FINAL OFFERING MEMORANDUM
STACK 2006-1 LTD.
STACK 2006-1 CORP.
U.S.$55,000,000 CLASS II SENIOR FLOATING RATE NOTES DUE 2046
U.S.$49,500,000 CLASS III SENIOR FLOATING RATE NOTES DUE 2046
U.S.$11,000,000 CLASS IV SENIOR FLOATING RATE NOTES DUE 2046
U.S.$11,500,000 CLASS V MEZZANINE FLOATING RATE DEFERRABLE NOTES DUE 2046
U.S.$24,000,000 CLASS VI MEZZANINE FLOATING RATE DEFERRABLE NOTES DUE 2046
U.S.$5,000,000 CLASS VII MEZZANINE FLOATING RATE DEFERRABLE NOTES DUE 2046
U.S.$19,000,000 SUBORDINATED NOTES DUE 2046
U.S.$5,910,000 CLASS P NOTES DUE 2046
____________
UNFUNDED SWAP AGREEMENT
U.S.$325,000,000 CLASS I SUPERSENIOR SWAP
____________
The Notes (other than the Class P Notes) are secured primarily by a diversified portfolio of RMBS Securities, CMBS Securities, ABS Securities (including CDO
Securities) and REIT Debt Securities (each as defined herein) and credit default swaps and other synthetic securities referencing such securities managed by TCW Asset
Management Company, as Investment Adviser.
Interest payable on August 10th, November 10th, February 10th and May 10th of each year, commencing in November 2006.
STACK 2006-1 Ltd. (the “Issuer”) and STACK 2006-1 Corp. (the “Co-Issuer”) and, together with the Issuer, the “Co-Issuers”) will issue U.S. $55,000,000 Class II
Senior Floating Rate Notes Due 2046 (the “Class II Notes”), U.S. $49,500,000 Class III Senior Floating Rate Notes Due 2046 (the “Class III Notes”), U.S. $11,000,000
Class IV Senior Floating Rate Notes Due 2046 (the “Class IV Notes”), U.S.$11,500,000 Class V Mezzanine Floating Rate Deferrable Notes Due 2046 (the “Class V
Notes”) and U.S.$24,000,000 Class VI Mezzanine Floating Rate Deferrable Notes Due 2046, (the “Class VI Notes” and, together with the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes and the Class VII Notes (as defined below), the “Rated Notes”), and the Issuer will issue U.S.$5,000,000 Class VII Mezzanine Floating Rate
Deferrable Notes Due 2046 (the “Class VII Notes”) and U.S.$19,000,000 Subordinated Notes Due 2046 (the “Subordinated Notes”). The Issuer will also issue
U.S.$5,910,000 Class P Notes Due 2046 (the “Class P Notes”). The Class P Notes consist of a component representing Subordinated Notes in the aggregate amount of
U.S.$2,000,000 (the “Class P Subordinated Note Component”) and a component representing the Class P Treasury Strip (the “Class P Treasury Strip Component”). The
Rated Notes, the Class P Notes and the Subordinated Notes are referred to collectively, as applicable, as the “Notes.” The Notes will be issued on or about July 27, 2006 (the
“Closing Date”) pursuant to an Indenture, dated as of the Closing Date (the “Indenture”), among the Co-Issuers and Investors Bank & Trust Company, as trustee (the
“Trustee”). The Issuer will enter into a super senior swap agreement with Morgan Stanley Capital Services Inc. (“MSCS”), to be dated as of the Closing Date (the
“Supersenior Swap”), pursuant to which MSCS will, in the circumstances described herein, make funds available to the Issuer. TCW Asset Management Company will act as
the investment adviser (the “Investment Adviser”) for the Issuer’s portfolio of Collateral Assets (as defined herein).
The Class P Treasury Strip is not being offered except as a Component of the Class P Notes.
The Rated Notes (other than the Class VII Notes) will be limited recourse debt obligations of the Issuer and non-recourse debt obligations of the Co-Issuer. The
Subordinated Notes, the Class VII Notes and the Class P Notes will be limited recourse debt obligations of the Issuer. The Notes do not represent interests in, or obligations of,
and are not insured or guaranteed by, the Investment Adviser, the Managers, the Placement Agents, the Trustee, the Collateral Administrator, the Administrator (each, as defined
herein), or any of their respective affiliates, officers or directors or any other person or entity (other than the Co-Issuers). Payments on the Notes will be made in accordance with
the Priority of Payments (described herein). The Issuer may optionally redeem each Class of the Notes under certain conditions described herein. For a more detailed description
of the Notes, see “Description of the Notes” herein.
This Offering Circular constitutes a prospectus (the “Prospectus”) for the purposes of Directive 2003/71/EC (the “Prospectus Directive”). References throughout this
document to the “Offering Circular” shall be taken to read “Prospectus” for such purpose. Application has been made to the Irish Financial Services Regulatory Authority (the
“Financial Regulator in Ireland”), as competent authority under the Prospectus Directive, for the Prospectus to be approved. Such approval relates only to the Notes which are to
be admitted to trading on the regulated market of the Irish Stock Exchange. Application has been made to the Irish Stock Exchange Limited (the “Irish Stock Exchange”) for
the Notes to be admitted to the Official List (as defined herein) and trading on its regulated market. Upon listing on the Irish Stock Exchange being granted, a prospectus
prepared pursuant to the Prospectus Directive will be published, which can be obtained from the Issuer. Application will be made to designate the Class VII Notes and the
Subordinated Notes for trading through the PORTAL System. No assurances can be given that the listing of the Notes on the Irish Stock Exchange will be obtained or, if
obtained, maintained for the entire period that such Notes are outstanding.
It is a condition of the issuance of the Notes on the Closing Date that (i) the Class II Notes be rated “Aaa” and “AAA” by Moody’s Investors Service, Inc.
(“Moody’s”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”), respectively, (ii) the Class III Notes be rated at least “Aa2” and “AA” by
Moody’s and S&P, respectively; (iii) the Class IV Notes be rated at least “Aa3” and “AA-” by Moody’s and S&P, respectively; (iv) the Class V Notes be rated at least “A2” and
“A” by Moody’s and S&P, respectively; (v) the Class VI Notes be rated at least “Baa2” and “BBB” by Moody’s and S&P, respectively; and (vi) the Class VII Notes be rated at
least “Ba1” and “BB+” by Moody’s and S&P, respectively. The Subordinated Notes will not be rated. The Class P Notes will be rated “Aaa” by Moody’s, but only as to the
ultimate receipt of principal.
Investing in the Notes involves risks. See “Risk Factors” herein.
INITIAL OFFERING PRICE OF THE RATED NOTES, THE CLASS P NOTES AND THE SUBORDINATED NOTES: 100 PERCENT
The Notes have not been registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and are being offered only (i) to persons that are both
qualified institutional buyers under Rule 144A under the Securities Act and Qualified Purchasers (as defined herein) and (ii) outside the United States to persons that are not
U.S. persons (as defined in Regulation S under the Securities Act) in offshore transactions in compliance with Regulation S. The Subordinated Notes are also being offered to
persons who are both Accredited Investors meeting the requirements of Rule 501(a) of Regulation D under the Securities Act in reliance on Section 4(2) of the Securities Act
and Qualified Purchasers. Neither of the Co-Issuers has been or will be registered under the U.S. Investment Company Act of 1940, as amended (the “Investment Company
Act”), in reliance on the exemption provided by Section 3(c)(7) thereof. For a description of certain restrictions on transfer, see “Transfer Restrictions” herein. Morgan Stanley
& Co. Incorporated (“MS”) and Morgan Stanley & Co. International Limited (“MSI” and, together with MS, “Morgan Stanley” and in connection with the Rated Notes (other
than the Class VII Notes) the “Managers” or in connection with the Class VII Notes, the Class P Notes, and the Subordinated Notes, the “Placement Agents”) expect to deliver
the Notes to purchasers on the Closing Date. The Managers expect to underwrite and privately place the Rated Notes (other than the Class VII Notes), MS expects to privately
place the Class VII Notes, the Class P Notes and the Subordinated Notes in the United States and MSI expects to privately place the Class VII Notes, the Class P Notes and the
Subordinated Notes outside the United States, and, in each case, may do so in individually negotiated transactions.
MORGAN STANLEY
August 15, 2006
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN AS
CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
CO-ISSUERS, THE MANAGERS, THE PLACEMENT AGENTS OR THE INVESTMENT
ADVISER. THIS FINAL OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES 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
HEREOF NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
IMPLY THAT NO CHANGE IN THE AFFAIRS OF EITHER OF THE CO-ISSUERS HAS
OCCURRED OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF. THE CO-ISSUERS AND THE MANAGERS AND THE
PLACEMENT AGENTS 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
PRINCIPAL AMOUNT OF ANY CLASS OF NOTES OFFERED HEREBY.
____________________________
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 NOTE 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.
____________________________
None of the Issuer, the Co-Issuer or the pool of Collateral has been or will be registered under the
Investment Company Act. Each purchaser of a Note will be deemed to have represented and agreed, that the
purchaser is acquiring the Notes for its own account or for one or more accounts as to each of which the
purchaser exercises sole investment discretion and in an authorized denomination, in each case, for the
purchaser and each such account. Each U.S. person purchasing a Note will also be deemed to have
represented and agreed, that it and any account for which it is acquiring the Notes is a Qualified Purchaser as
defined in, and for purposes of, the Investment Company Act and the rules thereunder. See “Transfer
Restrictions.”
____________________________
This Final Offering Memorandum has been prepared by the Co-Issuers solely for use in connection
with the offering (the “Offering”) of the Notes and the listing of such Notes, all as described herein. The CoIssuers accept responsibility for the information contained in this document (other than with respect to the
information appearing under the headings “The Investment Adviser” and “The Supersenior Swap
Counterparty and Initial CDS Counterparty”) (the “Information”). To the best of the knowledge and belief
of the Co-Issuers (who have taken reasonable care to ensure that such is the case), the Information contained
in this Final Offering Memorandum is in accordance with the facts and does not omit anything likely to
affect the import of such Information. The Investment Adviser takes responsibility for the section entitled
“The Investment Adviser”. To the best knowledge and belief of the Investment Adviser, having taken all
reasonable care that such is the case, the information contained in the section entitled “The Investment
A06547768/2.0/14 Aug 2006
ii
Adviser” is in accordance with the facts and does not omit anything likely to affect the import of such
information. The Supersenior Swap Counterparty and the Initial CDS Counterparty take responsibility for
the section entitled “The Supersenior Swap Counterparty and the Initial CDS Counterparty”. To the best
knowledge and belief of the Supersenior Swap Counterparty and the Initial CDS Counterparty, having taken
all reasonable care that such is the case, the information ontained in the section entitled “The Supersenior
Swap Counterparty and the Initial CDS Counterparty” is in accordance with the facts and does not omit
anything likely to affect the import of such information.
____________________________
None of the Investment Adviser, the Collateral Administrator, the Managers, the Placement Agents,
any Hedge Counterparty, the Supersenior Swap Counterparty or the Trustee or any of their respective
affiliates (other than the Co-Issuers) has separately verified the information contained in this Final Offering
Memorandum, except in the case of the Investment Adviser, for the section entitled “The Investment
Adviser” and except in the case of the Supersenior Swap Counterparty and Initial CDS Counterparty, for the
section entitled “The Supersenior Swap Counterparty and Initial CDS Counterparty”. Accordingly, no
representation, warranty, or undertaking, express or implied, is made, and no responsibility or liability is
accepted by the Investment Adviser, the Collateral Administrator, the Managers, the Placement Agents, any
Hedge Counterparty, the Supersenior Swap Counterparty, the Initial CDS Counterparty, or the Trustee or
any of their respective affiliates as to the accuracy or completeness of the information contained in this Final
Offering Memorandum, or any other information supplied in connection with the offer or sale of the Notes,
except in the case of the Investment Adviser with regard to the section entitled “The Investment Adviser”
and except in the case of the Supersenior Swap Counterparty and the Initial CDS Counterparty, for the
section entitled “The Supersenior Swap Counterparty and Initial CDS Counterparty”. Each person receiving
this Final Offering Memorandum acknowledges that such person has not relied on the Investment Adviser,
the Collateral Administrator, the Managers, the Placement Agents, any Hedge Counterparty, the Supersenior
Swap Counterparty, the Initial CDS Counterparty or the Trustee or any of their respective affiliates in
connection with the accuracy of such information or its investment decision. Each person contemplating
making an investment in the Notes must make its own investigation and analysis of the Co-Issuers and its
own determination of the suitability of any such investment, with particular reference to its own investment
objectives and experience and any other factors that may be relevant to it in connection with such
investment.
____________________________
In this Final Offering Memorandum, references to “U.S. Dollars,” “Dollars,” “$” and “U.S.$” are to
United States dollars.
____________________________
Notwithstanding anything herein to the contrary, effective from the date of commencement of
discussions, investors, and each employee, representative or other agent of the investors, may disclose to any
and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of the
Offering and all materials of any kind, including opinions or other tax analyses, that are provided to the
investors relating to such tax treatment and tax structure, except as reasonably necessary to comply with
applicable securities laws. For this purpose, “tax structure” is limited to any facts relevant to the U.S. federal
income tax treatment of the Offering and does not include information relating to the identity of the Issuer.
