a special purpose subsidiary of the Issuer (an "ETB Subsidiary") to receive and hold any such asset. Each ETB Subsidiary will be required at all times to have at least one independent director meeting the requirements of an "Independent Director" as set forth in such ETB Subsidiary’s organizational documents and complying with each Rating Agency’s then- current rating criteria at the time of its formation. The Issuer will cause the purposes and permitted activities of any such ETB Subsidiary to be restricted solely to the acquisition, holding and disposition of any asset or assets described above and will require such ETB Subsidiary to promptly distribute 100% of
91 the proceeds of any sale of such assets, net of any tax liabilities, to the Issuer. For reporting purposes and for purposes of calculating the Coverage Tests, the Interest Diversion Test, the Investment Criteria and any other requirements related to the acquisition of additional Collateral Assets, assets held by any ETB Subsidiary that constitute Equity Securities will be treated as Equity Securities owned by the Issuer (and the equity interest in such ETB Subsidiary shall not be included in such calculation).
Amounts received by the Issuer from any ETB Subsidiary shall be allocated as Interest Proceeds or Principal Proceeds in the same manner as if the underlying asset were owned by the Issuer directly.
TRANSACTION PARTIES
The following contains information about certain of the Transaction Parties. Additional information about the Transaction Parties is contained in the Term Sheet.
The Issuer
The Issuer is an exempted company incorporated in the Cayman Islands with limited liability. It was incorporated on September 13, 2012 under the Companies Law (2012 Revision) of the Cayman Islands with company registration number MC 271695. The registered office of the Issuer is at PO Box 1093, Queensgate House, Grand Cayman, KY1-1102, Cayman Islands. The telephone number of the Issuer's registered office and principal place of business is +1 (345) 945 7099. The Issuer has been established as a special purpose company for the purpose of issuing the Securities.
The authorized share capital of the Issuer will be US$50,000, divided into 50,000 ordinary shares of US$1.00 each, 250 of which will have been issued on the Closing Date. All of the issued shares (the "Shares") are fully-paid and held in trust by MaplesFS Limited as share trustee (in such capacity, the "Share Trustee"). The Share Trustee may only dispose or otherwise deal with the Shares with the approval of the Trustee for so long as there are any Securities outstanding. The Share Trustee has no beneficial interest in, and derives no benefit (other than its fee for acting as Share Trustee) from, its holding of the Shares. The Securities are solely obligations of the Issuer or the Issuers, as applicable, and not the Share Trustee.
The Issuer has no prior operating history (other than the accumulation of certain Collateral Assets prior to the Closing Date) or prior business and will not have any substantial assets or liabilities other than in connection with the Securities. The Issuer has, and will have, no assets other than (x) the sum of US$250 representing the issued and paid-up share capital, (y) the profit fee paid to the Issuer for issuing the Securities and (z) the Collateral. The US$250 representing the issued and paid-up share capital, the profit fee paid to the Issuer for issuing the Securities (not to exceed US$250) and the bank account to or in which such funds are credited or deposited, together with any interest thereon, are collectively referred to as the "Excepted Property".
Since the date of incorporation, no financial statements of the Issuer have been prepared. The Issuer is not required by Cayman Islands law, and does not intend, to publish audited financial statements or appoint any auditors.
The directors of the Issuer are Chris Watler and Dianne Farjallah. The Issuer's Articles of Association provide that the board of directors of the Issuer will consist of at least one director.
92 The Co-Issuer
The Co-Issuer has been established as a special purpose company for the purpose of issuing the Co-Issued Securities. The Co-Issuer is a limited liability company formed on December 7, 2012 in the State of Delaware with the file number 121308757. The sole member of the Co-Issuer is the Issuer. The registered office of the Co-Issuer is located at the office of Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, telephone number (302) 738-6680. The manager of the Co-Issuer will be Donald Puglisi. Mr. Puglisi may be contacted at the office of the Co-Issuer. The Co-Issuer has no prior operating history.
The Co-Issuer will be capitalized only to the extent of its membership interest of $10, will have no assets other than its equity capital and will have no debt other than as Co-Issuer of the Co-Issued Securities. Notices and demands to or upon the Co-Issuer in respect of the Co-Issued Securities and the Indenture may be served at the office specified above.
After giving effect to the issuance of the Securities, the Issuers will not have any loan capital (including term loans) outstanding or created but unissued, or any outstanding mortgages, charges (other than as created under the Indenture) or other borrowings or indebtedness in the nature of borrowing, including bank overdrafts and liabilities under acceptance credits, hire purchase agreements guarantees or other contingent liabilities, other than the Securities described herein.
The Securities are limited recourse obligations of the Issuer and the Co-Issued Securities are nonrecourse obligations of the Co-Issuer. The Securities do not represent obligations of any other Transaction Party or any of their respective Affiliates, or any directors or officers of the Issuer.
The Cayman Island Service Providers
MaplesFS Limited will also act as administrator to the Issuer in the Cayman Islands (in such capacity, the "Administrator"). The office of the Administrator will serve as the general business office of the Issuer. Through the office, and pursuant to the terms of an Administration Agreement to be entered into between the Issuer and the Administrator (the "Administration Agreement"), the Administrator will perform in the Cayman Islands or such other jurisdiction as may be agreed by the parties from time to time various management functions on behalf of the Issuer and the provision of certain clerical, administrative and other services until termination of the Administration Agreement. The Issuer and Administrator will also enter into a registered office agreement (the "Registered Office Agreement") for the provision of registered office facilities to the Issuer. In consideration of the foregoing, the Administrator will receive various fees payable by the Issuer at rates agreed upon from time to time, plus expenses. The terms of the Administration Agreement and the Registered Office Agreement provide that either party may terminate such agreements upon the occurrence of any of certain stated events, including any breach by the other party of its obligations under such agreements. In addition, the Administration Agreement and the Registered Office Agreement provide that either party shall be entitled to terminate such agreements by giving at least three months’ notice in writing to the other party provided that, in the case of the termination of the Administration Agreement, a replacement administrator has been appointed on similar terms.
The activities of the Administrator under the Administration Agreement will be subject to the overview of the Issuer’s board of directors.
The Administrator's principal office is PO Box 1093, Boundary Hall, Cricket Square, Grand Cayman, KY1-1102, Cayman Islands.
93 The Trustee
The Trustee will act for the benefit of the secured parties as expressly provided for in the Indenture. As provided for in the Indenture, the Trustee will hold the Collateral Assets of the Issuer as Trustee for the benefit of the secured parties under the Indenture, as security for the Issuers' obligations thereunder, and will carry out its duties and obligations provided for therein, including with respect to the disposition and liquidation of the assets of the Issuer, all in accordance with the terms of the Indenture. The Trustee’s address is set forth on the back inside cover of this Offering Memorandum.
The Trustee (i) may execute any of the trusts or powers, or perform any duties under the Indenture either directly or by or through agents or attorneys; provided, that the Trustee will not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by the Trustee with due care, (ii) will not be liable for any action it takes, suffers or omits to take that it reasonably believes to be authorized or within its rights or powers or within its discretion thereunder, other than acts or omissions constituting bad faith, willful misconduct or negligence of the Trustee’s duties under the Indenture, (iii) may perform discretionary acts under the Indenture without such acts being treated as a duty and the Trustee will not be answerable therefor other than for its own negligence, bad faith or willful misconduct, (iv) is not obligated to recalculate, evaluate or (absent manifest error) verify any report, certificate or information received from the Issuer or the Collateral Manager or monitor the Collateral Manager's compliance on behalf of the Issuer, and (v) will not be responsible or liable for the actions or omissions of, or any inaccuracies in the records of, any non-affiliated custodian, transfer agent, paying agent or calculation agent (other than itself in such capacities), clearing agency, DTC, Euroclear or Clearstream, or for the acts or omissions of the Collateral Manager or either of the Issuers.
The Indenture contains provisions for the indemnification of the Trustee and its directors, officers, employees and agents of any loss, liability or expense incurred without negligence, willful misconduct or bad faith on its part arising out of or in connection with the acceptance of the administration of the Indenture. Subject to matters described in the foregoing paragraph, the payment of the fees and expenses of, and any indemnification payments to, the Trustee under the Indenture, is the obligation of the Issuers and solely payable out of the Collateral in accordance with the Priorities of Payment (including, without limitation, the Acceleration Waterfall).
The Trustee and/or its Affiliates may receive compensation in connection with the Trustee’s investment of trust assets in certain Eligible Investments. Eligible Investments may include investments for which the Trustee or an Affiliate of the Trustee provides services or receives compensation. The Issuers, the Collateral Manager and their respective Affiliates may maintain other banking relationships in the ordinary course of business with the Trustee or its Affiliates.
The Trustee may resign at any time by giving prior written notice to each Issuer, the Collateral Manager, each Holder and each Rating Agency. Any such resignation shall also be deemed to be a resignation of the LIBOR Calculation Agent, the Collateral Administrator, the Security Registrar, the Paying Agent, the Securities Intermediary, the Voting Rights Registrar and the Transfer Agent and any other capacity performed by the Bank (each a "Trustee Role") to the extent the Trustee or an Affiliate thereof is acting in such role. The Trustee may be removed at any time by a Majority of the Securities (voting as a single Class) or, if an Event of Default has occurred and is continuing, by the Controlling Party. No resignation or removal of the Trustee will become effective until the acceptance of the appointment of the successor Trustee (who shall also agree to perform each Trustee Role).
Unless otherwise prohibited by applicable law, the Trustee will be required to provide to the Collateral Manager all reasonably available information in the Trustee's possession that is reasonably requested by the Collateral Manager in connection with regulatory matters, including any information that
94 is necessary or advisable in order for the Collateral Manager (or its parent or Affiliates) to complete its Form ADV, or to comply with any requirements of the Dodd–Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, and any other laws or regulations applicable to the Collateral Manager from time to time.
Collateral Administrator
Pursuant to a collateral administration agreement among the Issuer, the Collateral Manager and the Collateral Administrator to be entered into on the Closing Date (the "Collateral Administration Agreement"), the Collateral Administrator will be obligated to perform certain functions on behalf of the Issuer with respect to the administration of the Collateral under the Indenture. The Collateral Administrator’s address is set forth on the back inside cover of this Offering Memorandum.
The Collateral Administration Agreement contains provisions for the indemnification of the Collateral Administrator and its affiliates, directors, officers, shareholders, agents and employees (collectively, the "Collateral Administrator Indemnified Persons") from any and all losses, damages, liabilities, demands, charges, costs, expenses (including the reasonable fees and expenses of counsel and other experts) and claims of any nature in respect of, or arising from any acts or omissions performed or omitted by the Collateral Administrator Indemnified Persons pursuant to or in connection with the terms of the Collateral Administration Agreement, or in the performance or observance of its duties or obligations under the Collateral Administration Agreement; provided that such acts or omissions do not constitute criminal conduct, fraud, bad faith, willful misfeasance or gross negligence on the part of the Collateral Administrator Indemnified Persons, or reckless disregard of the Collateral Administrator's duties under the Collateral Administration Agreement.
The Collateral Administration Agreement provides that any of the Issuer, the Collateral Manager or the Collateral Administrator will be entitled to terminate such agreement by giving at least 30 days prior written notice in writing to the other parties. Deutsche Bank Trust Company Americas will also be immediately and automatically removed if Deutsche Bank Trust Company Americas is no longer acting as Trustee, and the Collateral Administrator may be terminated by the Issuer or the Collateral Manager for cause. Removal or resignation of the Collateral Administrator will not be effective until a replacement Collateral Administrator has been appointed.
Paying Agents
The Paying Agent will be the paying agent for the Securities pursuant to the Indenture. The payment of the fees and expenses of the Paying Agent relating to the Securities is solely the obligation of the Issuers and solely payable out of the Collateral in accordance with the Priorities of Payment (including, without limitation, the Acceleration Waterfall). The Paying Agent’s address is set forth on the back inside cover of this Offering Memorandum.
The Indenture contains provisions for the indemnification of the Paying Agent for any loss, liability or expense incurred without negligence, willful misconduct or bad faith on its part arising out of or in connection with the acceptance or administration of the Indenture.
MATURITY AND PREPAYMENT CONSIDERATIONS
The actual maturities of the Secured Notes are expected to occur prior to the Stated Maturity Date. "Average Life" refers to the average amount of time that will elapse from the date of delivery of a security until each dollar of the principal of such security will be paid to the investor. The actual Average Lives of the Secured Notes will be determined by the amount and frequency of principal payments, which
95 are dependent upon, among other things, the amount of sinking fund payments and any other payments received at or in advance of the scheduled maturity of Collateral Assets (whether through prepayment, sale, maturity, redemption, default or other liquidation or disposition). Substantially all of the Collateral Assets are expected to be subject to sinking fund payments, voluntary prepayment or optional redemption by the issuer of such securities. Any disposition of a Collateral Asset may change the composition and characteristics of the Collateral Assets and the rate of payment thereon, and, accordingly, may affect the actual Average Lives of the Secured Notes. The rate of future defaults and the amount and timing of any cash realization from Defaulted Assets also will affect the maturity and Average Lives of the Secured Notes. The ability of the Collateral Manager to reinvest Principal Proceeds in Collateral Assets meeting the Investment Criteria will also affect the Average Lives of the Secured Notes.
PLAN OF DISTRIBUTION
Morgan Stanley & Co. LLC, as the initial purchaser (in such capacity, the "Initial Purchaser"), will agree to purchase the Securities on the Closing Date pursuant to a purchase agreement, dated December 19, 2012 (the "Purchase Agreement"), subject to the satisfaction of certain conditions set forth in the Purchase Agreement, and expects to re-sell the Securities as described in this Offering Memorandum. The Initial Purchaser will sell the Securities in compliance with Regulation S under the U.S. Securities Act and Rule 144A of the U.S. Securities Act or another exemption from the registration requirements of the U.S. Securities Act, in each case subject to the satisfaction of certain conditions set forth in the Purchase Agreement. The Initial Purchaser will be under no obligation to hold any Securities acquired by it. In connection with its sale of Securities in certain jurisdictions, the Initial Purchaser will act through one or more of its Affiliates as its agents to the extent required by local law or Morgan Stanley & Co. LLC policy.
Purchasers of Securities may receive certain fees in connection with their purchase of Securities from the Initial Purchaser, which may be in the form of a discount. Pursuant to the Purchase Agreement, the Initial Purchaser will receive certain fees.
In order to facilitate the offering of the Securities, the Initial Purchaser (or persons acting on behalf of the Initial Purchaser) may engage in transactions that stabilize, maintain or otherwise affect the price of the Securities. Specifically, the Initial Purchaser (or persons acting on behalf of the Initial Purchaser) may over-allot one or more Classes of the Securities in connection with the offering, creating a short position in such Class or Classes of Securities for its own account; provided that such transactions may not be effected with a view to supporting the market price of the Securities at a level higher than the market price that might otherwise prevail. In addition, to cover overallotments or to stabilize the price of the Securities, the Initial Purchaser may bid for, and purchase, the Securities in the open market. The Initial Purchaser is not required to engage in any stabilization action or similar action. Any stabilization action may begin on or after the date on which adequate disclosure of the final terms of the offer of the Securities is made and, if begun, may be ended at any time, but any stabilization action must end no later than 30 days after the Closing Date.
The Issuers have been advised by the Initial Purchaser that the Initial Purchaser proposes to sell the Securities purchased by it as Initial Purchaser (i) outside the United States to Persons that are not U.S. Persons in offshore transactions in reliance on Regulation S under the U.S. Securities Act and (ii) to Persons that are both Qualified Institutional Buyers (or, in the case of Subordinated Notes, Accredited Investors) and Qualified Purchasers (or, in the case of Subordinated Notes, Knowledgeable Employees).
The Initial Purchaser will agree in the Purchase Agreement that it will not offer, sell or deliver any Securities within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Rule 144A under the U.S. Securities Act, to Qualified Institutional Buyers (as defined in
96 Rule 144A) purchasing for their own account or for the accounts of one or more Qualified Institutional Buyers or, in the case of Subordinated Notes, to Accredited Investors purchasing for their own accounts pursuant to another exemption from the registration requirements of the U.S. Securities Act, and that it will send to each other dealer to which it sells Securities, as applicable, during the restricted period a confirmation or other notice setting forth the restrictions on offers and sales of Securities within the United States or to, or for the account or benefit of, U.S. persons. In addition, with respect to Securities initially sold pursuant to Regulation S, until the expiration of 40 days after the commencement of the distribution of the offering of the Securities by the Initial Purchaser, an offer or sale of Securities, within the United States by a dealer (whether or not participating in the offering) may violate the registration requirements of the U.S. Securities Act if the offer or sale is made otherwise than pursuant to Rule 144A under the U.S. Securities Act or another exemption from the registration requirements of the U.S. Securities Act. Resales of Securities are restricted as described under "Transfer Restrictions" herein. Beneficial interests in a Regulation S Global Note may not be held by a U.S. person at any time, and U.S. resales of the Securities offered outside the United States in reliance on Regulation S may be effected only in accordance with the Transfer Restrictions described herein. As used in this paragraph, the terms "United States" and "U.S. person" have the meanings given to them by Regulation S.
No action has been or will be taken in any jurisdiction that would permit a public offering of the Securities or the possession, circulation or distribution of the Offering Memorandum in any country or jurisdiction where action for that purpose is required. Accordingly, the Securities may not be offered or sold, directly or indirectly, and neither the Offering Memorandum nor any other offering material or advertisements in connection with the Securities may be distributed or published, in or from any country or jurisdiction, except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction. The Initial Purchaser understands and agrees that it is solely responsible for its own compliance with all laws applicable in each jurisdiction in which it offers and sells Securities, or distributes any Offering Memorandum (in preliminary or final form) or any amendments thereof or supplements thereto or any other material and it agrees to comply with all such laws.
Purchasers of the Securities may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the purchase price.
The Collateral Manager and the Issuers extend to each prospective investor the opportunity, prior to the consummation of the sale of the Securities, to ask questions of, and receive answers from, the Collateral Manager and the Issuers concerning the Securities and the terms and conditions of the offering and to obtain any additional information it may consider necessary in making an informed investment decision and any information in order to verify the accuracy of the information set forth herein, to the extent the Issuers or the Collateral Manager possess the same.
Requests for such additional information can be directed to Morgan Stanley & Co. LLC at the address specified under "Transfer Restrictions."
The Issuers have agreed to indemnify the Initial Purchaser against certain liabilities, including liabilities under the U.S. Securities Act, or to contribute to payments it may be required to make in respect thereof.
Certain of the debt or equity securities of the issuers of Collateral Assets may have been originally underwritten or placed, or may be underwritten or placed by one or more of the Initial Purchaser or its Affiliates. In addition, one or more of the Initial Purchaser or its Affiliates may have in the past and may in the future perform investment banking services for issuers of the Collateral Assets.
97 In addition, one or more of the Initial Purchaser or its Affiliates may from time to time as a principal or through one or more investment funds that it manages, make investments in the equity securities of one or more of the issuers of Collateral Assets with the result that one or more of such issuers may be or may become controlled by it. One or more of the Initial Purchaser or its Affiliates may also be the Selling Institution under any Participation Interest or the Hedge Counterparty under any Hedge Agreement.
The Collateral Manager or one of its affiliates intends to purchase 20% of the Subordinated Notes issued on the Closing Date.
SETTLEMENT AND CLEARING
General
Any Security sold outside the United States to non-U.S. Persons in reliance on Regulation S and issued under the Indenture in the form of a permanent global security in definitive, fully registered form without interest coupons is referred to as a "Regulation S Global Note." Any Security sold to U.S. Persons and issued in the form of a permanent global security in definitive, fully registered form without interest coupons is referred to as a "Rule 144A Global Note."
Upon the issuance of a Global Note, The Depository Trust Company (together with its nominees and their respective successors, "DTC") or its custodian will credit, on its internal system, the respective stated initial principal amount of the individual beneficial interests represented by the Securities to the accounts of Persons who have accounts with DTC. The accounts initially will be designated by or on behalf of the Initial Purchaser. Ownership of beneficial interests in Global Notes will be limited to Persons who have accounts with DTC ("participants") or Persons who hold interests through participants. Ownership of beneficial interests in Global Notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of Persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or the nominee, as the case may be, will be considered the sole owner or holder of Global Notes for all purposes under the Indenture and such Securities. Except for transfers to Persons taking an interest in a Non- Clearing Agency Security in accordance with the Indenture and as further described hereunder and under "Transfer Restrictions", unless (x) DTC notifies the Issuer that it is unwilling or unable to continue as depository for such Global Note, (y) at any time DTC ceases to be a clearing agency registered under the U.S. Exchange Act and a successor depository is not appointed by the Issuer within 90 days after such notice or (z) an Event of Default has occurred and is continuing and such transfer is requested by any beneficial owner of an interest in such Global Note, owners of a beneficial interest in a Global Note will not be entitled to have any portion of a Global Note registered in their names, will not receive or be entitled to receive physical delivery of Securities in certificated form and will not be considered to be the owners or holders of any Securities under the Indenture. In addition, no beneficial owner of an interest in a Global Note will be able to transfer that interest except in accordance with DTC’s applicable procedures and, if applicable, those of Euroclear and Clearstream.
Investors may hold their interests in a Regulation S Global Note directly through Clearstream or Euroclear, if they are participants in these systems, or indirectly through organizations that are participants in these systems. Clearstream and Euroclear will hold such interests on behalf of their participants through their respective depositories, which in turn will hold such interests in customers’ securities accounts in the depositories’ names on the books of DTC. Investors may hold their interests in
98 Rule 144A Global Notes directly through DTC if they are participants in the system, or indirectly through organizations that are participants in the system.
Payments on Global Notes will be made to DTC or its nominee, as the registered owner thereof. None of the Transaction Parties or any of their agents or Affiliates will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests.
The Issuers expect that DTC or its nominee, upon receipt of any payment of any of the principal amount of and interest on a Global Note held by DTC or its nominee, will immediately credit the applicable participants’ accounts with payments in amounts proportionate to the respective beneficial interests in such Global Note as shown on the records of DTC or its nominee. The Issuers also expect that payments by participants to owners of beneficial interests in a Global Note held through the participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for the customers. The payments will be the responsibility of the participants.
Transfers between the participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in immediately available funds. The laws of some states require that certain Persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests in a Global Note to these Persons may be limited. Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of a Person having a beneficial interest in a Global Note to pledge its interest to Persons or entities that do not participate in the DTC system, or otherwise take actions in respect of its interest, may be affected by the lack of a physical certificate of the interest. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the Transfer Restrictions, cross-market transfers between DTC, on the one hand, and, directly or indirectly through Euroclear or Clearstream participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depository. However, these cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in the system in accordance with its rules and procedures and within its established deadlines (Brussels time). Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depository to take action to effect final settlement on its behalf by delivering or receiving interests in a Regulation S Global Note in DTC, and making or receiving payment in accordance with normal procedures for immediately available funds settlement applicable to DTC. Clearstream participants and Euroclear participants may not deliver instructions directly to the depositories for Clearstream or Euroclear.
Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in a Global Note from a DTC participant will be credited during the securities settlement processing day (which must be a business day for Euroclear and Clearstream) immediately following the DTC settlement date and the credit of any transactions in interests in a Global Note settled during the processing day will be reported to the relevant Euroclear or Clearstream participant on that day. Cash received in Euroclear or Clearstream as a result of sales of interests in a Global Note by or through a Euroclear or Clearstream participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream cash account only as of the business day following settlement in DTC.
99 DTC has advised the Issuers that it will take any action permitted to be taken by a Holder of the Securities (including the presentation of the applicable Securities for exchange as described below) only at the direction of one or more participants to whose account with DTC interests in a Global Note are credited and only in respect of that portion of the principal amount of the Securities as to which the participant or participants has or have given direction.
DTC has advised the Issuers as follows. DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a Clearing Agency registered pursuant to the provisions of Section 17A of the U.S. Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants").
The transfer or exchange of all or a portion of an interest in a Rule 144A Global Note for an interest in a Regulation S Global Note (or all or a portion of an interest in a Regulation S Global Note for an interest in a Rule 144A Global Note) will require delivery to the Trustee of a duly executed transfer certificate in the form required under the Indenture (a "Transfer Certificate") from the transferor (in the case of a transfer) or the Holder (in the case of an exchange). In addition, any transferee of an interest in a Security that is ERISA Restricted not taking delivery in the form of Global Notes will also be required to make certain representations and warranties in a Transfer Certificate.
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of interests in Regulation S Global Notes and Rule 144A Global Notes among participants of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform these procedures, and the procedures may be discontinued at any time. Neither the Issuers nor the Trustee will have any responsibility for the performance by DTC, Clearstream, Euroclear or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
If (x) DTC notifies the Issuer that it is unwilling or unable to continue as depository for the Global Notes, (y) at any time DTC ceases to be a clearing agency registered under the U.S. Exchange Act and a successor depository is not appointed by the Issuer within 90 days after such notice or (z) an Event of Default has occurred and is continuing and such transfer is requested by any beneficial owner of an interest in a Global Note, the Issuer (or, with respect to the Co-Issued Securities, the Issuers) will issue interests in Non-Clearing Agency Securities in exchange for interests in the applicable Global Notes. Such Non-Clearing Agency Securities will be subject to the Transfer Restrictions and will be issued in certificated form only if specified in the Term Sheet and requested by the holder of the beneficial interests.
Non-Clearing Agency Securities
Any Security issued in (a) certificated, fully registered form without interest coupons or (b) if specified in the Term Sheet, uncertificated, fully registered form evidenced by entry in the Security Register (other than in the name of a Clearing Agency or its nominee) is referred to as a "Non-Clearing Agency Security."
100 The transfer or exchange of interests in Securities that are required to be held as Non-Clearing Agency Securities will require delivery to the Trustee of a Transfer Certificate from the transferee.
In case any certificated Security becomes mutilated, defaced, destroyed, lost or stolen, upon request of the Holder, the Issuer (or, with respect to the Co-Issued Securities, the Issuers) will execute and, upon the request of the Issuer, the Trustee will authenticate and deliver a new certificate representing Securities of like tenor (including the same date of issuance) and equal principal amount, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on the Security. If the certificate representing such Security has been destroyed, lost or stolen, the applicant for a replacement certificate must furnish to the Issuer (or, with respect to the Co-Issued Securities, the Issuers) and the Trustee, security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft of the certificate, the applicant must also furnish satisfactory evidence of the destruction, loss or theft of such certificate and of the ownership thereof. If a replacement certificate is issued, the Issuer may require the payment by the registered Holder thereof of a sum sufficient to cover fees and expenses connected therewith.
Cancellation
All Securities surrendered for payment, registration of transfer, exchange or redemption (a "Cancellation"), or deemed lost or stolen, shall be promptly canceled by the Trustee and may not be reissued or resold. No Security may be surrendered (including any surrender in connection with any abandonment) except for payment as provided herein, or for registration of transfer, exchange or redemption in accordance with an Optional Redemption or, if such Special Redemption or Mandatory Redemption results in the payment in full of the applicable Class of Securities, a Special Redemption or Mandatory Redemption, of the Securities, or for replacement in connection with any Security deemed lost or stolen. In the event that a Security is cancelled in contravention of the immediately preceding sentence, such Security will continue to be treated as Outstanding solely for purposes of calculation of the Coverage Tests, the Interest Diversion Test, the Effective Date Par Test and the Event of Default Test until (a) if all of the Securities of any applicable Class are so cancelled, the entire Aggregate Outstanding Amount of each Higher-Ranking Class with respect thereto has been paid in full (including payment of all unpaid interest and, if applicable, Deferred Interest) or (b) if less than all of the Securities of an applicable Class are so cancelled, (x) the entire Aggregate Outstanding Amount of each Higher-Ranking Class with respect to such Class has been paid in full (including payment of all unpaid interest and, if applicable, Deferred Interest) and (y) the remaining Securities of such Class will have been paid in full (including payment of all unpaid interest and, if applicable, Deferred Interest); provided that, in the case of this clause (b)(y), all payments of principal to the Holders of the remaining Securities of the applicable Class will be deemed to reduce the principal amount of the cancelled Securities and the Securities that have not been cancelled on a pro rata basis (calculated as if the whole Class were Outstanding for all purposes).
101 U.S. FEDERAL INCOME TAX CONSIDERATIONS
Circular 230
Under 31 C.F.R. part 10, the regulations governing practice before the Internal Revenue Service (Circular 230), we and our tax advisors are (or may be) required to inform you that:
Any advice contained herein, including any opinions of counsel referred to herein, is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer;
Any such advice is written in connection with the promotion or marketing of the Notes and the transactions described herein (or in such opinion or other advice); and
Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
Introduction
The following is a summary of certain of the U.S. federal income tax consequences of an investment in the Notes by purchasers that acquire their Notes in the initial offering and, other than with respect to the Subordinated Notes, for an amount equal to their "issue price" (as defined pursuant to the Code and applicable U.S. Treasury Regulations). The discussion and the opinions referenced below are based upon laws, regulations, rulings, and decisions currently in effect, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been, or are expected to be, sought from the United States Internal Revenue Service (the "IRS") with respect to any of the U.S. federal income tax consequences discussed below, and no assurance can be given that the IRS or a court will not take contrary positions. Further, the following summary does not address all U.S. federal income tax consequences applicable to any given investor, nor does it address the U.S. federal income tax considerations (except, in some circumstances, in very general terms) applicable to all categories of investors, some of which may be subject to special rules, such as Non-U.S. Holders (as such term is defined below), banks, real estate investment trusts, regulated investment companies, insurance companies, tax-exempt organizations, dealers in securities or currencies, electing large partnerships, natural persons, cash method taxpayers, S corporations, estates and trusts, investors that hold their Notes as part of a hedge, straddle, or an integrated or conversion transaction, or U.S. Holders whose "functional currency" is not the Dollar. Furthermore, it does not address alternative minimum tax consequences, or the indirect effects on investors of equity interests in either a U.S. Holder (as such term is defined below) or a Non-U.S. Holder. In addition, this summary is generally limited to investors that will hold their Notes as "capital assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). Investors should consult their own tax advisors to determine the Cayman Islands, U.S. federal, state, local, and other tax consequences of the purchase, ownership, and disposition of the Notes.
As used herein, "U.S. Holder" means a beneficial owner of a Note that is an individual citizen or resident of the United States for U.S. federal income tax purposes, a corporation or other entity taxable as a corporation created or organized in, or under the laws of, the United States or any state thereof (including the District of Columbia), an estate, the income of which is subject to U.S. federal income taxation regardless of its source, or a trust for which a court within the United States is able to exercise primary supervision over its administration and for which one or more United States persons (as defined in the Code) have the authority to control all of its substantial decisions or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust.
102 `
"Non-U.S. Holder" means any holder (or beneficial holder) of a Note that is not a U.S. Holder or an entity treated as a partnership for U.S. federal income tax purposes.
If a partnership (or other pass-through entity) holds Notes, the tax treatment of a partner (or other equity holder) will generally depend upon the status of the partner (or other equity holder) and upon the activities of the partnership (or other pass-through entity). Partners of partnerships (or equity holders of other pass-thru entities) holding Notes should consult their own tax advisors.
Notes issued in additional offerings by the Issuer or the Co-Issuer may not be fungible for U.S. federal income tax purposes with the Notes issued in the original offering.
Recent U.S. Tax Legislation
Introduction
FATCA could result in the imposition of a withholding tax at a rate of 30% on payments of principal or certain income (including interest) made on or after January 1, 2014, in respect of the Notes, depending on the particular circumstances of the Issuer, Notes and holders (and beneficial owners thereof). It is also possible that Notes held by some or all holders may be subject to a forced sale (which could be for less than the fair market value of such Notes). There could also be withholding of 30% on payments to the Issuer of U.S. source interest and dividends (as of January 1, 2014) and on payments of sales proceeds from certain U.S. assets (as of January 1, 2017) held by the Issuer.
General
FATCA is particularly complex, is subject to further guidance and interpretive releases from the U.S. Department of the Treasury and the IRS, and is dependent on the particular factual circumstances of the Issuer, the Notes and, potentially, the holder of such Notes. Broadly, however, FATCA may require a payor of "U.S. source interest," "U.S. source dividends," or "other U.S. source periodic income" paid on or after January 1, 2014 (and of gross proceeds from the sale or disposition of assets of a type that produce U.S. source interest or U.S. source dividends paid on or after January 1, 2017) (together, "U.S. Source Income") to withhold 30% from such payments (which is not expected to be refundable with respect to the Issuer) except where (1) the assets giving rise to such U.S. Source Income comprise obligations that are outstanding on or before December 31, 2012 (and that are not modified after December 31, 2012 and treated as reissued for U.S. federal income tax purposes), although such obligations may need to be fully funded on or prior to December 31, 2012 (such obligations, "Grandfathered Obligations") or (2) the Issuer (and each foreign withholding agent (if any) in the chain of custody) enters into an FFI Agreement (as defined below) and meets certain withholding tax and information reporting requirements regarding its direct and indirect U.S. Holders. For these purposes, obligations do not include equities or certain debt obligations lacking a definitive term, such as saving and demand deposits. The Issuer expects to enter into an FFI Agreement and comply with such information reporting requirements and, accordingly, expects to be required to, among other things, to withhold (or instruct paying agents to withhold) 30% on payments to it that are attributable to "passthru payments" made to Recalcitrant Holders under its Notes.