____________________________
This Final Offering Memorandum does not constitute an offer to sell or the solicitation of an offer to
buy the Notes in any jurisdiction in which such offer or solicitation is unlawful.
____________________________
No invitation may be made to the public in the Cayman Islands to subscribe for the Notes.
____________________________
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iii
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE CO-ISSUERS AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THE NOTES 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.
____________________________
INFORMATION AS TO PLACEMENT WITHIN THE UNITED STATES
This Final Offering Memorandum is highly confidential and has been prepared by the Co-Issuers solely
for use in connection with the Offering. The Co-Issuers, the Managers and the Placement Agents reserve the
right to reject any offer to purchase Notes in whole or in part for any reason, or to sell less than the stated
initial principal amount of the Notes. This Final Offering Memorandum is personal to each offeree to whom
it has been delivered by the Co-Issuers, the Managers, the Placement Agents or any Affiliate thereof and
does not constitute an offer to any other person or to the public generally to subscribe for or otherwise
acquire the Notes. Distribution of this Final Offering Memorandum to any persons other than the offeree and
those persons, if any, retained to advise such offeree with respect thereto is unauthorized and any disclosure
of any of its contents, without the prior written consent of the Co-Issuers, is prohibited. Each prospective
purchaser in the United States, by accepting delivery of this Final Offering Memorandum, agrees to the
foregoing and to make no photocopies of this Final Offering Memorandum or any documents related hereto
and, if the offeree does not purchase the Notes or the Offering is terminated, to return this Final Offering
Memorandum and all documents attached hereto to: Morgan Stanley & Co. International Limited, 25 Cabot
Square, Canary Wharf, London E14 4QA England, Attention: Managing Director, Fixed Income Structured
Credit Products Transactions, or Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New
York 10036, Attention: Managing Director, Securitized Products Group.
AVAILABLE INFORMATION
To permit compliance with Rule 144A under the Securities Act (“Rule 144A”), the Co-Issuers, in
connection with the sale of the Rated Notes (other than the Class VII Notes), and the Issuer, in connection
with the sale of the Subordinated Notes, the Class VII Notes and the Class P Notes, will be required to
furnish upon request of a Holder of a Note to such Holder and a prospective purchaser designated by such
Holder, the information required to be delivered under Rule 144A(d)(4) under the Securities Act if at the
time of the request the Co-Issuers are not reporting companies under Section 13 or Section 15(d) of the U.S.
Securities Exchange Act of 1934, as amended (the “Exchange Act”), or are exempt from reporting pursuant
to Rule 12g3-2(b) under the Exchange Act. Neither the Issuer nor the Co-Issuer is expected to become a
reporting company or to be exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act.
INFORMATION AS TO PLACEMENT WITHIN THE UNITED KINGDOM
THIS OFFERING CIRCULAR AND ANY OTHER DOCUMENT PREPARED IN CONNECTION WITH
THE OFFERING AND ISSUANCE OF THE SECURITIES MAY ONLY BE COMMUNICATED OR CAUSED
TO BE COMMUNICATED IN THE UNITED KINGDOM TO A PERSON IN CIRCUMSTANCES SPECIFIED
IN THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 IN
WHICH SECTION 21(1) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 DOES NOT APPLY
TO THE CO-ISSUERS.
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iv
INFORMATION AS TO PLACEMENT WITHIN CANADA
For Ontario and Quebec Residents Only
This Final Offering Memorandum constitutes an offering of the Notes within Canada only in those
jurisdictions and to those persons where and to whom they may be lawfully offered for sale, and therein only
by persons permitted to sell the Notes. This Final Offering Memorandum is not, and under no circumstances
is to be construed as, an advertisement or a public offering of the Notes. No securities commission or similar
authority in Canada has reviewed or in any way passed upon this document or the merits of the Notes and
any representation to the contrary is an offence.
The offering of the Notes in Canada is being made solely by this Final Offering Memorandum provided
to potential investors. No person has been authorized to give any information or to make any representations
other than those contained herein or therein. The delivery of this Final Offering Memorandum does not
imply that any information contained herein is correct as of any date subsequent to the date set forth on the
cover hereof. This Final Offering Memorandum constitutes an offering of the Notes in the above-mentioned
provinces only.
Prior to consummating any transaction in the Notes, each investor will receive a copy of this final
offering memorandum regarding the Notes (the “Final Offering Memorandum”).
Resale Restrictions
The distribution of the Notes in Canada is being made only on a private placement basis and is exempt
from the requirement that the Co-Issuers prepare and file a prospectus with the relevant Canadian securities
regulatory authorities. Accordingly, any resale of Notes must be made in accordance with applicable
securities laws which may require resales to be made in accordance with exemptions from registration and
prospectus requirements. Purchasers are advised to seek legal advice prior to any resale of Notes.
Representations of Purchasers
Each Canadian investor who purchases Notes will be deemed to have represented to the Co-Issuers or
the Issuer, as applicable, and the Managers, the Placement Agents and the Investment Adviser that: (i) such
purchaser has reviewed the terms referred to above under “Resale Restrictions;” (ii) where required by law,
such purchaser is purchasing as principal and not as agent; (iii) to the knowledge of such purchaser, the sale
of any Notes was not accompanied by any advertisement in printed media of general and regular paid
circulation, radio or television; and (iv) such purchaser is a “sophisticated purchaser” within the meaning of
Section 43 of the Securities Act (Quebec) or is otherwise permitted under applicable securities laws to
purchase Notes without the benefit of a prospectus qualified under, or registration under, such securities
laws.
Taxation and Eligibility for Investment
Purchasers of Notes should consult their own legal and tax advisers with respect to the tax
consequences of an investment in the Notes in their particular circumstances and with respect to the
eligibility of the Notes for investment by the purchaser under relevant Canadian legislation.
Additional Risks
The Issuer’s investments will be denominated in currencies other than Canadian dollars. Therefore, the
value of the Notes to Canadian investors may be affected by fluctuations in the rate of exchange between the
Canadian dollar and other currencies.
Enforcement of Legal Rights
The Issuer has been incorporated under the laws of the Cayman Islands, and the Co-Issuer has been
incorporated in the United States under the laws of the State of Delaware. The Issuer, the Co-Issuer and their
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v
respective directors and officers as well as certain of the experts named herein will be located outside of
Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within
Canada upon the Co-Issuers or such persons. All or a substantial portion of the assets of the Issuer and such
persons will be located outside of Canada and, as a result, it may not be possible to satisfy a judgment
against the Issuer, the Co-Issuer or such persons in Canada or to enforce a judgment obtained in Canadian
courts against the Issuer, the Co-Issuer or persons outside of Canada.
Purchasers’ Contractual Rights of Action
Securities legislation in Ontario requires certain purchasers to be provided with rights of action for
rescission or damages where an offering memorandum and any amendment to it contain a Misrepresentation.
Where used herein, “Misrepresentation” means an untrue statement of a material fact or an omission to
state a material fact that is required to be stated or that is necessary to make any statement not misleading in
the light of the circumstances in which it was made. These remedies, or notice with respect thereto, must be
exercised or delivered, as the case may be, by the purchaser within the time limits prescribed by applicable
securities legislation.
Each purchaser should refer to provisions of applicable securities legislation for the particulars of these
rights or consult with a legal adviser. The applicable contractual rights are summarized below:
(a) in the event that this Final Offering Memorandum, together with any amendments hereto, is
delivered to a purchaser of Notes in Ontario, and contains a Misrepresentation, the purchaser will
be deemed to have relied upon the Misrepresentation and will, as provided below, have a
contractual right of action, against the Co-Issuers for damages or, alternatively, while still the
owner of any of the Notes purchased by that purchaser, for rescission, provided that the right of
action for rescission or damages will be exercisable by a purchaser resident in Ontario only if the
purchaser gives notice to the Co-Issuers, not less than 180 days after the date on which initial
payment is made for the Notes, that the purchaser is exercising this right;
(b) the Co-Issuers will not be liable if they prove that the purchaser purchased the Notes with
knowledge of the Misrepresentation;
(c) in the case of an action for damages, the Co-Issuers will not be liable for all or any portion of the
damages that they prove do not represent the depreciation in value of the Notes as a result of the
Misrepresentation relied upon; and
(d) in no case will the amount recoverable in any action for damages exceed the price at which the
Notes were sold to the purchaser.
The foregoing summary is subject to the express provisions of the Securities Act (Ontario), and the
regulations, rules and policy statements thereunder and reference should be made thereto for the complete
text of such provisions. The rights of action described herein are in addition to and without derogation from
any other right or remedy that the purchaser may have at law.
LANGUAGE OF DOCUMENTS/LANGUAGE DES DOCUMENTS
By accepting this Final Offering Memorandum, the purchaser acknowledges that it is its express wish
that all documents evidencing or relating in any way to the sale of the Notes be drawn up in the English
language only.
Par son acceptation de ce document, l’acheteur reconnait par les présentes que c’est sa volonté expresse
que tous les documents faisant foi ou se rapportant de quelque manière à la vente des valeurs mobilières
soient rédigés en anglais seulement.
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TABLE OF CONTENTS
AVAILABLE INFORMATION ...................................................................................................................... iv
INFORMATION AS TO PLACEMENT WITHIN THE UNITED KINGDOM ............................................ iv
INFORMATION AS TO PLACEMENT WITHIN CANADA ........................................................................ v
LANGUAGE OF DOCUMENTS/LANGUAGE DES DOCUMENTS .......................................................... vi
SUMMARY ...................................................................................................................................................... 1
RISK FACTORS............................................................................................................................................. 30
DESCRIPTION OF THE NOTES .................................................................................................................. 64
RATINGS OF THE NOTES......................................................................................................................... 108
DESCRIPTION OF THE CLASS P NOTES ............................................................................................... 110
SECURITY FOR THE NOTES.................................................................................................................... 118
USE OF PROCEEDS.................................................................................................................................... 152
MATURITY AND PREPAYMENT CONSIDERATIONS ......................................................................... 154
THE INVESTMENT ADVISER .................................................................................................................. 156
THE INVESTMENT ADVISORY AGREEMENT ..................................................................................... 165
THE ISSUER AND THE CO-ISSUER ........................................................................................................ 171
THE SUPERSENIOR SWAP COUNTERPARTY AND INITIAL CDS COUNTERPARTY ................... 174
INCOME TAX CONSIDERATIONS .......................................................................................................... 175
ERISA CONSIDERATIONS........................................................................................................................ 186
SUBSCRIPTION AND SALE; PRIVATE PLACEMENT .......................................................................... 189
SETTLEMENT AND CLEARING .............................................................................................................. 193
TRANSFER RESTRICTIONS ..................................................................................................................... 195
CLASS P TRANSFER RESTRICTIONS..................................................................................................... 211
LISTING AND GENERAL INFORMATION ............................................................................................. 218
LEGAL MATTERS ...................................................................................................................................... 220
Schedule A Moody’s Recovery Rate Matrix ............................................................................................... 221
Schedule B S&P Recovery Matrix............................................................................................................... 223
Schedule C Specified Types......................................................................................................................... 225
Schedule D Moody’s Notching Criteria....................................................................................................... 232
Schedule E S&P Rating Non-Notching ....................................................................................................... 234
Schedule F S&P Rating Notching................................................................................................................ 235
Schedule G Moody’s Asset Correlation Methodology ................................................................................ 237
Schedule H GLOSSARY OF CERTAIN DEFINED TERMS..................................................................... 240
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vii
SUMMARY
The following summary does not purport to be complete and is qualified in its entirety by reference to
the detailed information appearing elsewhere in this final offering memorandum (this “Final Offering
Memorandum”) and related documents referred to herein. The definitions of certain defined terms are
located in the glossary and the page numbers for definitions of all defined terms are located in an index of
defined terms appearing at the end of this Final Offering Memorandum. For a discussion of certain risk
factors to be considered in connection with an investment in the Notes, see “Risk Factors” herein.
The Issuer:
STACK 2006-1 Ltd. (the “Issuer”) is an exempted company
incorporated with limited liability under the laws of the Cayman
Islands for the limited purposes of acquiring or entering into the
Collateral Assets, acquiring the Eligible Investments, issuing the
Ordinary Shares and the Notes, entering into the Transaction
Documents and certain additional documents and engaging in
certain related and incidental activities, including the purchase of
the Class P Treasury Strip. Other than in connection with the
purchase of or entering into Collateral Assets prior to the Closing
Date, the Issuer has no prior operating history or prior business.
The Issuer will not have any substantial assets other than the
Collateral Assets, the Eligible Investments and the Issuer’s rights
under the Supersenior Swap, the Investment Advisory Agreement,
the Collateral Administration Agreement and any Hedge
Agreements entered into following the Closing Date. Under the
Indenture, the Collateral Assets and substantially all of the Issuer’s
other property and assets (other than the Class P Treasury Strip
Collateral) will be pledged to the Trustee for the benefit of the
Secured Parties (other than the Class P Noteholders, as security for
the Issuer’s obligations under the Notes and the Transaction
Documents.
The authorized share capital of the Issuer is U.S.$50,000 divided
into 50,000 ordinary shares of U.S.$1.00 each, 250 of which have
been issued. All of the issued shares (the “Ordinary Shares”) are
fully-paid and are held by Maples Finance Limited as share trustee
(in such capacity, the “Share Trustee”) under the terms of a
declaration of trust (the “Declaration of Trust”) under which the
Share Trustee holds the Ordinary Shares in trust until the
Termination Date (as defined in the Declaration of Trust) and may
only dispose of or otherwise deal with the Ordinary Shares with the
approval of the Trustee for so long as there are Notes Outstanding.
See “The Issuer and the Co-Issuer.”
The Co-Issuer:
STACK 2006-1 Corp. (the “Co-Issuer” and, together with the
Issuer, the “Co-Issuers”) is a corporation organized under the laws
of the State of Delaware for the limited purpose of co-issuing the
Rated Notes (other than the Class VII Notes). The Co-Issuer will not
have any assets (other than its common equity of U.S.$100) and will
not pledge any assets to secure the Notes. The common stock of the
Co-Issuer will be legally owned and held by Maples Finance
Limited under the terms of the Amended and Restated Declaration
of Trust. The Co-Issuer will have no claim against the Issuer in
respect of the Collateral Assets or otherwise. See “The Issuer and
A06547768/2.0/14 Aug 2006
1
the Co-Issuer.”
Investment Adviser:
Certain advisory, administrative and monitoring functions with
respect to the Collateral Assets will be performed by TCW Asset
Management Company (the “Investment Adviser”) pursuant to an
Investment Advisory Agreement entered into between the Issuer and
the Investment Adviser (the “Investment Advisory Agreement”).
The Investment Adviser will, on behalf of the Issuer, be authorized
to (i) select the Collateral Assets and Eligible Investments to be
acquired or entered into by the Issuer, (ii) monitor, invest and
reinvest the Collateral, (iii) instruct the Trustee with respect to any
disposition, termination or tender of a Collateral Asset, Eligible
Investment or Equity Security by the Issuer and (iv) monitor any
Hedge Agreements based on the restrictions set forth in the
Indenture and the Investment Advisory Agreement, based on the
Investment Adviser’s research, credit analysis and judgment.
Notes:
On or about July 27, 2006 (the “Closing Date”), the Co-Issuers will
issue or, in the case of the Class VII Notes, the Subordinated Notes
and the Class P Notes, the Issuer will issue, the Notes.
Notes
Principal
Amount
Class II Notes..........
Class III Notes ........
Class IV Notes
Class V Notes .........
Class VI Notes ........
Class VII Notes.......
Subordinated Notes
Class P Notes ..........
$55,000,000
$49,500,000
$11,000,000
$11,500,000
$24,000,000
$5,000,000
$19,000,000
$5,910,000*
Interest Rate
Three-Month LIBOR + 0.42%
Three-Month LIBOR + 0.48%
Three-Month LIBOR + 0.55%
Three-Month LIBOR + 1.20%
Three-Month LIBOR + 3.00%
Three-Month LIBOR + 6.25%
(1)
N/A
Moody’s
Rating
S&P
Rating
Aaa
Aa2
Aa3
A2
Baa2
Ba1
N/A
Aaa(2)
AAA
AA
AAA
BBB
BB+
N/A
N/A
__________________
Note:
*
The principal amount of the Class P Notes reflected here includes and is not in addition to the principal amount
of the Subordinated Notes comprising the Class P Subordinated Note Component.
(1) The Subordinated Notes will not receive interest at a stated rate but will be entitled to distributions on each
Payment Date if and to the extent funds are available for such purpose in accordance with the Priority of
Payments.
(2) The Moody’s rating of the Class P Notes is only as to the ultimate receipt of principal. The Moody’s rating of
the Class P Notes does not address any other distributions or payments thereon.
Status of the Notes:
The Notes will constitute limited recourse debt obligations of the
Issuer and the Rated Notes (other than the Class VII Notes) will
constitute non-recourse debt obligations of the Co-Issuer pursuant to
the Indenture. The rights of the Holders of each Class of the Notes
to receive payments on the Notes of such Class will be subject to the
Priority of Payments. The Class P Noteholders will be entitled to
receive all proceeds in respect of the related Class P Treasury Strip
Component and all proceeds of the Class P Subordinated Note
Component. Except in the limited circumstances described herein:
A06547768/2.0/14 Aug 2006
2
(A)
certain fees and expenses of the Co-Issuers, the Trustee,
the Supersenior Swap Counterparty, the Investment
Adviser, the Collateral Administrator and other persons to
the extent specified herein, will be senior in right of
payment to the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes, the Class VI Notes, the
Class VII Notes and the Subordinated Notes;
(B)
the Class II Notes will be senior in right of payment to the
Class III Notes, the Class IV Notes, the Class V Notes, the
Class VI Notes, the Class VII Notes and the Subordinated
Notes;
(C)
the Class III Notes will be senior in right of payment to the
Class IV Notes, the Class V Notes, the Class VI Notes, the
Class VII Notes and the Subordinated Notes;
(D)
the Class IV Notes will be senior in right of payment to the
Class V Notes, the Class VI Notes, the Class VII Notes
and the Subordinated Notes;
(E)
the Class V Notes will be senior in right of payment to the
Class VI Notes, the Class VII Notes and the Subordinated
Notes;
(F)
the Class VI Notes will be senior in right of payment to the
Class VII Notes and the Subordinated Notes; and
(G)
the Class VII Notes will be senior in right of payment to
the Subordinated Notes.
With respect to the Class P Treasury Strip Component only, the
Class P Notes are limited-recourse obligations of the Issuer and are
payable solely from payments of interest, principal or other
distributions in respect of the Class P Treasury Strip Component and
the Class P Subordinated Note Component. The Class P Notes will
be secured solely to the extent which the underlying Class P
Subordinated Note Component and Class P Treasury Strip
Component are secured. The Class P Notes will be entitled to no
other payments.
Supersenior Swap:
General
In order to provide the Issuer with funds to meet its obligations
under the CDS Assets, the Issuer will enter into a super senior swap
(the “Supersenior Swap”), with MSCS (the “Supersenior Swap
Counterparty”), under which the Supersenior Swap Counterparty
will agree to make available to the Issuer up to U.S.$325,000,000
(such amount, as it may from time to time be permanently reduced
by the Investment Adviser, acting on behalf of the Issuer, the
“Maximum Notional Amount”), subject to the terms and
conditions described therein. The Issuer will not make a Draw (as
defined below) under the Supersenior Swap on the Closing Date.
The Supersenior Swap is scheduled to terminate on the Stated
Maturity Date, (the “Scheduled Supersenior Swap Termination
Date”). The Supersenior Swap will be subject to early termination
in certain circumstances described under “Description of the
Notes—The Supersenior Swap”. The proceeds of Draws on the
A06547768/2.0/14 Aug 2006
3
Available Supersenior Swap Amount by the Issuer will not be
invested in Collateral Assets but instead will be used to make
payments to the CDS Counterparties and to cover Senior Interest
Shortfalls in each case as described herein.
Draws - CDS Loss Payments, CDS
Interest Payments, CDS Issuer
Termination Payments (other than
CDS
Subordinated
Issuer
Termination Payments) and Senior
Interest Shortfalls
On any Business Day up to but excluding the Supersenior Swap
Termination Date (except with respect to Draws described in (4)
below, which can only be made in anticipation of a Payment Date),
the Issuer may draw on the Available Supersenior Swap Amount to
obtain funds for the following purposes (each such draw, a
“Draw”):
(1) to pay any CDS Loss Payment due and payable to a CDS
Counterparty as and to the extent a Draw on the Available
Supersenior Swap Amount is required to make such
payment pursuant to the CDS Payment Priority described
below;
(2) to pay any CDS Interest Payment due and payable to a
CDS Counterparty as and to the extent a Draw on the
Available Supersenior Swap Amount is required to make
such payment pursuant to the CDS Payment Priority
described below;
(3) to pay any CDS Issuer Termination Payment (other than a
CDS Subordinated Issuer Termination Payment) due and
payable to a CDS Counterparty as and to the extent a
Draw on the Available Supersenior Swap Amount is
required to make such payment pursuant to the CDS
Payment Priority described below; or
(4) so long as no Event of Default has occurred and is
continuing, on any Payment Date that a Senior Interest
Shortfall exists, to pay any accrued and unpaid interest on
the Class II Notes, the Class III Notes or the Class IV
Notes, as applicable, in order of seniority in an amount
equal to such Senior Interest Shortfall pursuant to the
Priority of Payments; provided that any such Draw may
not exceed the lesser of (x) the amount of the Senior
Interest Shortfall and (y) the Cash Settlement Ceiling
Amount as of the date of the related Draw Notice.
The Trustee will make the Draws on the Available Supersenior
Swap Amount described above by delivering a notice (a “Draw
Notice”) for settlement on the Business Day following the delivery
of such Draw Notice in the case of a Draw for CDS Payments and
on the second Business Day following the delivery of such Draw
Notice in the case of a Draw for a Senior Interest Shortfall. Such
Draw Notice may be delivered via facsimile or electronic mail in
accordance with the terms of the Supersenior Swap.
Any (i) CDS Loss Payments, (ii) CDS Interest Payments or
(iii) CDS Issuer Termination Payments (other than any CDS
Subordinated Issuer Termination Payment) (such payments, “CDS
Payments”) required to be made by the Issuer to a CDS
Counterparty on any Business Day will be made in accordance with
the following order of priority (the “CDS Payment Priority”) from
A06547768/2.0/14 Aug 2006
4
the applicable sources of funds and, if necessary, Draws on the
Available Supersenior Swap Amount, as described below until the
aggregate amount of such CDS Payments are paid in full on such
Business Day:
(A) to the extent all or a portion of the CDS Payments due on such
Business Day relate to a (i) CDS Loss Payment or (ii) CDS Issuer
Termination Payment (other than a CDS Subordinated Issuer
Termination Payment),
first, Collateral Principal Collections on deposit in the
Collection Account or Eligible Investments as of such date
purchased with Collateral Principal Collections (whether or not
available in Cash) will be liquidated and such Cash and/or sale
proceeds thereof will be used to make such CDS Payments (other
than CDS Interest Payments) until paid in full,
second, provided that the CDS Payments (other than CDS
Interest Payments) have not been paid in full, CDS Reserve
Investments on deposit in the CDS Reserve Account as of such date
(whether or not available in Cash, but excluding any CDS Reserve
Investments being traded below par) will be liquidated and the sale
proceeds thereof (other than investment earnings thereon) will be
used to make such CDS Payments (other than CDS Interest
Payments) until paid in full,
third, provided that the CDS Payments (other than CDS
Interest Payments) have not been paid in full, Class I Reserve
Investments on deposit in the Class I Reserve Account as of such
date (whether or not available in Cash, but excluding any Class I
Reserve Investments being traded below par) will be liquidated and
the sale proceeds thereof (other than investment earnings
thereon) will be used to make such CDS Payments (other than CDS
Interest Payments) until paid in full,
fourth, provided that the CDS Payments (other than CDS
Interest Payments) have not been paid in full, transfer to or at the
direction of the CDS Counterparty of one or more CDS Reserve
Investments remaining in the CDS Reserve Account and/or Class I
Reserve Investments on deposit in the Class I Reserve Account in
an aggregate par amount up to the amount of the remaining CDS
Payments (other than CDS Interest Payments) until paid in full, and
among such CDS Reserve Investments or Class I Reserve
Investments, as the case may be, those with the shortest average life
will be transferred or delivered first,
fifth, provided that the CDS Payments (other than CDS Interest
Payments) have not been paid in full, a Draw will be made on the
Available Supersenior Swap Amount, (but only to the extent of the
Available Supersenior Swap Amount as of such date) and such
Draw will be used to make such CDS Payments (other than CDS
Interest Payments) until paid in full, and
(B) to the extent all or a portion of the CDS Payments relate to a
CDS Interest Payment,
first, Collateral Interest Collections on deposit in the
Collection Account or invested in Eligible Investments as of such
A06547768/2.0/14 Aug 2006
5
date (whether or not available in Cash) will be liquidated and the
sale proceeds thereof will be paid until the CDS Payments relating
to CDS Interest Payments have been paid in full,
second, provided that the CDS Payments relating to CDS
Interest Payments have not been paid in full, investment earnings on
CDS Reserve Investments on deposit in the CDS Reserve Account
as of such date will be paid until the CDS Payments relating to CDS
Interest Payments have been paid in full,
third, provided that the CDS Payments relating to CDS
Interest Payments have not been paid in full, investment earnings on
Class I Reserve Investments on deposit in the Class I Reserve
Account as of such date will be paid until the CDS Payments
relating to CDS Interest Payments have been paid in full, and
fourth, provided that the CDS Payments relating to CDS
Interest Payments have not been paid in full, a Draw will be made
on the Available Supersenior Swap Amount, (but only to the extent
of the Available Supersenior Swap Amount as of such date) and
such Draw will be used to make such CDS Payments relating to
CDS Interest Payments until paid in full,
provided that, following the calculation of Available Funds on each
Calculation Date, which calculation shall be performed after giving
effect to the payment of any CDS Payments in accordance with the
CDS Payment Priority and the payment of any Draw Repayment
Amount in accordance with the Used Supersenior Swap Amount
Repayment Priority, such Available Funds will not be available for
CDS Payments until after such Available Funds have been applied
in accordance with the Priority of Payments on the relevant Payment
Date; provided, further, that the foregoing shall not apply to
Collateral Interest Collections and Collateral Principal Collections
received after the relevant Calculation Date, as such Collateral
Interest Collections and Collateral Principal Collections are not
included in such Available Funds (and will be designated as
collections for the following period); and provided, further, that, if
two or more CDS Counterparties are due a payment pursuant to the
same clause set forth in clauses (A) and (B) above on the same
Business Day, the Trustee will apply such amounts pro rata (based
on the amounts due and payable on such day) among the CDS
Counterparties regardless of the order in which they notified the
Trustee that such amounts were due to them. For the avoidance of
doubt, when applying funds in accordance with subclauses first
through fifth of clause (A) and subclauses first through fourth of
clause (B) of the CDS Payment Priority, the source of funds referred
to in each subclause will be fully exhausted if not sufficient to pay
the CDS Payment(s) specified thereunder, as applicable, prior to the
application of funds from sources specified in succeeding
subclauses for the payment of such CDS Payments.