Preliminary guidance that was not included in the proposed regulations suggested that a payment with respect to a Note will be treated as a passthru payment (a "passthru payment") to the extent of (i) the amount (if any) of the payment that is treated as U.S. Source Income plus (ii) the amount of the payment that is not treated as U.S. Source Income multiplied by a ratio equal to the Issuer's average U.S. assets to its average total assets, determined as of specified testing dates. For purposes of this determination, the IRS may utilize a broad definition of U.S. assets. However, Grandfathered Obligations will neither be treated as U.S. assets nor subject to withholding. Proposed rules do not contain the above
103 ` formulation and it is unclear if the final rule for withholding on the non-U.S. source income portion of the payment described in (ii) above will adopt this assets-based approach. The Issuer will not be obligated to withhold on passthru payments defined in clause (ii) of the definition thereof until at least January 1, 2017.
Recent guidance indicates that an obligation that does not produce U.S. Source Income will be grandfathered if the obligation is outstanding six months after the adoption of final regulations addressing withholding on passthru payments. Because payments on the Notes are expected to be comprised solely of non-U.S. source payments and such final regulations have not yet been adopted, the Notes (other than the Subordinated Notes and any other Class of Notes recharacterized as equity for U.S. federal income tax purposes) should be Grandfathered Obligations. The Subordinated Notes (and any other Class of Notes recharacterized as equity for U.S. federal income tax purposes) are not eligible for grandfathering because they represent equity in the Issuer. Debt obligations of U.S. obligors held by the Issuer generally should be grandfathered if such obligations are outstanding as of (and not modified after) December 31, 2012 (even if the Issuer purchases the obligations after December 31, 2012) and debt obligations of non-U.S. obligors are expected to be grandfathered if such obligations are outstanding six months after the adoption of final regulations addressing withholding on passthru payments.
Reporting under FATCA
FATCA is likely to effectively require the Issuer (and any agent or broker through which a holder purchases its Notes, or any nominee or other entity through which a holder holds its Notes (any such agent, broker, nominee or other entity, an "Intermediary")) to enter into an agreement with the IRS (a "FFI Agreement") under which it will be required to, among other things, provide certain information to the IRS about its direct and indirect U.S. Holders. In order to provide such information, however, the Issuer (or an Intermediary) will be obliged to obtain information from all of the holders (not just from the U.S. Holders) in order to ensure that it has complied with certain proposed due diligence and identification requirements designed to identify U.S. Holders. U.S. Holders and non-U.S. Holders that have one or more "substantial U.S. owners" will be obligated to waive any non-U.S. law which prohibits the provision of the holder's information to the IRS. It may also require Non-U.S. Holders to waive any non-U.S. law which prohibits the provision of such information.
Accordingly, the Issuer expects to require (and that an Intermediary will require) each (i) Non- U.S. Holder to provide satisfactory documentation (which is to be determined) that it is not a U.S. person and that it does not have a "substantial U.S. owner" or, if it does have one or more "substantial U.S. owners", the name, address and taxpayer identification number of each such owner and (ii) U.S. Holder to provide its name, address and taxpayer identification number. If a holder is a non-U.S. entity or otherwise not the beneficial owner of the Notes, such holder will generally be required to provide certain information about its owners (or beneficial owners). Although certain exceptions to these disclosure requirements could apply, each holder should assume that the failure to provide the required information generally will compel the Issuer (or an Intermediary) to withhold on payments (including principal) made to such holder and could force the sale of such holder's Notes (and such sale could be for less than its then fair market value).
In addition, under the Indenture, each holder or beneficial owner of a Note agrees to (i) provide the Issuer (and any applicable Intermediary) with the Holder FATCA Information and (ii) permit the Issuer, the Collateral Manager, any applicable Intermediary and the Trustee (on behalf of the Issuer) to (x) share such information with the IRS, (y) compel or effect the sale of Notes held by any such holder that fails to comply with the foregoing requirement as described under "Transfer Restrictions" and (z) make other amendments to the Indenture to enable the Issuer to comply with FATCA.
104 `
Potential Withholding and Redemptions (or Forced Sales) Under FATCA
As indicated above, if a holder is or becomes a Recalcitrant Holder, the Issuer (or an Intermediary) may be required under the FFI Agreement to impose a 30 percent U.S. withholding tax on payments made to such holder. However, the Issuer generally will not be obligated to withhold on passthru payments until at least January 1, 2017. If the Issuer (or an Intermediary) is required, pursuant to the FFI Agreement, to withhold on payments to any Recalcitrant Holder, it is possible that any withholding that should otherwise be allocable to such Recalcitrant Holder may be disproportionately allocable to a particular Class of holders and that a Recalcitrant Holder (other than one described in clause (ii) of such definition) may be subject to the forced sale of its Notes.
If any withholding is imposed pursuant to the FFI Agreement (or otherwise) on payments to Recalcitrant Holders, the Issuer is under no obligation to gross up such payments.
The Issuer is permitted to enter into a supplemental indenture without the consent of holders to provide for the issuance of new Notes of a Class of Notes or the creation of sub-classes of such Class of Notes (in each case, with new identifiers) if it or the Trustee determines that one or more beneficial owners of such Class of Notes is a Recalcitrant Holder. The intent of such a supplemental indenture would be to allow holders of such Class that are not Recalcitrant Holders to take an interest in such new Note(s) or sub-class(es) in order to isolate the identity of the Recalcitrant Holder(s) and lessen the likelihood that holders, other than any applicable Recalcitrant Holder(s), would be subject to withholding due to the failure of a Recalcitrant Holder to provide the Issuer with Holder FATCA Information. However, there can be no assurance that any such supplemental indenture will be entered into or, if it is, that it will have the effect of eliminating or reducing withholding on any holder's Notes caused by a Recalcitrant Holder.
If a non-U.S. law prohibits a holder from providing the information requested by the Issuer as described in the immediately preceding subsection (or an Issuer (or an Intermediary) from providing the information to the IRS), such holder generally must execute a waiver of this non-U.S. law (and then provide such information) or dispose of its Notes (or otherwise have its interest in the Issuer cancelled) within a reasonable period of time. In addition, in complying with the U.S. reporting requirements under FATCA, it may be necessary for the Issuer (or an Intermediary) to agree in the FFI Agreement to "close out" any holder (and not just a holder that fails to obtain the foreign law waiver described above) that fails to respond to its reasonable requests for information that will enable the Issuer (or an Intermediary) to comply with such U.S. reporting requirements. In the event the Issuer (or an Intermediary) does "close out" any holder's interest, it may do so by causing the sale of such Notes (which could be for less than the fair market value of such Notes).
Uncertain Application
The full extent of the application of FATCA to the Issuer (and an Intermediary) is currently uncertain. Thus, it is not clear what actions, if any, will be required to minimize the impact of FATCA on the Issuer (and an Intermediary) and the holders. No assurance can be given that the Issuer (or an Intermediary) will be able to take all necessary actions or that actions taken will be successful to minimize the forced sale provision or the new withholding tax. Further, the efficacy of the Issuer's (or an Intermediary's) actions might not be within the control of the Issuer (or an Intermediary) and, for example, may depend on the actions of holders (and each foreign withholding agent (if any) in the chain of custody).
In addition, the Cayman Islands government has been in discussions with the Treasury with respect to the Cayman Islands entering into an IGA between the United States and the Cayman Islands. If such IGA is entered into, the Issuer may not be required to enter into an agreement with the IRS to avoid
105 ` withholding under FATCA but could instead choose to comply with Cayman Islands legislation that would be implemented to give effect to such IGA. In that event, the Issuer would be subject to modified FATCA requirements.
Each potential purchaser of Notes should consult its own tax advisor to obtain a more detailed explanation of FATCA and to learn how it might affect such investor in its particular circumstance.
U.S. Federal Income Tax Consequences to the Issuer
Upon the issuance of the Notes, Sidley Austin LLP will deliver an opinion generally to the effect that, under current law, assuming compliance with the Indenture (and certain other documents) and based upon certain factual representations made by the Issuer and/or the Collateral Manager, and assuming the correctness of all opinions and advice of counsel that permit the Issuer to take or fail to take any action under the transaction documents based upon such opinions or advice, although the matter is not free from doubt, the Issuer will not be treated as engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes. The opinion of Sidley Austin LLP will be based on certain factual assumptions, covenants and representations as to the Issuer's contemplated activities. The Issuer intends to conduct its affairs in accordance with such assumptions and representations, and the remainder of this summary assumes that the Issuer will not be treated as engaged in a trade or business within the United States for U.S. federal income tax purposes. In addition, you should be aware that the opinion referred to above will be predicated upon the Collateral Manager's compliance with the Investment Guidelines, which are intended to prevent the Issuer from engaging in activities which could give rise to a trade or business within the United States. Although the Collateral Manager has generally undertaken to comply with the Investment Guidelines, the Collateral Manager is permitted to depart from the Investment Guidelines if it obtains written advice from nationally recognized tax counsel that the departure will not cause the Issuer to be treated as engaged in a trade or business within the United States. There can be no assurance that any such opinion or advice of tax counsel will be consistent with Sidley Austin LLP's views and opinion standards, and any such departures would not be covered by the opinion of Sidley Austin LLP referred to above. The opinion of Sidley Austin LLP is based on the documents as of the Closing Date, and accordingly, will not address any potential U.S. federal income tax effect of any supplemental indenture. Furthermore, the Collateral Manager is not obligated to monitor (or, in come cases, conform the Issuer's activities in order to comply with) changes in law that could affect whether the Issuer is treated as engaged in a U.S. trade or business. The Collateral Manager might act in accordance with the Investment Guidelines notwithstanding the issuance of new decisions by the courts, new legislation or official guidance (regardless of whether such new interpretation, legislation or guidance would either merely increase the risk that the Issuer would be, or actually cause the Issuer to be, engaged in a U.S. trade or business). In addition, although the Collateral Manager can be removed for cause, violations of the Investment Guidelines may not constitute "cause". Such violations generally will not constitute "cause" if they do not, and cannot reasonably be expected to have, a material adverse effect on the holders of the Notes. It is not certain that a violation of the Investment Guidelines that causes an increase in the risk that the Issuer will be engaged in a trade or business in the United States for U.S. federal income tax (without actually having that effect) will be treated as reasonably being expected to have such a material adverse effect. In addition, the opinion of Sidley Austin LLP and any such other advice or opinions are not binding on the IRS or the courts, and no ruling will be sought from the IRS regarding this, or any other, aspect of the U.S. federal income tax treatment of the Issuer. Accordingly, in the absence of authority on point, the U.S. federal income tax treatment of the Issuer is not entirely free from doubt, and there can be no assurance that positions contrary to those stated in the opinion of Sidley Austin LLP or any such other advice or opinions may not be asserted successfully by the IRS.
If the IRS were to characterize successfully the Issuer as engaged in a U.S. trade or business, among other consequences, the Issuer would be subject to net income taxation in the United States on its
106 ` income (and possibly on a gross basis) that was effectively connected with such business (as well as the branch profits tax). The levying of such taxes could materially affect the Issuer's financial ability to make payments on the Notes.
There have been recent legislative proposals that were not enacted that proposed to treat a foreign corporation as a domestic corporation subject to U.S. federal income taxation if the foreign corporation's assets consisted primarily of assets managed on behalf of investors and decisions as to the management of those assets were made within the United States. If legislation with similar provisions were to be enacted and were to apply to the Issuer, then depending on the specific terms of those provisions, such a change in law could have a material adverse effect on the Issuer's ability to make payments on the Notes and could constitute a Tax Event that would permit a tax redemption.
Payments on the Collateral Assets (except for commitment fees and other similar fees associated with Delayed Funding Assets) are required not to be subject to withholding tax when the Collateral Assets are acquired by the Issuer unless the obligor thereof is required to make payments of additional amounts (so called "gross-up payments") that cover the full amount of such withholding tax on an after- tax basis. The Issuer will not, however, make any independent investigation of the circumstances surrounding the issue of the individual assets comprising the Assets, and there can be no assurance that income derived by the Issuer will not become subject to withholding tax as a result of a change in tax law or administrative practice or other causes. Moreover, as indicated above, certain payments received by the Issuer are permitted to be reduced by any applicable withholding taxes. In addition, if the Issuer is or becomes a CFC (defined below), the Issuer will incur U.S. withholding tax on any interest received from a related United States person. Certain distributions on Equity Securities likely will, and distributions on defaulted assets and certain securities rated below investment grade may, be subject to withholding taxes imposed by the United States.
If withholding or deduction of any taxes from payments is required by law in any jurisdiction, the Issuer will be under no obligation to make any additional payments to any holder in respect of such withholding or deduction. In addition, each of the Issuers or any Paying Agent may require (and holders and beneficial owners are deemed to agree to provide) certification and information acceptable to it to enable the Issuer to qualify for a reduced rate of withholding in any jurisdiction from or through which the Issuer receives payments on its assets.
Notwithstanding the foregoing, any commitment fee, facility fee or similar fee that the Issuer earns, as well as any lending fees received under a securities lending agreement, may be subject to a 30% withholding tax. In the event withholding in respect of a Collateral Asset is not initially imposed but is imposed retroactively, such withholding would reduce amounts otherwise available to make payments on the Notes (and could adversely affect some Classes of Notes that would not have been adversely affected had the withholding been imposed initially).
U.S. Classification and U.S Tax Treatment of the Secured Notes
The Issuer has agreed and, by its acceptance of a Secured Note, each holder will be deemed to have agreed, to treat the Secured Notes as debt of the Issuer for U.S. federal income tax purposes, except as otherwise required by applicable law; provided that this shall not limit a holder from making a protective qualified electing fund election (described below under "—Treatment of U.S. Holders of the Subordinated Notes—QEF Election") or filing certain United States tax information returns required of only certain equity owners with respect to various reporting requirements under the Code (as described below under "—Transfer and Other Reporting Requirements"). Upon the issuance of the Notes, Ashurst LLP will deliver an opinion generally to the effect that, assuming compliance with the Indenture (and certain other documents), and based on certain factual representations made by the Issuer and/or the
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Collateral Manager, the Class X Notes, the Class A Notes, the Class B Notes, the Class C Notes and the Class D Notes will, and the Class E Notes should, be characterized as debt of the Issuer for U.S. federal income tax purposes. The determination of whether a Note will be treated as debt for U.S. federal income tax purposes is based on the facts and circumstances existing at the time the Note is issued. The opinion of Ashurst LLP will be based on current law and certain representations and assumptions. Prospective investors should be aware that opinions of counsel are not binding on the IRS, and there can be no assurance that the IRS will not seek to characterize as something other than indebtedness any particular Class or Classes of the Notes. Further, the Issuers may, for certain specified purposes, enter into supplemental indentures, some of which may be entered into without the consent of any holders and without requiring the Issuer to specifically consider if such supplemental indentures will, for U.S. federal income tax purposes, affect the characterization (as debt or equity) of the Notes. The opinion of Ashurst LLP is based on the documents as of the Closing Date, and accordingly, will not address any potential U.S. federal income tax effect of any supplemental indenture. Except as discussed below under "— Alternative Characterization of the Notes" below, the balance of this discussion assumes that the Secured Notes will be characterized as debt of the Issuer for U.S. federal income tax purposes.
For U.S. federal income tax purposes, the Issuer, and not the Co-Issuer, will be treated as the issuer of the Notes.
Subject to the discussion of original issue discount below, U.S. Holders of the Secured Notes generally will include payments of stated interest received on the Notes in income in accordance with their normal method of tax accounting as ordinary interest income from sources outside the United States.
A U.S. Holder of Notes issued with original issue discount ("OID") must include the OID in income on a constant yield-to-maturity basis regardless of the timing of the receipt of the cash attributable to such income. A Note will have been issued with OID if its stated redemption price exceeds its issue price by an amount as great as 0.25% of its stated redemption price multiplied by its weighted average maturity (and in such case the amount of OID will be equal to its stated redemption price less its issue price). Additionally, because stated interest payments on the Class C Notes, the Class D Notes and the Class E Notes (the "Interest Deferral Notes") may not be considered to be unconditionally payable (a requisite for stated interest to not constitute OID) since they may be deferred in certain events, the Issuer intends to treat all interest on the Interest Deferral Notes (together with any excess of stated redemption price over issue price) as OID. U.S. Holders would be entitled to claim a loss upon maturity or other disposition of a Note with respect to OID accrued and included in gross income for which cash is not received. Such a loss generally would be a capital loss.
The Secured Notes may be debt instruments described in Section 1272(a)(6) of the Code (debt instruments that may be accelerated by reason of the prepayment of other debt obligations securing such debt instruments). Special tax rules principally relating to the accrual of OID, market discount, and bond premium apply to debt instruments described in Section 1272(a)(6). Further, those debt instruments may not be treated for U.S. federal income tax purposes as part of an integrated transaction with a related hedge under Treasury Regulation Section 1.1275-6. Prospective investors should consult with their own tax advisors regarding the effects of Section 1272(a)(6).
The Issuers may, for certain specified purposes, enter into supplemental indentures, some of which may be entered into without the consent of any holders and without requiring the Issuer to specifically consider if such supplemental indentures will cause, for U.S. federal income tax purposes, the Notes to be deemed to have been exchanged for the modified Notes. The opinion of Ashurst LLP is based on the documents as of the Closing Date, and accordingly, will not address any potential U.S. federal income tax effect of any supplemental indenture. In the event that a supplemental indenture
108 ` causes the Notes to be deemed to have been exchanged in such a transaction, gain or loss may be recognized in the manner indicated in the paragraph below.
In general, a U.S. Holder of a Secured Note will have a basis in that Secured Note equal to the cost of that Secured Note, increased by any OID and any market discount includible in income by such U.S. Holder and reduced by any amortized premium and any principal payments and any stated interest not treated as unconditionally payable for purposes of computing OID. Upon a sale, exchange or other disposition of a Secured Note, a U.S. Holder will generally recognize gain or loss equal to the difference between the amount realized on the sale, exchange or other disposition (less any accrued and unpaid interest (other than OID), which would be taxable as such), and the U.S. Holder's tax basis in such Secured Note. Such gain or loss generally will be long-term capital gain or loss if the U.S. Holder held the Secured Note for more than one year at the time of disposition. In certain circumstances, U.S. Holders that are individuals may be entitled to preferential treatment for net long-term capital gains; however, the ability of U.S. Holders to offset capital losses against ordinary income is limited. See also "3.8% Medicare Tax on Net Investment Income" below.
Alternative Characterization of the Secured Notes
Notwithstanding Ashurst LLP's opinion, holders and beneficial owners therein should recognize that there is some uncertainty regarding the appropriate classification of instruments such as the Secured Notes. It is possible, for example, that the IRS may contend that the Class E Notes, or any other Class of Secured Notes, should be treated in whole or in part as equity interests in the Issuer. Such a recharacterization might result in material adverse U.S. federal income tax consequences to U.S. Holders. If U.S. Holders of one or more Classes of the Secured Notes were treated as owning equity interests in the Issuer, the U.S. federal income tax consequences to those U.S. Holders would be as described under "— Treatment of U.S. Holders of the Subordinated Notes" and "—Transfer and Other Reporting Requirements." In order to avoid the application of the PFIC rules described below, each U.S. Holder of a Secured Note should consider making a qualified electing fund election provided in Section 1295 of the Code on a "protective" basis (although such a protective election may not be respected by the IRS because current regulations do not specifically authorize such an election). See "—Treatment of U.S. Holders of the Subordinated Notes—Status of the Issuer as a PFIC" and "—QEF Election." Further, U.S. Holders of Secured Notes should consult with their own tax advisors with respect to whether, if those Secured Notes were treated, in whole or in part, as representing equity in the Issuer, they would be required to file information returns in accordance with sections 6038, 6038B, and 6046 of the Code (and, if so, whether they should file such returns on a protective basis).
Non-U.S. Holders of the Secured Notes
Subject to the discussion under "—Recent U.S. Tax Legislation," above, a Non-U.S. Holder of a Secured Note that has no connection with the United States and is not related, directly or indirectly, to the Issuer or the holders of the Issuer's equity or the Subordinated Notes will not be subject to U.S. tax withholding on interest payments; provided that the Issuer is not engaged in a U.S. trade or business for U.S. federal income tax purposes. Non-U.S. Holders may be required to make certain tax representations regarding the identity of the beneficial owner of the Secured Notes in order to receive payments free of tax withholding, and Non-U.S. Holders may be required to provide such certification in order to receive payments free of backup withholding and not to have such payments be subject to information reporting. See also "Recent U.S. Tax Legislation," above, for a discussion of reporting obligations of non-U.S. Holders under FATCA.
Gain realized by a Non-U.S. Holder on the redemption or disposition of a Secured Note will not be subject to U.S. federal income tax unless (i) the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States or (ii) the Non-U.S. Holder is an individual present in
109 ` the United States for at least 183 days during the taxable year of redemption or disposition and certain other conditions are met.
Treatment of U.S. Holders of the Subordinated Notes
General. The Issuer has agreed and, by its acceptance of a Subordinated Note, each holder will be deemed to have agreed, to treat such Notes as equity in the Issuer for U.S. federal income tax purposes, except as otherwise required by applicable law. If U.S. Holders of the Subordinated Notes were treated as owning debt in the Issuer, the U.S. federal income tax consequences to those U.S. Holders would be as described under "—U.S. Classification and U.S. Tax Treatment of the Secured Notes". The balance of this discussion assumes that the Subordinated Notes will be characterized as equity in the Issuer. Prospective investors should consult their own tax advisors regarding the consequences of their acquiring, holding or disposing of the Subordinated Notes.
The Subordinated Notes will be characterized as equity (which the IRS could contend is voting equity) of the Issuer for U.S. federal income tax purposes.
Distributions on the Subordinated Notes. Subject to the anti-deferral rules discussed below, any payment on the Subordinated Notes that is distributed by the Issuer to a U.S. Holder that is subject to U.S. federal income tax will be taxable to that U.S. Holder as a dividend to the extent of the current and accumulated earnings and profits (determined under U.S. federal income tax principles) of the Issuer. Such payments will not be eligible for the dividends received deduction generally allowable to corporations and will not be eligible for the preferential income tax rate on qualified dividend income. Distributions in excess of earnings and profits will be non-taxable to the extent of, and will be applied against and reduce, the U.S. Holder's adjusted tax basis in the Subordinated Notes. Distributions in excess of earnings and profits and basis will be taxable as gain from the sale or exchange of property, as described below.
For the tax years beginning after December 31, 2012, distributions on the Subordinated Notes received by certain individuals, estates and trusts may be includible in "net investment income" for purposes of the Medicare contribution tax. Under recently released proposed regulations, QEF and Subpart F inclusions (discussed below) in respect of the Subordinated Notes will not (absent an election) be includible in "net investment income" subject to the Medicare contribution tax, but actual distributions with respect to prior inclusions will generally be subject to such tax. See "3.8% Medicare Tax on Net Investment Income" below.
Sale, Exchange or Other Disposition of the Subordinated Notes. In general, a U.S. Holder of the Subordinated Notes will recognize gain or loss upon the sale, exchange or other disposition of such Notes in an amount equal to the difference between the amount realized and such U.S. Holder's adjusted tax basis in such Notes. The character of that gain or loss (as ordinary or capital) generally will depend on whether the U.S. Holder either has made a QEF Election or is subject to the CFC rules (as each is described below). Initially, the tax basis of a U.S. Holder should equal the amount paid for the Subordinated Notes. That basis will be (i) increased by amounts taxable to the U.S. Holder by virtue of a QEF Election or the CFC rules, and (ii) decreased by actual distributions from the Issuer that are deemed to consist of previously taxed amounts or to represent the return of capital.
For the tax years beginning after December 31, 2012, gain on the disposition of the Subordinated Notes by certain individuals, estates and trusts may be includible in "net investment income" for the purposes of the Medicare contribution tax. See "3.8% Medicare Tax on Net Investment Income" below.
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Anti-Deferral Rules. Prospective investors should be aware that certain of the procedural rules for "PFICs" and "QEF" elections (as these terms are defined below) are complex and should consult their own tax advisors regarding these rules.
The tax consequences for U.S. Holders of the Subordinated Notes discussed above are likely to be materially modified by the anti-deferral rules. In general, each U.S. Holder's investment in the Issuer will be taxed as an investment in a passive foreign investment company ("PFIC") or a controlled foreign corporation ("CFC"), depending (in part) upon the percentage of the Issuer's equity that is acquired and held by certain U.S. Holders. If applicable, the rules pertaining to CFCs generally override those pertaining to PFICs (although, in certain circumstances, both sets of rules may apply simultaneously).
Prospective investors should be aware that in determining what percentage of the equity of the Issuer is held by various categories of investors (for example, for purposes of the CFC and information reporting rules described below), the Subordinated Notes will be treated as equity (and possibly as voting equity) and the Collateral Manager's interest in certain portions of its fee and other classes of Secured Notes may be considered equity (and possibly voting equity).
Prospective investors should be aware that the amount of the Issuer's income that is allocated to holders (under the QEF rules and/or the CFC rules discussed below) for any taxable year may be substantially greater than the amount of cash that is distributed on the Subordinated Notes for that year. Differences between allocated income and cash distributions for any taxable year may arise for a variety of reasons, including but not limited to, holding Assets subject to OID rules or purchased at a discount or premium, application of interest or other income received by the Issuer to acquire Assets or pay principal on the Secured Notes and realization of cancellation of indebtedness income if the Issuer ultimately fails to pay any portion of the Secured Notes upon maturity.
Status of the Issuer as a PFIC. The Issuer will be treated as a "PFIC" for U.S. federal income tax purposes. U.S. Holders in PFICs, other than U.S. Holders that make a timely "qualified electing fund" or "QEF" election described below, are subject to special rules for the taxation of "excess distributions" (which include both certain distributions by a PFIC and any gain recognized on a disposition of PFIC stock). In general, Section 1291 of the Code provides that the amount of any "excess distribution" will be allocated to each day of the U.S. Holder's holding period for its PFIC stock. The amount allocated to the current taxable year will be included in the U.S. Holder's gross income for the current taxable year as ordinary income. With respect to amounts allocated to prior taxable years, the tax imposed for the current taxable year will be increased by the "deferred tax amount" (an amount calculated with respect to each prior taxable year by multiplying the amount allocated to that year by the highest rate of tax in effect for that year, together with an interest charge, as though the amounts of tax were overdue).
An excess distribution is the amount by which distributions for a taxable year exceed 125% of the average distribution in respect of the Subordinated Notes during the three preceding taxable years (or, if shorter, the investor's holding period for the Subordinated Notes). As indicated above, any gain recognized upon disposition (or deemed disposition) of the Subordinated Notes will be treated as an excess distribution and taxed as described above (and not as capital gain). For this purpose, a U.S. Holder that uses a Subordinated Note as security for an obligation will be treated as having disposed of such Note.
Special rules apply to certain regulated investment companies that own interests in PFICs and any such investor should consult with its own tax advisors regarding the consequences to it of acquiring Subordinated Notes. Pursuant to recently enacted legislation, each U.S. Holder who is a shareholder of a PFIC is required to file an annual report containing such information as the IRS may require in the revised Form 8621. Until the IRS releases the revised Form 8621, this additional reporting requirement is
111 ` suspended (although a U.S. Holder that is currently otherwise required to file Form 8621 (e.g., a U.S. Holder that makes a QEF election with respect to the PFIC, receives a distribution with respect to the PFIC or makes an actual or deemed disposition of PFIC stock) must continue to file the current Form 8621). However, following the release of the revised Form 8621, U.S. Holders for which the filing of Form 8621 has been suspended for a taxable year will be required to attach Form 8621 for each suspended taxable year to their next income tax or information return required to be filed with the IRS. Additionally, in the event a U.S. Holder does not file Form 8621, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. Holder for the related tax year may not close before the date which is three years after the date on which such report is filed.
QEF Election. If a U.S. Holder (including certain U.S. Holders indirectly owning Subordinated Notes) makes the qualified electing fund election (the "QEF Election") provided in Section 1295 of the Code, the U.S. Holder will be required to include its pro rata share (unreduced by any prior year losses) of the Issuer's ordinary income and net capital gains (as ordinary income and long-term capital gain, respectively) for each taxable year and pay tax thereon even if such income and gain is not distributed to the U.S. Holder by the Issuer. In addition, any net losses of the Issuer will not be currently deductible by such U.S. Holder. Rather, any tax benefit from such losses will be available only when a U.S. Holder sells or disposes of its shares.
A U.S. Holder of a Subordinated Note that makes the QEF Election generally may elect to defer the payment of tax on undistributed income (until such income is distributed or the Subordinated Note is transferred), provided that it agrees to pay interest on such deferred tax liability. As indicated above, Collateral Assets may be purchased by the Issuer with substantial OID the cash payment of which may be deferred, perhaps for a substantial period of time, and the Issuer may use interest and other income from the Collateral Assets to purchase additional Collateral Assets or to retire Secured Notes. As a result, the Issuer may have in any given year substantial amounts of earnings for United States federal income tax purposes that are not distributed on the Subordinated Notes. Thus, absent an election to defer payment of taxes, U.S. Holders that make a QEF Election with respect to the Issuer may owe significant tax on significant "phantom" income. For this purpose, a U.S. Holder that uses a Subordinated Note as security for an obligation will be treated as having disposed of such Note. If the Issuer later distributes the income or gain on which the U.S. Holder has already paid taxes, amounts so distributed to the U.S. Holder will not be further taxable to the U.S. Holder. A U.S. Holder's tax basis in the Subordinated Notes will be increased by the amount included in that U.S. Holder's income and decreased by the amount of nontaxable distributions. A U.S. Holder making the QEF Election generally will recognize, on the disposition of the Subordinated Notes, capital gain or loss equal to the difference, if any, between the amount realized upon such disposition (including redemption or retirement) and its adjusted tax basis in such Notes. That gain or loss generally will be long-term capital gain or loss if the U.S. Holder held such Notes for more than one year at the time of disposition. In certain circumstances, U.S. Holders that are individuals may be entitled to preferential tax treatment for net long-term capital gains. The ability of U.S. Holders to offset capital losses against ordinary income is limited.
In general, a QEF Election should be made on or before the due date for filing a U.S. Holder's federal income tax return for the first taxable year for which it holds a Subordinated Note. The QEF Election is effective only if certain required information is made available by the Issuer. The Issuer will undertake to comply with the IRS information requirements necessary to be a qualified electing fund, which will permit U.S. Holders to make the QEF Election. Nonetheless, there can be no assurance that such information will be available or presented.
Where a QEF Election is not timely made by a U.S. Holder for the year in which it acquired its Subordinated Notes, but is made for a later year, the excess distribution rules can be avoided by making
112 ` an election to recognize gain from a deemed sale of such Notes at the time when the QEF Election becomes effective.
If the Issuer holds equity of another PFIC (an "equity PFIC"), a U.S. Holder of the Subordinated Notes that wants to avoid the application of the excess distribution rules (described above) with respect to its indirect interest in that equity PFIC will have to make a separate QEF Election with respect to that equity PFIC. In that case, the Issuer will provide, to the extent it receives it, the information needed for U.S. Holders to make the QEF Election. That information may not, however, be available to the Issuer. U.S. Holders should consult their own tax advisors with respect to the tax consequences of such a situation.
A U.S. Holder should consult its own tax advisors regarding whether it should make a QEF Election (and, if it fails to make an initial election, whether it should make an election for a subsequent taxable year).
Status of the Issuer as a CFC. U.S. tax law also contains special provisions addressing the taxation of interests in CFCs. A U.S. person that owns (directly or indirectly) at least 10% of the voting stock of a foreign corporation, is considered a "U.S. Shareholder" (a "U.S. Shareholder") with respect to the foreign corporation. If U.S. Shareholders in the aggregate own (directly or indirectly) more than 50% of the voting power or value of the stock of such corporation, the foreign corporation will be classified as a CFC. Complex attribution rules apply for purposes of determining ownership of stock in a foreign corporation such as the Issuer. As indicated above, the Subordinated Notes (as well as some or all of the Classes of the Secured Notes and certain portions of the Collateral Manager's fee) may be treated as voting equity in the Issuer.
If the Issuer is classified as a CFC for at least 30 consecutive days during its taxable year, a U.S. Shareholder (and possibly any U.S. Holder that is a direct or indirect holder of a grantor trust that is considered to be a U.S. Shareholder) that is a shareholder of the Issuer as of the end of the Issuer's taxable year generally will be subject to current U.S. federal income tax on its share of the income of the Issuer, regardless of the amount of any cash distributions from the Issuer. Earnings subject to tax generally will not be taxed again when they are distributed to the U.S. Holder. In addition, income that would otherwise be characterized as capital gain and gain on the sale of the CFC's stock by a U.S. Shareholder (during the period that the corporation is a CFC and for a five-year period thereafter) will be classified in whole or in part as dividend income.
Certain income generated by a corporation conducting a banking, financing, insurance, or other similar business would not be includible in a holder's income under the CFC rules. However, each U.S. Holder of a Note will agree not to take the position that the Issuer is engaged in such a business. Accordingly, if the CFC rules apply, a U.S. Shareholder generally will be subject to tax currently on its share of the Issuer's income.
The tax consequences of the ownership and disposition of Subordinated Notes, including the potential interplay of the PFIC, QEF and CFC rules, are quite complex, and U.S. Holders of Subordinated Notes (actually or constructively by attribution) should consult their tax advisors with respect to the tax consequences of ownership of such Notes.
Taxation of Non-U.S. Holders of Subordinated Notes
Subject to the discussion under "—Recent U.S. Tax Legislation," above, payments on, and gain from the sale, exchange or redemption of, Subordinated Notes generally should not be subject to U.S. federal income tax in the hands of a Non-U.S. Holder that has no connection with the United States other than the
113 ` holding of such Notes. Subject to the discussion under "—Recent U.S. Tax Legislation," above, United States information reporting and backup withholding generally will not apply to payments on a Subordinated Note to, and proceeds from the disposition of such Note by, a Non-U.S. Holder if the holder certifies as to its non-United States status on the appropriate Internal Revenue Service Form W-8. Backup withholding is not an additional tax and may be refunded or credited against the holder's U.S. federal income tax liability if certain required information is furnished to the IRS. But see "—Recent U.S. Tax Legislation," above, for a discussion of reporting obligations of non-U.S. Holders with respect to recently enacted legislation.
3.8% Medicare Tax On Net Investment Income
Beginning in 2013, U.S. Holders that are individuals, estates, and certain trusts will be subject to an additional 3.8% tax (the "3.8% Medicare Tax") on all or a portion of their "net investment income" which may include any income or gain with respect to the Notes. The 3.8% Medicare Tax will be imposed on the lesser of (i) net investment income (undistributed net investment income for estates and trusts) and (ii) the excess of modified adjusted gross income (adjusted gross income for estates and trusts) and a threshold amount. The threshold amount is $250,000 for a married taxpayer filing a joint return (or a surviving spouse), $125,000 for a married individual filing a separate return, the dollar amount at which the highest bracket begins for estates and trusts, and $200,000 in any other case. Recently released proposed regulations have subjected equity holders of PFICs and CFCs to such tax, although the application of the tax (and the availability of particular elections) is quite complex. U.S. Holders should consult their advisors with respect to their consequences with respect to the 3.8% Medicare Tax.
Tax-Exempt Investors
Special considerations apply to pension plans and other investors ("Tax-Exempt Investors") that are subject to tax only on their unrelated business taxable income ("UBTI"). A Tax-Exempt Investor's income from an investment in the Issuer generally should not be treated as resulting in UBTI under current law, so long as such investor's acquisition of the Notes is not debt-financed, and, with respect to an investment in the Secured Notes, such investor does not (in addition to the investment in such Secured Notes) own more than 50% of the Issuer's equity (which would include the Subordinated Notes and any Class of Notes (if any) or portion of the Collateral Manager's fee that is recharacterized as equity).
Tax-Exempt Investors should consult their own tax advisors regarding an investment in the Issuer.
Transfer and Other Reporting Requirements
In general, U.S. Holders who acquire any Subordinated Notes (or any Class of Notes that is recharacterized as equity in the Issuer) for cash may be required to file a Form 926 with the IRS and to supply certain additional information to the IRS if (i) such U.S. Holder owns (directly or indirectly) immediately after the transfer, at least 10% by vote or value of the Issuer or (ii) the transfer when aggregated with all related transfers under applicable regulations, exceeds U.S. $100,000. In the event a U.S. Holder that is required to file fails to file such form, that U.S. Holder could be subject to a penalty of up to U.S. $100,000 (computed as 10% of the gross amount paid for the Subordinated Notes) or more if the failure to file was due to intentional disregard of its obligation.
In addition, a U.S. Holder of Subordinated Notes that owns (actually or constructively) at least 10% by vote or value of the Issuer (and each officer or director of the Issuer that is a U.S. citizen or resident) may be required to file an information return on IRS Form 5471. A U.S. Holder of Subordinated Notes generally is required to provide additional information regarding the Issuer annually on IRS Form 5471 if it owns (actually or constructively) more than 50% by vote or value of the Issuer. U.S. Holders should consult their own tax advisors regarding whether they are required to file IRS Form
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5471. In the event a U.S. Holder that is required to file such form fails to file such form, the U.S. Holder could be subject to a penalty of U.S.$ 10,000 for each such failure to file (in addition to other consequences).
Prospective investors in the Subordinated Notes (or any Class of Notes or other interest that could be recharacterized as equity in the Issuer) should consult with their own tax advisors regarding whether they are required to file IRS Form 8886 in respect of this transaction. Such filing generally will be required if such investors file U.S. federal income tax returns or U.S. federal information returns and recognize losses in excess of a specified threshold, and significant penalties may be imposed on taxpayers that fail to file the form timely. Such filing will also generally be required by a U.S. Holder of the Subordinated Notes if the Issuer both participates in certain types of transactions that are treated as "reportable transactions," such as a transaction in which its loss exceeds a specified threshold, and either (x) such U.S. Holder owns 10% or more of the aggregate amount of the Subordinated Notes and makes a QEF Election with respect to the Issuer or (y) the Issuer is treated as a CFC and such U.S. Holder is a "U.S. Shareholder" (as defined above) of the Issuer. If the Issuer does participate in a reportable transaction, it will make reasonable efforts to make such information available. Significant penalties may be imposed on taxpayers required to file Form 8886 that fail to do so timely.
A U.S. Holder that is an individual and holds certain foreign financial assets must file new IRS Form 8938 to report the ownership of such assets if the total value of those assets exceeds the applicable threshold amounts. The threshold varies depending on whether the individual lives in the United States or files a joint income tax return with a spouse. For example, an unmarried U.S. Holder living in the United States is required to file Form 8938 if the total value of all specified foreign financial assets is more than U.S. $50,000 on the last day of the tax year or more than U.S. $75,000 at any time during the tax year. U.S. Holders in other situations have the same or greater thresholds. In general, specified foreign financial assets include debt or equity interests (that are not regularly traded on an established securities market) issued by foreign financial institutions (such as the Issuer), and any interest in a foreign entity that is not a financial institution, including any stock or security, and any financial instrument or contract held for investment that has an issuer or counterparty that is not a U.S. person. Proposed regulations also would require certain domestic entities that are formed, or availed of, for purposes of holding, directly or indirectly, specified foreign financial assets to file IRS Form 8938. In addition, certain non-resident alien individuals may be required to file Form 8938, notwithstanding the availability of any special treatment under an income tax treaty. However, in general, such form is not required to be filed with respect to the Notes if they are held through a U.S. payer, such as a U.S. financial institution and U.S. branches of non- U.S. banks, and certain non-U.S. branches or subsidiaries of U.S. financial institutions.
Taxpayers who fail to make the required disclosure with respect to any taxable year are subject to a penalty of U.S.$10,000 for such taxable year, which may be increased up to U.S.$50,000 for a continuing failure to file the form after being notified by the IRS. In addition, the failure to file Form 8938 will extend the statute of limitations for a taxpayer's entire related income tax return (and not just the portion of the return that relates to the omission) until at least 3 years after the date on which the Form 8938 is filed.
All U.S. Holders are urged to consult with their own tax advisors with respect to whether a Note is a foreign financial asset that (if the applicable threshold were met) would be subject to this rule.
FBAR Reporting
U.S. Holders should consider their possible obligation to file a form TD F 90-22.1 – "Foreign Bank and Financial Accounts Report" with respect to their Subordinated Notes. Holders should consult their tax advisers with respect to this possible reporting requirement.
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Information Reporting and Backup Withholding
As a condition to the payment of principal and interest on any Note without United States federal back-up withholding, the Issuer and the Paying Agent will require the delivery of properly completed and signed applicable United States federal income tax certifications (generally, an IRS Form W-9 (or applicable successor form) in the case of a person that is a "United States person" within the meaning of Section 7701(a)(30) of the Code or the applicable IRS Form W-8 (or applicable successor form) in the case of a person that is not a "United States person" within the meaning of Section 7701(a)(30) of the Code).
In addition, under certain circumstances, information reporting requirements will apply to payments on a Note to, and the proceeds of the sale of a Note by, U.S. Holders and "backup withholding" will apply to such payments if the U.S. Holder fails to provide an accurate taxpayer identification number or otherwise fails to comply with, or establish an exemption from, the backup withholding requirements. Non-U.S. Holders generally will be required to comply with applicable certification procedures to establish that they are not U.S. Holders in order to avoid the application of such information reporting requirements and backup withholding. Backup withholding is not an additional tax and may be refunded or credited against the holder's federal income tax liability if certain required information is furnished to the IRS. The information reporting requirements may apply regardless of whether withholding is required. See also "—Recent U.S. Tax Legislation," above, for a discussion of reporting obligations under FATCA.
CAYMAN ISLANDS TAX CONSIDERATIONS
The following is a discussion on certain Cayman Islands income tax consequences of an investment in the Securities. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor's particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under Existing Cayman Islands Laws:
(i) Payments of interest and principal on the Securities will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of interest and principal to any Holder of the Securities, nor will gains derived from the disposal of the Securities be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.
(ii) No stamp duty is payable in respect of the issue of the Securities. The holder of any Securities (or a legal personal representative of such holder) whose Securities are brought into the Cayman Islands may in certain circumstances be liable to pay stamp duty imposed under the laws of the Cayman Islands in respect of such Securities. An instrument of transfer in respect of a Security is stampable if executed in or brought into the Cayman Islands.
The Issuer has been incorporated under the laws of the Cayman Islands as an exempted company with limited liability and, as such, has obtained an undertaking from the Governor in Cabinet of the Cayman Islands in the following form:
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The Tax Concessions Law 2011 Revision Undertaking as to Tax Concessions
In accordance with the provision of section 6 of The Tax Concessions Law (2011 Revision), the Governor in Cabinet undertakes with Canyon Capital CLO 2012-1, Ltd. ("the Issuer").
(a) That no law which is hereafter enacted in the Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the Issuer or its operations; and
(b) In addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable:
(i) On or in respect of the shares, debentures or other obligations of the Issuer; or
(ii) by way of the withholding in whole or part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (2011 Revision).
These concessions shall be for a period of twenty years from September 25, 2012.
If Cayman Islands law were to change so that the Issuer were required to withhold tax from payments on the Securities, the Issuer would be responsible for withholding such tax, but would not be responsible to make "gross-up" payments to Holders of the Securities.
The Cayman Islands does not have an income tax treaty arrangement with the U.S..
All payments in respect of the Securities will be made without withholding or deduction for, or on account of, any present or future taxes, duties or charges of whatever nature unless the Issuer or a paying agent is required by applicable law to make any payment in respect of the Securities subject to any withholding or deduction for, or on account of, any present or future taxes, duties or charges of whatever nature. In that event the Issuer or the paying agent (as the case may be) shall make such payment after such withholding or deduction has been made and shall account to the relevant authorities for the amount so required to be withheld or deducted. Neither the Issuer nor the paying agent will be obliged to make any additional payments to Holders of Securities in respect of such withholding or deduction. No income or withholding taxes are due in the Cayman Islands with respect to the Securities.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY OF CERTAIN OF THE TAX IMPLICATIONS OF AN INVESTMENT IN SECURITIES. PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS PRIOR TO INVESTING TO DETERMINE THE TAX IMPLICATIONS OF SUCH INVESTMENT IN LIGHT OF SUCH INVESTOR’S CIRCUMSTANCES.
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ERISA CONSIDERATIONS
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THE STATEMENTS ABOUT U.S. FEDERAL TAX ISSUES ARE MADE TO SUPPORT MARKETING OF THE SECURITIES. NO TAXPAYER CAN RELY ON THEM TO AVOID TAX PENALTIES. EACH PROSPECTIVE PURCHASER SHOULD SEEK ADVICE FROM AN INDEPENDENT TAX ADVISOR ABOUT THE TAX CONSEQUENCES UNDER ITS OWN PARTICULAR CIRCUMSTANCES OF INVESTING IN SECURITIES UNDER THE LAWS OF THE CAYMAN ISLANDS, THE UNITED STATES AND ITS CONSTITUENT JURISDICTIONS AND ANY OTHER JURISDICTION WHERE THE PURCHASER MAY BE SUBJECT TO TAXATION. ______
The U.S. Employee Retirement Income Security Act of 1974, as amended ("ERISA"), imposes certain requirements on "employee benefit plans" (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, including entities such as collective investment funds and separate accounts whose underlying assets include the assets of such plans (collectively, "ERISA Plans"), and on those persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA’s general fiduciary requirements, including the requirement of investment prudence and diversification and the requirement that an ERISA Plan’s investments be made in accordance with the documents governing the ERISA Plan. The prudence of a particular investment must be determined by the responsible fiduciary of an ERISA Plan by taking into account the ERISA Plan’s particular circumstances and all of the facts and circumstances of the investment including, but not limited to, the matters discussed under "Risk Factors" and the fact that in the future there may be no market in which such fiduciary will be able to sell or otherwise dispose of Securities it may purchase.
Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan as well as those plans that are not subject to ERISA but to which Section 4975 of the Code applies, such as individual retirement accounts and Keogh plans, including entities whose underlying assets include the assets of such plans (together with ERISA Plans, "Plans") and certain persons (referred to as "parties in interest" under ERISA or "disqualified persons" under Section 4975 of the Code) having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in interest or disqualified person who engages in a prohibited transaction under ERISA or Section 4975 of the Code (each, a "prohibited transaction") may be subject to excise taxes and other penalties and liabilities under ERISA and the Code, and the transaction may have to be rescinded. In addition, the fiduciary of the Plan that engaged in such a non-exempt prohibited transaction may be subject to penalties under ERISA and/or the Code.
The Issuer, the Initial Purchaser, the Trustee, the Collateral Administrator, and the Collateral Manager, or any of their respective affiliates, may be parties in interest and disqualified persons with respect to many Plans. Prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Code may arise if Securities are acquired or held by a Plan with respect to which the Issuer, the Initial Purchaser, the Trustee, the Collateral Administrator or the Collateral Manager, or any of their respective affiliates, is a party in interest or a disqualified person. Certain exemptions from the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code may be applicable, however, in certain cases depending in part on the type of Plan fiduciary making the decision to acquire a Security and the circumstances under which such decision is made. Included among these exemptions are Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code (relating to transactions between Plans and certain service providers) and Prohibited Transaction Class Exemption ("PTCE") 91-38 (relating to investments by bank collective investment funds), PTCE 84-14 (relating to transactions effected by a
118 ` qualified professional asset manager), PTCE 95-60 (relating to transactions involving insurance company general accounts), PTCE 90-1 (relating to investments by insurance company pooled separate accounts) and PTCE 96-23 (relating to transactions determined by in house asset managers). There can be no assurance that any of these exemptions or any other exemption will be available with respect to any particular transaction involving Securities.
Governmental plans (as defined in Section 3(32) of ERISA), non-U.S. plans (as defined in Section 4(b)(4) of ERISA), certain church plans (as defined in Section 3(33) of ERISA), non-U.S. plans and other plans, while not subject to the fiduciary responsibility provisions of ERISA or the provisions of Section 4975 of the Code, may nevertheless be subject to other applicable local, state, federal or non-U.S. laws that are substantially similar to the prohibited transaction provisions of Section 406 of ERISA or Section 4975 of the Code ("Other Plan Law"). Fiduciaries of any such plans should consult with their counsel before purchasing any Securities.
Any insurance company proposing to invest assets of its general account in Securities should consider the extent to which such investment would be subject to the requirements of Title I of ERISA and Section 4975 of the Code in light of the U.S. Supreme Court's decision in John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993), and the enactment of Section 401(c) of ERISA on August 20, 1996. In particular, such an insurance company should consider (i) the exemptive relief granted by the U.S. Department of Labor for transactions involving insurance company general accounts in PTCE 95-60 and (ii) if such exemptive relief is not available, whether its purchase of Securities will be permissible under the final regulations issued under Section 401(c) of ERISA. The final regulations provide guidance on which assets held by an insurance company constitute "plan assets" for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code. The regulations do not exempt the assets of insurance company general accounts from treatment as "plan assets" to the extent they support certain participating annuities issued to Plans after December 31, 1998.
In addition, the U.S. Department of Labor regulation, 29 C.F.R. Section 2510.3-101 (as modified by Section 3(42) of ERISA, the "Plan Asset Regulation"), describes what constitutes the assets of a Plan with respect to the Plan’s investment in an entity for purposes of certain provisions of ERISA, including the fiduciary responsibility provisions of Title I of ERISA, and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan invests in an "equity interest" of an entity that is neither a "publicly offered security" nor a security issued by an investment company registered under the U.S. Investment Company Act, the Plan’s assets include both the equity interest and an undivided interest in each of the entity’s underlying assets, unless it is established that the entity is an "operating company" or that equity participation in the entity by Benefit Plan Investors is not "significant," as described below.
Under the Plan Asset Regulation, an "equity interest" means any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and that has no substantial equity features. "Benefit Plan Investor" means (i) any "employee benefit plan" (as defined in Section 3(3) of ERISA) that is subject to Title I of ERISA, (ii) any "plan" described in Section 4975(e)(1) of the Code to which Section 4975 of the Code applies or (iii) any entity whose underlying assets could be deemed to include "plan assets" by reason of an employee benefit plan's or plan's investment in the entity within the meaning of the Plan Asset Regulation or otherwise.
The Issuer does not intend to treat any Class of Securities that are Not ERISA Restricted as "equity interests" in the Issuer for purposes of the Plan Asset Regulation. However, there can be no assurance that any Class designated as Not ERISA Restricted would be characterized by the U.S. Department of Labor or others as indebtedness and not as an equity interest. Each prospective purchaser (including transferees) (each, a "Purchaser") of a Not ERISA Restricted Security will be deemed to have
119 ` made certain representations with respect to ERISA, the Code and Other Plan Law matters as described under "Transfer Restrictions" in the Base Offering Memorandum.
Securities that are ERISA Restricted may be considered "equity interests" in the Issuer for purposes of the Plan Asset Regulation and will not constitute "publicly-offered securities" for purposes of the Plan Asset Regulation. In addition, the Issuer will not be registered under the U.S. Investment Company Act and it is not likely that the Issuer will qualify as an "operating company" for purposes of the Plan Asset Regulation. Therefore, if equity participation in any Class of ERISA Restricted Securities by Benefit Plan Investors is "significant" within the meaning of the Plan Asset Regulation, the assets of the Issuer could be considered to be the assets of any Plans that purchase any of such Securities. In such circumstances, in addition to considering the applicability of ERISA and Section 4975 of the Code to such Securities, a Plan fiduciary considering an investment in such Securities would have to consider, among other things, the applicability of ERISA and Section 4975 of the Code to transactions involving the Issuer, the Initial Purchaser, the Trustee, the Collateral Administrator, the Collateral Manager or their respective affiliates, including whether such transactions might constitute a prohibited transaction under ERISA or Section 4975 of the Code or otherwise may result in a breach of fiduciary duty under ERISA.
Under the Plan Asset Regulation, equity participation in an entity by Benefit Plan Investors is "significant" on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the total value of any class of equity interests in the entity is held by Benefit Plan Investors (the "25% Limitation"). For purposes of this determination, the value of equity interests held by a person (other than a Benefit Plan Investor) that has discretionary authority or control with respect to the assets of the Issuer or that provides investment advice for a fee (direct or indirect) with respect to such assets (or any "affiliate" of such a person (as defined in the Plan Asset Regulation)) is disregarded (each, a "Controlling Person").
The Issuer intends to limit participation by Benefit Plan Investors in ERISA Restricted Securities (or any interest therein) so that the Issuer will not be deemed to hold assets of any Plans pursuant to the Plan Asset Regulation or otherwise. In order to effect these limitations, each prospective Purchaser of an ERISA Restricted Security (or any interest therein) will be deemed to have made (and generally also will be required to make) certain representations regarding its status as a Benefit Plan Investor or Controlling Person and with respect to other ERISA, Code and Other Plan Law matters as described under "Transfer Restrictions" in the Base Offering Memorandum. Any purported sale or transfer of an ERISA Restricted Security or any interest therein that does not comply with the foregoing shall be null and void ab initio and the Issuer will have the right to cause a forced transfer or the applicable ERISA Restricted Securities to a permitted transferee.
ERISA Restricted Securities will not be permitted to be sold or transferred to Purchasers that have represented that they are, or are acting on behalf of or with the assets of, Benefit Plan Investors or Controlling Persons to the extent that such sale may result in Benefit Plan Investors owning 25% or more of any Class of ERISA Restricted Securities determined in accordance with the Plan Asset Regulation and the Indenture and assuming that all of the representations made (or deemed to be made) by Purchasers of Securities are true. Each ERISA Restricted Security held as principal by the Collateral Manager, the Initial Purchaser, the Trustee, the Collateral Administrator and any of their respective affiliates and persons that have represented that they are Controlling Persons will be disregarded and will not be treated as outstanding for purposes of determining compliance with such 25% limitation.
There can be no assurance that there will not be circumstances in which transfers of Securities will be restricted in order to comply with any applicable aforementioned limitation. Moreover, there can be no assurance that, despite the restrictions relating to purchases by or transfers to Benefit Plan Investors
120 ` and Controlling Persons and the procedures to be employed by the Initial Purchaser, assets of the Issuer will not be deemed to be assets of Plan investors by reason of the Plan Asset Regulation or otherwise.
If for any reason the assets of the Issuer were deemed to be "plan assets" of a Plan, certain transactions that the Issuer might enter into, or may have entered into, in the ordinary course of its business might constitute non-exempt "prohibited transactions" under Section 406 of ERISA or Section 4975 of the Code and might have to be rescinded at significant cost to the Issuer. The Collateral Manager, on behalf of the Issuer, may be prevented from engaging in certain investments or other transactions or fee arrangements because they might be deemed to cause non-exempt prohibited transactions. Moreover, if the underlying assets of the Issuer were deemed to be assets constituting plan assets, (i) the assets of the Issuer could be subject to ERISA's reporting and disclosure requirements, (ii) a fiduciary causing a Benefit Plan Investor to make an investment in the equity of the Issuer could be deemed to have delegated its responsibility to manage the assets of the Benefit Plan Investor, (iii) various providers of fiduciary or other services to the Issuer, and any other parties with authority or control with respect to the Issuer, could be deemed to be Plan fiduciaries or otherwise parties in interest or disqualified persons by virtue of their provision of such services, and (iv) it is not clear that Section 404(b) of ERISA, which generally prohibits plan fiduciaries from maintaining the indicia of ownership of assets of plans subject to Title I of ERISA outside the jurisdiction of the district courts of the United States, would be satisfied in all instances.
Each Plan fiduciary who is responsible for making the investment decisions whether to purchase or commit to purchase and to hold Securities should determine whether, under the general fiduciary standards of investment prudence and diversification and under the documents and instruments governing the Plan, an investment in the Securities is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan’s investment portfolio. Any Plan or plan subject to Other Plan Law proposing to invest in Securities should consult with its counsel to confirm that such investment will not result in a prohibited transaction or violation of any Other Plan Law and will satisfy the other requirements of ERISA, the Code or Other Plan Law, as applicable.
Additional restrictions may apply to ERISA Restricted Securities, such as, in the case of ERISA Restricted Securities, the form of Security that Benefit Plan Investors and Controlling Persons may hold. Any such restrictions will be set forth in the Term Sheet.
The sale of any Securities to a Plan is in no respect a representation by the Issuers, the Initial Purchaser, the Trustee, the Collateral Administrator, the Collateral Manager or any of their respective affiliates that such an investment meets all relevant legal requirements with respect to investments by Purchasers generally or any particular Purchaser, or that such an investment is appropriate for Purchasers generally or any particular Purchaser.
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TRANSFER RESTRICTIONS
Because of the transfer restrictions set forth in the Indenture (the "Transfer Restrictions") and described below, purchasers are advised to consult legal counsel prior to making any offer, resale, pledge, purchase or other transfer of the Securities. Purchasers of Securities represented by an interest in a Regulation S Global Note are advised that such interests are not transferable to U.S. Persons at any time except in accordance with the following restrictions.
Each prospective purchaser of Securities in the form of a Rule 144A Global Note (each, a "144A Offeree") or Regulation S Global Note (a "Regulation S Offeree", and together with the 144A Offerees, the "Global Note Offerees"), by accepting delivery of this Offering Memorandum, will be deemed to have represented and agreed that: (i) this Offering Memorandum is personal to such Global Note Offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Securities other than pursuant to Rule 144A under the U.S. Securities Act, in offshore transactions in accordance with Regulation S or pursuant to another exemption from the registration requirements of the U.S. Securities Act, (ii) prior to the later of the date on which Securities are sold to such prospective purchaser and the Closing Date, distribution of this Offering Memorandum, or disclosure of any of its contents to any person other than such Global Note Offeree and those persons, if any, retained to advise such Global Note Offeree with respect thereto and other persons meeting the requirements of Rule 144A under the U.S. Securities Act or Regulation S is unauthorized and any disclosure of any of its contents, without the prior written consent of the Issuers, is prohibited and (iii) such Global Note Offeree will make no photocopies of this Offering Memorandum or any documents referred to herein (prior to the later of the date on which Securities are sold to such prospective purchaser and the Closing Date) and, if such Global Note Offeree does not purchase the Securities or the offering of the Securities is terminated, will return this Offering Memorandum and all documents referred to herein to the Initial Purchaser at the following address: Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Managing Director, CLO Group.
Under the Indenture, the Issuers will agree to comply with the requirements of Rule 144A relative to the dissemination of information to prospective purchasers in the secondary market.
Each (i) Global Note Offeree purchasing a beneficial interest in a Global Note and transferee of a beneficial interest in a Global Note will be deemed, and (ii) purchaser (including transferees and each beneficial owner of an account on whose behalf Securities are being purchased) of a Non-Clearing Agency Security (each Person described in clauses (i) and (ii), a "Purchaser") will be required, pursuant to a Representation Letter or a Transfer Certificate, to make the representations and agreements substantially as set forth below. In addition, the Initial Purchaser will require the Purchasers of the Subordinated Notes to make the representations and agreements substantially as set forth below, pursuant to a Representation Letter. Transferees that will hold interests in a Security that is ERISA Restricted in the form of interests in a Non-Clearing Agency Security will be required to provide a Transfer Certificate. The Transaction Parties are presumed to have relied on such representations and agreements.
1. Receipt of Final Offering Materials. The Purchaser has received and reviewed the final offering memorandum, the memorandum referred to as the "done deal memorandum" and the marketing book, each dated as of the date of the final offering memorandum (collectively, the "Final Offering Materials"), relating to the offering of the Securities.
2. Sophistication/Investment Decision. The Purchaser is capable of evaluating the merits and risks of an investment in the Securities. The Purchaser is able to bear the economic risks of an investment in the Securities. The Purchaser has had access to such information concerning the Transaction Parties and the Securities as it deems necessary or appropriate to make an informed
122 ` investment decision, including an opportunity to ask questions and receive information from the Transaction Parties, and it has received all information that it has requested concerning its purchase of the Securities. The Purchaser has, to the extent it deems necessary, consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers (its "Advisors") with respect to its purchase of the Securities.
The Purchaser (i) has made its investment decision based upon its own judgment, any advice received from its Advisors, and its review of the Final Offering Materials, and not upon any view, advice or representations (whether written or oral) of any Transaction Party and (ii) hereby reconfirms its decision to make an investment in the Securities to the extent such decision was made prior to the receipt of the Final Offering Materials. None of the Transaction Parties is acting as a fiduciary or financial or investment adviser to the Purchaser. None of the Transaction Parties has given the Purchaser any assurance or guarantee as to the expected or projected performance of the Securities. The Purchaser understands that the Securities will be highly illiquid. The Purchaser is prepared to hold the Securities for an indefinite period of time or until maturity.
3. Offering/Investor Qualifications.
If the Purchaser is purchasing Securities in the form of an interest in a Regulation S Global Note: (i) the Purchaser understands that the Securities are offered to and purchased by it in an offshore transaction not involving any public offering in the United States, in reliance on the exemption from registration provided by Regulation S under the U.S. Securities Act, and that the Securities will not be registered under the U.S. federal securities laws or any state securities laws or the securities laws of any other applicable jurisdiction and (ii) the Purchaser is not a U.S. Person or U.S. resident for purposes of the U.S. Investment Company Act and understands that interests in a Regulation S Global Note may not be owned at any time by a U.S. Person.
If the Purchaser is purchasing Securities in the form of an interest in a Rule 144A Global Note: (i) the Purchaser understands that the Securities are offered to and purchased by it in a transaction not involving any public offering in the United States, in reliance on the exemption from registration provided by Rule 144A or another exemption from the registration requirements of the U.S. Securities Act, and that the Securities will not be registered under the U.S. federal securities laws or the securities laws of any other applicable jurisdiction and (ii) the Purchaser is both a Qualified Institutional Buyer and a Qualified Purchaser, but is:
(A) not a dealer of the type described in paragraph (a)(1)(ii) of Rule 144A unless it, as applicable, owns and invests on a discretionary basis not less than $25,000,000 in securities of non- affiliated issuers of the dealer; and
(B) not a participant-directed employee plan (such as a 401(k) plan), or any other type of plan referred to in paragraph (a)(1)(i)(D) or (a)(1)(i)(E) of Rule 144A) or trust fund referred to in paragraph (a)(1)(i)(F) of Rule 144A that holds the assets of such a plan, unless investment decisions with respect to such plan are made solely by the fiduciary, trustee or sponsor of such plan and not by beneficiaries of the plan.
If the Purchaser is not purchasing a Global Note: (i) the Purchaser understands that the Securities are offered to and purchased by it in a transaction not involving any public offering in the United States, in reliance on Rule 144A under the U.S. Securities Act, Regulation S under the U.S. Securities Act or another exemption from the registration requirements of the U.S. Securities Act and that the Securities will not be registered under the U.S. federal securities laws or any state securities laws or the securities laws of any other applicable jurisdiction and (ii) the Purchaser is either (a) not a U.S. Person or U.S.
123 ` resident for purposes of the U.S. Investment Company Act or (b) either (i) both a Qualified Institutional Buyer and a Qualified Purchaser or (ii) in the case of the Subordinated Notes, both an Accredited Investor and either a Qualified Purchaser or a Knowledgeable Employee.
If the Purchaser is a Qualified Purchaser or, in the case of Subordinated Notes, a Knowledgeable Employee, the Purchaser is acquiring the Securities as principal for its own account for investment and not for sale in connection with any distribution thereof. The Purchaser and each such account was not formed solely for the purpose of investing in the Securities and is not a (i) partnership, (ii) common trust fund or (iii) special trust, pension fund or retirement plan in which the partners, beneficiaries or participants, as applicable, may designate the particular investments to be made. The Purchaser agrees that it shall not hold such Securities for the benefit of any other Person and shall be the sole beneficial owner thereof for all purposes and that it shall not sell participation interests in the Securities or enter into any other arrangement pursuant to which any other Person shall be entitled to a beneficial interest in the distributions on the Securities and further that the Securities purchased directly or indirectly by it constitute an investment of no more than 40% of the Purchaser’s assets.
4. Investment Intent/Subsequent Transfers. The Purchaser is not purchasing the Securities with a view to the resale, distribution or other disposition thereof in violation of the U.S. Securities Act. The Purchaser will not, at any time, offer to buy or offer to sell the Securities by any form of general solicitation or advertising, including, but not limited to, any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium or broadcast over television or radio or seminar or meeting whose attendees have been invited by general solicitations or advertising.
The Purchaser will provide notice to each Person to whom it proposes to transfer any interest in the Securities of the Transfer Restrictions and representations set forth in the Indenture (including the exhibits referenced therein). The Purchaser understands that any such transfer may be made only pursuant to an exemption from registration under the U.S. Securities Act and any applicable state securities laws. The Purchaser understands that transfers of ERISA Restricted Securities to Benefit Plan Investors or Controlling Persons may be limited or prohibited. In addition:
(A) Rule 144A Global Notes may not at any time be held by or on behalf of Persons that are not both Qualified Institutional Buyers and Qualified Purchasers. Before any interest in a Rule 144A Global Note may be resold, pledged or otherwise transferred to a Person who takes delivery in the form of an interest in a Regulation S Global Note, the transferor will be required to provide the Trustee with a Transfer Certificate.
(B) Regulation S Global Notes may not at any time be held by or on behalf of U.S. Persons. Before any interest in a Regulation S Global Note may be resold, pledged or otherwise transferred to a Person who takes delivery in the form of an interest in a Rule 144A Global Note, the transferor will be required to provide the Trustee with a Transfer Certificate.
(C) Before any interest in Securities may be resold, pledged or otherwise transferred to a Person that will hold an interest in a Non-Clearing Agency Security, the transferee will be required to provide the Trustee with a Transfer Certificate.
(D) ERISA Restricted Securities purchased by Benefit Plan Investors or Controlling Persons after the Closing Date shall be issued in the form of Non-Clearing Agency Securities and such Purchasers may not at any time hold ERISA Restricted Securities in the form of a Global Note, except that Controlling Persons acquiring ERISA Restricted Securities from other Controlling Persons that acquired such Securities on the Closing Date may, with the consent of the Issuer, hold an interest in a Global Note.
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5. Benefit Plans.
With Respect Only to Securities that are ERISA Restricted: Unless otherwise specified in a signed investor representation letter delivered to the Initial Purchaser or in a Transfer Certificate, the Purchaser is not (i) any "employee benefit plan" (as defined in Section 3(3) of ERISA) that is subject to Title I of ERISA, (ii) any "plan" described in Section 4975(e)(1) of the Code to which Section 4975 of the Code applies or (iii) any entity whose underlying assets could be deemed to include "plan assets" by reason of an employee benefit plan's or plan’s investment in the entity within the meaning of the Plan Asset Regulation or otherwise (each, a "Benefit Plan Investor").
Unless otherwise specified in a signed investor representation letter delivered to the Initial Purchaser or in a Transfer Certificate, the Purchaser is not a Person (other than a Benefit Plan Investor) that has discretionary authority or control with respect to the assets of the Issuer or that provides investment advice for a fee (direct or indirect) with respect to such assets (or any "affiliate" of such a Person (as defined in the Plan Asset Regulation)) (each, a "Controlling Person"); provided, that no such representation is made by the Collateral Manager, the Initial Purchaser or the Trustee or their respective affiliates, and, provided, further, that in the event the Collateral Manager, the Initial Purchaser or the Trustee or any of their respective affiliates purchase ERISA Restricted Securities, such purchaser will notify the Trustee prior to such purchase.