Amounts Available for Draws The maximum amount available to be drawn on the Supersenior
under the Supersenior Swap
Swap at any time will be (i) in the case of a CDS Interest Payment,
CDS Loss Payment or CDS Issuer Termination Payment (other than
a CDS Subordinated Issuer Termination Payment), the Available
Supersenior Swap Amount and (ii) in the case of a Senior Interest
A06547768/2.0/14 Aug 2006
6
Shortfall, the lesser of (x) the amount of the Senior Interest Shortfall
and (y) the Cash Settlement Ceiling Amount as of the date of the
related Draw Notice. In no event may any Draw be made under the
Supersenior Swap if, after giving effect thereto, (i) the Used
Supersenior Swap Amount would exceed the Maximum Notional
Amount or (ii) the Used Supersenior Swap Amount would exceed
the Available Supersenior Swap Amount immediately before giving
effect to such Draw.
Supersenior Swap Drawing Fee
A drawing fee (the “Supersenior Swap Drawing Fee”) will accrue
at a rate equal to Applicable LIBOR plus 0.33 percent per annum
(the “Supersenior Swap Drawing Fee Rate”) on the Average Used
Supersenior Swap Amount for the Periodic Interest Accrual Period
then most recently ended, calculated in the manner described under
“Description of the Notes—The Supersenior Swap—Supersenior
Swap Commitment Fee; Supersenior Swap Drawing Fee.” The
Supersenior Swap Drawing Fee will rank prior to the payment of
interest on any Class of Notes in accordance with the Priority of
Payments on each Payment Date.
Supersenior Swap Commitment Fee
A commitment fee (the “Supersenior Swap Commitment
Fee”) will accrue at a rate equal to 0.18 percent per annum (the
“Supersenior Swap Commitment Fee Rate”), on the Average
Available Supersenior Swap Amount for the Periodic Interest
Accrual Period then most recently ended, calculated in the manner
described under “Description of the Notes—The Supersenior
Swap—Supersenior Swap Commitment Fee; Supersenior Swap
Drawing Fee.” The Supersenior Swap Commitment Fee will rank
prior to the payment of interest on any Class of Notes in accordance
with the Priority of Payments on each Payment Date.
Reductions to Maximum Notional The Investment Adviser, acting on behalf of the Issuer in its sole
Amount under the Supersenior discretion, may reduce the Maximum Notional Amount irrevocably
Swap
on any Payment Date by an amount not to exceed the amount (not
less than zero) equal to (x) the sum of the Available Supersenior
Swap Amount, the Class I Reserve Balance and the CDS Reserve
Account Balance minus (y) the CDS Asset Balance, determined in
each case as of the related Calculation Date. Any reductions to the
Maximum Notional Amount will be permanent.
Repayment of Used Supersenior
Swap Amount
On each Business Day on which the Used Supersenior Swap
Amount is greater than zero, the Issuer will repay such Used
Supersenior Swap Amount (after making any CDS Payments due on
such Business Day in accordance with the CDS Priority of
Payments) from the following sources (the “Draw Repayment
Available Payment Sources”), any such payment, a “Draw
Repayment Amount”):
(A) to the extent all or a portion of the Used Supersenior Swap
Amount relates to (i) a CDS Loss Payment, (ii) a CDS Issuer
Termination Payment (other than a CDS Subordinated Issuer
Termination Payment) or (iii) a Senior Interest Shortfall (such
portion of the Used Supersenior Swap Amount, the “Outstanding
Principal Draw Amount”),
first, Collateral Principal Collections on deposit in the
Collection Account or Eligible Investments as of such date
A06547768/2.0/14 Aug 2006
7
purchased with Collateral Principal Collections (whether or not
available in Cash) will be liquidated and such Cash and/or sale
proceeds (other than investment earnings thereon) will be paid to the
Supersenior Swap Counterparty until the Outstanding Principal
Draw Amount is reduced to zero,
second, if the Outstanding Principal Draw Amount has not
been reduced to zero, CDS Reserve Investments on deposit in the
CDS Reserve Account as of such date (whether or not available in
Cash, but excluding any CDS Reserve Investments being traded
below par) will be liquidated and the sale proceeds thereof (other
than investment earnings thereon) will be paid to the Supersenior
Swap Counterparty until the Outstanding Principal Draw Amount is
reduced to zero,
third, if the Outstanding Principal Draw Amount has not been
reduced to zero, Class I Reserve Investments on deposit in the
Class I Reserve Account as of such date (whether or not available in
Cash, but excluding any Class I Reserve Investments being traded
below par) will be liquidated and the sale proceeds thereof (other
than investment earnings thereon) will be paid to the Supersenior
Swap Counterparty until the Outstanding Principal Draw Amount is
reduced to zero, provided, that if any portion of the Outstanding
Principal Draw Amount was used to cover a Senior Interest
Shortfall, the aggregate amount of proceeds applied in clauses first
through third to reduce such portion of the Outstanding Principal
Draw Amount shall not exceed the amount of Synthetic Notional
Proceeds received during the relevant Due Period by such date (and
to the extent such date is a Payment Date, before giving effect to the
Synthetic Applications Sequence on the related Calculation Date),
and
fourth, if the Outstanding Principal Draw Amount, other than
that portion attributable to Senior Interest Shortfalls, has not been
reduced to zero, transfer to or at the direction of Supersenior Swap
Counterparty one or more CDS Reserve Investments remaining in
the CDS Reserve Account and/or Class I Reserve Investments on
deposit in the Class I Reserve Account in an aggregate par amount
up to the remaining Outstanding Principal Draw Amount (other than
that portion attributable to Senior Interest Shortfalls) and among
such CDS Reserve Investments or Class I Reserve Investments, as
the case may be, those with the shortest average life will be
transferred or delivered first; and
(B) to the extent all or a portion of the Used Supersenior Swap
Amount relates to a CDS Interest Payment, (such portion of the
Used Supersenior Swap Amount, the “Outstanding Interest Draw
Amount”),
first, Collateral Interest Collections on deposit in the
Collection Account or invested in Eligible Investments as of such
date (whether or not available in Cash) will be liquidated and the
sale proceeds thereof will be paid to the Supersenior Swap
Counterparty until the Outstanding Interest Draw Amount is
reduced to zero,
second, if the Outstanding Interest Draw Amount has not
A06547768/2.0/14 Aug 2006
8
been reduced to zero, investment earnings on CDS Reserve
Investments on deposit in the CDS Reserve Account as of such date
will be paid to the Supersenior Swap Counterparty until the
Outstanding Interest Draw Amount is reduced to zero, and
third, if the Outstanding Interest Draw Amount has not been
reduced to zero, investment earnings on Class I Reserve Investments
on deposit in the Class I Reserve Account as of such date will be
paid to the Supersenior Swap Counterparty until the Outstanding
Interest Draw Amount is reduced to zero;
provided that, following the calculation of Available Funds on each
Calculation Date, such Available Funds will not be available for
Draw Repayment Amounts until after such Available Funds have
been applied in accordance with the Priority of Payments on the
relevant Payment Date. The order of priority set forth in clauses
(A) and (B) above is referred to as the “Used Supersenior Swap
Amount Repayment Priority”.
For the avoidance of doubt, when applying funds in accordance with
subclauses first through fourth of clause (A) and subclauses first
through third of clause (B) of the Used Supersenior Swap Amount
Repayment Priority, the source of funds referred to in each
subclause will be fully exhausted if not sufficient to pay an
Outstanding Principal Draw Amount or Outstanding Interest Draw
Amount, as applicable, prior to the application of funds from
sources specified in seceding subclauses for the payment of such
amounts.
Repayments of Used Supersenior Swap Amounts and deposits to the
Class I Reserve Account will rank prior to the payment of principal
of the Notes in the manner set forth in the Used Supersenior Swap
Amount Repayment Priority and the Priority of Payments.
Class I Reserve Account
Funds will be from time to time deposited into the Class I Reserve
Account subject to and in accordance with the Priority of Payments.
Amounts on deposit from time to time in the Class I Reserve
Account will be invested in Class I Reserve Investments. Investment
earnings on amounts on deposit in the Class I Reserve Account will
constitute Collateral Interest Collections and will be withdrawn and
deposited into the Collection Account. Any deposits to the Class I
Reserve Account will permanently reduce the Available Supersenior
Swap Amount in the amount of such deposits.
If, on any Business Day, the Issuer is required to make a (i) CDS
Interest Payment, (ii) a CDS Loss Payment or (iii) CDS Issuer
Termination Payment (other than a CDS Subordinated Issuer
Termination Payment) pursuant to a CDS Asset, the Trustee will
apply Cash on deposit in the Class I Reserve Account and the sale
proceeds from the sale of any Class I Reserve Investments as and to
the extent required in the CDS Payment Priority.
On or before the Business Day immediately preceding each
Payment Date, the Trustee will, as directed by the Issuer (which
direction may be in the form of standing instructions), withdraw
Cash from the Class I Reserve Account and sell Class I Reserve
Investments such that the amount of Cash and sale proceeds equals
A06547768/2.0/14 Aug 2006
9
the Excess Class I Reserve Amount, if any, as of the related
Calculation Date, and such amount will be deposited into the
Collection Account as Collateral Interest Collections or Collateral
Principal Collections, as applicable. See “Description of the
Notes—The Supersenior Swap—Class I Reserve Account.”
Issuer’s Rights Upon Failure by If the Supersenior Swap Counterparty fails to fund a Draw under the
Supersenior Swap Counterparty Supersenior Swap (unless it is not required to do so pursuant to the
Fund a Draw
netting provisions of the Supersenior Swap), the Supersenior Swap
Counterparty will be in default under the Supersenior Swap. In such
circumstance, the Trustee may (in the case of a failure to fund a
Draw related to a Senior Interest Shortfall under the Supersenior
Swap), and shall (in all other cases) if directed in writing by the
affected CDS Counterparties as described in “Security for the
Notes—Early Termination of CDS Assets”, subject to the terms of
the Indenture (including for the avoidance of doubt, the Trustee’s
rights of indemnification thereunder), pursue remedies at law or in
equity to require the Supersenior Swap Counterparty to fund the
aggregate amount of the Draws that the Supersenior Swap
Counterparty fails to fund and to compensate the Issuer for the
reasonable costs and expenses (including reasonable attorneys’ fees
and expenses) incurred by or on behalf of the Issuer as a result of
such failure. See “Description of the Notes—The Supersenior
Swap—Issuer’s Rights Upon Failure by Supersenior Swap
Counterparty to Fund a Draw.”
Use of Proceeds:
The proceeds from the issuance of the Notes will be used by the
Issuer on the Closing Date to (i) purchase or otherwise acquire or
commit to purchase on the Closing Date a portfolio of Collateral
Assets that will, as of the Closing Date, satisfy the Eligibility
Criteria described herein and have a Principal Balance of
approximately U.S.$450,000,000, (ii) make a deposit to the Expense
Reserve Account in an amount of approximately U.S.$30,000,
(iii) acquire the CDS Reserve Investments with a Principal Balance
equal to U.S.$0 and make a deposit to the CDS Reserve Account in
an amount equal to U.S.$0 and use such funds to acquire the CDS
Reserve Investments during the Reinvestment Period, (iv) pay
certain fees and expenses payable in connection with the offering of
the Notes, including fees to the Managers and the Placement Agents
and (v) undertake certain related activities. The remaining net
proceeds of approximately U.S.$0 will be deposited in the
Collection Account on the Closing Date and invested in Eligible
Investments pending the purchase of or entering into additional
Collateral Assets during the Ramp-Up Period. See “Security for the
Notes—Collateral Assets” and “Use of Proceeds.”
Collateral Assets:
The “Collateral Assets” will consist of the Cash Assets, the Credit
Linked Securities and the CDS Assets as described below. The
Credit Linked Securities and the CDS Assets are sometimes referred
to collectively as the “Synthetic Assets.”
The “Cash Assets” will consist of Structured Finance Securities and
REIT Debt Securities of the Specified Types that, in each case, are
owned by the Issuer and pledged to the Trustee for the benefit of the
Secured Parties and that comply with the Eligibility Criteria
A06547768/2.0/14 Aug 2006
10
described herein.
The “Credit Linked Securities” will consist of credit-linked notes
or similar synthetic securities issued by a trust or similar special
purpose entity (and not by a corporate entity, bank or financial
institution or any other operating entity) (each, a “Credit Linked
Security Issuer”) and not structured as credit default swaps. Each
Credit Linked Security will reference a specified Reference
Obligation in a principal amount equal to the principal amount of
the related Credit Linked Security. The Credit Linked Security
Issuer will not own or otherwise hold the related Reference
Obligation, but rather will enter into a credit default swap in respect
of such Reference Obligation with a bank or derivative dealer that
meets the definition of “CDS Counterparty.” Any such credit default
swap will be similar in nature and structure to the CDS Assets of the
Issuer and, as such, will be subject to certain restrictions that will be
contained in the Indenture. See “Security for the Notes— CDS
Assets.” The Issuer will have no obligation to make any payment in
respect of a Credit Linked Security after the initial purchase of such
Credit Linked Security.
The “CDS Assets” will be structured as credit default swaps. Under
each CDS Asset, the Issuer sells credit protection on a specified
Reference Obligation and the obligations of the Issuer to the swap
counterparty will not be Cash collateralized or secured with a pledge
of any dedicated assets. Instead, the Issuer will use amounts from
Collateral Interest Collections, Collateral Principal Collections,
funds on deposit in the Class I Reserve Account, funds on deposit in
the CDS Reserve Account and funds drawn from the Available
Supersenior Swap Amount, in each case, as and to the extent
required in accordance with the CDS Payment Priority.
On or prior to the Closing Date, the Issuer is expected to have
purchased or entered into, or have entered into binding agreements
to purchase or enter into, a portfolio of Collateral Assets selected by
the Investment Adviser representing at least 90 percent (by
aggregate Principal Balance) of the Expected Effective Date
Balance. See “Security for the Notes—Collateral Accumulation on
or Prior to the Closing Date.”
At the end of the Ramp-Up Period, approximately 35 percent by
Principal Balance of the Collateral Assets are expected to consist of
Cash Assets and Credit Linked Securities. At the end of the
Ramp-Up Period, approximately 65 percent by Principal Balance of
the Collateral Assets are expected to consist of CDS Assets.
The Reference Obligations underlying the Synthetic Assets will
consist of Structured Finance Securities and/or REIT Debt
Securities of the Specified Types. Subject to the limited exceptions
described herein, the Reference Obligations must satisfy the
Eligibility Criteria.
CDS Assets:
Under the CDS Assets, the Issuer will have exposure to certain
Reference Obligations as a seller of credit protection. Under such
CDS Assets, if any amount is owed by the Issuer in respect of CDS
Interest Shortfalls or CDS Principal Shortfalls, the Issuer will be
required to make payments to the CDS Counterparty (if in respect of
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a CDS Interest Shortfall, a “CDS Interest Payment” and if in
respect of a CDS Principal Shortfall, a “CDS Principal Payment”
and, collectively, “CDS Shortfall Payments”). Following the
occurrence of a Credit Event in respect of the Reference Obligation,
the CDS Counterparty may elect physical settlement with respect to
all or a portion of the notional amount of the relevant CDS Asset in
which case the Issuer will be obligated to make a payment (a
“Physical Settlement Payment” and, together with a CDS
Principal Payment, a “CDS Loss Payment”) to the CDS
Counterparty. The Physical Settlement Payment generally will be in
the amount of the notional amount of the relevant CDS Asset, or the
appropriate proportionate share thereof if physical settlement is
elected only in part, in exchange for delivery by the CDS
Counterparty of the Reference Obligation, or the appropriate
proportionate share thereof, as the Deliverable Obligation. Certain
events constitute both a CDS Shortfall Event and a Credit Event, in
which case, it is at the option of the CDS Counterparty whether to
elect physical settlement (and, if so, whether such physical
settlement will be in part or in whole). CDS Shortfall Payments will
continue to be made from time to time with respect to the portion of
the notional amount not physically settled. In addition, following the
occurrence of a Credit Event, a CDS Counterparty may elect partial
physical settlement on more than one occasion. Where only CDS
Shortfall Payments are made, and physical settlement is not elected,
the Issuer does not receive a Deliverable Obligation. CDS Issuer
Termination Payments may also be required to be made by the
Issuer in connection with the early termination of a CDS Asset and a
CDS Issuer Up-front Payment may be required to be made by the
Issuer upon entering into a CDS Asset.
Under the CDS Assets, the Issuer will obtain funds for the purpose
of making CDS Interest Payments, CDS Loss Payments and CDS
Issuer Termination Payments (other than CDS Issuer Up-front
Payments and CDS Subordinated Issuer Termination Payments) on
any Business Day from Collateral Interest Collections, Collateral
Principal Collections, funds on deposit in the Class I Reserve
Account, funds on deposit in the CDS Reserve Account and funds
drawn from the Available Supersenior Swap Amount, in each case,
as and to the extent required in accordance with the CDS Payment
Priority.
Under the CDS Assets, each respective CDS Counterparty will pay
to the Issuer the Premium Amount payable under such CDS Asset.
Each CDS Counterparty also will be obligated to pay to the Issuer
any CDS Reimbursement Amounts. In addition, a CDS
Counterparty may be required to pay to the Issuer a CDS
Counterparty Termination Payment in connection with an early
termination of a CDS Asset.
Premium Amounts (including any Designated Accrued Premium in
respect of a CDS Counterparty Termination Payment) paid to the
Issuer will be deposited into the Collection Account as Collateral
Interest Collections and distributed in accordance with the Priority
of Payments. CDS Reimbursement Amounts paid to the Issuer
under a CDS Asset will be deposited into the Collection Account as
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Collateral Interest Collections or Collateral Principal Collections,
(except any Designated Accrued Premium component thereof) as
the case may be. Any CDS Counterparty Termination Payments
(except any Designated Accrued Premium component thereof) and
Sale Proceeds paid to the Issuer in respect of CDS Assets, and any
Deliverable Obligation Sale Proceeds paid to the Issuer, will be
deposited into the Collection Account as Collateral Principal
Collections; provided that in the case of CDS Counterparty
Termination Payments, any portion thereof paid to the Issuer that
constitutes Designated Accrued Premium (as determined by the
Investment Adviser) will be deposited into the Collection Account
as Collateral Interest Collections.
The CDS Assets will be subject to additional restrictions as
described herein (see “Security for the Notes—CDS Assets”) and
contained in the Indenture.
Trustee and Collateral
Administrator:
The Trustee will be Investors Bank & Trust Company (“IBTC” or
the “Trustee”), acting through its office in Boston, Massachusetts.
IBTC will also act as Collateral Administrator under the Collateral
Administration Agreement.
Ramp-Up Period:
The Issuer will purchase or enter into, or enter into binding
agreements to purchase or enter into, at the direction of the
Investment Adviser, Collateral Assets satisfying the Eligibility
Criteria such that the aggregate Principal Balance of the Collateral
Assets that are owned or subject to binding agreements by the Issuer
at the end of the Ramp-Up Period is at least equal to the Expected
Effective Date Balance and will satisfy the Collateral Quality Tests,
the Portfolio Percentage Limitations and the Coverage Tests.
Effective Date Rating:
Within eight Business Days following the Effective Date, the Issuer
will request each Rating Agency rating the Rated Notes to confirm
that it has not reduced or withdrawn the rating it assigned to such
Class of Rated Notes on the Closing Date (a “Rating
Confirmation”). In connection with obtaining a Rating
Confirmation from each Rating Agency, the Investment Adviser, on
behalf of the Issuer, may propose a plan to the Rating Agencies (a
“Proposed Plan”) to receive such Rating Confirmation. If the Issuer
does not obtain such Rating Confirmation within 30 days following
the Effective Date or such later date that such Rating Agencies may
determine (a “Rating Confirmation Failure”), on each Payment
Date thereafter, the Issuer is required (in accordance with the
Priority of Payments and the Used Supersenior Swap Amount
Repayment Priority), to (a) pay the Used Supersenior Swap
Amount, if any, then deposit funds to the Class I Reserve Account
to the extent necessary to reduce the Available Supersenior Swap
Amount to zero, and then pay principal of the Class II Notes, the
Class III Notes, the Class IV Notes, the Class V Notes, the Class VI
Notes and the Class VII Notes, sequentially in order of seniority
and/or (b) apply Synthetic Notional Proceeds to reduce the
Available Supersenior Swap Amount to the extent of the Available
Synthetic Notional Proceeds Amount, in accordance with the
Synthetic Applications Sequence, in the amounts necessary for each
Rating Agency to confirm their respective ratings of such Notes
assigned on the Closing Date or, if earlier, until the outstanding
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principal balance of each Class of Rated Notes and the Available
Supersenior Swap Amount is reduced to zero.
Reinvestment Period:
The Issuer expects during the Reinvestment Period, subject to
certain conditions described herein, to reinvest Synthetic Notional
Proceeds, Sale Proceeds, Designated CDS Reserve Account
Proceeds and other available Collateral Principal Collections in
additional Collateral Assets that, in each case, meet the
Reinvestment Criteria. Pending reinvestment in Collateral Assets,
the Issuer may invest Collateral Principal Collections in Eligible
Investments. Collateral Interest Collections may also be invested in
Eligible Investments. The “Reinvestment Period” will be the
period beginning on the Closing Date and continuing through the
earlier to occur of: (i) the end of the Due Period immediately
preceding the Payment Date occurring in August 2010 and (ii) the
occurrence of an Event of Default that results in acceleration of the
Notes; provided that if such acceleration is rescinded in accordance
with the Indenture, this clause (ii) shall not be applicable with
respect to that particular Event of Default and acceleration. See
“Security for the Notes—Substitute Collateral Assets and
Reinvestment Criteria.”
There will be no reinvestment in Substitute Collateral Assets after
the Reinvestment Period (except, at the option of the Investment
Adviser, during the first Due Period after the Reinvestment Period
to the extent described in the Priority of Payments for Collateral
Principal Collections).
Interest Payments on the
Rated Notes:
Interest will accrue on the outstanding principal balance of each
Rated Note for each Periodic Interest Accrual Period at a per annum
rate as follows:
Class of Notes
Applicable Periodic
Interest Rate
Class II Notes
Three-Month LIBOR plus 0.42%
Class III Notes
Three-Month LIBOR plus 0.48%
Class IV Notes
Three-Month LIBOR plus 0.55%
Class V Notes
Three-Month LIBOR plus 1.20%
Class VI Notes
Three-Month LIBOR plus 3.00%
Class VII Notes
Three-Month LIBOR plus 6.25%
Interpolated LIBOR will be used for the first Periodic Interest
Accrual Period for the Rated Notes and for calculating LIBOR in
connection with the Supersenior Swap Drawing Fee during that
period.
Periodic Interest on the Rated Notes will be calculated on the basis
of a 360-day year and the actual number of days elapsed in the
applicable Periodic Interest Accrual Period.
Periodic Interest on the Rated Notes will be payable in arrears on
each Payment Date, commencing on the Initial Payment Date and
ending on the Stated Maturity Date unless repaid or redeemed prior
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thereto.
The Supersenior Swap Commitment Fee will accrue on the Average
Available Supersenior Swap Amount in the manner described under
“Description of the Notes—The Supersenior Swap—Supersenior
Swap Commitment Fee; Supersenior Swap Drawing Fee.”
The Supersenior Swap Drawing Fee will accrue on the Average
Used Supersenior Swap Amount in the manner described under
“Description of the Notes—The Supersenior Swap—Super senior
Swap Commitment Fee; Supersenior Swap Drawing Fee.”
Priority of Payments:
Payments on the Notes will be made in accordance with the Priority
of Payments. See “Description of the Notes—Priority of Payments.”
The Coverage Tests:
On each Payment Date on which any of the Rated Notes are
Outstanding, if any of the Coverage Tests are not satisfied as of the
related Calculation Date, Collateral Interest Collections and
Collateral Principal Collections that would otherwise be available
(i) to make distributions to the Holders of the Subordinated Notes,
(ii) for the purchase of, or entry into, additional Collateral Assets,
(iii) for the payment of certain fees and expenses, (iv) in the case of
a failure to satisfy the Senior Interest Coverage Test or the Senior
Par Value Coverage Test, for interest payments on the Class V
Notes, the Class VI Notes and the Class VII Notes, (v) in the case of
a failure to satisfy the Class V Interest Coverage Test or the Class V
Par Value Coverage Test, for interest payments on the Class VI
Notes and the Class VII Notes and, (vi) in the case of a failure to
satisfy the Class VI Interest Coverage Test or the Class VI Par
Value Coverage Test, for interest payments on the Class VII Notes,
will instead be applied, in accordance with the Priority of Payments,
on the related Payment Date, to pay any outstanding Used
Supersenior Swap Amount, then to make a deposit into the Class I
Reserve Account to reduce the Available Supersenior Swap Amount
to zero and then applied to pay principal of the Rated Notes
sequentially in order of seniority, in each case, until such Coverage
Tests are satisfied or, if earlier, the applicable Class of Rated Notes
is paid in full and/or the Available Supersenior Swap Amount is
reduced to zero. In addition, if any Coverage Test (other than the
Class VII Interest Diversion Test) remains unsatisfied after such
application of Collateral Interest Collections and Collateral
Principal Collections, Synthetic Notional Proceeds that otherwise
would have been available, in accordance with the Synthetic
Applications Sequence, for reinvestment in additional CDS Assets
instead will be applied to reduce the Available Supersenior Swap
Amount until such Coverage Tests are satisfied or, if earlier, the
Available Supersenior Swap Amount is reduced to zero. In the case
of a failure to satisfy the Class VII Interest Diversion Test,
Collateral Interest Collections that otherwise would have been
available for payments of the Subordinate Investment Advisory Fee,
certain payments of principal on the Class VI Notes and the Class
VII Notes and for payment of certain available remaining amounts
to Holders of the Subordinated Notes will instead be used to redeem
Class VII Notes until such Class VII Interest Diversion Test is
satisfied or, if earlier, the Class VII Notes are paid in full (all in
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accordance with the Priority of Payments).