The Purchaser understands and agrees that (i) no acquisition or transfer of an ERISA Restricted Security (or any interest therein) will be effective, and none of the Collateral Manager, the Initial Purchaser, the Issuer or the Trustee will recognize any such acquisition or transfer if, after giving effect to such acquisition or transfer, (a) 25% or more (as determined under ERISA and the Plan Asset Regulation) of any Class of the ERISA Restricted Securities, respectively, would be held by Benefit Plan Investors (excluding, in each case, ERISA Restricted Securities held by Controlling Persons) immediately after such acquisition or transfer or (b) (1) the underlying assets of the Issuer would be treated as assets of the purchaser or transferee of any Security (or interest therein) by virtue of its ownership interest and thereby subject the Issuer and the Collateral Manager (or other persons responsible for the investment and operation of the Issuer’s assets) to laws or regulations that are similar to the fiduciary responsibility or prohibited transaction provisions of ERISA or Section 4975 of the Code (any law, rule or regulation that results in such treatment of the Issuer, "Similar Law"), or (2) it would result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code (or, in the case of a governmental, non-U.S., church or other plan, a non-exempt violation of any Other Plan Law), and (ii) in the event that the Issuer determines that (after a transfer) 25% or more of any Class of ERISA Restricted Securities is held by Benefit Plan Investors, as determined under ERISA and the Plan Asset Regulation, the Issuer may cause a sale or transfer in order to reduce the percentage of that Class of ERISA Restricted Securities held by Benefit Plan Investors.
The Purchaser will not sell or otherwise transfer an ERISA Restricted Security or any interest therein otherwise than to a Person who makes or is deemed to make these same representations and agreements with respect to its acquisition, holding and disposition of such ERISA Restricted Securities.
With Respect to all Securities: The Purchaser’s purchase, holding and disposition of Securities will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or, in the case of a governmental, church, non-U.S. or other plan, a non-exempt violation of any Other Plan Law, and will not subject the Issuers, the Trustee or the Initial Purchaser to any laws, rules or regulations applicable to such plan as a result of the investment in the Issuers by such plan.
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The Purchaser acknowledges that the Issuers, the Collateral Manager, the Trustee, the Initial Purchaser and their respective affiliates, shall be entitled to conclusively rely upon the truth and accuracy of the foregoing representations and agreements without further inquiry.
Except as otherwise agreed by the Issuer with an initial investor in the Subordinated Notes on the Closing Date, the Purchaser and any fiduciary causing it to acquire an interest in any Securities agrees to indemnify and hold harmless the Issuers, the Collateral Manager, the Trustee, the Initial Purchaser and their respective Affiliates, from and against any cost, damage or loss incurred by any of them as a result of any of the foregoing representations and agreements being or becoming false.
Any purported acquisition or transfer of any Security or beneficial interest therein to an acquirer or transferee that does not comply with the requirements of this clause 5 shall be null and void ab initio.
The Purchaser understands that the representations made in this clause 5 shall be deemed to be made on each day from the date that the Purchaser acquires an interest in the Securities until the date it has disposed of its interests in the Securities.
In the event that any representation in this clause 5 becomes untrue (or, with respect to Securities that are ERISA Restricted Securities, there is any change in status of the Purchaser as a Benefit Plan Investor or Controlling Person), the Purchaser shall immediately notify the Trustee; provided that, if the Purchaser becomes a Benefit Plan Investor or any assets used by it to acquire the ERISA Restricted Securities constitute assets of a Benefit Plan Investor, it will also provide the Trustee with the maximum percentage of the invested assets that will constitute "plan assets" for purposes of Title I of ERISA or Section 4975 of the Code, acknowledging that if it cannot provide the foregoing percentage, that for purposes of determining whether Benefit Plan Investors own less than 25% of the value of each class of the ERISA Restricted Securities, 100% of the assets it invests shall be treated as "plan assets."
If any Person shall become the beneficial owner of a Security who has made or is deemed to have made a Benefit Plan Investor, Controlling Person, prohibited transaction, Other Plan Law or Similar Law representation that is subsequently shown to be false or misleading or whose beneficial ownership otherwise causes a violation of the 25% Limitation (any such Person, a "Non-Permitted ERISA Holder"), such Person will be required to sell its interest in such Security or be subject to forced sale of such interest as described in the last paragraph under this heading "Transfer Restrictions."
6. Certain Tax Matters. The Purchaser has read the summary of the U.S. federal income tax considerations in "U.S. Federal Income Tax Considerations." The Purchaser will treat the characterization of the Securities as debt or equity for U.S. tax purposes in a manner consistent with the treatment of such Securities by the Issuer as described in " U.S. Federal Income Tax Considerations" and will take no action inconsistent with such treatment.
The Purchaser understands that the Issuer may require certification acceptable to it (i) to permit the Issuer to make payments to it without, or at a reduced rate of, withholding or (ii) to enable the Issuer to qualify for a reduced rate of withholding in any jurisdiction from or through which the Issuer receives payments on its assets. The Purchaser agrees to provide any such certification that is requested by the Issuer.
Each Holder and beneficial owner of a Subordinated Note that is not a "United States person" (as defined in Section 7701(a)(30) of the Code) will make, or by acquiring such Security or an interest therein will be deemed to make, a representation to the effect that (a) either (i) it is not a bank, or (ii) it is a Person that is eligible for benefits under an income tax treaty with the United States that eliminates U.S. federal income taxation of U.S. source interest not attributable to a permanent establishment in the United
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States, and (b) it is not purchasing the Security in order to reduce its U.S. federal income tax liability pursuant to a tax avoidance plan within the meaning of Treasury Regulation 1.881-3(a)(4)(i)(B).
The Purchaser of any Security agrees to (i) provide the Trustee and the Issuer (and any Intermediary) with the Holder FATCA Information and (ii) permit the Issuer, the Collateral Manager and the Trustee (on behalf of the Issuer) to (x) share such information with the IRS and any other taxing authority, (y) compel or effect the sale of Securities held by such Purchaser if it fails to comply with the foregoing requirements and the Issuer determines in its sole discretion that it is required to close out such Holder under FATCA and (z) make other amendments to the Indenture to enable the Issuer to comply with FATCA. The Purchaser acknowledges that any such sale of Securities held by such Purchaser may be for less than the fair market value of such Securities.
7. Cayman Islands. The Purchaser is not a member of the public in the Cayman Islands.
8. Privacy. The Purchaser acknowledges that the Issuer may receive a list of participants holding positions in the Securities from one or more book-entry depositories.
9. Non-Petition. The Purchaser will not institute against, or join any other Person in instituting against, either of the Issuers or any ETB Subsidiary any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings, or other proceedings under Cayman Islands law, United States federal or state bankruptcy law or similar laws of any jurisdiction until the date which is one year (or, if longer, the applicable preference period then in effect) plus one day after the payment in full of all Securities.
The Purchaser understands that the foregoing restrictions are a material inducement for each Holder and beneficial owner of the Securities to acquire such Securities and for the Issuer, the Co-Issuer and the Collateral Manager to enter into the Indenture (in the case of the Issuer and the Co-Issuer) and the other applicable transaction documents and are an essential term of the Indenture and that any Holder or beneficial owner of a Security, the Collateral Manager or either of the Issuers may seek and obtain specific performance of such restrictions (including injunctive relief), including, without limitation, in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings, or other proceedings under Cayman Islands law, United States federal or state bankruptcy law or similar laws of any jurisdiction.
10. Effect of Breaches. The Purchaser agrees that (i) any sale, pledge or other transfer of the Securities (or any interest therein) made in violation of the Transfer Restrictions, or made based upon any false or inaccurate representation made by the Purchaser or a transferee to the Issuers or the Issuer, as applicable, will be null and void ab initio and of no force or effect and (ii) none of the Transaction Parties has any obligation to recognize any sale, pledge or other transfer of the Securities (or any interest therein) made in violation of any Transfer Restriction or made based upon any such false or inaccurate representation.
11. Legends. The Purchaser acknowledges that the Securities will bear a legend to the following effect unless the Issuers determine otherwise in compliance with applicable law:
(a) With respect to Secured Notes:
THIS SECURITY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE APPLICABLE ISSUER HAS NOT BEEN REGISTERED UNDER THE UNITED STATES INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT
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COMPANY ACT"). THIS SECURITY AND INTERESTS HEREIN MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT (A)(1) TO A QUALIFIED PURCHASER (FOR PURPOSES OF THE INVESTMENT COMPANY ACT) THAT THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT THAT IS NOT A BROKER-DEALER WHICH OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25 MILLION IN SECURITIES OF ISSUERS THAT ARE NOT AFFILIATED PERSONS OF THE DEALER AND IS NOT A PLAN REFERRED TO IN PARAGRAPH (a)(1)(i)(D) OR (a)(1)(i)(E) OF RULE 144A OR A TRUST FUND REFERRED TO IN PARAGRAPH (a)(1)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH A PLAN, IF INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE BENEFICIARIES OF THE PLAN, PURCHASING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, OR (2) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS SPECIFIED IN THE INDENTURE REFERRED TO BELOW, AND IN EACH CASE WHICH MAY BE EFFECTED WITHOUT LOSS OF ANY APPLICABLE INVESTMENT COMPANY ACT EXCEPTION, (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION AND (C) IN AN AUTHORIZED DENOMINATION FOR THE PURCHASER AND FOR EACH SUCH ACCOUNT. EACH PURCHASER OF THIS SECURITY WILL BE DEEMED TO HAVE MADE THE REPRESENTATIONS AND AGREEMENTS SET FORTH IN SECTION 2.5 OF THE INDENTURE, OR, IF REQUIRED UNDER THE INDENTURE, MUST DELIVER A TRANSFER CERTIFICATE IN THE FORM PROVIDED IN THE INDENTURE. ANY TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE AND EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY TO THE APPLICABLE ISSUER, THE TRUSTEE OR ANY INTERMEDIARY. THE ISSUER HAS THE RIGHT, UNDER THE INDENTURE, TO COMPEL ANY NON- PERMITTED HOLDER OR RECALCITRANT HOLDER (AS EACH IS DEFINED IN THE INDENTURE) TO SELL ITS INTEREST IN THE SECURITIES, OR MAY SELL SUCH INTEREST ON BEHALF OF SUCH OWNER.
EACH HOLDER AND EACH BENEFICIAL OWNER OF THIS SECURED NOTE, BY ACCEPTANCE OF SUCH NOTE, OR ITS INTEREST IN SUCH NOTE, AS THE CASE MAY BE, SHALL BE DEEMED TO HAVE AGREED TO TREAT, AND SHALL TREAT, SUCH NOTE AS DEBT OF THE ISSUER FOR U.S. FEDERAL INCOME TAX PURPOSES.
(b) With respect to Class C, Class D and Class E Notes:
THE CLASS C/CLASS D/CLASS E NOTES ARE BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID") FOR U.S. FEDERAL INCOME TAX PURPOSES. THE ISSUE PRICE, TOTAL AMOUNT OF OID, ISSUE DATE AND YIELD TO MATURITY MAY BE OBTAINED BY CONTACTING THE TRUSTEE AT 1761 EAST ST. ANDREW PLACE SANTA ANA, CA 92705.
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(c) With respect to Subordinated Notes:
THIS SECURITY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE APPLICABLE ISSUER HAS NOT BEEN REGISTERED UNDER THE UNITED STATES INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT COMPANY ACT"). THIS SECURITY AND INTERESTS HEREIN MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT (A)(1) TO A QUALIFIED PURCHASER OR A KNOWLEDGEABLE EMPLOYEE (FOR PURPOSES OF THE INVESTMENT COMPANY ACT) THAT THE SELLER REASONABLY BELIEVES IS EITHER (X) AN ACCREDITED INVESTOR WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR (Y) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT THAT IS NOT A BROKER-DEALER WHICH OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25 MILLION IN SECURITIES OF ISSUERS THAT ARE NOT AFFILIATED PERSONS OF THE DEALER AND IS NOT A PLAN REFERRED TO IN PARAGRAPH (a)(1)(i)(D) OR (a)(1)(i)(E) OF RULE 144A OR A TRUST FUND REFERRED TO IN PARAGRAPH (a)(1)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH A PLAN, IF INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE BENEFICIARIES OF THE PLAN, PURCHASING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, OR (2) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS SPECIFIED IN THE INDENTURE REFERRED TO BELOW, AND IN EACH CASE WHICH MAY BE EFFECTED WITHOUT LOSS OF ANY APPLICABLE INVESTMENT COMPANY ACT EXCEPTION, (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION AND (C) IN AN AUTHORIZED DENOMINATION FOR THE PURCHASER AND FOR EACH SUCH ACCOUNT. EACH PURCHASER OF THIS SECURITY WILL BE DEEMED TO HAVE MADE THE REPRESENTATIONS AND AGREEMENTS SET FORTH IN SECTION 2.5 OF THE INDENTURE, OR, IF REQUIRED UNDER THE INDENTURE, MUST DELIVER A TRANSFER CERTIFICATE IN THE FORM PROVIDED IN THE INDENTURE. ANY TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE AND EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY TO THE APPLICABLE ISSUER THE TRUSTEE OR ANY INTERMEDIARY. THE ISSUER HAS THE RIGHT, UNDER THE INDENTURE, TO COMPEL ANY NON-PERMITTED HOLDER OR RECALCITRANT HOLDER (AS EACH IS DEFINED IN THE INDENTURE) TO SELL ITS INTEREST IN THE SECURITIES, OR MAY SELL SUCH INTEREST ON BEHALF OF SUCH OWNER.
EACH HOLDER AND EACH BENEFICIAL OWNER OF THIS NOTE, BY ACCEPTANCE OF SUCH NOTE, OR ITS INTEREST IN SUCH NOTE, AS THE CASE MAY BE, SHALL BE DEEMED TO HAVE AGREED TO TREAT, AND SHALL TREAT, SUCH NOTE AS EQUITY IN THE ISSUER FOR U.S. FEDERAL INCOME TAX PURPOSES
EACH HOLDER AND BENEFICIAL OWNER OF THIS NOTE THAT IS NOT A "UNITED STATES PERSON" (AS DEFINED IN SECTION 7701(a)(30) OF THE CODE) WILL MAKE,
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OR BY ACQUIRING THIS NOTE OR AN INTEREST HEREIN WILL BE DEEMED TO MAKE, A REPRESENTATION TO THE EFFECT THAT (A) EITHER (I) IT IS NOT A BANK, OR (II) IT IS A PERSON THAT IS ELIGIBLE FOR BENEFITS UNDER AN INCOME TAX TREATY WITH THE UNITED STATES THAT ELIMINATES U.S. FEDERAL INCOME TAXATION OF U.S. SOURCE INTEREST NOT ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE UNITED STATES AND (B) IT IS NOT PURCHASING THIS NOTE IN ORDER TO REDUCE ITS U.S. FEDERAL INCOME TAX LIABILITY PURSUANT TO A TAX AVOIDANCE PLAN WITHIN THE MEANING OF TREASURY REGULATION 1.881-3(a)(4)(i)(B).
(d) In addition, all the Securities will contain the legends below:
EACH HOLDER AND EACH BENEFICIAL OWNER OF ANY INTEREST IN THIS SECURITY WILL REPRESENT AND AGREE, OR BE DEEMED TO REPRESENT AND AGREE, ON EACH DAY FROM THE DATE ON WHICH SUCH HOLDER OR BENEFICIAL OWNER ACQUIRES THIS SECURITY THROUGH AND INCLUDING THE DATE ON WHICH SUCH HOLDER OR BENEFICIAL OWNER DISPOSES OF THIS SECURITY, THAT (I) ITS ACQUISITION, HOLDING AND DISPOSITION OF THIS SECURITY (OR ANY INTEREST HEREIN) DOES NOT AND WILL NOT CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF THE UNITED STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") AND/OR SECTION 4975 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE") (OR, IN THE CASE OF A GOVERNMENTAL, CHURCH, NON-U.S. OR OTHER PLAN, A NON-EXEMPT VIOLATION OF ANY FEDERAL, STATE, LOCAL, NON-U.S. LAW OR OTHER LAWS OR REGULATIONS THAT ARE SUBSTANTIALLY SIMILAR TO THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA AND/OR SECTION 4975 OF THE CODE ("OTHER PLAN LAW"), AND WILL NOT SUBJECT THE ISSUERS OR THE INITIAL PURCHASER TO ANY LAWS, RULES OR REGULATIONS APPLICABLE TO SUCH PLAN SOLELY AS A RESULT OF THE INVESTMENT IN THE ISSUERS BY SUCH PLAN); AND (II) IT WILL NOT SELL OR OTHERWISE TRANSFER THIS SECURITY (OR ANY INTEREST HEREIN) OTHERWISE THAN TO AN ACQUIRER OR TRANSFEREE THAT MAKES OR IS DEEMED TO MAKE THESE SAME REPRESENTATIONS, WARRANTIES AND AGREEMENTS WITH RESPECT TO ITS ACQUISITION, HOLDING AND DISPOSITION OF THIS SECURITY (OR ANY INTEREST HEREIN).
THE FAILURE TO PROVIDE THE ISSUER, THE TRUSTEE AND ANY PAYING AGENT WITH EITHER THE HOLDER FATCA INFORMATION OR THE APPLICABLE U.S. FEDERAL INCOME TAX CERTIFICATIONS (GENERALLY, U.S. INTERNAL REVENUE SERVICE FORM W-9 (OR SUCCESSOR APPLICABLE FORM) IN THE CASE OF A PERSON THAT IS A "UNITED STATES PERSON" WITHIN THE MEANING OF SECTION 7701(a)(30) OF THE CODE OR AN APPLICABLE U.S. INTERNAL REVENUE SERVICE FORM W-8 (OR SUCCESSOR APPLICABLE FORM) IN THE CASE OF A PERSON THAT IS NOT A "UNITED STATES PERSON" WITHIN THE MEANING OF SECTION 7701(a)(30) OF THE CODE OR THE HOLDER FATCA INFORMATION) MAY RESULT IN U.S. FEDERAL WITHHOLDING TAX OR BACK-UP WITHHOLDING TAX FROM PAYMENTS TO THE HOLDER IN RESPECT OF THIS NOTE.
EACH HOLDER AND BENEFICIAL OWNER OF THIS NOTE AGREES TO (I) PROVIDE THE TRUSTEE AND THE ISSUER WITH THE HOLDER FATCA INFORMATION AND (II) PERMIT THE ISSUER, AND THE COLLATERAL MANAGER AND TRUSTEE (ON
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BEHALF OF THE ISSUER) TO (X) SHARE SUCH INFORMATION WITH THE IRS, (Y) COMPEL OR EFFECT THE SALE OF THIS NOTE IF SUCH HOLDER OR BENEFICIAL OWNER FAILS TO COMPLY WITH THE FOREGOING REQUIREMENTS AND (Z) MAKE OTHER AMENDMENTS TO THE INDENTURE TO ENABLE THE ISSUER TO COMPLY WITH FATCA.
THE PRINCIPAL AMOUNT OF THIS SECURITY IS PAYABLE AS SET FORTH HEREIN. THE OUTSTANDING PRINCIPAL AMOUNT OF THIS SECURITY AT ANY TIME MAY DIFFER FROM THE AMOUNT SHOWN ON THE FACE HEREOF. ANY PERSON ACQUIRING THIS SECURITY MAY ASCERTAIN ITS AGGREGATE OUTSTANDING AMOUNT BY INQUIRY OF THE TRUSTEE.
(e) In addition, ERISA Restricted Securities will contain the legend below:
THIS SECURITY (OR ANY INTEREST HEREIN) MAY BE PURCHASED BY (I) AN "EMPLOYEE BENEFIT PLAN" (AS DEFINED IN SECTION 3(3) OF ERISA) THAT IS SUBJECT TO TITLE I OF ERISA, (II) A "PLAN" DESCRIBED IN SECTION 4975(E)(1) OF THE CODE TO WHICH SECTION 4975 OF THE CODE APPLIES OR (III) AN ENTITY WHOSE UNDERLYING ASSETS COULD BE DEEMED TO INCLUDE "PLAN ASSETS" BY REASON OF AN EMPLOYEE BENEFIT PLAN'S OR PLAN’S INVESTMENT IN THE ENTITY WITHIN THE MEANING OF 29 C.F.R. SECTION 2510.3-101 (AS MODIFIED BY SECTION 3(42) OF ERISA, THE "PLAN ASSET REGULATION") OR OTHERWISE (EACH, A "BENEFIT PLAN INVESTOR") OR A PERSON (OTHER THAN A BENEFIT PLAN INVESTOR) THAT HAS DISCRETIONARY AUTHORITY OR CONTROL WITH RESPECT TO THE ASSETS OF THE ISSUER OR THAT PROVIDES INVESTMENT ADVICE FOR A FEE (DIRECT OR INDIRECT) WITH RESPECT TO SUCH ASSETS (OR ANY "AFFILIATE" OF SUCH A PERSON (AS DEFINED IN THE PLAN ASSET REGULATION)) (EACH, A "CONTROLLING PERSON"), ONLY SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE INDENTURE, INCLUDING THAT BENEFIT PLAN INVESTORS MAY NOT HOLD, IN THE AGGREGATE, 25 PERCENT OR MORE OF THIS SECURITY (OR ANY INTEREST HEREIN), AS DETERMINED UNDER ERISA AND THE PLAN ASSET REGULATION PROMULGATED THEREUNDER (THE "25% LIMITATION"). EACH PURCHASER OR TRANSFEREE OF THIS SECURITY WILL BE REQUIRED AND/OR DEEMED TO REPRESENT, WARRANT AND COVENANT THAT THE ACQUISITION, HOLDING AND DISPOSITION OF THIS SECURITY WILL NOT RESULT IN (A) THE UNDERLYING ASSETS OF THE ISSUER BEING TREATED AS ASSETS OF THE PURCHASER OR TRANSFEREE OF THIS SECURITY (OR INTEREST THEREIN) BY VIRTUE OF ITS INTEREST AND THEREBY SUBJECT THE ISSUER AND THE COLLATERAL MANAGER (OR OTHER PERSONS RESPONSIBLE FOR THE INVESTMENT AND OPERATION OF THE ISSUER’S ASSETS) TO LAWS OR REGULATIONS THAT ARE SIMILAR TO THE FIDUCIARY RESPONSIBILITY OR PROHIBITED TRANSACTION PROVISIONS OF ERISA OR SECTION 4975 OF THE CODE ("SIMILAR LAWS") OR (B) A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF A GOVERNMENTAL, NON-U.S., CHURCH OR OTHER PLAN, A NON-EXEMPT VIOLATION OF ANY OTHER PLAN LAW). ANY ACQUISITION OR TRANSFER OF THIS SECURITY (OR ANY INTEREST HEREIN) IN VIOLATION OF THE ABOVE RESTRICTIONS SHALL BE VOID AB INITIO. THE ISSUER HAS THE RIGHT, UNDER THE INDENTURE, TO COMPEL ANY BENEFICIAL OWNER OF A SECURITY (OR ANY INTEREST HEREIN) WHO HAS MADE OR HAS BEEN DEEMED TO MAKE A BENEFIT PLAN INVESTOR, CONTROLLING PERSON, PROHIBITED TRANSACTION, OTHER
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PLAN LAW OR SIMILAR LAW REPRESENTATION THAT IS SUBSEQUENTLY SHOWN TO BE FALSE OR MISLEADING OR WHOSE OWNERSHIP OTHERWISE CAUSES A VIOLATION OF THE 25% LIMITATION TO SELL ITS INTEREST IN SUCH SECURITY, OR MAY SELL SUCH INTEREST ON BEHALF OF SUCH OWNER.
(f) In addition, Global Notes will contain the legends below:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE [ISSUERS OR THEIR AGENT]1 [ISSUER OR ITS AGENT]2 FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE IN WHOLE, BUT NOT IN PART, SHALL BE LIMITED TO TRANSFERS TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO HEREIN.
12. Compulsory Sales. The Purchaser understands that the Issuer has the right under the Indenture to compel any Non-Permitted Holder to sell its interest in the Securities or may sell such interest in the Securities on behalf of such Non-Permitted Holder.
13. Opinion. The Purchaser understands that any Accredited Investor that is not a Qualified Institutional Buyer must provide an opinion of counsel (acceptable to the Trustee) to the effect that the transfer is pursuant to an exemption from the registration under the U.S. Securities Act.
14. Regulation U. With respect to the Secured Notes, either (x) the Purchaser's principal place of business is not located within any Federal Reserve District of the FRB or (y) the Purchaser has satisfied and will satisfy any application registration or other requirements of the FRB including, without limitation, Regulation U, in connection with its application of the Secured Notes.
In addition, the Indenture will provide that, if (x) any Person that is a Non-Permitted Holder with respect to any Security becomes the beneficial owner of such Security or (y) any beneficial owner of an interest in any Security is designated as a Recalcitrant Holder, the Issuer shall (but, in the case of a Recalcitrant Holder, only if the Issuer determines, in its sole discretion, that it is required under its FFI Agreement to close out such beneficial owner), promptly after discovery (or after designation as a Recalcitrant Holder) of any such Non-Permitted Holder or Recalcitrant Holder by any of the Issuer, the Co-Issuer or the Trustee (and notice by the Trustee or the Co-Issuer, if either of them makes the discovery), send notice to such Non-Permitted Holder or, in its sole discretion, Recalcitrant Holder demanding that such Non-Permitted Holder or Recalcitrant Holder, as applicable, transfer its interest in such Securities to a Person that is not a Non-Permitted Holder or Recalcitrant Holder within 30 days (or, in the case of a Non-Permitted ERISA Holder, 14 days) of the date of such notice. If such Non-Permitted Holder or Recalcitrant Holder fails to so transfer the applicable Securities or interest (and, in the case of a
1 Insert into a Class A Note, Class B Note, Class C Note and Class D Note 2 Insert into a Class E Note and Subordinated Note
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Recalcitrant Holder, such beneficial owner continues to be a Recalcitrant Holder on the date of sale by the Issuer), the Issuer shall have the right, without further notice to the Non-Permitted Holder or Recalcitrant Holder, as applicable, to sell such Non-Permitted Holder’s or Recalcitrant Holder’s interest (on behalf of such Non-Permitted Holder or Recalcitrant Holder) to a purchaser selected by the Issuer (or an independent advisor or expert engaged by the Collateral Manager on behalf of the Issuer) that is not a Non-Permitted Holder or Recalcitrant Holder. The Issuer, or the Collateral Manager (or such independent advisor or expert) acting on behalf of the Issuer, may select the purchaser by soliciting bids from two or more brokers or other market professionals that regularly deal in securities similar to the Securities, and selling such Securities or interest to the highest such bidder; provided, however, that the Issuer, or the Collateral Manager (or independent advisor or expert) may sell the applicable Securities or interest following an alternative sales procedure if the Issuer deems an alternative sales procedure to be reasonably necessary, so long as such sales procedure is consistent with Section 9-610(b) of the UCC, as applied to securities that may decline speedily in value. The Holder of each Security, the Non-Permitted Holder or Recalcitrant Holder and each other Person in the chain of title from the Holder to the Non- Permitted Holder or Recalcitrant Holder, by its acceptance of an interest in the applicable Securities, agrees to cooperate with the Issuer and the Collateral Manager (or such independent advisor or expert acting on behalf of the Issuer) to effect such transfers. The proceeds of such sale, net of any commissions, expenses and taxes due in connection with such sale shall be remitted to the Non-Permitted Holder or Recalcitrant Holder, as applicable. The terms and conditions of any sale described in this paragraph shall, subject to compliance with the requirements described in this paragraph, be determined in the sole discretion of the Issuer or the Collateral Manager acting on behalf of the Issuer, and none of the Issuer, the Trustee or the Collateral Manager (or any independent advisor or expert acting on behalf of the Issuer) shall be liable to any Person having an interest in the Securities sold as a result of any such sale or the exercise of such discretion.
The Holder of each Security, by its acceptance of an interest in the applicable Securities, agrees to provide to the Issuer and the Collateral Manager all information reasonably available to it that is reasonably requested by the Collateral Manager in connection with regulatory matters, including any information that is necessary or advisable in order for the Collateral Manager (or its parent or Affiliates) to complete its Form ADV, or to comply with any requirements of the Dodd–Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, and any other laws or regulations applicable to the Collateral Manager from time to time.
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GLOSSARY
"Account": Each of the following segregated, non-interest bearing trust accounts: the Closing Date Interest Account, the Collection Account, the Contingent Payment Reserve Account, the Custodial Account, the Expense Reserve Account, the Interest Reserve Account, the Payment Account, the Unused Proceeds Account, any Hedge Collateral Account, the Letter-of-Credit Reserve Account and the Class X Notes Account.
"Accredited Investor": The meaning specified in Rule 501(a) under Regulation D under the U.S. Securities Act.
"Additional Issuance Par Ratio": For any date of determination, a percentage equal to "A divided by B," where:
A = the Collateral Principal Balance as of such date of determination; and
B = the Aggregate Outstanding Amount of the Senior Notes, the Mezzanine Notes and the Class E Notes.
"Additional Issuance Threshold Test": A test satisfied with respect to any issuance of Additional Subordinated Notes if (i) the applicable additional issuance occurs during the Reinvestment Period, (ii) no Event of Default has occurred and is continuing at the time of such additional issuance, (iii) the Additional Issuance Par Ratio is at least equal to 108.0% 5 Business Days prior to the date of such additional issuance, (iv) no more than two additional issuances have occurred at the time of such proposed additional issuance (including such issuance) and (v) the aggregate principal amount of Additional Subordinated Notes issued on the proposed additional issuance date will be no less than $10,000,000.
"Affiliate" or "Affiliated": With respect to a Person, (a) any other Person who, directly or indirectly, is in control of, or controlled by, or is under common control with, such Person or (b) any other Person who is a director, officer or employee (i) of such Person, (ii) of any subsidiary or parent company of such Person or (iii) of any Person described in clause (a) above. For the purposes of this definition, control of a Person will mean the power, direct or indirect, (a) to vote more than 50% of the securities having ordinary voting power for the election of directors of such Person or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; provided, that, with respect to (x) each of the Issuers, Affiliate will not include the other, the Administrator, the Share Trustee or any other special purpose company that the Administrator or the Share Trustee controls and (y) the Collateral Manager, Affiliate will not include Persons or accounts for whom the Collateral Manager provides services as investment adviser solely as a result of such services.
"Aggregate Excess Funded Spread": As of any date of determination, the amount obtained by multiplying:
(a) the rate (not less than zero) equal to three-month LIBOR during the Interest Accrual Period in which such date occurs; by
(b) the amount (not less than zero) equal to (i) the Aggregate Principal Balance of the Collateral Assets (excluding Defaulted Assets) as of such date minus (ii) the Effective Date Target Par Amount.
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"Aggregate Funded Spread": As of any date of determination, the sum of the products obtained with respect to each Collateral Asset (other than any Defaulted Asset, any Partial PIK Asset (and any Collateral Asset not considered a Partial PIK Asset due to the proviso to the definition thereof) to the extent of any non-cash interest, any PIKable Asset to the extent of any non-cash interest or any PIKing Asset to the extent of any non-cash interest and the unfunded portion of any Delayed Funding Asset) by multiplying:
(a) (i) in the case of each Floating Rate Asset that bears interest at a spread over a London interbank offered rate based index, the stated spread on such Floating Rate Asset above such index, in each case, then in effect as of such date;
(ii) in the case of each Floating Rate Asset (x) that bears interest at a spread over an index other than a London interbank offered rate based index, the excess of the sum of such spread and such index, in each case, then in effect as of such date or (y) which is a Letter-of- Credit, the excess of the sum of such spread plus a rate of interest on a deposited amount, in each case, over three-month LIBOR calculated with respect to the Securities then in effect, in each case, as of such date (which spread or excess in the case of this clause (ii) may be expressed as a negative percentage);
(iii) in the case of each LIBOR Floor Obligation, the interest over LIBOR for such Collateral Asset shall be equal to the sum of (a) the applicable spread over LIBOR or the floor, as applicable, and (b) the excess, if any, of the specified "floor" rate relating to such Collateral Asset over LIBOR for the Securities; by
(b) the outstanding principal amount of each such Collateral Asset (excluding any portion consisting of capitalized or deferred interest);
provided that, with respect to any Floating Rate Asset that is a Permitted Withholding Tax Asset, for purposes of the calculation in (a) above, an amount equal to any expected withholding tax (as reasonably determined by or on behalf of the Issuer) on such Permitted Withholding Tax Asset shall be excluded.
"Aggregate Outstanding Amount": On any date of determination, when used with respect to any Class of Securities, the aggregate principal amount of such Securities Outstanding (including any Deferred Interest previously added to the principal amount of the related Class of Securities that remains unpaid).
"Aggregate Principal Balance": When used with respect to all or any designated portion of the Collateral Assets, the sum of the Principal Balances of all such Collateral Assets.
"Aggregate Unfunded Spread": As of any date of determination, the sum of the products obtained by multiplying (i) for each Delayed Funding Asset (other than Defaulted Assets), the commitment fee then in effect as of such date and (ii) the undrawn commitments of each such Delayed Funding Asset as of such date, provided that, with respect to any Delayed Funding Asset that is a Permitted Withholding Tax Asset, in determining the commitment fee (or equivalent fee) for (i) above, an amount equal to any expected withholding tax (as reasonably determined by the Collateral Manager) on such commitment fee shall be excluded.
"Allocated Principal Proceeds": With respect to any Payment Date during the Reinvestment Period, Principal Proceeds that were received within 30 days of the related Determination Date and have been designated for reinvestment by the Collateral Manager not later than such Determination Date.