On the Effective Date, the portfolio of Collateral Assets and Eligible
Investments is expected to satisfy all of the Coverage Tests. If any
of the Coverage Tests set forth below is not satisfied prior to any
proposed purchase of, or entering into, Collateral Assets on or after
the Effective Date, the Issuer will not be permitted to make such
purchase or enter into a Collateral Asset unless after giving effect
thereto such Coverage Tests are met or, if any Coverage Test is not
met, the applicable ratio would be maintained or improved after
giving effect to such purchase or entry; provided that with respect to
the reinvestment of Sale Proceeds and Synthetic Notional Proceeds
from the sale or termination of a Defaulted Security during the
Reinvestment Period, each Coverage Test is satisfied both before
and after such sale or termination.
Par Value Coverage Tests &
Class VII Interest Diversion Test:
The Par Value Coverage Test for the Rated Notes is satisfied as of
any date of determination when the Senior Par Value Coverage
Ratio, the Class V Par Value Coverage Ratio, the Class VI Par
Value Coverage Ratio and, in the case of the Class VII Interest
Diversion Test, the Class VII Interest Diversion Ratio, are equal to
or exceed the required levels set forth below:
Par Value Coverage Test &
Class VII Interest Diversion Test
Senior Par Value Coverage Test
Class V Par Value Coverage Test
Class VI Par Value Coverage Test
Class VII Interest Diversion Test
Required Par Value
Coverage Ratio
108.50 percent
106.90 percent
102.50 percent
101.80 percent
See “Security for the Notes—The Coverage Tests.”
Interest Coverage Tests:
The Interest Coverage Test for the Rated Notes is satisfied as of any
date of determination when the Senior Interest Coverage Ratio, the
Class V Interest Coverage Ratio and the Class VI Interest Coverage
Ratio are equal to or exceed the required levels set forth below:
Interest Coverage Test
Required Interest
Coverage Ratio
Senior Interest Coverage Test
Class V Interest Coverage Test
Class VI Interest Coverage Test
115.0 percent
109.0 percent
105.0 percent
See “Security for the Notes—The Coverage Tests.”
Collateral Quality Tests:
On the Effective Date, the portfolio of Collateral Assets is expected
to satisfy all of the Collateral Quality Tests. On and after the
Effective Date, the Collateral Quality Tests will be required to be
satisfied after giving effect to any purchase of or entry into
Collateral Assets or, if immediately prior to the proposed purchase
of or entry into an additional Collateral Asset, one or more of such
Collateral Quality Tests was not satisfied, no Collateral Quality Test
that was unsatisfied shall be further from being satisfied after giving
effect to such proposed transaction and no Collateral Quality Test
that was satisfied shall be unsatisfied after giving effect to such
A06547768/2.0/14 Aug 2006
16
transaction.
Portfolio Percentage Limitations:
On the Effective Date, the portfolio of Collateral Assets is expected
to satisfy all of the Portfolio Percentage Limitations. On and after
the Effective Date, the Portfolio Percentage Limitations will be
required to be satisfied after giving effect to any purchase of or
entry into Collateral Assets or, if immediately prior to the proposed
purchase of or entry into such additional Collateral Assets, one or
more of such Portfolio Percentage Limitations was not satisfied, no
Portfolio Percentage Limitation that was unsatisfied shall be further
from being satisfied after giving effect to such proposed transaction
and no Portfolio Percentage Limitation that was satisfied shall be
unsatisfied after giving effect to such transaction.
Stated Maturity:
The Notes will mature on the Payment Date occurring in August of
2046 (the “Stated Maturity Date”), unless repaid or redeemed
prior thereto. The Notes will be subject to early repayment or
redemption (i) on any Payment Date in connection with a mandatory
redemption, to the extent that any Coverage Test is not satisfied as
described herein, or a Tax Redemption, (ii) on any Payment Date
during the Reinvestment Period in connection with a Special
Amortization, (iii) on any Payment Date after the Effective Date in
connection with a Proposed Plan to obtain a Rating Confirmation or
a Rating Confirmation Failure, (iv) on any Payment Date through
and including the Payment Date in August of 2011, to the limited
extent of payments on the Class VI Notes and Class VII Notes in
accordance with clause (xx) of the Priority of Payments for
Collateral Interest Collections, and (v) after the Non-Call Period in
connection with an Optional Redemption or an Auction Call
Redemption. See “Description of the Notes – Auction Call
Redemption”. The Collateral Assets may be liquidated and the
Notes repaid or redeemed upon the occurrence of one or more
Events of Default as described herein and set forth in the Indenture,
pursuant to the Liquidation Priority. See “Security For The Notes –
Events of Default”.
Principal Repayments:
No principal will be payable in respect of any Rated Notes during
the Reinvestment Period other than in connection with the failure of
a Coverage Test, a Special Amortization, the payment of principal
of the Class VI Notes and Class VII Notes in accordance with clause
(xx) under the Priority of Payments for Collateral Interest
Collections, a Tax Redemption, a Proposed Plan to obtain a Rating
Confirmation or a Rating Confirmation Failure.
Beginning on the first Payment Date following the Reinvestment
Period (i.e., the Payment Date occurring in November 2010),
Collateral Principal Collections available in accordance with the
Priority of Payments (after application of the CDS Payment Priority
and the Used Supersenior Swap Amount Repayment Priority on the
related Calculation Date) will be applied first to make deposits to
the Class I Reserve Account to reduce the Available Supersenior
Swap Amount and, second, after the Available Supersenior Swap
Amount is reduced to zero, to the payment of principal starting with
the most senior Class of Rated Notes then Outstanding. See
“Description of the Notes—Principal of the Rated Notes” and “—
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17
Principal Prepayments.”
Subordinated Notes:
Distributions, if any, on the Subordinated Notes will be made on
each Payment Date through the Final Subordinated Maturity Date, if
and to the extent funds are available for such purpose in accordance
with the Priority of Payments.
The Holders of the Subordinated Notes will not be entitled to
receive interest on the Subordinated Notes at a stated rate. Instead,
any amounts remaining after the payment of all other amounts
ranking senior in the Priority of Payments will be distributed to the
Holders of the Subordinated Notes on each Payment Date. See
“Description of the Notes—Priority of Payments.”
Class P Notes:
The U.S.$5,910,000 aggregate face amount of the Class P Notes
comprises the Class P Treasury Strip Component and the Class P
Subordinated Note Component.
All amounts paid on any Payment Date with respect to the Class P
Subordinated Note Component will be deposited into the Class P
Treasury Strip Component Account on behalf of, and for the benefit
of, the Holders of the Class P Notes. Funds standing to the credit of
the Class P Treasury Strip Component Account that constitute Class
P Treasury Strip Collateral will be available for application to the
amounts due to the Holders of the Class P Notes as described in the
Indenture. Funds standing to the credit of the Class P Treasury Strip
Component Account that constitute amounts paid with respect to the
Class P Subordinated Note Component will be available for
distribution to the Class P Notes on the Payment Date on which
such funds were credited to the Class P Treasury Strip Component
Account in accordance with the terms of the Indenture.
On any Redemption Date or Payment Date following a declaration
of Accelerated Maturity, the Trustee will disburse (solely from the
Class P Treasury Strip Component Account) to the Holders of the
Class P Notes, pro rata, based on their respective portions of the
Class P Notes, the redemption price of the Class P Treasury Strip
Collateral in the form of a distribution in kind of each item in the
Class P Treasury Strip Component Account.
The Holders of the Class P Notes will be treated as Holders of the
Class P Treasury Strip and the Subordinated Notes to the extent of
the Class P Subordinated Note Component and Class Treasury Strip
Component represented by the Class P Notes Investor Balance. The
Holder of any Class P Note will be entitled to vote, or to direct the
voting of, the Components of such Class P Note and shall be
entitled to no additional voting rights.
Tax Redemption:
If a Tax Event occurs and is continuing, then the Rated Notes will
be optionally redeemable, in whole but not in part (such a
redemption, a “Tax Redemption”), at the written direction of the
Holders of at least a majority of the outstanding principal balance of
the Subordinated Notes, on any Payment Date (after application of
the CDS Payment Priority and the Used Supersenior Swap Amount
Repayment Priority on the related Calculation Date), whether during
or after the Non-Call Period, on which such Tax Event is continuing
at the applicable Redemption Price. In connection with a Tax
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Redemption, the Available Supersenior Swap Amount will be
reduced to zero and the Supersenior Swap will be terminated.
The ability of the Holders of the Subordinated Notes to direct a Tax
Redemption will be subject to satisfaction of various conditions
described herein, including the condition that sufficient Available
Funds, including Sale Proceeds from the sale or termination of all or
substantially all of the Collateral Assets and other assets in the
portfolio in connection with the proposed redemption determined as
described herein, are expected to be sufficient to pay the Total
Redemption Amount in accordance with the Priority of Payments.
Optional Redemption:
After the period commencing on the Closing Date and ending on the
Business Day preceding the Payment Date occurring in August
2009 (the “Non-Call Period”), the Rated Notes will be subject to
optional redemption in whole but not in part (an “Optional
Redemption”) on any Payment Date (after application of the CDS
Payment Priority and the Used Supersenior Swap Amount
Repayment Priority on the related Calculation Date) by the Issuer, at
the direction of the Holders of at least 66⅔ percent of the
outstanding principal balance of the Subordinated Notes at the
applicable Redemption Price. In connection with an Optional
Redemption, the Available Supersenior Swap Amount will be
reduced to zero and the Supersenior Swap will be terminated. The
ability of the Holders of the Subordinated Notes to direct an
Optional Redemption in whole will be subject to satisfaction of
various conditions described herein, including the condition that
sufficient Available Funds, including Sale Proceeds from the sale or
termination of all or substantially all of the Collateral Assets and
other assets in the portfolio in connection with the proposed
redemption, determined as described herein, are expected to be
sufficient to pay the Total Redemption Amount in accordance with
the Priority of Payments. See “Description of the Notes—Early
Redemption of the Notes—Optional Redemption.”
Special Amortization:
During the Reinvestment Period, one or more Classes of the Rated
Notes may be repaid (provided that, prior to any payment of
principal on the Rated Notes, the Available Supersenior Swap
Amount shall have been reduced to zero), at the direction of the
Investment Adviser, in whole or in part, sequentially in order of
seniority by the Issuer (a “Special Amortization”) on one or more
Payment Dates (after application of the CDS Payment Priority and
the Used Supersenior Swap Amount Repayment Priority on the
related Calculation Dates) if, at any time during the related Due
Period, (A) the Investment Adviser has been unable, for a period of
at least 30 consecutive days, to identify Collateral Assets that would
meet the Reinvestment Criteria in sufficient amounts to permit the
reinvestment in additional Collateral Assets of all or a portion of the
Collateral Principal Collections then on deposit in the Collection
Account and all or a portion of any Synthetic Notional Proceeds
available for reinvestment in accordance with the Synthetic
Applications Sequence on the preceding Payment Date or arising
thereafter and (B) the Investment Adviser elects, in its sole
discretion, to designate all or a portion of (x) such Collateral
Principal Collections for reduction of the Available Supersenior
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Swap Amount by deposit to the Class I Reserve Account or
payment of principal of the Rated Notes (provided that, prior to any
payment of principal on the Rated Notes, the Available Supersenior
Swap Amount shall have been reduced to zero) by notification to
the Trustee (the amount of such designated Collateral Principal
Collections, the “Cash Special Amortization Amount”) and
(y) such designated Synthetic Notional Proceeds (the “Synthetic
Special Amortization Amount”) for application to reduce the
Available Supersenior Swap Amount. On the first Payment Date
following any date on which such direction is given, (x) funds
available in accordance with the Priority of Payments for Collateral
Principal Collections in an amount up to the Cash Special
Amortization Amount will be applied to pay any outstanding Used
Supersenior Swap Amount, then deposited into the Class I Reserve
Account in an amount up to the amount required to reduce the
Available Supersenior Swap Amount to zero, and then applied to
pay principal of the Rated Notes, sequentially in order of seniority
in accordance with the Priority of Payments and (y) following such
application, an amount equal to the Synthetic Special Amortization
Amount will be applied to reduce the Available Supersenior Swap
Amount in accordance with the Synthetic Applications Sequence.
The Investment Adviser may withdraw any notice designating a
Special Amortization on or prior to the related Calculation Date. See
“Description of the Notes—Special Amortization of the Rated
Notes.”