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"Amortization Period": The period from and excluding the last day of the Reinvestment Period to and including the earlier of the latest Stated Maturity Date and the date on which all Securities are paid in full; provided, however, that references to Payment Dates in the Amortization Period will include Payment Dates for which the Determination Date was prior to the Amortization Period.
"Bridge Loan": A Collateral Asset issued in connection with a merger, acquisition, consolidation, sale of all or substantially all of the assets of a Person or similar transaction, which Collateral Asset by its terms is required to be repaid within one year of the incurrence thereof with proceeds from additional borrowings or other refinancing and has an Assigned Moody’s Rating and an S&P Rating.
"Business Day": Any day other than Saturday, Sunday or any other day on which commercial banks in New York, New York or the city in which the Corporate Trust Office of the Trustee is located are authorized or required by applicable law, regulation or executive order to close or, for final payment of principal, in the relevant place of presentation.
"Caa Assets": All Collateral Assets that have Moody’s Ratings of Caa1 or lower (other than (x) any Defaulted Assets and (y) Current Pay Assets in excess of the Current Pay Haircut Threshold Percentage).
"Caa/CCC Excess": The greater of:
(i) the excess, if any, by which the aggregate principal amount (without giving effect to any capitalized interest) of Caa Assets exceeds 5% of the Collateral Principal Balance; and
(ii) the excess, if any, by which the aggregate principal amount (without giving effect to any capitalized interest) of CCC Assets exceeds 5% of the Collateral Principal Balance,
provided, that in determining which of the CCC Assets and Caa Assets shall be included in the Caa/CCC Excess, the CCC Assets and Caa Assets with the lowest Market Value shall be deemed to constitute such Caa/CCC Excess.
"CCC Assets": All Collateral Assets that have S&P Ratings of CCC+ or lower (other than (x) any Defaulted Assets and (y) Current Pay Assets in excess of the Current Pay Haircut Threshold Percentage).
"Class": Any Securities that bear the same alphanumeric designation and Order of Priority (it being understood that any Classes of Securities that rank pari passu with respect to payment of interest shall constitute a single Class for certain specified purposes expressly set forth herein).
"Class Break Even Default Rate": For each Class of Secured Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class) is the maximum percentage of defaults, at any time, that the Current Portfolio or the Proposed Portfolio, as applicable, can sustain, as determined by the Issuer by application of the S&P CDO Monitor, which after giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priorities of Payment, will result in sufficient funds remaining for the payment of such Class of Secured Notes in full.
"Class Default Differential": For each Class of Secured Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class) is (a) the Class Break Even Default Rate for such Class minus (b) the Class Scenario Default Rate for such Class.
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"Class Scenario Default Rate": For each Class of Secured Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class) is the estimate of the cumulative default rate for the Current Portfolio or the Proposed Portfolio, as applicable, consistent with the initial S&P rating of such Class of Securities, determined by application by the Issuer of the S&P CDO Monitor.
"Clearing Agency": An organization registered as a "clearing agency" pursuant to Section 17A of the U.S. Exchange Act.
"Clearstream": Clearstream Banking, société anonyme, or any successor clearing corporation.
"Code": The Internal Revenue Code of 1986, as amended.
"Collateral Management Agreement": The collateral management agreement, dated as of the Closing Date, between the Issuer and the Collateral Manager.
"Collateral Principal Balance": As of any date of determination, the sum (without duplication) of (i) the Aggregate Principal Balance of the Collateral Assets as of such date, (ii) Eligible Principal Investments as of such date and (iii) cash deposited in the Principal Collection Subaccount and the Unused Proceeds Account; provided, however, with respect to a date of determination after a Determination Date and before the related Payment Date, such calculation shall give effect to any distribution to be made pursuant to the Priorities of Payment.
"Controlling Affected Class": In connection with a Tax Event, the Affected Class (as defined below), in the event there is only one Affected Class and the Highest-Ranking Class of the Affected Classes, in the event there is more than one Affected Class. For purposes of this definition, the term "Affected Class" means any Class of Secured Notes that will receive less than the aggregate amount of the interest on and principal of such Class of Securities that such Class would have otherwise received on the immediately following Payment Date but for the occurrence of such Tax Event; provided, however, that if the withholding tax that would otherwise result in the Tax Event is imposed as a result of a Securityholder’s failure to provide the Issuer with the Holder FATCA Information that Securityholder shall not be considered a member of the Affected Class and shall have no right to vote on or deliver a Required Redemption Direction.
"Controlling Party": A Majority of the Securities of the Controlling Class.
"Counterparty Criteria": With respect to any (i) Participation Interest or (ii) a Letter-of-Credit (the funded amounts with respect to which are not held in a Letter-of-Credit Eligible Account described under (a) in the definition of such term), a criterion that will be met if immediately after giving effect to such acquisition, the percentage of the Collateral Principal Balance that consists in the aggregate of (A) Participation Interests with Selling Institutions that have the same or a lower credit rating and (B) Letters-of-Credit with the relevant agent that have the same or a lower credit rating, does not exceed the "Aggregate Percentage Limit" (in the case of all Selling Institutions or agents) or "Individual Percentage Limit" (in the case of a Selling Institution or agent) set forth below for such credit rating (provided, that any rating by Moody’s that is on credit watch by Moody’s with positive or negative implication at the time of calculation will be treated as having been upgraded or downgraded by one rating subcategory, as the case may be):
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Credit Rating Aggregate Percentage Individual Percentage Moody’s Limit Limit Aaa 20.0% 20.0% Aa1 20.0% 10.0% Aa2 20.0% 10.0% Aa3 15.0% 5.0% A1* 10.0% 5.0% A2* 5.0% 5.0% ______* If the applicable Moody’s short-term unsecured debt rating is below P-1 or is on any ratings watch list with negative implications, then such Moody’s rating for calculating the Counterparty Criteria will be below A2.
Credit Rating Aggregate Percentage Individual Percentage S&P Limit Limit AAA 20.0% 20.0% AA+ 10.0% 10.0% AA 10.0% 10.0% AA- 5.0% 5.0% A+ 5.0% 5.0% A** 5.0% 5.0% A- or below 0.0% 0.0% ______** Only for so long as the Selling Institution or agent, as applicable, has an S&P long term unsecured debt rating of at least A and a short term unsecured debt rating of at least A-1. If such Selling Institution or agent, as applicable, does not have an S&P short term unsecured debt rating or has an S&P short term unsecured debt rating of less than A-1, then the minimum S&P rating for purposes of the Counterparty Criteria will be A+.
"Coupon Excess": As of any date of determination, the percentage (if positive) obtained by multiplying:
(i) the excess, if any, of the Weighted Average Coupon over the Minimum Weighted Average Coupon by
(ii) the number obtained by dividing (a) the Aggregate Principal Balance of the funded portions of all Fixed Rate Assets (excluding any Defaulted Asset and the unfunded portion of any Delayed Funding Asset) by (b) the Aggregate Principal Balance of all Floating Rate Assets (excluding any Defaulted Asset and the unfunded portion of any Delayed Funding Asset).
"Cov-Lite Loan": A loan that (i) does not contain any financial covenants or (ii) requires the borrower to comply with an Incurrence Covenant and that is not subject to Maintenance Covenants; provided, that for all purposes other than the determination of the S&P Recovery Rate for such loan, a loan described in clause (i) or (ii) above which either contains a cross-default or cross-acceleration provision to, or is pari passu with, another loan of the same borrower that requires such borrower to comply with a Maintenance Covenant will be deemed not to be a Cov-Lite Loan.
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"Credit Improved Asset":
(a) so long as a Restricted Trading Condition is not in effect, as of any date of determination, any Collateral Asset that in the Collateral Manager's commercially reasonable business judgment has significantly improved in credit quality from the condition of its credit at the time of purchase which judgment may (but need not) be based on one or more of the following facts:
(i) the issuer of such Collateral Asset has shown improved financial results since the published financial reports first produced after it was purchased by the Issuer;
(ii) the obligor of such Collateral Asset since the date on which such Collateral Asset was purchased by the Issuer has raised significant equity capital or has raised other capital that has improved the liquidity or credit standing of such obligor; or
(iii) with respect to which one or more of the following criteria applies: (A) such Collateral Asset has been upgraded or put on a watch list for possible upgrade by either of the Rating Agencies since the date on which such Collateral Asset was acquired by the Issuer; (B) if such Collateral Asset is a Floating Rate Asset or a Fixed Rate Asset, the Sale Proceeds (excluding Sale Proceeds that constitute Interest Proceeds) of such asset would be at least 101% of its purchase price; (C) if such Collateral Asset is a Floating Rate Asset, the price of such loan has changed during the period from the date on which it was acquired by the Issuer to the proposed sale date by a percentage either 0.25% more positive, or 0.25% less negative, as the case may be, than the percentage change in the average price of the applicable Eligible Loan Index over the same period; (D) if such Collateral Asset is a Floating Rate Asset, the price of such asset changed during the period from the date on which it was acquired by the Issuer to the date of determination by a percentage either 0.50% more positive, or 0.50% less negative, as the case may be, than the percentage change in a nationally recognized loan index selected by the Collateral Manager over the same period; or (E) if such Collateral Asset is a Fixed Rate Asset, the Market Value of such bond has changed since the date of its acquisition by a percentage either 1.00% more positive or 1.00% less negative than the percentage change in the Merrill Lynch US High Yield Master II Constrained Index, Bloomberg ticker HUC0 (or such other index as the Collateral Manager selects and provides notice of to the Rating Agencies), over the same period, as determined by the Collateral Manager; or
(b) if a Restricted Trading Condition is in effect, any Collateral Asset:
(i) that in the Collateral Manager's commercially reasonable business judgment has significantly improved in credit quality from the condition of its credit at the time of purchase and with respect to which one or more of the criteria referred to in clause (a)(iii) above applies, or
(ii) with respect to which the Controlling Party votes to treat such Collateral Asset as a Credit Improved Asset.
"Credit Risk Asset": As of any date of determination, any Collateral Asset that in the Collateral Manager's commercially reasonable business judgment has a significant risk of declining in credit quality and, with a lapse of time, becoming a Defaulted Asset and if a Restricted Trading Condition is in effect:
(a) any Collateral Asset as to which one or more of the following criteria applies:
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(i) such Collateral Asset has been downgraded or put on a watch list for possible downgrade by either of the Rating Agencies since the date on which such Collateral Asset was acquired by the Issuer;
(ii) if such Collateral Asset is a Floating Rate Asset, the price of such asset has changed during the period from the date on which it was acquired by the Issuer to the proposed sale date by a percentage either 0.25% more negative, or 0.25% less positive, as the case may be, than the percentage change in the average price of an Eligible Loan Index;
(iii) if such Collateral Asset is a Floating Rate Asset or a Fixed Rate Asset, the Market Value of such Collateral Asset has decreased by at least 1.00% of the price paid by the Issuer for such Collateral Asset; or
(iv) if such Collateral Asset is a Fixed Rate Asset, the Market Value of such asset has changed since its date of acquisition by a percentage either 1.00% more negative or 1.00% less positive than the percentage change in the Merrill Lynch US High Yield Master II Constrained Index, Bloomberg ticker HUC0 (or such other index as the Collateral Manager selects and provides notice of to the Rating Agencies) over the same period, as determined by the Collateral Manager; or
(b) any Collateral Asset which the Controlling Party otherwise consents to treat as a Credit Risk Asset.
"Current Pay Asset": A Collateral Asset (other than a DIP Collateral Asset):
(a) as to which all interest payments that are contractually due have been paid in cash and, if the issuer of such Collateral Asset is not subject to a bankruptcy proceeding, all payments (including interest payments referred to above) that are contractually due have been paid;
(b) with respect to which, if the issuer of such Collateral Asset is subject to a bankruptcy proceeding, the issuer has made all payments the bankruptcy court has approved;
(c) that pays interest at least quarterly;
(d) that would satisfy subclauses (b), (c) and (d) of the definition of "Defaulted Asset" (without giving effect to the provision of subclauses (b) and (c) relating to Current Pay Assets);
(e) as to which the Collateral Manager, in good faith, expects that the issuer will pay the next scheduled interest payment in cash when due and the Collateral Manager has not received notice that any subsequent scheduled interest payments will not be made;
(f) as to which the Moody's Additional Current Pay Criteria are satisfied (for so long as any Secured Notes are rated by Moody's); and
(g) as to which the S&P Additional Current Pay Criteria are satisfied.
"Default": Any Event of Default or any occurrence that is, or with notice or the lapse of time or both would become, an Event of Default.
"Defaulted Asset": Any Collateral Asset or any other obligation included in the Collateral with respect to which, as of any date of determination:
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(a) the obligor has defaulted in the payment of principal and/or interest for five Business Days (without regard to any waiver or grace period in the related Underlying Instruments), but only until such default has been cured through the payment of all past due interest and/or principal; provided, however, that such cure period shall only be available if the Collateral Manager has certified to the Trustee in writing (with a copy to the Collateral Administrator) that, to the knowledge of the Collateral Manager, which knowledge is not based solely on information received from the obligor of such Collateral Asset, such default resulted from non-credit related causes; provided, further, that a Collateral Asset shall not constitute a Defaulted Asset under this clause (a) if it is a PIKing Asset or any Partial PIK Asset that is current in the payment of principal and of any interest that is required by the Underlying Instruments to be paid in cash;
(b) any bankruptcy, insolvency or receivership proceeding has been initiated in connection with the obligor and is unstayed and undismissed; provided, however, that, if such proceeding is an involuntary proceeding, the condition of this clause (b) will not be satisfied until the earliest of the following: (A) the related obligor consents to such proceeding, (B) an order for relief under the U.S. Bankruptcy Code, or any substantially similar order under a proceeding not taking place under the U.S. Bankruptcy Code, has been entered and (C) such proceeding remains unstayed and undismissed for 90 days; provided, further, that any Collateral Asset received in a distressed exchange or other distressed restructuring will not be treated as a Defaulted Asset pursuant to this clause (b) if it otherwise satisfies the definition of Collateral Asset (unless, for the avoidance of doubt, it becomes a Defaulted Asset due to subsequent events); provided, further, that Current Pay Assets and DIP Collateral Assets shall not constitute Defaulted Assets under this clause (b) notwithstanding such bankruptcy, insolvency or receivership proceeding;
(c) (i) the Collateral Manager has actual knowledge that the obligor is in default (for five Business Days (without regard to any waiver or grace period in the related Underlying Instruments)) as to payment of principal and/or interest on any other obligation of such obligor (and such default has not been cured) and (ii) at least one of the following conditions is satisfied: (A) both such other obligation and the Collateral Asset are full recourse unsecured obligations and the other obligation is senior to or pari passu with the Collateral Asset in right of payment or (B) both of the following conditions (1) and (2) are satisfied: (1) the security interest securing the other obligation is senior to or pari passu with the security interest securing the Collateral Asset and (2) the other obligation is a full recourse secured obligation secured by the same collateral (in whole or in part) and senior to or pari passu with the Collateral Asset in right of payment; provided, however, that a Collateral Asset shall not constitute a Defaulted Asset under this clause (c) if it is a Current Pay Asset or DIP Collateral Asset;
(d) the obligor has an S&P Rating of CC or below or SD (or such obligor had such a rating that was withdrawn) or in respect of a Participation Interest, the Selling Institution has a credit rating from S&P of CC or below or SD (or such Selling Institution had such a rating that was withdrawn); provided, however, that a DIP Collateral Asset or a Current Pay Asset shall not constitute a Defaulted Asset under this clause (d);
(e) such Collateral Asset is a Participation Interest in a debt obligation that would, if such debt obligation were a Collateral Asset, constitute a Defaulted Asset (a "Defaulted Participation Interest");
(f) such Collateral Asset is a Participation Interest in a debt obligation (other than a Defaulted Participation Interest) with respect to which the Selling Institution (x) has defaulted in the performance of any of its payment obligations under the related participation agreement or (y) has a long- term rating from Moody's of D or LD;
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(g) either Moody’s probability-of-default rating for such Collateral Asset is D or, if Moody’s probability-of-default rating for such Collateral Asset includes LD, Moody’s press release assigning the LD rating specifies the default of such Collateral Asset as the cause of its rating action; or
(h) a distressed exchange or other debt restructuring (where the obligor of such Collateral Asset or any other obligation included in the Collateral has offered the class of holders of such Collateral Asset generally a new obligation or package of obligations that in the reasonable business judgment of the Collateral Manager amounts to a diminished financial obligation) has become binding upon the holders of such Collateral Asset or any other obligation included in the Collateral; provided that if such new obligation or package of obligations satisfies the definition of Collateral Asset, it shall not be treated as a Defaulted Asset under this clause (h).
"Defaulted Interest": Any Interest Distribution Amount due and payable in respect of any Non- Deferrable Class or any interest on such Defaulted Interest that is not punctually paid or duly provided for on the applicable Payment Date or at the Stated Maturity Date of the applicable Security. To the extent lawful and enforceable, interest on such Defaulted Interest will accrue at a per annum rate equal to the applicable Interest Rate until paid.
"Deferrable Notes": Each Class of Securities designated as Deferrable in the Term Sheet, until such time as such Class is the Highest-Ranking Class.
"Delayed Drawdown Debt Asset": A Collateral Asset that (i) requires the Issuer to make one or more future advances to the obligor under the Underlying Instruments relating thereto, (ii) specifies a maximum amount that can be borrowed on one or more fixed borrowing dates, and (iii) does not permit the re-borrowing of any amount previously repaid by the obligor thereof; provided, however, that any such Collateral Asset will be a Delayed Drawdown Debt Asset only to the extent that a commitment by the Issuer to make advances to the obligor thereof is outstanding.
"Delayed Funding Asset": Any Delayed Drawdown Debt Asset or Revolving Collateral Asset.
"DIP Collateral Asset": Any interest in a loan or financing facility having a rating or rating estimate by S&P (or if there is no rating estimate by S&P, the Collateral Manager has commenced the process of obtaining a rating or rating estimate within 5 Business Days of acquisition) and that is explicitly rated by Moody’s (including any estimated rating by Moody’s (so long as such estimated rating was issued, confirmed or updated by Moody's within the 12 month period prior to the date of determination)) that is purchased directly or by way of assignment (i) which is an obligation of (A) a debtor in possession as described in §1107 of the U.S. Bankruptcy Code or any other applicable bankruptcy law, including, without limitation, any bankruptcy, insolvency, reorganization or similar law enacted under the laws of the Cayman Islands or any other applicable jurisdiction or (B) a trustee (if appointment of such trustee has been ordered pursuant to §1104 of the U.S. Bankruptcy Code or any other applicable bankruptcy law, including, without limitation, any bankruptcy, insolvency, reorganization or similar law enacted under the laws of the Cayman Islands or any other applicable jurisdiction) (in either such case, a "Debtor") organized under the laws of the United States or any state therein and (ii) the terms of which have been approved by an order of the United States Bankruptcy Court, the United States District Court, or any other court of competent jurisdiction, the enforceability of which order is not subject to any pending contested matter or proceeding (as such terms are defined in the Federal Rules of Bankruptcy Procedure) and which order provides that: (i) such DIP Collateral Asset is fully secured by liens on the Debtor’s otherwise unencumbered assets pursuant to §364(c)(2) of the U.S. Bankruptcy Code or any other applicable bankruptcy law, including, without limitation, any bankruptcy, insolvency, reorganization or similar law enacted under the laws of the Cayman Islands or any other applicable jurisdiction; or (ii) such DIP Collateral Asset is secured by liens of equal or senior priority on property of
142 ` the Debtor’s estate that is otherwise subject to a lien pursuant to §364(d) of the U.S. Bankruptcy Code or any other applicable bankruptcy law, including, without limitation, any bankruptcy, insolvency, reorganization or similar law enacted under the laws of the Cayman Islands or any other applicable jurisdiction. Notwithstanding the foregoing, such a loan will not be deemed to be a DIP Collateral Asset following the emergence of the related debtor-in-possession from bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. To the extent not prohibited by applicable confidentiality agreements, any notices related to each such DIP Collateral Asset’s restructuring or amendment will be forwarded to each Rating Agency.
"Discount Asset": Any Collateral Asset (other than a Defaulted Asset) having a Purchase Price of, (a) in the case of Floating Rate Assets, less than 85% (or, if it has a Moody’s Rating of at least B3, 80%) of par unless and until it has a Market Value equal to or greater than 90% of par for 30 consecutive days and (b) in the case of Fixed Rate Assets, less than 80% (or, if it has a Moody’s Rating of at least B3, 75%) of par and a yield greater than 2% over the yield of the Merrill Lynch US High Yield Master II Index (or such other nationally recognized high yield index as the Collateral Manager selects and provides notice of to the Rating Agencies and the Collateral Administrator), unless (x) it has a Market Value equal to or greater than 85% of par for 30 consecutive days and (y) the yield on such Collateral Asset is less than or equal to the yield of the Merrill Lynch US High Yield Master II Index (or such other nationally recognized high yield index as the Collateral Manager selects and provides notice of to the Rating Agencies and the Collateral Administrator), as determined daily for any period of 30 consecutive days since the acquisition by the Issuer of such Collateral Asset; provided that any Collateral Asset that is purchased with Sale Proceeds of a Collateral Asset that is not a Discount Asset will not be considered a Discount Asset if such Collateral Asset (i) was purchased or committed to be purchased within five Business Days of such sale, (ii) was purchased at a price (as a percentage of par) equal to or greater than the sale price of the sold Collateral Asset, (iii) was purchased at a purchase price not less than 75% of par, (iv) had a rating equal to or greater than the rating of the sold Collateral Asset, (v) when included in the aggregate principal amount of all Collateral Assets not considered Discount Assets due to this proviso (excluding those assets that would not otherwise be considered a Discount Asset anymore), does not cause such aggregate principal amount to exceed 10% of the Effective Date Target Par Amount (cumulative for all Collateral Assets during the period commencing on the Closing Date and ending on the latest Stated Maturity Date) and (vi) was not a CCC Asset or a Caa Asset at the time of its purchase.
"Domicile": With respect to any issuer of, or obligor with respect to, a Collateral Asset, as reasonably determined by the Collateral Manager (i) its country of organization or (ii) if it is organized in Bermuda or incorporated in the Cayman Islands, its country of organization or incorporation, as applicable, and the country in which a substantial portion of its operations are located or from which a substantial portion of its revenue is derived, in each case directly or through subsidiaries.
"Eligible Country": Any of (x) the United States or (y) any other country, in the case of this clause (y) only, for so long as such country has a Moody’s foreign currency country ceiling rating of at least Aa2 (and, if rated Aa2, not on watch for downgrade) and an S&P foreign currency rating of at least AA.
"Eligible Investment": Any U.S. dollar-denominated investment that, at the time it is delivered to the Trustee, is one or more of the following obligations or securities:
(a) cash;
(b) direct Registered obligations of, and Registered obligations the timely payment of principal of and interest on which is fully and expressly guaranteed by, the United States of America, or any agency or instrumentality of the United States of America with the Eligible Investment Required
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Ratings the obligations of which are backed by the full faith and credit of the United States of America, subject to the following exclusions: (i) General Services Administration participation certificates; (ii) U.S. Maritime Administration guaranteed Title XI financings; (iii) Financing Corp. debt obligations; (iv) Farmers Home Administration Certificates of Beneficial Ownership; and (v) Washington Metropolitan Area Transit Authority guaranteed transit bonds;
(c) demand and time deposits in, certificates of deposit or trust accounts with bankers’ acceptances issued by, or federal funds sold by any depositary institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal and/or state banking authorities so long as the commercial paper and/or the debt obligations of such depositary institution or trust company (or, in the case of the principal depositary institution in a holding company system, the commercial paper or debt obligations of such holding company) at the time of such investment or contractual commitment providing for such investment have the Eligible Investment Required Ratings; provided, however, that any investment in commercial paper or bankers’ acceptances will not have a maturity in excess of 183 days;
(d) unleveraged repurchase or forward obligations with respect to (A) any security described in clause (b) above or (B) any other Registered security issued or guaranteed by an agency or instrumentality of the United States of America, in either case entered into with a depositary institution or trust company (acting as principal) described in clause (c) above or entered into with an entity (acting as principal) with the Eligible Investment Required Ratings; provided, further, that no such repurchase obligation will extend for a term in excess of 183 days;
(e) Registered debt securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any state thereof that have a credit rating of not less than Aa2 (or, if lower, the long-term U.S. government rating) by Moody’s (and, if rated Aa2 or such lower rating, not on watch for downgrade) and AA (or, if lower, the long-term U.S. government rating) by S&P at the time of such investment or contractual commitment providing for such investment;
(f) commercial paper or other short-term obligations with the Eligible Investment Required Ratings and that either are bearing interest or are sold at a discount from the face amount thereof and have a maturity of not more than 183 days from their date of issuance;
(g) a Reinvestment Agreement issued by any bank (if treated as a deposit by such bank), including the Trustee, or a Reinvestment Agreement or guaranteed investment issued by any insurance company or other corporation or entity, in each case with the Eligible Investment Required Ratings; or
(h) shares or other securities of non-United States money market funds which funds have, at all times, credit ratings of Aaa-mf by Moody’s and AAAm or AAAm-G by S&P, respectively;
provided, however, that (i) funds on deposit in the Expense Reserve Account and the Contingent Payment Reserve Account will be invested in overnight funds that are Eligible Investments, (ii) Eligible Investments purchased with funds in the Collection Account and the Interest Reserve Account will be held until maturity except as otherwise specifically provided in the Indenture but, in any event, any Eligible Investment held in any Account shall mature no later than the earlier of the Business Day immediately preceding the next Payment Date (or, in the case of Eligible Investments issued by the Bank, on such Payment Date) and 60 days after its acquisition by the Issuer, (iii) Eligible Investments must be purchased at a price less than or equal to par, (iv) such obligation or security does not have a "p," "pi," "q," "r," "f," "t," or "sf" subscript assigned to any rating by S&P, (v) neither all nor substantially all of the remaining amounts payable thereunder consist of interest and not principal payments, (vi) the acquisition (including the manner of acquisition), ownership, enforcement or disposition of such obligation or
144 ` security will not cause the Issuer to be engaged in a trade or business within the United States for U.S. federal income tax purposes or otherwise to be subject to tax on a net income basis in the United States, (vii) such obligation or security is not subject to any withholding tax at any time through its maturity unless (A) the obligor of the obligation or security is required to make "gross up" payments that cover the full amount of such withholding tax on an after-tax basis pursuant to the Underlying Instrument with respect thereto or (B) such withholding is the result of the failure by the Holders to provide the Issuer with the Holder FATCA Information and such withholding is allocated amongst such non-complying Holders, (viii) such obligation or security is not a mortgage-backed security, asset-backed security or asset backed commercial paper and is not secured by real property, (ix) at the time of purchase, such obligation or security is not subject to an Offer, (x) its repayment is not subject to substantial non-credit related risk as determined by the Collateral Manager and (xi) such obligation or security must mature no later than 60 days after the date on which the Eligible Investment Required Ratings with respect to S&P are no longer satisfied or such shorter time as is required in the Indenture.
Any investment, which otherwise qualifies as an Eligible Investment, may (1) be made or issued by, or acquired from or through, the Trustee or any of its Affiliates and (2) be made in securities of any entity for which the Trustee or any of its Affiliates receives compensation or serves as offeror, distributor, investment advisor or other service provider.
"Eligible Investment Required Ratings": (1) (A) in the case of securities or other obligations having up to a one-month maturity, a long term debt credit rating from Moody's of "A3" or a short-term debt credit rating of "P-1" from Moody's, (B) in the case of securities or other obligations not subject to clause (1)(A) above having up to a three-month maturity, a long term debt credit rating from Moody's of "A2" or a short-term debt credit rating of "P-1" from Moody's, (C) in the case of securities or other obligations not subject to clauses (1)(A) or (1)(B) above having up to a six-month maturity, a long term debt credit rating from Moody's of "A1" and a short-term debt credit rating of "P-1" from Moody's, and (D) in the case of securities or other obligations having greater than a six-month maturity, a long term debt credit rating from Moody's of "Aaa", and (2) (A) in the case of securities or other obligations having up to a sixty day maturity, a short-term credit rating of "A-1" or better by S&P, and (B) in the case of securities or other obligations not subject to clause (2)(A) above, a short-term credit rating of "A-1+" by S&P (or, if no short-term rating exists, a long-term rating of "AA-" or better by S&P), in each case, at the time of such investment or the contractual commitment providing for such investment.
"Eligible Loan Index": With respect to each Collateral Asset that is a loan, one of the following indices: CS Institutional Leveraged Loan Index (formerly CSFB Leveraged Loan Index Plus), the Deutsche Bank Leveraged Loan Index, the Goldman Sachs/Loan Pricing Corporation Liquid Leveraged Loan Index, the Banc of America Securities Leveraged Loan Index, the S&P/LSTA Leveraged Loan Indices, or any successor index to any of the foregoing.
"Eligible Principal Investments": Eligible Investments purchased with Principal Proceeds (including amounts designated as Principal Proceeds pursuant to the Priorities of Payment and any Unused Proceeds).
"Equity Security": (i) Any security that by its terms does not provide for periodic payments of interest at a stated coupon rate and repayment of principal at a stated maturity and any other security that is not eligible for purchase by the Issuer as a Collateral Asset and is not an Eligible Investment or (ii) any Swapped Equity Security; provided, however, for the purposes hereof, the capital stock of an ETB Subsidiary shall not constitute an Equity Security; it being understood that Equity Securities may not be purchased by the Issuer but may be received by the Issuer in exchange for a Collateral Asset or a portion thereof in connection with an insolvency, bankruptcy, reorganization, debt restructuring or workout of the issuer thereof.
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"ERISA Restricted": Those Securities designated as ERISA Restricted in the Term Sheet (if any).
"Euroclear": Euroclear Bank S.A./N.V. as the operator of the Euroclear system and any successor or successors thereto.
"Excluded Letter-of-Credit": A Letter-of-Credit in respect of which (x) the full amount of withholding tax (whether U.S. or non-U.S.) is not being withheld or (y) the Issuer (or the Collateral Manager on its behalf) has not received an opinion of nationally recognized tax counsel to the effect that payments with respect to such facility are not subject to withholding tax (whether U.S. or non-U.S.).
"FATCA": Sections 1471 through 1474 of the Code, any final current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code, or any U.S. or non-U.S. fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with either the implementation of such Sections of the Code or analogous provisions of non-U.S. law.
"Fee Basis Amount": With respect to any Payment Date, the sum of the outstanding principal amount of all Collateral Assets (including undrawn commitments that have not been irrevocably reduced in respect of Delayed Funding Assets) and Eligible Investments.
"First Lien Last Out Loan": Any assignment of or participation interest in a loan that: (a) is not (and cannot by its terms become) subordinate in right of payment to any other obligation of the obligor of the loan (other than (i) with respect to trade claims, capitalized leases or similar obligations and (ii) subordination in right of payment solely to one or more Senior Secured Loans of the obligor of the loan that becomes effective solely upon the occurrence of a default or event of default by the obligor of the loan); (b) is secured by a valid perfected security interest or lien in, to or on specified collateral securing the obligor's obligations under the loan that, prior to the occurrence of a default or event of default by the obligor of the loan, is a first priority security interest or lien; and (c) the value of the collateral securing the loan together with other attributes of the obligor (including, without limitation, its general financial condition, ability to generate cash flow available for debt service and other demands for that cash flow) is adequate (in the commercially reasonable judgment of the Collateral Manager) to repay the loan in accordance with its terms and to repay all other loans of equal seniority secured by a first lien or security interest in the same collateral.
"Fixed Rate Asset": Each Collateral Asset that bears interest at a fixed rate, except as otherwise specified in the proviso to the definition of Floating Rate Asset.
"Floating Rate Asset": Each Collateral Asset that bears interest at a floating rate; provided, however, that any Fixed Rate Asset that is subject to an Asset Specific Hedge shall be considered a Floating Rate Asset bearing interest at a floating rate equal to LIBOR plus a spread equal to the payment to be received by the Issuer pursuant to the Asset Specific Hedge.
"FRB": Any Federal Reserve Bank.
"Global Note": Any Rule 144A Global Note or Regulation S Global Note.
"Hedge Counterparty": The Issuer’s counterparty under a Hedge Agreement.
"Higher-Ranking Class": With respect to any Class, each Class that is senior in Order of Priority to such Class.
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"Highest-Ranking Class": Each Class that is designated in the Term Sheet with the Order of Priority that is senior in Order of Priority to all other outstanding Classes; provided that the Class A Notes and the Class X Notes will be considered together as a single Class and any other Classes of Notes that rank pari passu will be considered together as a single Class.
"Holder" or "Securityholder": With respect to any Security, the Person in whose name such Security is registered in the Security Register.
"Holder FATCA Information": Information requested by the Issuer or a FATCA Intermediary (or an agent thereof) to be provided by the Securityholders to the Issuer or a FATCA Intermediary that in the reasonable determination of the Issuer or a FATCA Intermediary is required to be requested by FATCA (including pursuant to the terms of a voluntary agreement entered into with a taxing authority) or a related rule or published administrative interpretation.
"Incurrence Covenant": A covenant by a borrower to comply with certain financial covenants only upon the occurrence of certain actions by the borrower, including, but not limited to, debt issuance, payment of dividends, share purchase, merger, acquisitions or divestitures.
"Independent": As to any Person, any other Person (including, in the case of an accountant or lawyer, a firm of accountants or lawyers or any investment bank and any member thereof) who at the time of determination (i) does not have and is not committed to acquire any material direct or any material indirect financial interest in such Person or in any Affiliate of such Person, and (ii) is not connected with such Person as an officer, employee, promoter, underwriter, voting trustee, partner, director or Person performing similar functions. When used with respect to any accountant, "Independent" may include an accountant who audits the books of such Person if in addition to satisfying the criteria set forth above the accountant is independent with respect to such Person within the meaning of Rule 101 of the Code of Ethics of the American Institute of Certified Public Accountants.
"Interest Distribution Amount": With respect to any Class of Secured Notes, (a) the aggregate amount of interest accrued, at the applicable Interest Rate, during the related Interest Accrual Period on the Aggregate Outstanding Amount of the applicable Secured Notes on the first day of such Interest Accrual Period (after giving effect to any payment of principal of such Secured Notes on any Payment Date preceding such Payment Date) and (b) any Defaulted Interest with respect to such Class of Secured Notes.
"Interest Proceeds": The sum of the following amounts (without duplication):
(a) any of the following amounts received during a Due Period to the extent not used to purchase accrued interest, make payments (other than termination payments) to the Hedge Counterparty under any Asset Specific Hedge or Timing Hedge or make a deposit to the Interest Reserve Account:
(i) all cash payments of interest (including capitalized interest and amounts that are the economic equivalent of interest) or dividends on the Collateral Assets, including in the Collateral Manager’s judgment (determined as of the Trade Date), accrued interest (other than Principal Financed Accrued Interest) received in connection with a sale of Collateral Assets;
(ii) all payments of interest on Eligible Investments and any payment of principal of Eligible Investments purchased with Interest Proceeds; and
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(iii) all amendment and waiver fees, all late payment fees, all commitment fees, all delayed settlement compensation whether or not netted against any principal or purchase price paid for a Collateral Asset and all other fees and commissions (in each case except to the extent otherwise designated as Principal Proceeds by the Collateral Manager by written notice to the Trustee on or prior to the related Determination Date) received in connection with the Collateral Assets (other than fees and commissions received in connection with the purchase, sale, restructuring or default of Collateral Assets);
provided, however, that (x) amounts received on or following the date on which a Collateral Asset becomes a Defaulted Asset (but only for so long as such Collateral Asset is a Defaulted Asset) will not be treated as Interest Proceeds but as Principal Proceeds until the sum of (1) such amounts received and (2) any other recoveries of principal on such Defaulted Asset exceeds its par amount and (y) amounts received with respect to any Current Pay Asset in excess of the Current Pay Haircut Threshold Percentage (as determined by the Collateral Manager) will not be treated as Interest Proceeds but as Principal Proceeds (but only for so long as such Collateral Asset constitutes part of the excess over the Current Pay Haircut Threshold Percentage) until the sum of (1) such amounts received and (2) any other recoveries of principal on such Collateral Asset exceeds its par amount;
(b) all payments (other than termination payments and, with respect to an Asset Specific Hedge, upfront premium payments) received pursuant to any Hedge Agreements with respect to the related Payment Date and all scheduled interest payments received with respect to a Hedged Asset with respect to the related scheduled payment date under the related Asset Specific Hedge;
(c) the aggregate amount of the funds withdrawn from the Interest Reserve Account for distribution on such Payment Date;
(d) with respect to the first, second and third Payment Dates, the aggregate amount of the funds withdrawn from the Closing Date Interest Account for distribution on such Payment Date;
(e) any amounts transferred from the Expense Reserve Account and designated by the Collateral Manager as Interest Proceeds on or prior to the first Determination Date;
(f) any amounts designated by the Collateral Manager as Interest Proceeds (other than such proceeds that have been designated by the Collateral Manager as Principal Proceeds pursuant to the definition of Principal Proceeds) transferred from the Letter-of-Credit Reserve Account in respect of any Excluded Letter-of-Credit in relation to which the Issuer (or the Collateral Manager on its behalf) has received an opinion of nationally recognized tax counsel to the effect that payments with respect to such facility are not subject to withholding tax (whether U.S. or non-U.S.); and
(g) any amounts transferred from the Class X Notes Account and required to be treated as Interest Proceeds or, if not required to be treated as Interest Proceeds, designated by the Collateral Manager as Interest Proceeds.
For the avoidance of doubt (x) any Interest Proceeds designated as Principal Proceeds by the Collateral Manager pursuant to the Priorities of Payment shall thereafter be classified as Principal Proceeds and (y) Excepted Property and any proceeds thereof will not constitute Interest Proceeds.
"Interest Rate": The interest rate designated in respect of each Class of Securities in the Term Sheet.
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"Issuer Expense Payment Sequence": On each Payment Date, Issuer Expenses payable pursuant to the Priorities of Payment and not previously paid will be paid in the following order of priority: (a) first, to the payment of the Issuer Expenses (excluding indemnification payments) due to the Trustee, as such, and to the Collateral Administrator, then due to the Bank in any of its other capacities under the Indenture and the Account Control Agreement, (b) second, to the payment of Petition Expenses (allocable solely from the Petition Expense Amount until such amount has been applied in full), (c) third, to the payment of the Issuer Expenses constituting indemnification payments due to the Trustee, as such, and to the Collateral Administrator, then due to the Bank in any of its other capacities under the Indenture and the Account Control Agreement; (d) fourth, to the payment of any other Issuer Expenses (other than any indemnification payments) in the order of priority specified in the definition of Issuer Expenses not otherwise paid under (a), (b) or (c) above; and (e) fifth, to the payment as directed in writing by the Collateral Manager of any other indemnification payments pro rata according to the amount due to each other party. Issuer Expenses not paid on a given Payment Date will be carried over for payment on the next Payment Date.
"Issuer Expenses": (1) amounts to make any capital infusion to an ETB Subsidiary necessary to pay any accrued and unpaid taxes, registered office fees and governmental fees owed by such ETB Subsidiary (to the extent that such amounts remain unpaid) and (2) all amounts (including indemnification payments) due or accrued with respect to any Payment Date to (a) the Trustee under the Indenture and the Account Control Agreement and the Collateral Administrator under the Collateral Administration Agreement; (b) the Bank in any of its other capacities under the Indenture and the Account Control Agreement; (c) each of the Rating Agencies for fees and expenses in connection with any rating of the Securities and Collateral Assets and provision of credit estimates, including any on- going surveillance fees and expenses; (d) the Independent accountants, agents and counsel of the Issuer and any ETB Subsidiary for fees and expenses; (e) the Administrator for amounts payable pursuant to the Administration Agreement, MaplesFS Limited for amounts payable pursuant to the Registered Office Agreement and any administration fees owed by an ETB Subsidiary; (f) any Person in respect of Petition Expenses; (g) the Collateral Manager or successor Collateral Manager pursuant to the Collateral Management Agreement (other than the Senior Collateral Management Fee, the Subordinated Collateral Management Fee and the Incentive Management Fee); (h) any reserve for expenses related to an Optional Redemption or discharge of the Indenture; and (i) any Person in respect of any other fees, expenses, payments or indemnities permitted under the Indenture and the documents delivered pursuant to or in connection with the Indenture and the Securities.
"Issuer Order": A written order or request (which may be in the form of a standing order or request) dated and signed in the name of the Issuer by an authorized officer of the Issuer, or in the name of the Co-Issuer by an authorized officer of the Co-Issuer, or by an authorized officer of the Collateral Manager on behalf of the Issuers where permitted pursuant to the Indenture or the Collateral Management Agreement, as the context may require or permit.
"Junior Notes": Any Class of Securities designated as Junior Notes in the Term Sheet.
"Knowledgeable Employee": Any "knowledgeable employee," as defined in Rule 3c-5 under the U.S. Investment Company Act, with respect to the Issuer.
"Letter-of-Credit": Any letter of credit facility that requires a lender party thereto to pre-fund in full its obligations thereunder, provided that any such lender (a) shall have no further funding obligation thereunder and (b) shall have a right to be reimbursed or repaid by the borrower its pro rata share of any draws on a letter of credit issued thereunder; provided, that the account into which the prefunded amounts in respect of a letter of credit facility shall be deposited shall be a Letter-of-Credit Eligible Account at the time of such deposit.
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"Letter-of-Credit Eligible Account": (a) A segregated trust account maintained with the corporate trust department of a federal depository institution or state-chartered depository institution rated (x) at least A and A-1 by S&P (or at least A+ by S&P if such institution has no short term rating) and (y) at least "P-1" and "A1" by Moody’s.
"LIBOR": The London interbank offered rate, as determined by the calculation agent in accordance with the following provisions (in each case rounded to the nearest 0.00001%):
(a) On the second day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in London prior to the commencement of an Interest Accrual Period (each such day, a "LIBOR Determination Date"), LIBOR for any given Security will equal the rate, as obtained by the LIBOR Calculation Agent, for Eurodollar deposits having a maturity of the Index Maturity that appears on the Reuters Screen LIBOR01 Page or any successor thereto (or, if the Index Maturity does not appear on such page, the rate determined by linear interpretation), as of 11:00 a.m. (London time) on such LIBOR Determination Date as reported by Bloomberg Financial Commodities News.
(b) If, on any LIBOR Determination Date, such rate does not appear on such page (or its successor), the LIBOR Calculation Agent will request quotations from four major banks in the London interbank market selected by the LIBOR Calculation Agent (after consultation with the Collateral Manager) (the "Reference Banks") to leading banks in the London interbank market for Eurodollar deposits having a maturity of the Index Maturity in an amount determined by the LIBOR Calculation Agent. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR will equal such arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR will be deemed to be the arithmetic mean of the offered quotations that leading banks in the City of New York selected by the LIBOR Calculation Agent (after consultation with the Collateral Manager) are quoting on the relevant LIBOR Determination Date for Eurodollar deposits of three months in an amount determined by the LIBOR Calculation Agent by reference to the principal London offices of leading banks in the London interbank market. If the LIBOR Calculation Agent is unable to determine LIBOR using any of these methods, then LIBOR will mean LIBOR as previously determined on the last LIBOR Determination Date.
With respect to any Collateral Asset, LIBOR shall be the London interbank offered rate and Index Maturity will be the applicable period determined in accordance with the related Underlying Instrument. With respect to Securities, the Index Maturity will be specified in the Term Sheet.
"LIBOR Floor Obligation": As of any date, a Floating Rate Asset (a) for which the related Underlying Instruments allow a libor rate option that provides that such libor rate is (in effect) calculated as the greater of (i) a specified "floor" rate per annum and (ii) the London interbank offered rate for the applicable interest period for such Collateral Asset and (b) that, as of such date, bears interest based on such libor rate option, but only if as of such date the London interbank offered rate for the applicable interest period is less than such "floor" rate.
"Lower-Ranking Class": With respect to any Class, each Class that is junior in Order of Priority to such Class.
"Maintenance Covenant": A covenant by a borrower that requires such borrower to comply with certain financial covenants during the periods or as of a specified day in each reporting period, as the case may be, specified in the underlying loan agreement, regardless of any action taken by such borrower.
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"Majority": With respect to any Class or Classes, the Holders of more than 50% of the Aggregate Outstanding Amount of the Securities of such Class or Classes, as the case may be. With respect to the Securities collectively, the Holders of more than 50% of the Aggregate Outstanding Amount of all Outstanding Securities.
"Margin Stock": The meaning given to such term in Regulation U issued by the Board of Governors of the Federal Reserve System.
"Market Value": As of any Measurement Date, for any Collateral Asset, the product of (a) the par amount of such Collateral Asset and (b) the Collateral Asset's price determined as follows (and, in all cases, as shall be certified in writing (including via electronic mail or facsimile) by the Collateral Manager to the Trustee and the Collateral Administrator):
(a) the bid price or value determined by a Qualified Pricing Service selected by the Collateral Manager;
(b) if such bid price or value is not available from a Qualified Pricing Service, then (i) the average of the bid side prices or values determined by three nationally recognized Independent broker- dealers (one of which may be Morgan Stanley) selected by the Collateral Manager who are active in the trading of such securities; or (ii) if only two such bid prices or values are available, the lower of such two bid prices; or
(c) if more than one such bid price or value is not available, then (i) so long as the Collateral Manager is a registered investment adviser under the U.S. Advisers Act: (A) one bid price or value if only one is available, or (B) if one such bid price or value is not available, then the lower of: (I) at the option of the Collateral Manager, the bid side market value of such Collateral Asset as determined by the Collateral Manager (which must be the market value used by the Collateral Manager for the obligation for other portfolios that it manages), and (II) the higher of (x) 70% of the outstanding principal balance of such Collateral Asset and (y) the S&P Recovery Rate for such Collateral Asset multiplied by the outstanding principal balance thereof; or (ii) if the Collateral Manager is not registered under the U.S. Advisers Act, then the lower of: (A) the bid side market value of such Collateral Asset as determined by the Collateral Manager for a period of up to 30 days, and after 30 days, zero; and (B) the higher of (i) 70% of the outstanding principal balance of such Collateral Asset and (ii) the S&P Recovery Rate for such Collateral Asset multiplied by the outstanding principal balance thereof. The Market Value of Current Pay Assets may only be determined under clause (a) or (b), and shall be zero until it can be determined pursuant to such clauses.
"Measurement Date": Any of the following: (a) the Effective Date, (b) after the Effective Date, any date on which there is a sale, purchase or substitution of any Collateral Asset, (c) each Determination Date, (d) the date of determination of the monthly report and payment date report under the Indenture, and (e) with reasonable notice, any other Business Day requested by either Rating Agency.
"Mezzanine Notes": Any Security specified in the Term Sheet as Mezzanine Notes.
"Moody’s": Moody’s Investors Service, Inc. and any successor or successors thereto and, if such corporation shall for any reason no longer perform the functions of a securities rating agency, "Moody’s" shall be deemed to refer to any other nationally recognized rating agency designated in writing by the Collateral Manager on behalf of the Issuer (with a copy to the Trustee), except that Rating Agency Confirmation must be obtained from S&P prior to substitution of the ratings of any such other rating agency for purposes of the determination of the S&P Rating.
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"Moody’s Additional Current Pay Criteria": Criteria satisfied with respect to any Collateral Asset if (a) either such Collateral Asset has (i) a Market Value of at least 85% of its outstanding principal amount and a Moody’s Rating of at least Caa2; or (ii) a Market Value of at least 80% of its outstanding principal amount and a Moody’s Rating of at least Caa1, or (b) (i) such Collateral Asset is a loan and the price of an the Eligible Loan Index is trading below 90%, such Collateral Asset has either (x) a Market Value of at least 85% of the average price of the applicable Eligible Loan Index and a Moody’s Rating of at least Caa2 or (y) a Market Value of at least 80% of the average price of the applicable Eligible Loan Index and a Moody’s Rating of at least Caa1, or (ii) if such Collateral Asset is a bond and the Merrill Lynch US High Yield Master II Constrained Index, Bloomberg ticker HUC0 (or such other index as the Collateral Manager selects and provides notice of to the Rating Agencies), as determined by the Collateral Manager, is trading below 90%, such Collateral Asset has a Market Value of at least 75% of such index.
"Moody’s Diversity Score": A single number that indicates collateral concentration in terms of both obligor and industry concentration, calculated as set forth in the Indenture or such other schedule provided to the Issuer, the Trustee, the Collateral Administrator and the Collateral Manager for which Rating Agency Confirmation has been obtained from Moody’s. For the purposes of the calculation of the Moody's Diversity Score, obligors that are Affiliates with one another will be considered one obligor; provided, however, that an Affiliate of an obligor that is in a different industry from such obligor will be treated as a separate obligor from such obligor if Rating Agency Confirmation has been obtained from Moody’s. If Moody’s modifies its industrial classification groups, the Collateral Manager may elect to have any or all of the Collateral Assets reallocated among such modified industrial classification groups for purposes of determining the Industry Diversity Score (as set forth in the Indenture) and the Moody’s Diversity Score so long as (i) the Collateral Manager has provided written notice of such election to Moody’s, the Trustee and the Collateral Administrator and (ii) Rating Agency Confirmation has been obtained from Moody’s.
"Moody’s Group Country": Any Moody’s Group I Country, Moody’s Group II Country, Moody’s Group III Country or Moody’s Group IV Country.
"Moody’s Group I Countries": Australia, the Netherlands, New Zealand and the United Kingdom.
"Moody’s Group II Countries": Germany, Ireland, Sweden and Switzerland.
"Moody’s Group III Countries": Austria, Belgium, Denmark, Finland, France, Iceland, Liechtenstein, Luxembourg, Norway and Spain.
"Moody’s Group IV Countries": Greece, Italy and Portugal.
"Moody’s Industry Classification": The Moody’s Industry Classifications set forth in a schedule to the Indenture, which industry classifications may be updated at the option of the Collateral Manager if Moody’s publishes revised industry classifications and Moody’s or the Collateral Manager provides written notice thereof to the Trustee (with a copy to the Collateral Administrator).
"Moody’s Recovery Amount": With respect to any Collateral Asset, the amount equal to the product of (i) the applicable Moody’s Recovery Rate and (ii) the outstanding principal amount of such Collateral Asset.
"Non-Deferrable Class": Each Class of Secured Notes that is not designated as Deferrable in the Term Sheet or that is designated as Deferrable in the Term Sheet but is then the Highest-Ranking Class of Secured Notes Outstanding.
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"Non-Permitted Holder": Any Person that is not a non-U.S. Person or both a Qualified Institutional Buyer and Qualified Purchaser (or in the case of Subordinated Notes, is not (i) both an Accredited Investor and either a Qualified Purchaser or a Knowledgeable Employee or (ii) both a Qualified Institutional Buyer and Qualified Purchaser) or that is a Non-Permitted ERISA Holder.
"Not ERISA Restricted": Those Securities designated as Not ERISA Restricted in the Term Sheet.
"Note Payment Sequence": The application, to the extent required pursuant to the Priorities of Payment, of Interest Proceeds or Principal Proceeds, as applicable in the following order:
(a) to the payment of the accrued and unpaid Interest Distribution Amount with respect to the Class X Notes and the accrued and unpaid Interest Distribution Amount with respect to the Class A Notes, pro rata based on amounts due, until such amounts have been paid in full;
(b) to the payment of principal of the Class X Notes and principal of the Class A Notes, pro rata based on their respective Aggregate Outstanding Amounts, until the Class X Notes and the Class A Notes have been paid in full;
(c) to the payment of the accrued and unpaid Interest Distribution Amount in respect of the Class B -1 Notes and the Class B-2 Notes, pro rata based on amounts due, until such amounts have been paid in full;
(d) to the payment of principal of the Class B-1 Notes and the Class B-2 Notes, pro rata based on their respective Aggregate Outstanding Amounts, until the Class B Notes have been paid in full;
(e) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount in respect of the Class C Notes and (2) second, any Deferred Interest on the Class C Notes and interest thereon, until such amounts have been paid in full;
(f) to the payment of principal of the Class C Notes, until the Class C Notes have been paid in full;
(g) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount in respect of the Class D Notes and (2) second, any Deferred Interest on the Class D Notes and interest thereon, until such amounts have been paid in full;
(h) to the payment of principal of the Class D Notes, until the Class D Notes have been paid in full;
(i) to the payment of (1) first, the accrued and unpaid Interest Distribution Amount in respect of the Class E Notes and (2) second, any Deferred Interest on the Class E Notes and interest thereon, until such amounts have been paid in full; and
(j) to the payment of principal of the Class E Notes, until the Class E Notes have been paid in full.
"Offer": With respect to any Collateral Asset, any offer by the obligor of such security or by any other Person made to all of the holders of such security to purchase or otherwise acquire such security (other than pursuant to any redemption in accordance with the terms of the related Underlying
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Instruments) or to convert or exchange such security into or for cash, securities or any other type of consideration.
"Order of Priority": With respect to any Class of Securities, the priority level specified for such Class in the Term Sheet under "General Terms — Securities — Priority Level."
"Outstanding": With respect to each Class of Securities, as of any date of determination, all of such Class of Securities theretofore issued and delivered under the Indenture except: (i) Securities subject to Cancellation by the Security Registrar or delivered to the Security Registrar for cancellation or registered in the Security Register on the date that the Indenture has been discharged; (ii) Securities or portions thereof for whose payment or redemption funds in the necessary amount have been theretofore irrevocably deposited with the Trustee or any Paying Agent in trust for the Holders of such Securities; provided, that if such Securities or portions thereof are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor satisfactory to the Trustee or Paying Agent has been made; (iii) Securities in exchange for or in lieu of which other Securities have been issued and delivered pursuant to the Indenture, unless proof satisfactory to the Trustee is presented that any such Securities are held by a Protected Purchaser (as defined in the UCC); and (iv) Securities alleged to have been mutilated, destroyed, lost or stolen for which replacement Securities have been issued.
In determining whether the Holders of the requisite Aggregate Outstanding Amount have given any request, demand, authorization, direction, notice, consent or waiver, (i) any Securities owned by the Issuer, the Co-Issuer or any Affiliate thereof shall be disregarded and deemed not to be Outstanding and (ii) Securities beneficially owned by the Collateral Manager or its affiliates shall be disregarded and deemed not to be Outstanding with respect to the matters indicating such in the Collateral Management Agreement (provided that they may vote for all other purposes). In determining whether the Trustee or the Bank will be protected in relying upon any request, demand, authorization, direction, notice, consent or waiver of Holders pursuant to the Indenture, only Securities that a Trust Officer of the Trustee actually knows to be so owned will be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not one of the Issuers or any other obligor upon the Securities or any Affiliate of the Issuers or such other obligor.
"Partial PIK Asset": A Collateral Asset on which the interest, in accordance with its related Underlying Instrument, is currently being (i) partly paid in cash (with a minimum cash payment of LIBOR plus 0.50% required under the Underlying Instruments) and (ii) partly deferred, or paid by the issuance of additional debt securities identical to such debt security or through additions to the principal amount thereof, provided that a Collateral Asset that pays interest equal to or greater than LIBOR plus 2.00% in cash will not be considered to be a Partial PIK Asset.
"Participation Interest": A participation interest in a loan (i) that is represented by a contractual obligation of a Selling Institution that has at least a long-term rating of A and a short-term rating of A-1 (or to the extent such Selling Institution does not have a short-term rating or has a short-term rating of less than A-1, a long-term rating of A+) by S&P and a short-term rating of P-1 (and is not on negative credit watch) by Moody’s, or a long-term rating of A3 and a short-term rating of P-1 by Moody’s (if such Selling Institution has both a long-term and a short-term rating by Moody’s) or a long-term rating of A2 by Moody’s (if such Selling Institution has only a long-term rating by Moody’s) and (ii) the underlying loan with respect to which would otherwise be a Collateral Asset if it were acquired directly by the Issuer.
"Paying Agent": The Trustee and any other Person authorized by the Issuer to pay any amounts to be paid on any Securities on behalf of the Issuer pursuant to the Indenture.
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"Permitted Withholding Tax Asset": A Collateral Asset that (a) as of the acquisition date is subject to withholding tax imposed by a jurisdiction in which an obligor thereof is located, provided that (x) the Issuer’s entire liability for any taxes in respect of such Collateral Asset is expected to be fully satisfied by amounts to be withheld or deducted by such obligor (or its agents) from payments under such Collateral Asset and (y) the acquisition (including the manner of acquisition), ownership, enforcement or disposition of such Collateral Asset will not subject the Issuer to net income taxes in such jurisdiction or (b) is a Letter-of-Credit.
"Person": An individual, corporation (including a business trust or a limited liability company), partnership, limited liability partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated association or government or any agency or political subdivision thereof.
"PIKable Assets": A debt obligation (other than a Partial PIK Asset or a Collateral Asset described in the proviso to the definition of the term "Partial PIK Asset") that, at any time, provides for periodic payments of interest to be deferred (without defaulting) but which is not a PIKing Asset at such time.
"PIKing Asset": A Collateral Asset (other than a Partial PIK Asset or a Collateral Asset described in the proviso to the definition of the term "Partial PIK Asset") either (a) that is currently deferring all interest or paying all interest "in-kind," which interest is otherwise payable in cash or (b) on which the interest, in accordance with its related Underlying Instrument is currently being (i) partly paid in cash and (ii) partly deferred, or paid by the issuance of additional Collateral Assets identical to such Collateral Asset or through additions to the principal amount thereof; provided, however, that such Collateral Asset will cease to be a PIKing Asset at such time as it (x)(A) ceases to defer interest or to pay any interest through the issuance of additional Collateral Assets or through additions to the principal amount thereof, (B) pays in cash all accrued interest that was previously paid-in-kind and (C) commences payment of all current interest in cash or (y) ceases paying any interest-in-kind (in which case such Collateral Asset will be a Defaulted Asset).
"Prepaid Collateral Asset": Any Collateral Asset to the extent prepaid (in whole or in part), whether by tender, redemption prior to the stated maturity of such Collateral Asset, exchange or other prepayment.
"Principal Balance": With respect to each Collateral Asset or Eligible Investment, the outstanding principal amount thereof; provided, however, that:
(a) for all purposes,
(i) the Principal Balance of each PIKable Asset, PIKing Asset and Partial PIK Asset excludes deferred or capitalized interest;
(ii) the Principal Balance of each Equity Security will be zero; and
(iii) the Principal Balance of each Delayed Funding Asset will be its outstanding commitment amount (including funded and unfunded amounts);
(b) (i) solely for purposes of calculating the Par Coverage Ratio and the Additional Issuance Par Ratio and for determining whether the Aggregate Principal Balance of Collateral Assets (purchased or committed) is at least equal to the Effective Date Target Par Amount (except, in the case of a determination of whether the Aggregate Principal Balance of the Collateral Assets (purchased or
155 ` committed) is at least equal to the Effective Date Target Par Amount, a Defaulted Asset described under clause (d) of the definition of Defaulted Asset), the Principal Balance of each Defaulted Asset will be the lesser of (x) its Market Value and (y) its Recovery Value and (ii) for the Event of Default Ratio and for all other purposes, the Principal Balance of each Defaulted Asset will be its Market Value; provided that, Defaulted Assets that have been defaulted for longer than 36 months will have a Principal Balance of zero; and
(c) solely for purposes of calculating the Collateral Principal Balance for purposes of determining the Par Coverage Ratio and the Additional Issuance Par Ratio and for determining whether the Aggregate Principal Balance of Collateral Assets (purchased or committed) is at least equal to the Effective Date Target Par Amount:
(i) the Principal Balance of each the following assets will be the lesser of (x) its Market Value and (y) its Recovery Value:
(A) each PIKing Asset that has been paying interest through the issuance of additional debt securities identical to such PIKing Asset or through an addition to the principal amount thereof for the shorter of (a) in the case of a PIKing Asset with a Moody’s Rating of Baa3 or higher, one year and two payment periods or (b) in the case of a PIKing Asset with a Moody’s Rating lower than Baa3, six consecutive months and one payment period; and
(B) each Current Pay Asset in excess of the Current Pay Haircut Threshold Percentage (it being understood and agreed that for purposes of determining the Current Pay Assets (or portion thereof) comprising such excess, the Current Pay Assets with the lowest price, expressed as a percentage of par, shall comprise such excess);
(ii) on any date on and after the Effective Date, the Principal Balance of any obligation (or any portion thereof) included in the Caa/CCC Excess will be its Market Value (beginning with those Caa Assets and CCC Assets with the lowest price, expressed as a percentage of par); and
(iii) the Principal Balance of any Discount Asset will be its purchase price (expressed as a percentage of par) multiplied by its aggregate outstanding principal balance.
For purposes of this definition, (x) if a Collateral Asset that falls under more than one of the above categories, the category resulting in the greatest reduction to the Collateral Principal Balance will apply to such Collateral Asset; and (y) the Principal Balance of any Collateral Asset will include any Principal Financed Accrued Interest with respect to such Collateral Asset. For purposes of determining which Collateral Assets constitute the excess amounts referred to in clause (c)(ii) above, the Collateral Manager shall select the applicable Collateral Assets based on the percentage prices underlying their Market Values, beginning with the Collateral Assets having the lowest percentage prices underlying their Market Value.
"Principal Financed Accrued Interest": With respect to any Collateral Asset, the amount of accrued interest (if any) purchased with Principal Proceeds (including Unused Proceeds or proceeds from the issuance of any Additional Subordinated Notes).
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"Principal Proceeds": The sum of the following amounts (without duplication):
(a) all amounts received during such Due Period, (excluding, with respect to the related Payment Date, amounts that have been reinvested or committed for reinvestment (including during the Amortization Period, Sale Proceeds of Credit Risk Assets and Principal Proceeds relating to Prepaid Collateral Assets, up to the Reinvestment Percentage thereof) or deposited in a reserve account) that do not constitute Interest Proceeds (excluding any call, redemption or prepayment premium received on any Hedged Asset that is required to be applied to the termination payment payable to the Hedge Counterparty thereon);
(b) all termination payments received pursuant to a Hedge Agreement (and not used to enter into a replacement Hedge Agreement); and
(c) (i) Unused Proceeds, (ii) any amounts transferred from the Expense Reserve Account and designated by the Collateral Manager as Principal Proceeds on or prior to the first Determination Date, (iii) Principal Financed Accrued Interest, (iv) the net proceeds of any Additional Subordinated Notes (other than those proceeds designated by the Collateral Manager as Interest Proceeds), (v) any amounts designated by the Collateral Manager as Principal Proceeds (other than such proceeds that have been designated by the Collateral Manager as Interest Proceeds pursuant to the definition of Interest Proceeds) transferred from the Letter-of-Credit Reserve Account in respect of any Excluded Letter-of-Credit in relation to which the Issuer (or the Collateral Manager on its behalf) has received an opinion of nationally recognized tax counsel to the effect that payments with respect to such facility are not subject to withholding tax (U.S. or non-U.S.), and (vi) any amounts transferred from the Class X Notes Account not required to be treated as Interest Proceeds and designated by the Collateral Manager as Principal Proceeds. Excepted Property and any proceeds thereof will not constitute Principal Proceeds;
provided, however, that any Allocated Principal Proceeds will not be distributed in accordance with the Priorities of Payment on the Payment Date with respect to which they constitute Allocated Principal Proceeds.
"Prospectus Directive": Directive 2003/71/EC, as amended.
"Purchase Price": The net price paid by the Issuer in purchasing a Collateral Asset, taking into account upfront fees or any other costs or fees paid or received.
"Qualified Institutional Buyer": The meaning specified in Rule 144A under the U.S. Securities Act.
"Qualified Pricing Service": LPC Pricing Service, LoanX, DebtX (solely with respect to bonds), Markit Group Limited, IDC or Houlihan Lokey (in each case if Independent from the Collateral Manager) or any other nationally-recognized pricing service independent from and selected by the Collateral Manager and notified to each Rating Agency.
"Qualified Purchaser": Any Person that, at the time of its acquisition, purported acquisition or proposed acquisition of Securities is a qualified purchaser for purposes of Section 3(c)(7) of the U.S. Investment Company Act.
"Rated Notes": Each Class of Securities designated as Rated Notes in the Term Sheet, which shall include each Class of Securities for which assignment of a rating on the Closing Date by a Rating Agency is a condition to issuance of the Securities.
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"Rating Agency": Each of Moody’s and S&P in each case only for so long as any Rated Notes are Outstanding and rated by such entity. For the avoidance of doubt, after the retirement of the Class A Notes, Rating Agency Confirmation from Moody's will not be required and notices to Rating Agencies will not be required to be sent to Moody's, but all Collateral Quality Tests and other calculations and criteria that refer to Moody's ratings or other Moody's criteria or methodology will continue to apply.
"Rating Agency Confirmation": Confirmation in writing (which may be evidenced by a press release or an exchange of electronic messages or facsimiles) from each Rating Agency (or the specified Rating Agency) that any proposed action or designation will not cause the then-current ratings of the Rated Notes to be reduced or withdrawn; provided that, with respect to any provision of the Indenture or any other transaction document requiring Rating Agency Confirmation, if the applicable Rating Agency (a) makes a public announcement or informs the Issuer, the Collateral Manager or the Trustee that (i) it believes Rating Agency Confirmation is not required with respect to the applicable action or (ii) its practice is not to give such confirmations or (b) for the avoidance of doubt, no longer constitutes a Rating Agency under the Indenture, the requirement for Rating Agency Confirmation with respect to such Rating Agency will not apply.
"Recalcitrant Holder": (i) A owner or beneficial owner of debt or equity in the Issuer that fails to provide the Holder FATCA Information or (ii) a foreign financial institution as defined under Section 1471(d)(4)of the Code that does not satisfy (or is not deemed to satisfy or not excused from satisfying) Section 1471(b) of the Code.
"Recovery Value": With respect to any Collateral Asset as of any date of determination, the lower of Moody’s Recovery Amount and the S&P Recovery Amount.
"Redemption Agreement": A binding agreement with a financial institution or its Affiliate, which entity (x) has a long term unsecured debt obligations (other than obligations whose rating is based on the credit of a Person other than such institution) which, so long as any Rated Notes are Outstanding, have a credit rating from each Rating Agency at least equal to the highest rating of any Class of Securities rated by such Rating Agency then Outstanding, (y) has a short term unsecured debt obligations credit rating of P–1 from Moody’s (and is not on watch for downgrade) and at least A–1 from S&P or (z) is otherwise acceptable to Moody’s and S&P (such acceptance to be evidenced in writing (including e-mail) following notice from the Collateral Manager).
"Redemption Price": In the case of (a) Secured Notes, (i) 100% of the aggregate outstanding principal amount of such Securities (including any Deferred Interest) plus (ii) accrued and unpaid interest thereon (including any Defaulted Interest and interest thereon); and (b) each Subordinated Note, its pro rata share of all excess Principal Proceeds and Interest Proceeds payable to the Subordinated Notes pursuant to the Priorities of Payment; provided that the Redemption Price of any Class of Secured Notes may be a lesser amount agreed to by 100% of the Aggregate Outstanding Amount of such Class of Secured Notes (but, in the case of a Refinancing, only if all Par Coverage Tests are satisfied, with an excess over the required Par Coverage Ratio with respect to the Class E Notes of at least 0.5%, immediately prior to giving effect to such Refinancing).