Auction Call Redemption:
If any Rated Notes are Outstanding on the first Auction Date, which
is the date 15 Business Days prior to the Payment Date occurring in
August 2014, then an auction of the Collateral Assets will be
conducted on such Auction Date and each Auction Date thereafter
by the Trustee (at the expense of the Issuer and with the assistance
of the Investment Adviser) on behalf of the Secured Parties; and
provided that the Investment Adviser determines (after application
of the CDS Payment Priority and the Used Supersenior Swap
Amount Repayment Priority on the related Calculation Date) that
bids received for the purchase of the Collateral Assets together with
all other funds available to the Issuer will be at least equal to the
Total Redemption Amount plus such additional amount as necessary
for the Holders of the Subordinated Notes to receive the Auction
Redemption Targeted Internal Rate of Return, on the Payment Date
immediately following such Auction Date, and on such Payment
Date, the Notes will be redeemed in whole but not in part, the
Available Supersenior Swap Amount will be reduced to zero and the
Supersenior Swap terminated. If such auction conditions are not
satisfied and the auction is not conducted successfully on an
Auction Date, (i) the Trustee will conduct auctions on each Auction
Date thereafter until the Rated Notes are redeemed in full and (ii) if
the Auction is not successful on the Payment Date occurring in
August 2014 and on subsequent dates thereafter, Collateral Interest
Collections remaining after application of amounts in clauses
(i) through (xxi) of the Priority of Payments for Collateral Interest
Collections will be applied to first, pay any outstanding Used
Supersenior Swap Amount, second, pay principal of the Class VII
Notes until paid in full, third, pay principal of the Class VI Notes
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20
until paid in full, fourth, pay principal of the Class V Notes until
paid in full, fifth, pay principal of the Class IV Notes until paid in
full, sixth pay principal of the Class III Notes until paid in full,
seventh pay principal of the Class II Notes until paid in full, and
eighth, make a deposit to the Class I Reserve Account to reduce the
Available Supersenior Swap Amount to zero, in accordance with the
Priority of Payments.
See “Description of the Notes—Auction Call Redemption.”
Redemption of the Subordinated
Notes:
Provided that all of the CDS Assets have been terminated and all
amounts due and payable by the Issuer thereunder have been
determined, on or after payment in full of interest on and principal
of each Class of Rated Notes (in connection with a Redemption of
the Rated Notes or Auction Call Redemption or otherwise) and
payment of, or establishment of a reasonable reserve for, all other
amounts payable by the Issuer under the Priority of Payments and
the payment of all other amounts payable in connection with, or
establishment of a reasonable reserve for, the termination of the
CDS Assets, the Subordinated Notes will be subject to redemption
in whole but not in part on any Payment Date by the Issuer, at the
direction of the Holders of at least 66⅔ percent of the outstanding
principal balance of the Subordinated Notes. See “Description of the
Notes—Early Redemption of the Notes.”
Hedge Agreements:
After the Closing Date, the Issuer may from time to time enter into
interest rate swap agreements and/or interest rate cap agreements,
and/or Deemed Floating Asset Hedges (together with the related
ISDA Master Agreement, schedule, confirmations and related credit
support documents, each, a “Hedge Agreement”) with one or more
counterparties (each, a “Hedge Counterparty”), for the primary
purpose of managing the Issuer’s interest rate risk exposure relating
to the variable rate of interest applicable to the Rated Notes relative
to the Fixed Rate Collateral Assets held by the Issuer with respect to
which Rating Agency Confirmation has been received. Any
payments required to be made under the Hedge Agreements will be
made in accordance with the Priority of Payments. See “Description
of the Notes—Priority of Payments” and “Security for the Notes—
Hedge Agreements.”
Security for the Notes:
Pursuant to the Indenture and the Account Control Agreement, the
Notes (other than the Class P Notes) will be secured by (i) the
Collateral Assets acquired or entered into and the Class I Reserve
Investments and Eligible Investments acquired by the Issuer, (ii) the
Collection Account, the Note Payment Account, the Interest
Reserve Account, the Expense Reserve Account, the CDS Reserve
Account and the Class I Reserve Account and all income from
investment of funds in any such account, (iii) the Issuer’s rights
under any CDS Issuer Accounts, (iv) all Cash delivered to the
Trustee for the benefit of the Secured Parties, (v) the Issuer’s rights
under the Supersenior Swap, (vi) the Issuer’s rights under any
Hedge Agreements, (vii) the Issuer’s rights under the Investment
Advisory Agreement, the Administration Agreement and the
Collateral Administration Agreement, (viii) any other assets and
rights of the Issuer pledged to the Trustee pursuant to the Indenture
(other than the Class P Treasury Strip Collateral), and (ix) all
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21
proceeds of the foregoing (collectively, the “Collateral”). The Class
P Treasury Strip Collateral will be pledged to the Trustee solely as
security for the Issuer’s obligations under the Class P Treasury Strip
Component of the Class P Notes. The Class P Notes will not be
secured by the Collateral (other than indirectly, to the extent that the
Class P Subordinated Note Component is secured by the Collateral).
Available Funds:
The aggregate amount of collections that will be available for
payment of the Notes and of certain fees and expenses of the
Co-Issuers on any Payment Date, pursuant to the Priority of
Payments, will be the amount of Collateral Interest Collections and
Collateral Principal Collections in the Collection Account as of the
Calculation Date relating to such Payment Date (which amount, in
the case of any Redemption Date or any other Payment Date on
which the aggregate outstanding principal balance of all the Rated
Notes is being or has been paid in full, shall include any amounts
remaining in the other pledged accounts other than the reasonable
reserve, if any, created for any CDS Assets which cannot be
terminated, subject to the prior written consent of the Initial CDS
Counterparty in respect of the amount of such reserve) and, without
duplication, the amount of any Excess Class I Reserve Amount in
the Class I Reserve Account as of such Calculation Date and the
amount of any Excess CDS Reserve Amount in the CDS Reserve
Account as of such Calculation Date (the “Available Funds”);
provided, however, that following the calculation of Available
Funds on each Calculation Date, such Available Funds will not be
available for CDS Payments or Draw Repayment Amounts until
after such Available Funds have been applied in accordance with the
Priority of Payments on the relevant Payment Date.
Interest Reserve Account:
The Trustee will deposit Collateral Interest Collections received on
Non-Quarterly Collateral Assets to the Interest Reserve Account to
the extent and in the manner described herein under “Security for
the Notes—Interest Reserve Account.” Any funds on deposit in the
Interest Reserve Account will be invested in Eligible Investments.
On the last day of each Due Period, any funds on deposit in the
Interest Reserve Account will be withdrawn to the extent and in the
manner described herein under “Security for the Notes—Interest
Reserve Account” for deposit to the Collection Account for
application as Collateral Interest Collections in accordance with the
Priority of Payments on the related Payment Date.
Expense Reserve Account:
On each Payment Date (other than the Stated Maturity Date),
pursuant to the Priority of Payments, from Collateral Interest
Collections in the Collection Account, the Trustee will deposit in
the Expense Reserve Account the amount needed to bring the
amount on deposit therein equal to U.S.$30,000 (unless the
Investment Adviser in its sole discretion directs that a lesser amount
be deposited into the Expense Reserve Account). Any funds on
deposit in the Expense Reserve Account will be invested in Eligible
Investments. The Trustee may from time to time withdraw amounts
from the Expense Reserve Account to pay accrued and unpaid
Administrative Expenses of the Co-Issuers. On the Business Day
prior to the Initial Payment Date, all amounts in excess of
U.S.$30,000 (unless the Investment Adviser in its sole discretion
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22
directs that a lesser amount be deposited into the Expense Reserve
Account) remaining on deposit in the Expense Reserve Account will
be deposited by the Trustee into the Collection Account as
Collateral Principal Collections for application in accordance with
the Priority of Payments on the Initial Payment Date. All amounts
remaining on deposit in the Expense Reserve Account at the time
when substantially all of the Issuer’s assets have been sold or
otherwise disposed of will be deposited by the Trustee into the
Collection Account as Collateral Interest Collections for application
in accordance with the Priority of Payments on the immediately
succeeding Payment Date.
Ratings:
It is a condition to the issuance of the Rated Notes on the Closing
Date that the Rated Notes be rated at least as follows:
Moody’s
Rating
Notes
Class II Notes
Aaa
Class III Notes
Aa2
Class IV Notes
Aa3
Class V Notes
A2
Class VI Notes
Baa2
Class VII Notes
Ba1
Class P Notes
Aaa
The Subordinated Notes will not be rated.
S&P
Rating
AAA
AA
AAA
BBB
BB+
N/A
The rating of the Class P Notes by Moody’s is only as to the
ultimate receipt of principal.
A credit rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time
by the assigning rating agency. See “Ratings of the Notes.”
The Offering:
The Rated Notes and the Class P Notes are being offered (i) to nonU.S. Persons (as defined in Regulation S (“Regulation S”) under
the United States Securities Act of 1933, as amended (the
“Securities Act”)) (“Non-U.S. Persons”) in offshore transactions in
reliance on Regulation S and (ii) to persons that are both QIBs and
Qualified Purchasers (each as defined below) or, solely with respect
to the Subordinated Notes, that are both Accredited Investors (as
defined below) and Qualified Purchasers, in each case, in
accordance with any applicable securities laws of any state of the
United States and any other jurisdiction.
A “QIB” is a “qualified institutional buyer” as defined in Rule
144A under the Securities Act.
A “Qualified Purchaser” is a “qualified purchaser” within the
meaning of Section 3(c)(7) of the Investment Company Act of 1940,
as amended (the “Investment Company Act”).
An “Accredited Investor” is an investor that meets the
requirements of Rule 501(a) of Regulation D under the Securities
Act.
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23
Minimum Denominations and
Record Date:
Each Class of Rated Notes will be issued and may be transferred
only in minimum denominations of U.S.$500,000 (in original
principal balance) and integral multiples of U.S.$1,000 in excess
thereof, in each case, with respect to interests in a Rule 144A Global
Note or interests in a Regulation S Global Note.
The Subordinated Notes and the Class P Notes will be issued and
may be transferred only in minimum denominations of
U.S.$250,000 (in original principal balance) and integral multiples
of U.S.$1,000 in excess thereof, subject to waiver in the Placement
Agents’ sole discretion for certain investors provided that, no
Subordinated Note or Class P Note may be issued or transferred
unless it has a minimum denomination equal to or greater than an
amount of U.S. dollars equivalent to at least €50,000.
After issuance, any Rated Note may fail to be in such required
minimum denomination due to repayment of principal thereof in
accordance with the Priority of Payments and any Class V Note,
Class VI Note or Class VII Note may fail to be in an amount that is
an integral multiple of U.S.$1,000 due to the addition to the
principal balance thereof of any Class V Cumulative Applicable
Periodic Interest Shortfall Amount, Class VI Cumulative Applicable
Periodic Interest Shortfall Amount or Class VII Cumulative
Applicable Periodic Interest Shortfall Amount, respectively.
All payments in respect of the Notes will be made to the person in
whose name the relevant Note is registered 15 days prior to the
applicable Payment Date or, if later, the date on which the relevant
Note was issued (the “Record Date”).
Form, Registration and Transfer:
Except as provided below, Rated Notes initially sold pursuant to
Rule 144A under the Securities Act or another exemption from the
registration requirements of the Securities Act (other than
Regulation S) will be represented by one or more permanent global
notes in definitive, fully registered form without interest coupons
attached (the “Rule 144A Global Notes”) deposited with the
Trustee as custodian for DTC and registered in the name of DTC or
its nominee. DTC will credit the account of its participants with the
principal balance of the Rule 144A Global Notes being purchased
by or through the participant. Interests in the Rule 144A Global
Notes will be shown on, and transfers thereof will be effected only
through, records maintained by DTC.
Except as provided below, Rated Notes initially sold to Non-U.S.
Persons in offshore transactions in reliance on Regulation S will be
represented by one or more permanent global notes in definitive,
fully registered form without interest coupons attached (the
“Regulation S Global Notes” and, together with the Rule 144A
Global Notes, the “Global Notes”).
The Regulation S Global Notes will be deposited with the Trustee
acting as custodian for DTC and registered in the name of DTC (or
its nominee) for credit to the applicable purchaser accounts at
Euroclear Bank S.A./N.V., as operator of the Euroclear system
(“Euroclear”) and Clearstream Banking, société anonyme
(“Clearstream”). Interests in the Regulation S Global Notes will be
shown on, and transfers thereof will be effected only through,
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24
records maintained by Euroclear and Clearstream. Interests in
Regulation S Global Notes may be held only through Euroclear or
Clearstream and may not be held by a U.S. Person at any time.
Transfers of interests in the Rule 144A Global Notes and the
Regulation S Global Notes are subject to certain additional
restrictions. In particular, to enforce the restrictions on transfers
of interests in any Notes issued in the form of a Global Note, the
Indenture permits the Issuer to demand that the Holder of
(i) any interest in a Rule 144A Global Note held by a person who
is determined not to have been both a Qualified Purchaser and a
QIB at the time of acquisition of such interest and (ii) any
interest in a Regulation S Global Note held by a U.S. Person or a
person within the United States, in each case at the time of the
acquisition of such interest, sell such interest to a Holder that is
permitted under the Indenture and, if the Holder does not
comply with such demand within 30 days thereof, the Issuer
may sell such Holder’s interest in such Global Notes on such
terms as the Issuer may choose. In addition, transferees of Global
Notes will be deemed to have made certain representations relating
to compliance with all applicable securities, ERISA and tax laws.