"Refinancing Proceeds": The proceeds from any Refinancing permitted under the Indenture.
"Registered": With respect to any debt obligation issued by a United States person (as defined in the Code), a debt obligation (a) that is issued after July 18, 1984 and (b) that is in registered form for purposes of the Code.
"Regulation S": Regulation S under the U.S. Securities Act.
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"Reinvestment Agreement": A guaranteed reinvestment agreement from a bank, insurance company or other corporation or entity, for which Rating Agency Confirmation has been obtained; provided, however, that such agreement provides that it is terminable by the purchaser, without penalty, in the event that the rating assigned to such agreement by either Rating Agency is at any time lower than the rating required pursuant to the terms of the Indenture to be assigned to such agreement in order to permit the purchase thereof.
"Reinvestment Percentage": With respect to Principal Proceeds of Credit Risk Assets satisfying one or more of the criteria referred to in clause (a) of the definition thereof and/or Prepaid Collateral Assets and each Due Period, up to 50% of such amounts, calculated on either an asset by asset basis or an aggregate basis at the election of the Collateral Manager.
"Reinvestment Period": The period from and including the Closing Date to and including the Scheduled Reinvestment Period Termination Date; provided, however, that the Reinvestment Period will terminate early upon the first to occur of: (a) an acceleration of the Secured Notes following an Event of Default, (b) an Optional Redemption (other than pursuant to a Refinancing) or (c) the occurrence of a Special Redemption; provided, further, that references to Payment Dates in the Reinvestment Period will include any Payment Date for which the last day of the related Due Period was during the Reinvestment Period.
"Representation Letter": A representation letter or subscription agreement, dated on or prior to the Closing Date, provided to the Issuer and Initial Purchaser by (x) the initial purchasers of the Subordinated Notes and/or (y) the initial purchasers of any Non-Clearing Agency Securities.
"Restricted Trading Condition": Each day during which both (a) (i) the Moody’s rating or the S&P rating, as applicable, of the Class A Notes is one or more subcategories below its initial rating on the Closing Date, (ii) the S&P rating of the Class B Notes, the Class C Notes, the Class D Notes or the Class E Notes is two or more subcategories below its initial rating on the Closing Date or (iii) the Moody’s rating or the S&P rating, as applicable, of any applicable Class of Secured Notes has been withdrawn and not reinstated (except in connection with the repayment in full of such Class); provided, however, that the Restricted Trading Condition shall not apply (so long as the Moody's rating or the S&P rating, as applicable, of the Class A Notes or the S&P rating of the Class B Notes, the Class C Notes, the Class D Notes or the Class E Notes has not been further downgraded, withdrawn or put on watch) upon the direction of the Controlling Party; and (b) the then-current aggregate principal balance of the Collateral Assets and Eligible Investments is less than the Target Par Balance.
"Revolving Collateral Asset": Any Collateral Asset (other than a Delayed Drawdown Debt Asset) that is a senior secured obligation (including funded and unfunded portions of revolving credit lines and letter of credit facilities, unfunded commitments under specific facilities and other similar loans and investments) that under the Underlying Instruments relating thereto may require one or more future advances to be made to the obligor by the Issuer; provided, however, that any such Collateral Asset will be a Revolving Collateral Asset only to the extent of committed unfunded amounts to be funded by the Issuer thereunder, and only until all commitments by the Issuer to make advances to the obligor thereof expire, or are terminated, or are irrevocably reduced to zero.
"Rule 144A": Rule 144A under the U.S. Securities Act.
"S&P": Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business, and any successor or successors thereto and, if such corporation shall for any reason no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally
159 ` recognized rating agency designated in writing by the Collateral Manager on behalf of the Issuer (with a copy to the Trustee and the Collateral Administrator).
"S&P Additional Current Pay Criteria": Criteria satisfied with respect to any Collateral Asset if either (i) the obligor of such Collateral Asset has made an offer to exchange one or more of its outstanding debt obligations for a different debt obligation or to repurchase and retire one or more of its outstanding debt obligations for cash, or any combination thereof, and the Collateral Asset is already held by the Issuer and is subject to such offer or ranks equal to or higher in priority than the obligation subject to such offer, or (ii) such Collateral Asset has a Market Value of at least 80% of its outstanding principal amount.
"S&P Asset Specific Recovery Rating": With respect to any Collateral Asset, the corporate recovery rating assigned by S&P to such Collateral Asset.
"S&P CDO Monitor": (a) The software model used to calculate the default frequency in terms of the amount of debt assumed to default as a percentage of the original principal amount of the Collateral Assets consistent with a specified benchmark rating level based upon certain assumptions and S&P’s proprietary corporate default studies, as such model may be amended by S&P from time to time, or (b) any other model used similarly for which Rating Agency Confirmation has been obtained from S&P, in each case as such model may be amended from time to time by S&P.
The S&P CDO Monitor calculates the projected cumulative default rate of a pool of Collateral Assets consistent with a specified benchmark rating level based upon S&P’s proprietary corporate debt default studies. The S&P CDO Monitor considers each obligor’s issuer rating, the number of issuers or obligors in the portfolio, the issuer or obligor industry concentration in the portfolio and the remaining weighted average maturity of the Collateral Assets (other than Defaulted Assets) and Eligible Principal Investments included in the portfolio and calculates a cumulative default rate based on the statistical probability of distributions or defaults on the Collateral Assets and Eligible Principal Investments included in the portfolio.
"S&P Industry Classification": The S&P Industry Classifications set forth in a schedule to the Indenture, which industry classifications may be updated at the option of the Collateral Manager if S&P publishes revised industry classifications and S&P or the Collateral Manager provides written notice thereof to the Trustee and the Collateral Administrator.
"S&P Recovery Amount": With respect to any Collateral Asset, the amount equal to the product of (i) the applicable S&P Recovery Rate and (ii) the outstanding principal amount of such Collateral Asset (using the appropriate column labeled with the senior most Class of Securities involved in the applicable calculation).
"Sale Proceeds": All proceeds (including Principal Financed Accrued Interest but excluding any accrued interest purchased with Interest Proceeds) that are received with respect to sales or other disposition of Collateral Assets, Eligible Principal Investments and Equity Securities net of any amounts expended by the Collateral Manager, the Trustee or the Collateral Administrator in connection with such sale or other disposition that are reimbursable pursuant to the Indenture.
"SEC": The U.S. Securities and Exchange Commission.
"Second Lien Loan": Any assignment of or Participation Interest in or other interest in a loan that (i) is not (and cannot by its terms become) subordinate in right of payment to any other obligation of the obligor of the loan other than a Senior Secured Loan with respect to the liquidation of such obligor or
160 ` the collateral for such loan and (ii) that is secured by a valid second priority perfected pledge of collateral provided that at the time of the assignment of or Participation Interest in such loan (in the Collateral Manager's reasonable discretion at such time), the value of collateral securing such loan and all senior and pari passu ranking loans of the relevant obligor, equals or exceeds the outstanding balance of such loan and all obligations of the relevant obligor which rank senior or pari passu to such loan.
"Secured Note": Any Class or Classes of Securities specified in the Term Sheet as Secured Notes.
"Securities Intermediary": Is as defined in Section 8-102(a)(14) of the Uniform Commercial Code.
"Security Register": A register in which the Security Registrar will provide for the registration of Securities and the registration of transfers of Securities.
"Selling Institution": The entity obligated to make payments to the Issuer under the terms of a Participation Interest.
"Senior Notes": Any Class or Classes of Securities specified in the Term Sheet as Senior Notes.
"Senior Secured Bond": Any Fixed Rate Asset that is secured by the pledge of collateral and has the most senior pre-petition priority (including pari passu with other obligations of the obligor, but subject to customary permitted liens, such as, but not limited to, any tax liens) in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings.
"Senior Secured Loan": Any assignment of, Participation Interest in or other interest in a loan that (i) is secured by a first priority perfected security interest or lien on specified collateral (subject to customary exemptions for permitted liens, including, without limitation, any tax liens), (ii) has the most senior pre-petition priority (including pari passu with other obligations of the obligor) in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings and (iii) by its terms is not permitted to become subordinate in right of payment to any other obligation of the obligor thereof.
"Senior Secured Note": Any note (i) that is not (and cannot by its terms become, in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings or otherwise) subordinate (except with respect to liquidation preferences with respect to pledged collateral) in right of payment to any obligation of the obligor but subject to customary permitted liens, such as, but not limited to, any tax liens and (ii) that is secured by a valid first-priority perfected pledge of collateral.
"Senior Unsecured Bond": Any bond (other than a Senior Secured Bond) that has the most senior pre-petition priority (including pari passu with other obligations of the obligor, but subject to customary permitted liens, such as, but not limited to, any tax liens) in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings.
"Senior Unsecured Loan": Any assignment of or Participation Interest in or other interest in a loan (other than a Second Lien Loan or a Senior Secured Loan) that is not secured by the pledge of collateral and has the most senior pre-petition priority (including pari passu with other obligations of the obligor, but subject to any super-priority lien imposed by operation of law, such as, but not limited to, any tax liens) in any bankruptcy, reorganization, arrangement, insolvency, moratorium or liquidation proceedings.
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"Special Redemption": A redemption that will occur during the Reinvestment Period on the next succeeding Payment Date if the Collateral Manager, at its discretion, notifies the Trustee that it has been unable using commercially reasonable efforts for a period of at least 20 consecutive days to invest Principal Proceeds in Collateral Assets; provided that the occurrence of a Special Redemption will terminate the Reinvestment Period.
"Special Redemption Amount": The amount of Principal Proceeds designated by the Collateral Manager for distribution in connection with a Special Redemption.
"Spread Excess": As of any date of determination, the percentage (if positive) obtained by multiplying
(i) the excess, if any, of the Weighted Average Spread over the Minimum Weighted Average Spread; by
(ii) the number obtained by dividing (a) the Aggregate Principal Balance of the funded portions of all Floating Rate Assets (excluding any Defaulted Asset and the unfunded portion of any Delayed Funding Asset) by (b) the Aggregate Principal Balance of all Fixed Rate Assets (excluding any Defaulted Asset and the unfunded portion of any Delayed Funding Asset).
"Step-Down Coupon Asset": An obligation, the interest payments of which are scheduled to decrease (although interest payments may decrease upon the occurrence of certain events, such as a decrease of the index relating to Floating Rate Assets, the change from a default rate of interest to a non- default rate or an improvement in the obligor’s financial condition).
"Structured Finance Asset": Any security secured directly by, or representing ownership of, a pool of receivables or other pool of financial assets of any obligor, including collateralized debt obligations and mortgage-backed securities and other similar securities.
"Subordinated Loan": Any assignment of or Participation Interest in or other interest in a loan that is subordinated in right of payment to any senior unsecured debt obligations of the related issuer. For the avoidance of doubt, a Second Lien Loan shall not constitute a Subordinated Loan.
"Subordinated Notes": Any Class or Classes of Securities designated as the Subordinated Notes under the heading "Class" in the Term Sheet.
"Sufficient Reserve Requirement": (a) The sum of the amount on deposit in the Contingent Payment Reserve Account is greater than or equal to (b) the sum of the Aggregate Principal Balance of the undrawn and outstanding commitments under all Delayed Funding Assets that require future payments by the Issuer.
"Supermajority": With respect to any Class or Classes, the Holders of more than 66 ⅔% of the Aggregate Outstanding Amount of the Securities of such Class or Classes, as the case may be. With respect to the Securities collectively, the Holders of more than 66 ⅔% of the Aggregate Outstanding Amount of all Outstanding Securities.
"Synthetic Asset": Any U.S. dollar denominated swap transaction, debt security, security issued by a trust or similar vehicle or other investment (other than a Letter-of-Credit) purchased from or entered into with a synthetic counterparty, the returns on which are linked to the credit performance of one or
162 ` more reference obligations, but which may provide for a different maturity, payment dates, interest rate, credit exposure or other credit or non-credit related characteristics than such reference obligations.
"Target Par Balance": An amount equal to (a) the Effective Date Target Par Amount, minus (b) the amount of any principal payments made on the Securities of any Class, plus (c) the aggregate amount of Principal Proceeds that result from any issuance of Additional Subordinated Notes.
"Tax Event": Any new, or change to (a) a U.S. or non-U.S. tax statute, treaty, regulation, rule, ruling, practice, procedure or judicial decision or interpretation which results in any portion of any payment due from any issuer or obligor under any Collateral Asset becoming properly subject to the imposition of U.S. or non-U.S. tax, which in the case of withholding tax is not compensated for by a "gross-up" provision under the terms of the Collateral Asset, or (b) a Cayman Islands law that results in Holders of the Securities becoming properly subject to the imposition of Cayman Islands withholding tax unless the Issuer has changed its governing jurisdiction to a jurisdiction that does not impose withholding tax on Holders of the Secured Notes within 90 days of becoming aware of such change in law, but only, in each case, if such tax or taxes amount, in the aggregate, to at least $1,000,000, during any 12 month period.
"Tested Classes": In respect of (A)(i) the Senior Coverage Tests, the Senior Notes, (ii) the Class C Interest Coverage Test and the Class C Par Coverage Test, the Senior Notes and the Class C Notes and (iii) the Class D Interest Coverage Test and the Class D Par Coverage Test, the Senior Notes and the Mezzanine Notes, (B) the Interest Diversion Test, the Senior Notes, the Mezzanine Notes and the Class E Notes and (C) the Class E Par Coverage Test, the Senior Notes, the Mezzanine Notes and the Class E Notes; provided that the Class X Notes shall not constitute a Tested Class in respect of any Par Coverage Test or the Interest Diversion Test.
"Treasury Regulations": The regulations promulgated under the Code, including any successor regulations.
"UCC": The Uniform Commercial Code, as in effect from time to time in the State of New York.
"Underlying Instrument": The indenture, credit agreement or other agreement pursuant to which a Collateral Asset has been issued or created and each other agreement that governs the terms of or secures the obligations represented by such Collateral Asset or of which the holders of such Collateral Asset are the beneficiaries, as each may be amended from time to time in accordance with its terms.
"Unsecured Loan": A loan that is not secured by any lien or security interest on the assets of the obligor.
"U.S. Advisers Act": The U.S. Investment Advisers Act of 1940, as amended.
"U.S. Bankruptcy Code": The U.S. Bankruptcy Code, Title 11 of the United States Code, as amended from time to time.
"U.S. Exchange Act": The U.S. Securities Exchange Act of 1934, as amended.
"U.S. Investment Company Act": The U.S. Investment Company Act of 1940, as amended.
"U.S. Securities Act": The U.S. Securities Act of 1933, as amended.
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"Voting Rights": Any request, demand, authorization, direction, notice, consent, waiver or other action provided by the Indenture or the Collateral Management Agreement to be given or taken by Holders.
"Weighted Average Coupon": As of any date of determination, a rate equal to a fraction (expressed as a percentage) obtained by (i) multiplying the Principal Balance of each Fixed Rate Asset (excluding any Defaulted Asset and the unfunded portion of any Delayed Funding Asset) as of such date by the current per annum rate at which it pays interest, provided that with respect to any Fixed Rate Asset that is a Permitted Withholding Tax Asset, an amount equal to any expected withholding tax (as reasonably determined by or on behalf of the Issuer) on such Permitted Withholding Tax Asset shall be excluded from the current per annum rate, (ii) summing the amounts determined pursuant to clause (i) for all such Fixed Rate Assets as of such date, and (iii) dividing such sum by the Aggregate Principal Balance of all such Fixed Rate Assets as of such date. If the Weighted Average Coupon as of any date of determination determined as provided above is less than the Minimum Weighted Average Coupon, an amount equal to the Spread Excess, if any, as of such date will be added to clause (i) of the Weighted Average Coupon to the extent necessary to cause the Weighted Average Coupon to equal the Minimum Weighted Average Coupon.
"Weighted Average Life": With respect to each Collateral Asset (other than a Defaulted Asset) as of any date of determination is the number obtained by (i) summing the products of (A) (x) the number of actual days from such date of determination to the respective dates of each successive scheduled distribution of principal of a Collateral Asset divided by (y) 365 and (B) the related amounts of the principal of such scheduled distribution; and (ii) dividing such sum by the sum of all successive scheduled distributions of principal of such Collateral Asset; provided that, for purposes of determining the Weighted Average Life of a Bridge Loan, the date of the final scheduled distribution of principal shall be deemed to be the latest maturity date permitted under the applicable Underlying Instruments.
"Weighted Average Spread": As of any date of determination, the number obtained by dividing:
(a) the amount equal to the sum of (i) the Aggregate Funded Spread, (ii) the Aggregate Unfunded Spread and (iii) except for purposes of the S&P CDO Monitor, the Aggregate Excess Funded Spread; by
(b) an amount equal to the lesser of (i) (x) the Effective Date Target Par Amount minus (y) the Aggregate Principal Balance of Fixed Rate Assets and (ii) the Collateral Principal Balance of all Floating Rate Assets (excluding Floating Rate Assets that are Defaulted Assets); provided that, for purposes of the S&P CDO Monitor, clause (i) above shall not apply.
If the Weighted Average Spread as of any date of determination, determined as provided above, is less than the Moody’s Weighted Average Spread Test, an amount equal to the Coupon Excess, if any, as of such date will be added to the Weighted Average Spread to the extent necessary to cause the Weighted Average Spread to equal the Moody’s Weighted Average Spread Test.
"Zero-Coupon Asset": A security that, at the time of determination, does not make periodic payments of interest.
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SCHEDULE A
Moody’s Rating Schedule
"Assigned Moody’s Rating": The monitored publicly available rating or the estimated rating expressly assigned to a debt obligation (or facility) by Moody’s that addresses the full amount of the principal and interest promised; provided that, if application has been made for such estimated rating, pending its receipt, the Assigned Moody’s Rating will be B3 if the Collateral Manager certifies to the Trustee (with a copy to the Collateral Administrator) that the Collateral Manager believes that such estimated rating is expected to be at least B3; provided, further, that an estimated rating shall no longer constitute an Assigned Moody's Rating if it was provided by Moody's more than 12 months prior to the date of determination and an update or confirmation by Moody's has not been applied for by the Collateral Manager and received during such 12 month period.
"Moody’s Default Probability Rating": With respect to any Collateral Asset as of any date of determination, the rating determined in the following manner:
(i) With respect to a Collateral Asset that is a Senior Secured Loan, if the obligor of such Collateral Asset has a corporate family rating by Moody’s, then such corporate family rating, and with respect to a Collateral Asset that is a Senior Secured Note that has a Moody’s rating equal to or better than the corporate family rating by Moody’s, then such corporate family rating.
(ii) With respect to a Collateral Asset that is a Senior Secured Loan, if not determined pursuant to clause (i) above, if such Collateral Asset (a) is publicly rated by Moody’s, such public rating, or (b) is not publicly rated by Moody’s but for which a rating or rating estimate has been assigned by Moody’s upon the request of the Issuer or the Collateral Manager, such rating or the corporate family rating estimate, as applicable.
(iii) With respect to a Collateral Asset other than a DIP Collateral Asset, if not determined pursuant to clause (i) or (ii) above, (a) if such Collateral Asset is a Senior Secured Loan and if the obligor of such Collateral Asset has one or more senior unsecured obligations publicly rated by Moody's, then one subcategory above the Moody's public rating on any such obligation as selected by the Collateral Manager or (b) for all other Collateral Assets (other than a DIP Collateral Asset), (A) if the obligor of such Collateral Asset has one or more senior unsecured obligations publicly rated by Moody’s, then the Moody's public rating on any such obligation as selected by the Collateral Manager or, if no such rating is available, (B) if such Collateral Asset is publicly rated by Moody's, such public rating or, if no such rating is available, (C) if a rating or credit estimate has been assigned to such Collateral Asset by Moody's upon the request of the Issuer or the Collateral Manager, such rating or, in the case of a credit estimate, the applicable credit estimate for such obligation.
(iv) With respect to a Collateral Asset (other than a DIP Collateral Asset) if not determined pursuant to clause (i), (ii) or (iii) above, if the Collateral Asset is (a) a Senior Secured Loan, one subcategory higher than the Moody’s Derived Rating or (b) not a Senior Secured Loan, the Moody’s Derived Rating.
(v) With respect to a DIP Collateral Asset, one rating subcategory below the Moody’s Rating of such DIP Collateral Asset.
For purposes of calculating a Moody’s Default Probability Rating, each applicable rating that is on credit watch by Moody’s with positive or negative implication or negative outlook at the time of calculation will be adjusted in accordance with the Moody’s Outlook/Review Rules.
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"Moody’s Derived Rating": With respect to a Collateral Asset whose Moody’s Rating or Moody’s Default Probability Rating cannot otherwise be determined pursuant to the definitions thereof, such Moody’s Rating or Moody’s Default Probability Rating shall be determined as set forth below:
(a) if the obligor has a senior unsecured obligation with an Assigned Moody’s Rating, such Assigned Moody’s Rating;
(b) if the preceding clause does not apply, the Moody’s "Issuer Rating" for the obligor;
(c) if the preceding clauses do not apply, but the obligor has a subordinated obligation with an Assigned Moody’s Rating, then
(i) if such Assigned Moody’s Rating is at least B3 (and, if rated B3, not on watch for downgrade), the Moody’s Derived Rating shall be the rating which is one rating subcategory higher than such Assigned Moody’s Rating, or
(ii) if such Assigned Moody’s Rating is less than B3 (or rated B3 and on watch for downgrade), the Moody’s Derived Rating shall be such Assigned Moody’s Rating;
(d) if the preceding clauses do not apply, but the obligor has a senior secured obligation with an Assigned Moody’s Rating, then:
(i) if such Assigned Moody’s Rating is at least Caa3 (and, if rated Caa3, not on watch for downgrade), the Moody’s Derived Rating shall be the rating which is one subcategory below such Assigned Moody’s Rating, or
(ii) if such Assigned Moody’s Rating is less than Caa3 (or rated Caa3 and on watch for downgrade), then the Moody’s Derived Rating shall be "C";
(e) if the preceding clauses do not apply, but the obligor has a senior unsecured obligation (other than a bank loan) with a monitored public rating from S&P (without any postscripts, asterisks or other qualifying notations, that addresses the full amount of principal and interest promised), then the Moody’s Derived Rating shall be:
(i) one rating subcategory below the Moody’s equivalent of such S&P rating if it is BBB– or higher, or
(ii) two rating subcategories below the Moody’s equivalent of such S&P rating if it is BB+ or lower;
(f) if the preceding clauses do not apply, but the obligor has a subordinated obligation (other than a bank loan) with a monitored public rating from S&P (without any postscripts, asterisks or other qualifying notations, that addresses the full amount of principal and interest promised), the Assigned Moody’s Rating shall be deemed to be: (i) one rating subcategory below the Moody’s equivalent of such S&P rating if it is BBB– or higher; or (ii) two rating subcategories below the Moody’s equivalent of such S&P rating if it is BB+ or lower, and the Moody’s Derived Rating shall be determined pursuant to clause (c) above;
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(g) if the preceding clauses do not apply, but the obligor has a senior secured obligation with a monitored public rating from S&P (without any postscripts, asterisks or other qualifying notations, that addresses the full amount of principal and interest promised), the Assigned Moody’s Rating shall be deemed to be:
(i) one rating subcategory below the Moody’s equivalent of such S&P rating if it is BBB– or higher; or
(ii) two rating subcategories below the Moody’s equivalent of such S&P rating if it is BB+ or lower, and the Moody’s Derived Rating shall be determined pursuant to clause (d) above;
(h) if the preceding clauses do not apply and each of the following clauses (i) through (viii) do apply, the Moody’s Derived Rating will be Caa1:
(i) neither the obligor nor any of its Affiliates is subject to reorganization or bankruptcy proceedings,
(ii) no debt securities or obligations of the obligor are in default,
(iii) neither the obligor nor any of its Affiliates has defaulted on any debt during the preceding two years,
(iv) the obligor has been in existence for the preceding five years,
(v) the obligor is current on any cumulative dividends,
(vi) the fixed-charge ratio for the obligor exceeds 125% for each of the preceding two fiscal years and for the most recent quarter,
(vii) the obligor had a net profit before tax in the past fiscal year and the most recent quarter, and
(viii) the annual financial statements of such obligor are unqualified and certified by a firm of independent accountants of international reputation, and quarterly statements are unaudited but signed by a corporate officer;
(i) if the preceding clauses do not apply but each of the following clauses (i) and (ii) do apply, the Moody’s Derived Rating will be Caa3:
(i) neither the obligor nor any of its Affiliates is subject to reorganization or bankruptcy proceedings; and
(ii) no debt security or obligation of such obligor has been in default during the past two years; and
(j) if the preceding clauses do not apply and a debt security or obligation of the obligor has been in default during the past two years, the Moody’s Derived Rating will be Ca.
Notwithstanding the foregoing, no more than 10% of the Collateral Assets, by Aggregate Principal Balance, may be given a Moody’s Derived Rating based on a rating given by S&P as provided in clauses
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(f) through (h) above. For purposes of calculating a Moody’s Derived Rating, each applicable rating calculated pursuant to clauses (e), (f) or (g) above using an S&P rating that is on credit watch by S&P with positive or negative implication or on negative outlook at the time of calculation will be adjusted in accordance with the Moody’s Outlook/Review Rules, after giving effect to the determination of the rating in accordance with the provisions above.
"Moody's Outlook/Review Rules" means, for any Collateral Asset that is placed on negative outlook or on review for upgrade or downgrade, (A) the rating otherwise determined in accordance with the definition of Moody's Default Probability Rating for purposes of calculating Moody’s Weighted Average Rating Factor shall be adjusted as follows: (i) for any Collateral Asset that is placed on negative outlook, such rating shall be adjusted downward one notch, (ii) for any Collateral Asset that is placed on review for possible downgrade, such rating shall be adjusted downward two notches and (iii) for any Collateral Asset that is placed on review for possible upgrade, such rating shall be adjusted upward one notch; and (B) the rating otherwise determined in accordance with the definition of Moody’s Default Probability Rating, Moody's Derived Rating or Moody's Rating for all other purposes shall be adjusted as follows: (i) for any Collateral Asset that is placed on review for possible downgrade, such rating shall be adjusted downward one notch and (ii) for any Collateral Asset that is placed on review for possible upgrade, such rating shall be adjusted upward one notch.
"Moody’s Rating": With respect to any Collateral Asset as of any date of determination, the rating determined in the following manner:
(i) If it has an Assigned Moody’s Rating, such Assigned Moody’s Rating.
(ii) If is a Senior Secured Loan or Participation Interest in a Senior Secured Loan, (a) if the obligor has a corporate family rating by Moody’s, then such corporate family rating, (b) if the obligor has one or more senior unsecured obligations publicly rated by Moody’s, one subcategory higher than the Moody’s public rating on any such senior unsecured obligation as selected by the Collateral Manager, otherwise (c) one subcategory higher than the Moody’s Derived Rating of such Collateral Asset.
(iii) Unless it is a DIP Collateral Asset, (a) if the obligor has one or more senior unsecured obligations publicly rated by Moody’s, the Moody’s public rating on any such senior unsecured obligation as selected by the Collateral Manager, otherwise (b) the Moody’s Derived Rating of such Collateral Asset.
(iv) If it is a DIP Collateral Asset, the Assigned Moody’s Rating.
For purposes of calculating a Moody’s Rating, each applicable rating on credit watch by Moody’s with positive or negative implication or negative outlook at the time of calculation will be adjusted in accordance with the Moody’s Outlook/Review Rules.
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"Moody’s Rating Factor": For each Collateral Asset, the number set forth to the right of the applicable Moody’s Default Probability Rating below:
Moody’s Default Moody’s Rating Moody’s Default Moody’s Rating Probability Rating Factor Probability Rating Factor Aaa 1 Ba1 940 Aa1 10 Ba2 1,350 Aa2 20 Ba3 1,766 Aa3 40 B1 2,220 A1 70 B2 2,720 A2 120 B3 3,490 A3 180 Caa1 4,770 Baa1 260 Caa2 6,500 Baa2 360 Caa3 8,070 Baa3 610 Ca, not rated or withdrawn 10,000
For purposes of calculating the Moody’s Weighted Average Rating Factor Test, each Defaulted Asset will be excluded
"Moody’s Recovery Rate": With respect to any Collateral Asset (other than a Collateral Asset with a specific recovery rate assigned by Moody’s), the recovery rate specified in Table I below corresponding to such type of Collateral Asset:
Table I Moody’s Recovery Rates
Type of Collateral Asset Recovery Rate Senior Secured Loans* The recovery rate determined by reference to Table II below Non-Senior Secured Loans and Non-Senior The recovery rate determined by reference to Secured Notes** Table III below Bonds The recovery rate determined by reference to Table IV below DIP Collateral Assets 50% ______* Also includes Second Lien Loans and Senior Secured Notes with a rating by Moody’s that is equal to or greater than the obligor’s Moody’s corporate family rating. ** Also includes Second Lien Loans and Senior Secured Notes that do not have a rating by Moody’s that is at least equal to the obligor’s Moody’s corporate family rating.
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Table II Moody’s Recovery Rates for Senior Secured Loans
Number of rating sub-categories by which the Moody’s Rating is above or below the Moody’s Default Probability Rating Recovery Rate -3 or less 20% -2 30% -1 40% 0 45% 1 50% 2 or more 60%
Table III Moody’s Recovery Rates for Non-Senior Secured Loans
Number of rating sub-categories by which the Moody’s Rating is above or below the Moody’s Default Probability Rating Recovery Rate -3 or less 0% -2 5.0% -1 10.0% 0 25.0% 1 30.0% 2 or more 35.0%
Table IV Moody’s Recovery Rates for Bonds
Number of rating sub-categories by which the Moody’s Rating is above or below the Moody’s Default Probability Rating Recovery Rate* -3 or less 0% -2 5.0% -1 10.0% 0 25.0% 1 30.0% 2 or more 35.0% ______* The recovery rate for a subordinated debt security will be 15% if its Moody’s Rating has been determined by reference to the definition of "Moody’s Derived Rating."
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"Moody’s WARF": The quotient (rounded up to the nearest whole number) equal to ‘A divided by B’, where:
A = the sum of the products, for all Collateral Assets (excluding Defaulted Assets) of (i) the Principal Balance of the Collateral Asset and (ii) the Moody’s Rating Factor of the Collateral Asset; and
B = the Aggregate Principal Balance of all Collateral Assets (excluding Defaulted Assets).
"Moody’s WARR": The percentage (rounded up to the nearest whole number) equal to "A divided by B," where:
A = the sum of the products, for all Collateral Assets (excluding Defaulted Assets) of (i) the Principal Balance of the Collateral Asset and (ii) the Moody’s Recovery Rate of the Collateral Asset; and
B = the Aggregate Principal Balance of all Collateral Assets (excluding Defaulted Assets).
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SCHEDULE B
S&P Rating Schedule
The "S&P Rating" of each Collateral Asset will be determined in the following manner:
(i) (a) if there is an issuer credit rating of the issuer of such Collateral Asset by S&P as published by S&P, or the guarantor which unconditionally and irrevocably guarantees such Collateral Asset pursuant to a form of guaranty approved by S&P for use in connection with this transaction, then the S&P Rating shall be such rating (regardless of whether there is a published rating by S&P on the Collateral Assets of such issuer held by the Issuer, provided that private ratings (that is, ratings provided at the request of the obligor) may be used for purposes of this definition if the related obligor has consented to the disclosure thereof and a copy of such consent has been provided to S&P) or (b) if there is no issuer credit rating of the issuer by S&P but (1) there is a senior secured rating on any obligation or security of the issuer, then the S&P Rating of such Collateral Asset shall be one sub-category below such rating; (2) if clause (1) above does not apply, but there is a senior unsecured rating on any obligation or security of the issuer, the S&P Rating of such Collateral Asset shall equal such rating; and (3) if neither clause (1) nor clause (2) above applies, but there is a subordinated rating on any obligation or security of the issuer, then the S&P Rating of such Collateral Asset shall be one sub-category above such rating if such rating is higher than “BB+”, and shall be two sub-categories above such rating if such rating is “BB+” or lower;
(ii) with respect to any Collateral Asset that is a DIP Collateral Asset, the S&P Rating thereof shall be the credit rating assigned to such issue by S&P;
(iii) if there is not a rating by S&P on the issuer or on an obligation of the issuer, then the S&P Rating may be determined pursuant to clauses (a) through (c) below:
(a) if an obligation of the issuer is not a DIP Collateral Asset and is publicly rated by Moody’s, then the S&P Rating will be determined in accordance with the methodologies for establishing the Moody’s Rating set forth above except that the S&P Rating of such obligation will be (1) one sub-category below the S&P equivalent of the Moody’s Rating if such Moody’s Rating is “Baa3” or higher and (2) two sub-categories below the S&P equivalent of the Moody’s Rating if such Moody’s Rating is “Ba1” or lower;
(b) the S&P Rating may be based on a credit estimate provided by S&P, and in connection therewith, the Issuer, the Collateral Manager on behalf of the Issuer or the issuer of such Collateral Asset shall, prior to or within 30 days after the acquisition of such Collateral Asset, apply (and concurrently submit all available S&P Required Information in respect of such application) to S&P for a credit estimate which shall be its S&P Rating; provided that, if such S&P Required Information is submitted within such 30-day period, then, pending receipt from S&P of such estimate, such Collateral Asset shall have an S&P Rating as determined by the Collateral Manager in its sole discretion if the Collateral Manager certifies to the Trustee and the Collateral Administrator that it believes that such S&P Rating determined by the Collateral Manager is commercially reasonable and will be at least equal to such rating; provided further, that if such S&P Required Information is not submitted within such 30-day period, then, pending receipt from S&P of such estimate, the Collateral Asset shall have (1) the S&P Rating as determined by the Collateral Manager for a period of up to 90 days after the acquisition of such Collateral Asset and (2) an S&P Rating of “CCC-” following such 90-day period; unless, during such 90-day period, the Collateral Manager has requested the extension of such period and S&P, in its sole discretion, has granted such request; provided further, that if such 90-day period (or
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other extended period) elapses pending S&P’s decision with respect to such application, the S&P Rating of such Collateral Asset shall be “CCC-”; provided further, that if the Collateral Asset has had a public rating by S&P that S&P has withdrawn or suspended within six months prior to the date of such application for a credit estimate in respect of such Collateral Asset, the S&P Rating in respect thereof shall be “CCC-” pending receipt from S&P of such estimate, and S&P may elect not to provide such estimate until a period of six months have elapsed after the withdrawal or suspension of the public rating; provided further that the S&P Rating may not be determined pursuant to this clause (b) if the Collateral Asset is a DIP Collateral Asset; provided further that such credit estimate shall expire 12 months after the acquisition of such Collateral Asset, following which such Collateral Asset shall have an S&P Rating of “CCC-” unless, during such 12-month period, the Issuer applies for renewal thereof and obtains and pays for an annual review of such Collateral Asset, in which case such credit estimate shall continue to be the S&P Rating of such Collateral Asset until S&P has confirmed or revised such credit estimate, upon which such confirmed or revised credit estimate shall be the S&P Rating of such Collateral Asset; provided further that such confirmed or revised credit estimate shall expire on the next succeeding 12-month anniversary of the date of the acquisition of such Collateral Asset and (when renewed annually by obtaining and paying for an annual review of such Collateral Asset) on each 12-month anniversary thereafter;
(c) with respect to a Collateral Asset that is not a Defaulted Asset, the S&P Rating of such Collateral Asset will at the election of the Issuer (at the direction of the Collateral Manager) be “CCC‑”; provided (i) neither the issuer of such Collateral Asset nor any of its Affiliates are subject to any bankruptcy or reorganization proceedings and (ii) the issuer has not defaulted on any payment obligation in respect of any debt security or other obligation of the issuer at any time within the two year period ending on such date of determination, all such debt securities and other obligations of the issuer that are pari passu with or senior to the Collateral Asset are current and the Collateral Manager reasonably expects them to remain current; provided further that, if the Aggregate Principal Balance of the Collateral Obligations assigned an S&P Rating of "CCC-" under this clause (iii)(c) exceeds 10.0% of the Collateral Principal Amount, the Collateral Manager will use commercially reasonable efforts to provide to S&P the same S&P Required Information regarding such Collateral Obligations as it would be required to provide to S&P under clause (iii)(b) above if it were seeking to obtain or maintain a credit estimate for such Collateral Obligations; or
(iv) with respect to a DIP Collateral Asset that has no issue rating by S&P or a Current Pay Asset that is rated “D” or “SD” by S&P, the S&P Rating of such DIP Collateral Asset or Current Pay Asset, as applicable, will be, at the election of the Issuer (at the direction of the Collateral Manager), “CCC-” or the S&P Rating determined pursuant to clause (iii)(b) above;
provided, that for purposes of the determination of the S&P Rating, (x) if the applicable rating assigned by S&P to an obligor or its obligations is on “credit watch positive” by S&P, such rating will be treated as being one sub-category above such assigned rating and (y) if the applicable rating assigned by S&P to an obligor or its obligations is on “credit watch negative” by S&P, such rating will be treated as being one sub-category below such assigned rating.
"S&P Required Information": S&P’s then-current "Credit Estimate Information Requirements" and any other information S&P reasonably requests in order to produce a credit estimate for the relevant Collateral Asset.
"S&P Recovery Rate": With respect to each Collateral Asset will be determined in the following manner; provided, however, that the S&P Recovery Rate set forth below may be (i) increased if
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Rating Agency Confirmation has been obtained from S&P with respect to such increase or (ii) amended in accordance with any S&P criteria revisions if Rating Agency Confirmation has been obtained from S&P with respect to such amendment:
(i) If a Collateral Asset has an S&P Asset Specific Recovery Rating, the S&P Recovery Rate for such Collateral Asset will be the applicable percentage set forth in Table 1 below, based on such S&P Asset Specific Recovery Rating and the applicable Class of Securities:
Table 1: S&P Recovery Rates For Collateral Assets With S&P Asset Specific Recovery Ratings*
S&P S&P S&P S&P S&P S&P Recovery Recovery Recovery Recovery Recovery Recovery Rate for Rate for Rate for Rate for Rate for Rate for Secured Secured Secured Secured Secured Secured Notes rated Notes rated Notes rated Notes rated Notes rated Notes rated "B" and "AAA" "AA" "A" "BBB" "BB" "CCC" Asset Specific (%) (%) (%) (%) (%) (%) Recovery Rates 1+ 75 85 88 90 92 95 1 65 75 80 85 90 95 2 50 60 66 73 79 85 3 30 40 46 53 59 65 4 20 26 33 39 43 45 5 5 10 15 20 23 25 6 2 4 6 8 10 10
______* The S&P Recovery Rate will be the applicable rate set forth above based on the applicable Class of Secured Notes and the rating thereof as of the Closing Date.
(ii) If a Collateral Asset is senior unsecured debt or subordinate debt and does not have an S&P Asset Specific Recovery Rating but the same issuer has other debt obligations that rank senior, the S&P Recovery Rate for such Collateral Asset will be the applicable percentage set forth in Tables 2 and 3 below:
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Table 2: Recovery Rates for Senior Unsecured Assets Junior to Assets with Recovery Ratings
S&P S&P S&P S&P S&P S&P Recovery Recovery Recovery Recovery Recovery Recovery Rate for Rate for Rate for Rate for Rate for Rate for Secured Secured Secured Secured Secured Secured Notes rated Notes rated Notes rated Notes rated Notes rated Notes rated "B" and "AAA" "AA" "A" "BBB" "BB" "CCC" Senior Asset (%) (%) (%) (%) (%) (%) Recovery Rate Group 1 1+ 18 20 23 26 29 31 1 18 20 23 26 29 31 2 18 20 23 26 29 31 3 12 15 18 21 22 23 4 5 8 11 13 14 15 5 2 4 6 8 9 10 6 ------Group 2 1+ 16 18 21 24 27 29 1 16 18 21 24 27 29 2 16 18 21 24 27 29 3 10 13 15 18 19 20 4 5 5 5 5 5 5 5 2 2 2 2 2 2 6 ------Group 3 1+ 13 16 18 21 23 25 1 13 16 18 21 23 25 2 13 16 18 21 23 25 3 8 11 13 15 16 17 4 5 5 5 5 5 5 5 2 2 2 2 2 2 6 ------
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Table 3: Recovery Rates for Subordinated Assets Junior to Assets with Recovery Ratings
S&P S&P S&P S&P S&P S&P Recovery Recovery Recovery Recovery Recovery Recovery Rate for Rate for Rate for Rate for Rate for Rate for Secured Senior Asset Secured Secured Secured Secured Secured Notes rated Recovery Notes rated Notes rated Notes rated Notes rated Notes rated "B" and Rate "AAA" "AA" "A" "BBB" "BB" "CCC" Group 1 1+ 8 8 8 8 8 8 1 8 8 8 8 8 8 2 8 8 8 8 8 8 3 5 5 5 5 5 5 4 2 2 2 2 2 2 5 ------6 ------
(iii) In all other cases, as applicable, based on the applicable Class of Securities, the S&P Recovery Rate for such Collateral Asset will be the applicable percentage set forth in Table 4 below:
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Table 4: Tiered Corporate Recovery Rates (By Asset Class And Class of Securities)*
S&P S&P S&P S&P S&P S&P Recovery Recovery Recovery Recovery Recovery Recovery Rate for Rate for Rate for Rate for Rate for Rate for Secured Secured Secured Secured Secured Secured Notes rated Notes rated Notes rated Notes rated Notes rated Notes rated "B" and "AAA" "AA" "A" "BBB" "BB" "CCC" Senior secured first- lien(%)** Group 1 50 55 59 63 75 79 Group 2 45 49 53 58 70 74 Group 3 39 42 46 49 60 63 Group 4 17 19 27 29 31 34 Senior secured cov- lite loans/ senior secured bonds (%) Group 1 41 46 49 53 63 67 Group 2 37 41 44 49 59 62 Group 3 32 35 39 41 50 53 Group 4 17 19 27 29 31 34 Mezzanine/ senior secured notes/second- lien/senior unsecured loans/senior unsecured bonds/First Lien Last Out Loans (%)*** Group 1 18 20 23 26 29 31 Group 2 16 18 21 24 27 29 Group 3 13 16 18 21 23 25 Group 4 10 12 14 16 18 20 Subordinated loans/ subordinated bonds (%) Group 1 8 8 8 8 8 8 Group 2 10 10 10 10 10 10 Group 3 9 9 9 9 9 9 Group 4 5 5 5 5 5 5 Synthetic **** **** **** **** **** **** Securities
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Group 1: Hong Kong, Norway, Singapore, Sweden, U.K., Ireland, Finland, Denmark, Netherlands, Australia, and New Zealand Group 2: Belgium, Germany, Austria, Portugal, Luxembourg, South Africa, Switzerland, Canada, Israel, Japan and United States Group 3: France, Italy, Greece, South Korea, Taiwan, Argentina, Brazil, Chile, Mexico, Spain, Turkey and United Arab Emirates Group 4: Kazakhstan, Russia, Ukraine and others not included in Group 1, Group 2 or Group 3 ______* The S&P Recovery Rate will be the applicable rate set forth above based on the applicable Class of Rated Notes and the rating thereof as of the Closing Date. ** Solely for the purpose of determining the S&P Recovery Rate for such loan, no loan will constitute a "Senior Secured Loan" unless such loan (a) is secured by a valid first priority security interest in collateral and (b) in the Collateral Manager’s commercially reasonable judgment (with such determination being made in good faith by the Collateral Manager at the time of such loan’s purchase and based upon information reasonably available to the Collateral Manager at such time and without any requirement of additional investigation beyond the Collateral Manager’s customary credit review procedures), is secured by specified collateral that has a value not less than an amount equal to the sum of (i) the aggregate principal amount of all loans senior or pari passu to such loans and (ii) the outstanding principal balance of such loan, which value may be derived from, among other things, the enterprise value of the issuer of such loan (provided that the terms of this footnote may be amended or revised at any time by a written agreement of the Issuer, the Collateral Manager and the Trustee (without the consent of any Holder of any Security), subject to receipt of Rating Agency Confirmation from S&P, in order to conform to S&P then-current criteria for such loans); provided that, for the purposes of this clause (b), the collateral securing such loan may not be comprised primarily of common stock or other equity interests. *** Solely for the purpose of determining the S&P Recovery Rate for such loan, the aggregate principal balance of all Senior Unsecured Loans and Second Lien Loans that, in the aggregate, represent up to 15% of the Collateral Principal Balance will have the S&P Recovery Rate specified for Senior Unsecured Loans and Second Lien Loans in the table above and the aggregate principal balance of all Senior Unsecured Loans and Second Lien Loans in excess of 15% of the Collateral Principal Balance will have the S&P Recovery Rate specified for Subordinated Loans in the table above. **** As determined by S&P on a case by case basis.
"S&P Minimum WARR": For each Class of Rated Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class) is the applicable recovery rate in the table below selected by the Collateral Manager independently for each Class of Rated Notes from time to time with prior notification to the Trustee and S&P; provided, however, that such election will not be effective unless after giving effect to such election the S&P CDO Monitor Test is satisfied:
Class A Notes Class B Notes Class C Notes Class D Notes Class E Notes 38.50% 47.00% 50.50% 56.50% 60.00% 38.77% 47.31% 50.92% 56.93% 60.55% 39.05% 47.62% 51.33% 57.36% 61.10% 39.32% 47.93% 51.75% 57.79% 61.64% 39.60% 48.24% 52.17% 58.21% 62.19% 39.87% 48.55% 52.58% 58.64% 62.74% 40.14% 48.86% 53.00% 59.07% 63.29% 40.42% 49.17% 53.42% 59.50% 63.83% 40.69% 49.48% 53.83% 59.93% 64.38%
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40.96% 49.79% 54.25% 60.36% 64.93% 41.24% 50.10% 54.67% 60.79% 65.48% 41.51% 50.40% 55.08% 61.21% 66.02% 41.79% 50.71% 55.50% 61.64% 66.57% 42.06% 51.02% 55.92% 62.07% 67.12% 42.33% 51.33% 56.33% 62.50% 67.67% 42.61% 51.64% 56.75% 62.93% 68.21% 42.88% 51.95% 57.17% 63.36% 68.76% 43.15% 52.26% 57.58% 63.79% 69.31% 43.43% 52.57% 58.00% 64.21% 69.86% 43.70% 52.88% 58.42% 64.64% 70.40% 43.98% 53.19% 58.83% 65.07% 70.95% 44.25% 53.50% 59.25% 65.50% 71.50% 44.73% 54.04% 59.88% 66.21% 72.25% 45.21% 54.57% 60.50% 66.93% 73.00% 45.70% 55.11% 61.13% 67.64% 73.75% 46.18% 55.64% 61.75% 68.36% 74.50% 46.66% 56.18% 62.38% 69.07% 75.25% 47.14% 56.71% 63.00% 69.79% 76.00% 47.63% 57.25% 63.63% 70.50% 76.75% 48.11% 57.79% 64.25% 71.21% 77.50% 48.59% 58.32% 64.88% 71.93% 78.25% 49.07% 58.86% 65.50% 72.64% 79.00% 49.55% 59.39% 66.13% 73.36% 79.75% 50.04% 59.93% 66.75% 74.07% 80.50% 50.52% 60.46% 67.38% 74.79% 81.25% 51.00% 61.00% 68.00% 75.50% 82.00%
"S&P WARR": As of any date of determination, with respect to any Class of Rated Notes (for which purpose, the Class B-1 Notes and the Class B-2 Notes shall constitute a single Class), is the number, expressed as a percentage, obtained by: (a) summing the products obtained by multiplying (i) the Principal Balance of each Collateral Asset (other than a Defaulted Asset) by (ii) its corresponding S&P Recovery Rate; (b) dividing such sum by the Aggregate Principal Balance of all Collateral Assets (excluding Defaulted Assets); and (c) rounding to the nearest tenth of a percent.
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INDEX OF DEFINED TERMS
Following is an index of defined terms used in this Offering Memorandum and the page number where each definition appears.
1 144A Offeree...... 122 C 17g-5 Website ...... 55 Caa Assets ...... 136 Caa/CCC Excess...... 136 2 Cancellation...... 101 Canyon...... 1, 29 25% Limitation ...... 120 CCC Assets...... 136 CEBS...... 54 Certifying Holder...... 79 3 CFC ...... 111 3.8% Medicare Tax ...... 114 CFTC...... xv Class ...... 136 Class A Notes ...... 2 A Class B Notes ...... 2 Acceleration Waterfall ...... 28 Class B-1 Notes ...... 2 Account...... 134 Class B-2 Notes ...... 2 Account Control Agreement ...... 63 Class Break Even Default Rate...... 136 Accountants' Report ...... 70 Class C Interest Coverage Test...... 21 Accredited Investor ...... 134 Class C Notes ...... 2 Additional Issuance Par Ratio ...... 134 Class C Par Coverage Test...... 21 Additional Issuance Threshold Test ...... 134 Class D Interest Coverage Test...... 21 Additional Subordinated Notes ...... 78 Class D Notes ...... 2 Administration Agreement...... 93 Class D Par Coverage Test ...... 21 Administrator ...... 1, 93 Class Default Differential ...... 136 Advisors ...... 123 Class E Notes...... 2 Affiliate...... 134 Class E Par Coverage Test...... 21 Affiliated ...... 134 Class Scenario Default Rate ...... 137 Aggregate Excess Funded Spread ...... 134 Class X Notes ...... 2 Aggregate Funded Spread ...... 135 Class X Notes Account...... 90 Aggregate Outstanding Amount...... 135 Clearing Agency...... 137 Aggregate Principal Balance...... 135 Clearstream...... 137 Aggregate Purchase Price...... 5 Closing Date ...... 3 Aggregate Unfunded Spread ...... 135 Closing Date Interest Account...... 89 Allocated Principal Proceeds...... 135 Closing Date Interest Deposit Amount ...... 6 Amortization Period...... 136 Closing Date Target Par...... 6 Approval Class...... 86 CMVM ...... xi Article 122a...... 54 Code...... 102, 137 ASIC ...... i Co-Issued Securities ...... 1 Asset Specific Hedge ...... 88 Co-Issuer ...... 1 Assigned Moody’s Rating...... 165 Collateral ...... 63 Authorized Denominations...... 3 Collateral Administration Agreement...... 95 Average Life ...... 95 Collateral Administrator ...... 1 Collateral Administrator Indemnified Persons...... 95 Collateral Assets ...... 8 B Collateral Management Agreement ...... 137 Collateral Management Fees ...... 84 Bank...... 1 Collateral Manager ...... 1 Banking Act ...... vii Collateral Manager Breaches...... 83 Base...... 2 Collateral Manager Indemnitee...... 84 Benefit Plan Investor...... 119, 125 Collateral Principal Balance ...... 137 Bridge Loan...... 136 Collateral Quality Matrix...... 20 Business Day...... 136
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Collateral Quality Tests...... 16 ERISA Plans...... 118 Collection Account...... 89 ERISA Restricted ...... 146 Companies Law...... 29 ETB Subsidiary...... 91 Contingent Payment Reserve Account...... 89 Euroclear...... 146 Controlling Affected Class...... 137 Event of Default...... 71 Controlling Class...... 5 Event of Default Ratio...... 23 Controlling Party...... 137 Event of Default Test...... 23 Controlling Person ...... 120, 125 Event of Default Trigger...... 22 Corporations Act ...... i Excepted Property...... 92 Counterparty Criteria ...... 137 Excluded Letter-of-Credit...... 146 Coupon Excess...... 138 Expense Reserve Account ...... 89 Coverage Tests...... 21 Cov-Lite Loan ...... 138 CPO...... xv F Credit Improved Asset ...... 139 FATCA...... 58, 146 Credit Risk Asset...... 139 Fee Basis Amount...... 146 Cross Transactions ...... 82 FFI Agreement...... 58, 104 Current Pay Asset...... 140 FIEL...... viii Current Pay Haircut Threshold Percentage ...... 23 Final Offering Materials ...... 122 Current Portfolio ...... 19 Financial Services Act ...... vii Custodial Account...... 91 First Lien Last Out Loan...... 146 CVM ...... x Fixed Rate Asset...... 146 Floating Rate Asset...... 146 D FRA ...... 55 FRB ...... 146 Debtor ...... 142 FSMA...... xii Declaration of Trust ...... 92 Default...... 140 Defaulted Asset ...... 140 G Defaulted Interest...... 142 Global Note ...... 146 Defaulted Participation Interest...... 141 Global Note Offerees...... 122 Deferrable Notes ...... 142 Grandfathered Obligation ...... 58 Deferred Interest...... 64 Grandfathered Obligations...... 103 Delayed Drawdown Debt Asset ...... 142 Delayed Funding Asset ...... 142 Determination Date ...... 3 H DIP Collateral Asset...... 142 Hedge Agreement ...... 87 Discount Asset ...... 143 Hedge Collateral Account...... 91 Discretionary Sale ...... 11 Hedge Counterparty...... 146 Dodd-Frank Act ...... 53 Hedged Asset...... 88 Domicile...... 143 Hedged Asset Maximum Percentage ...... 23 DTC ...... 98 Higher-Ranking Class...... 146 Due Period ...... 3 Highest-Ranking Class ...... 147 Holder...... 147 E Holder FATCA Information ...... 147 EEA...... iii Effective Date ...... 7 I Effective Date Confirmation Failure...... 70 IGA...... 60 Effective Date Moody's Condition...... 70 Incentive Management Fee...... 4, 84 Effective Date Par Ratio...... 23 Incurrence Covenant...... 147 Effective Date Par Test ...... 22, 23 Indenture...... 71 Effective Date Target Par Amount...... 6 Independent ...... 147 Eligibility Criteria ...... 8 indirect participants ...... 100 Eligible Country...... 143 Initial Purchaser...... 1 Eligible Investment ...... 143 Interest Accrual Period ...... 64 Eligible Investment Required Ratings...... 145 Interest Collection Subaccount ...... 89 Eligible Loan Index...... 145 Interest Coverage Amount...... 22 Eligible Principal Investments...... 145 Interest Coverage Ratio ...... 22 equity PFIC ...... 113 Interest Coverage Test ...... 22 Equity Security...... 145 Interest Deferral Notes...... 108 ERISA...... 118
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Interest Distribution Amount...... 147 Moody’s Diversity Score...... 152 Interest Diversion Test ...... 21, 22 Moody’s Diversity Score Test ...... 18 Interest Proceeds ...... 147 Moody’s Group Country...... 152 Interest Rate ...... 148 Moody’s Group I Countries...... 152 Interest Rate Hedges ...... 87 Moody’s Group II Countries...... 152 Interest Reserve Account ...... 90 Moody’s Group III Countries ...... 152 Interim Targets...... 7 Moody’s Group IV Countries...... 152 Intermediary...... 1, 104 Moody’s Industry Classification...... 152 Internal Rate of Return...... 5 Moody’s Rating ...... 168 Introductory Statement...... 2 Moody’s Rating Factor...... 169 Investitori Qualificati ...... vii Moody’s Recovery Amount...... 152 Investment Criteria...... 12 Moody’s Recovery Rate ...... 169 Investment Guidelines...... 57 Moody’s WARF ...... 171 Irish Listing Agent ...... 1 Moody’s WARF Modifier ...... 20 Irish Stock Exchange...... 2 Moody’s WARR...... 171 IRS ...... 58, 102 Moody’s Weighted Average Rating Factor Test...... 18 Issuer...... 1 Moody’s Weighted Average Recovery Rate Test...... 19 Issuer Expense Payment Sequence...... 149 Moody’s Weighted Average Spread Test ...... 16 Issuer Expenses ...... 149 Moody's Effective Date Report...... 70 Issuer Indemnitee ...... 83 Moody's Specified Tested Items ...... 70 Issuer Order...... 149 Issuer-Only Securities ...... 1 Issuers ...... 1 N Non-Call Period...... 3 J Non-Clearing Agency Security...... 100 Non-Deferrable Class ...... 152 Junior Coverage Test...... 21 Non-Permitted ERISA Holder...... 126 Junior Notes ...... 149 Non-Permitted Holder ...... 153 Non-Quarterly Pay Assets ...... 90 Non-Removing Class...... 86 K Non-U.S. Holder...... 103 Knowledgeable Employee...... 149 Not ERISA Restricted...... 153 Note ...... 2 Note Payment Sequence ...... 153 L Notes...... 2 Letter-of-Credit ...... 149 NRSRO...... 56 Letter-of-Credit Eligible Account ...... 150 Letter-of-Credit Reserve Account ...... 91 O Liabilities ...... 83 LIBOR...... 150 Offer ...... 153 LIBOR Calculation Agent...... 1 Offering Memorandum...... 2 LIBOR Determination Date ...... 150 Official List ...... 2 LIBOR Floor Obligation ...... 150 OID...... 108 Lower-Ranking Class...... 150 Optional Redemption...... 65, 66 Order of Priority ...... 154 Other Plan Law...... 119 M Outstanding...... 154 Maintenance Covenant...... 150 Majority...... 151 P Mandatory Redemption...... 68 Margin Stock...... 151 Par Coverage Ratio...... 22 Market Value...... 151 Par Coverage Test...... 21 Measurement Date ...... 151 Partial PIK Asset ...... 154 Mezzanine Coverage Tests...... 21 participants ...... 98 Mezzanine Notes...... 151 Participation Interest...... 154 Minimum Weighted Average Coupon ...... 18 passthru payment ...... 103 Minimum Weighted Average Spread...... 16 Paying Agent ...... 1, 154 Moody’s ...... 151 Payment Account...... 89 Moody’s Additional Current Pay Criteria ...... 152 Payment Date...... 3 Moody’s Default Probability Rating ...... 165 PCL...... 55 Moody’s Derived Rating...... 166 Permitted Withholding Tax Asset...... 155 Person ...... 155
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Petition Expense Amount...... 23 Restricted Trading Condition...... 159 Petition Expenses ...... 80 Revolving Collateral Asset ...... 159 PFIC...... 111 Rule 144A...... 159 PIKable Assets ...... 155 Rule 144A Global Note ...... 98 PIKing Asset ...... 155 Rule 17g-5 ...... 55 Plan Asset Regulation ...... 119 Plans...... 118 Portfolio Concentration Limits...... 10 S Prepaid Collateral Asset ...... 155 S&P ...... 159 Principal ...... 86 S&P Additional Current Pay Criteria...... 160 Principal Balance ...... 155 S&P Asset Specific Recovery Rating...... 160 Principal Collection Subaccount ...... 89 S&P CDO Monitor ...... 160 Principal Financed Accrued Interest ...... 156 S&P CDO Monitor Test ...... 19 Principal Proceeds...... 157 S&P Industry Classification...... 160 Priorities of Payment...... 26 S&P Minimum WARR...... 178 Priority of Interest Payments...... 24 S&P Minimum WAS...... 16 Priority of Principal Payments ...... 26 S&P Rating...... 172 Process Agent...... 1 S&P Recovery Amount ...... 160 Proposed Portfolio...... 19 S&P Recovery Rate ...... 173 Proposing Class...... 86 S&P WARR...... 179 Prospectus Directive...... 157 S&P Weighted Average Recovery Rate Test...... 19 PTCE...... 118 S&P Weighted Average Spread Test...... 16 Purchase Agreement...... 96 Sale Proceeds...... 160 Purchase Price...... 157 Scheduled Effective Date...... 3 Purchaser...... 119, 122 Scheduled Reinvestment Period Termination Date ...... 3 SEC...... 160 Q Second Lien Loan...... 160 Secured Note ...... 161 QEF Election...... 112 Secured Notes Redemption...... 65 Qualified Institutional Buyer...... 157 Securities ...... 2 Qualified Pricing Service ...... 157 Securities Intermediary...... 63, 161 Qualified Purchaser...... 157 Security...... 2 Security Register...... 161 Security Registrar ...... 1 R Securityholder...... 147 Rated Notes...... 157 Selected Non-Quarterly Pay Assets ...... 90 Rating Agency...... 158 Selling Institution ...... 161 Rating Agency Confirmation ...... 158 Senior Collateral Management Fee...... 4, 84 Recalcitrant Holder ...... 158 Senior Coverage Tests ...... 21 Record Date...... 79 Senior Interest Coverage Test...... 21 Recovery Value...... 158 Senior Notes ...... 161 Redemption Agreement...... 158 Senior Par Coverage Test ...... 21 Redemption Date...... 65 Senior Secured Bond ...... 161 Redemption Price...... 158 Senior Secured Loan...... 161 Reference Banks...... 150 Senior Secured Note ...... 161 Refinancing ...... 6 Senior Unsecured Bond ...... 161 Refinancing Proceeds...... 158 Senior Unsecured Loan...... 161 Registered ...... 158 SFA...... xi Registered Office Agreement...... 93 Share Trustee...... 1, 92 Registered Office Provider...... 1 Shares ...... 92 Regulation S...... 158 Similar Law ...... 125 Regulation S Global Note ...... 98 Special Redemption...... 162 Regulation S Offeree...... 122 Special Redemption Amount...... 162 Regulations...... 55 Spread Excess...... 162 Reinvestment Agreement ...... 159 Stated Maturity Date...... 3 Reinvestment Percentage ...... 159 Step-Down Coupon Asset...... 162 Reinvestment Period ...... 159 Structured Finance Asset ...... 162 Relevant Implementation Date...... iii Subordinated Collateral Management Fee...... 4, 84 Relevant Member State ...... iii Subordinated Loan...... 162 Removing Class ...... 86 Subordinated Notes...... 2, 162 Representation Letter ...... 159 Sufficient Reserve Requirement ...... 162 Required Redemption Direction...... 5 Supermajority ...... 162
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Swapped Equity Security ...... 14 U.S. Securities Act...... 163 Switzerland...... xii U.S. Shareholder...... 113 Synthetic Asset...... 162 U.S. Source Income ...... 103 UBTI...... 114 UCC...... 163 T Underlying Instrument...... 163 Target Par Balance ...... 163 Unsecured Loan...... 163 Tax Event ...... 163 Unused Proceeds...... 88 Tax-Exempt Investors ...... 114 Unused Proceeds Account ...... 88 Term Sheet ...... 2 USA PATRIOT Act...... 54 Test ...... 68 Tested Classes ...... 163 V Timing Hedges...... 88 Trade Date...... 8 Voting Rights...... 164 Trading Plan...... 14 Voting Rights Registrar ...... 1 Transaction Parties...... 1 Transfer Agent ...... 1 Transfer Certificate ...... 100 W Transfer Restrictions ...... 122 Weighted Average Coupon...... 164 Treasury Regulations ...... 163 Weighted Average Coupon Test...... 18 Trustee...... 1 Weighted Average Life...... 164 Trustee Role ...... 94 Weighted Average Life Test...... 19 Weighted Average Recovery Rate Test ...... 19 U Weighted Average Spread ...... 164 Weighted Average Spread Test ...... 16 U.S. Advisers Act...... 163 U.S. Bankruptcy Code...... 163 U.S. Exchange Act ...... 163 Z U.S. Holder ...... 102 Zero-Coupon Asset ...... 164 U.S. Investment Company Act...... 163 U.S. Person...... 53
184 PRINCIPAL OFFICE OF THE ISSUER REGISTERED OFFICE OF THE CO-ISSUER Canyon Capital CLO 2012-1, Ltd. Canyon Capital CLO 2012-1, LLC c/o MaplesFS Limited c/o Donald Puglisi P.O. Box 1093, Boundary Hall 850 Library Avenue, Cricket Square Suite 204 George Town, Grand Cayman, KY1-1102 Newark, Delaware 19711 Cayman Islands
COLLATERAL MANAGER Canyon Capital Advisors LLC 2000 Avenue of the Stars, 11th Floor Los Angeles, CA 90067
TRUSTEE AND PAYING SECURITY REGISTRAR COLLATERAL AGENT ADMINISTRATOR Deutsche Bank Trust Company Deutsche Bank Trust Company Americas Deutsche Bank Trust Company Americas 1761 East St. Andrew Place Americas 1761 East St. Andrew Place Santa Ana, CA 92705-4934 1761 East St. Andrew Place Santa Ana, CA 92705-4934 Attention: Structured Credit Santa Ana, CA 92705-4934 Attention: Structured Credit Services—Canyon Capital CLO Attention: Structured Credit Services—Canyon Capital CLO 2012-1, Ltd. Services—Canyon Capital CLO 2012-1, Ltd. 2012-1, Ltd.
ADMINISTRATOR IRISH LISTING AGENT MaplesFS Limited (for any Securities listed on the P.O. Box 1093, Boundary Hall Irish Stock Exchange) Cricket Square Maples and Calder George Town, Grand Cayman, 75 St. Stephen’s Green KY1-1102 Dublin 2, Ireland Cayman Islands
LEGAL ADVISORS To the Initial Purchaser and the Issuers To the Trustee and Collateral Administrator As to United States Law As to United States Law Ashurst LLP Seyfarth Shaw LLP 1875 K Street, NW 333 South Hope Street, Suite 3900 Washington, DC 20006 Los Angeles, CA 90071
To the Issuer To the Collateral Manager As to Cayman Islands Law As to United States Law Maples and Calder Sidley Austin LLP P.O. Box 309, Ugland House 787 Seventh Street South Church Street, George Town New York, New York 10019 Grand Cayman, KY1-1104 Cayman Islands 186 IMPORTANT NOTICE
Attached please find an electronic copy of the Offering Memorandum, dated January 23, 2013, relating to an offering of Securities by Canyon Capital CLO 2012-1, Ltd. and Canyon Capital CLO 2012-1, LLC, as applicable.
This Offering Memorandum does not constitute an offer to the public generally or to any person other than the recipient to subscribe for or otherwise acquire any of the Securities offered therein. This Offering Memorandum is not an offer to sell the Securities and is not a solicitation of an offer to buy the Securities in any jurisdiction where the offer or sale is not permitted.
DISTRIBUTION OF THIS OFFERING MEMORANDUM TO ANY PERSONS OTHER THAN THE PERSON RECEIVING THIS ELECTRONIC COPY FROM THE INITIAL PURCHASER REFERRED TO HEREIN AND ITS RESPECTIVE AGENTS, AND ANY PERSONS RETAINED TO ADVISE THE PERSON RECEIVING THIS ELECTRONIC TRANSMISSION FROM THE INITIAL PURCHASER WITH RESPECT HERETO IS UNAUTHORIZED. ANY PHOTOCOPYING, DISCLOSURE OR ALTERATION OF THE CONTENTS OF THIS OFFERING MEMORANDUM, AND ANY FORWARDING OF A COPY OF THIS OFFERING MEMORANDUM BY ANY MEANS TO ANY PERSON OTHER THAN THE PERSON RECEIVING THIS COPY FROM THE INITIAL PURCHASER OR ITS RESPECTIVE AGENTS, IS PROHIBITED. BY ACCEPTING DELIVERY OF THIS OFFERING MEMORANDUM, THE RECIPIENT AGREES TO THE FOREGOING.