See “Transfer Restrictions.”
Interests in Regulation S Global Notes may only be exchanged for
interests in Rule 144A Global Notes in connection with transfers to
persons who are eligible to hold such Notes pursuant to Rule 144A
and otherwise in compliance with the Securities Act upon
appropriate written certification in the manner provided in the
Indenture. Interests in Rule 144A Global Notes may only be
exchanged for interests in the Regulation S Global Notes in
connection with transfers to Non-U.S. Persons in offshore
transactions in reliance on Regulation S upon appropriate written
certification in the manner provided in the Indenture.
The Subordinated Notes that are initially sold in the United States or
to U.S. Persons who are Accredited Investors (and also Qualified
Purchasers) will be issued in the form of one or more physical
certificates in definitive, fully registered form only, registered in the
name of the beneficial owner thereof (each such Note, a “Physical
Note”).
Transfers of interests in such Physical Notes are subject to
certain additional restrictions. In particular, to enforce
restrictions on transfers of Subordinated Notes, the Indenture
permits the Issuer to demand that any Holder of a Subordinated
Note who is determined not to have been (A) both an Accredited
Investor and a Qualified Purchaser, purchasing for its own
account or for the accounts of one or more Accredited Investors
who are Qualified Purchasers for which the purchaser is acting
as a fiduciary or agent with sole investment discretion or (B) a
Non-U.S. Person purchasing for its own account or for one or
more accounts, each of which is a Non-U.S. Person and as to
each of which it exercises sole investment discretion, in an
offshore transaction in accordance with Regulation S, in each
case, at the time of the acquisition of such Subordinated Note,
sell its Subordinated Notes to a Holder permitted under the
A06547768/2.0/14 Aug 2006
25
Indenture and, if the Holder does not comply with such demand
within 30 days thereof, the Issuer may sell such Holder’s
Subordinated Notes on such terms as the Issuer may choose. In
addition, transfers and exchanges of Subordinated Notes may
only be made upon delivery to the Note Registrar and the
Trustee, as transfer agent, of written certifications confirming
that such transfer or exchange is taking place in compliance
with all applicable transfer restrictions. See “Transfer
Restrictions.”
Class P Notes sold in the United States or to U.S. Persons pursuant
to Rule 144A under the Securities Act will be issued in the form of
physical certificates registered in the name of the beneficial owners
thereof in definitive, fully registered form without interest coupons
attached (the "Class P Rule 144A Certificated Notes"). Transfers
and exchanges of Class P Rule 144A Certificated Notes may only
be made upon delivery to the Issuer and the Trustee of written
certifications confirming that such transfer or exchange is taking
place in compliance with all applicable transfer restrictions. See
"Description of the Class P Notes—Form, Denomination and
Registration of the Notes."
The Class P Notes sold to non-U.S. Persons in offshore transactions
in reliance on Regulation S will be initially represented by either (i)
one or more temporary global certificates in definitive, fully
registered form without interest coupons attached (the "Class P
Temporary Regulation S Global Notes") through Euroclear and/or
Clearstream or (ii) physical certificates, registered in the name of
the beneficial owners thereof or a nominee, in definitive, fully
registered form (each such Class P Note, a "Class P Regulation S
Certificated Note"). The Class P Temporary Regulation S Global
Notes will be exchangeable for permanent global certificates in
definitive, fully registered form without interest coupons attached
(the "Class P Permanent Regulation S Global Notes" and,
together with the Class P Temporary Regulation S Global Notes, the
"Class P Regulation S Global Notes") on or after the Exchange
Date upon written certification that the beneficial interests in such
Class P Temporary Regulation S Global Notes are owned by
persons who are not U.S. Persons. After the applicable Exchange
Date, interests in Class P Regulation S Global Notes or Class P
Regulation S Certificated Notes may be exchanged or transferred
for Class P Rule 144A Certificated Notes only in connection with
transfers to U.S. Persons that are eligible to hold such Class P Rule
144A Certificated Notes pursuant to Section 4(2) of the Securities
Act, Rule 144A under the Securities Act or any other exemption
from registration and otherwise in compliance with the Securities
Act upon appropriate written certification in the manner provided in
the Indenture. See "Class P Form, Denomination and Registration of
the Class P Notes."
If the Trustee is advised by any Holder of Class P Notes that such
Holder is not permitted under the documents related to the Class P
Notes, applicable law or otherwise, to receive the Class P Treasury
Strip Collateral, "in kind" or any Holder of a Class P Note fails to
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26
complete any documentation required for a transfer of the Class P
Treasury Strip Collateral, the Issuer will direct the Trustee to
liquidate such Holder's portion of the Class P Treasury Strip
Collateral in a sale arranged by the Trustee and such Holder's Class
P Notes will be redeemed from the net proceeds of the allocable
amount of the Class P Treasury Strip Collateral and the
Subordinated Notes represented by the portion of the Class P
Subordinated Note Component allocable to such Holder, will be
delivered to such Holder. In order for the Holders of the Class P
Notes to obtain delivery of the Class P Treasury Strip Collateral
each Holder must be an eligible transferee of the Class P Treasury
Strip Collateral pursuant to the documents related to the Class P
Notes and applicable law.
Transfers of interests in the Class P Notes are subject to certain
additional restrictions. Each purchaser of Class P Notes in making
its purchase, will make, or will be deemed to have made, certain
acknowledgments, representations and agreements relating to
compliance with all applicable Notes, ERISA and tax laws set forth
in the Indenture and under "Class P Transfer Restrictions."
Listing:
Application will be made to the Irish Stock Exchange Limited (the
“Irish Stock Exchange”) for the Notes to be admitted to the
Official List (the “Official List”) and trading on its regulated
market. Upon listing on the Irish Stock Exchange being granted, a
prospectus prepared pursuant to the Prospectus Directive will be
published, which can be obtained from the Issuer. No application
will be made to list any of the Notes on any other stock exchange.
The issuance and settlement of the Notes on the Closing Date are
not conditioned on the listing of such Notes on the Irish Stock
Exchange. No assurances can be given that following the Closing
Date the listing of such Notes on the Irish Stock Exchange will be
obtained or, if it is obtained, maintained for the entire period that
such Notes are Outstanding. The fees and expenses related to the
admission to the Irish Stock Exchange are expected to be
approximately €26,734.45 (approximately U.S.$34,305.65 as of the
date hereof).
Governing Law:
The Notes, the Indenture, the Account Control Agreement, the
Investment Advisory Agreement, the CDS Assets, the Supersenior
Swap, the Collateral Administration Agreement and any Hedge
Agreements will be governed by, and construed in accordance with,
the laws of the State of New York. The Administration Agreement
and the Articles will be governed by the laws of the Cayman
Islands.
The Administrator:
Maples Finance Limited, a licensed trust company incorporated in
the Cayman Islands, will act as administrator (in such capacity, the
“Administrator”) and will perform certain administrative services
for the Issuer in the Cayman Islands.
Irish Listing Agent and Irish Paying McCann FitzGerald Listing Services Limited will be the Irish listing
Agent:
agent (the “Irish Listing Agent” or “MFLSL”) and Custom House
Administration and Corporate Services Limited will be the Irish
A06547768/2.0/14 Aug 2006
27
paying agent (the “Irish Paying Agent”) for the Notes.
Legal Investment:
Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory
authorities may be subject to restrictions on investment in the Notes.
Tax Status:
For a discussion of certain tax consequences to purchasers of the
Notes, see “Income Tax Considerations” herein.
ERISA Considerations:
Each purchaser or transferee of the Rated Notes (other than the
Class VII Notes) will be deemed to represent and warrant and, in
certain cases, will represent and warrant in writing that either (i) it is
not, nor is it acting on behalf of, a Benefit Plan Investor that is
subject to ERISA, Section 4975 of the Code or any federal, state,
local or foreign law that is substantially similar to the prohibited
transaction provisions of Title I of ERISA or Section 4975 of the
Code (“Similar Law”) or (ii) its acquisition, holding and disposition
of such Notes will not constitute or otherwise result in a non-exempt
prohibited transaction under ERISA, Section 4975 of the Code or
Similar Law.
Each initial investor and subsequent transferee in the Class VII
Notes, the Subordinated Notes or the Class P Notes (the “ERISA
Restricted Notes”) will be deemed to represent and warrant and, in
certain cases, will represent and warrant in writing that, during the
period it holds any interest in a ERISA Restricted Note, it is not and
is not acting on behalf of any of (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to Title I of
ERISA, (b) a plan (as defined in Section 4975(e)(1) of the Code)
that is subject to Section 4975 of the Code or (c) any other entity,
including without limitation, an insurance company general account,
whose underlying assets include assets of the plans described in (a)
or (b) above by reason of such plan’s investment in the entity.
See “ERISA Considerations” herein for a more detailed discussion
of certain ERISA-related considerations with respect to an
investment in the Notes.
A06547768/2.0/14 Aug 2006
28
RISK FACTORS
An investment in the Notes involves significant risks that each prospective purchaser should carefully
consider prior to making an investment decision with respect to the Notes. Additional risk factors regarding
the Class P Notes are included in the Section entitled “Description of the Class P Notes – Class P Risk
Factors.” Prospective purchasers should carefully consider, in addition to the matters set forth elsewhere in
this Final Offering Memorandum, the following factors.
1. Limited Assets to Make Payments on the Notes. The Notes will constitute limited recourse debt
obligations of the Issuer and the Rated Notes (other than the Class VII Notes) will constitute non-recourse
debt obligations of the Co-Issuer. The Notes will be payable solely from and to the extent of the available
proceeds from the Collateral. The Issuer, as a special purpose company, will have no significant assets other
than the Collateral Assets, the Note Payment Account, the Collection Account, the Interest Reserve Account,
the Class I Reserve Account, the Expense Reserve Account, the CDS Reserve Account and the rights of the
Issuer under any CDS Issuer Accounts, the Investment Advisory Agreement, the Supersenior Swap, the
Collateral Administration Agreement and any Hedge Agreements, all of which will be pledged to secure the
Notes and other obligations owing to the Secured Parties. The Co-Issuer will have no substantial assets.
Except for the Issuer and, with respect to the Rated Notes (other than the Class VII Notes) only, the CoIssuer, no person or entity will be obligated to make any payments on the Notes. Consequently, Holders of
the Notes must rely solely upon distributions on the Collateral Assets and any other Collateral pledged to
secure the Notes for the payment of amounts payable in respect of the Notes. If distributions on such
Collateral (or the Class P Treasury Strip Collateral in the case of the Class P Notes) are insufficient to make
payments on the Notes, in accordance with the Priority of Payments, no other assets of the Issuer or any
other person or entity (including, for the avoidance of doubt, the Investment Adviser, Morgan Stanley and
MSCS) will be available for the payment of the deficiency, and after the disposition of all proceeds of the
Collateral, any remaining claims against the Issuer or the Co-Issuer, as applicable, will be extinguished and
will not revive thereafter. The Class P Treasury Strip Collateral will be pledged to the Trustee solely as
security for the Issuer’s obligations under the Class P Notes. The Class P Notes will not be secured by the
Collateral.
2. Subordination of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V
Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes. Payments of interest on and
principal of the Rated Notes and distributions on the Subordinated Notes are subject to the Priority of
Payments. All Classes of Notes are subordinated to the payment of certain fees and expenses of the CoIssuers, the Trustee, Supersenior Swap Counterparty, the Investment Adviser, the Collateral Administrator
and other persons to the extent specified under the Priority of Payments. In addition, except in the limited
circumstances described herein, each Class of Rated Notes is subordinated in right of payment to each
Class with an earlier numerical designation and the Subordinated Notes are subordinated to all Rated Notes.
Furthermore, payments to CDS Counterparties (except CDS Subordinated Issuer Termination Payments) are
effectively senior in payment to any Class of Notes, because they are payable on dates other than Payment
Dates from either Collateral Interest Collections or Collateral Principal Collections, depending on the type of
payment. CDS Subordinated Issuer Termination Payments will be payable solely out of Collateral Principal
Collections and only after the payment in full of the Rated Notes in accordance with the Priority of
Payments. The CDS Payment Priority and the Used Supersenior Swap Amount Repayment Priority will be
applied on every Business Day. In accordance with the Priority of Payments, interest on and principal of
each Class of Notes will generally be payable only on Payment Dates. Therefore, CDS Payments and Draw
Repayment Amounts are effectively senior to any payments of interest on and principal of the Notes.
The application of Collateral Interest Collections and Collateral Principal Collections to pay amounts
due to CDS Counterparties could result in reductions or delays in the payment of interest on each Class of
Rated Notes and distributions on the Subordinated Notes. To the extent that the application of Collateral
Interest Collections and Collateral Principal Collections in such manner results in a failure to pay or make
certain Administrative Expenses, the Supersenior Swap Commitment Fee, the Supersenior Swap Drawing
Fee, the Senior Investment Advisory Fee, certain payments payable to Hedge Counterparties, certain
deposits required to be made to the Class I Reserve Account or the CDS Reserve Account, or interest on the
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29
Class II Notes, the Class III Notes or the Class IV Notes on such Payment Date, in each case, in accordance
with the Priority of Payments, an Event of Default will occur under the Indenture. The CDS Counterparties,
the Supersenior Swap Counterparty and the Investment Adviser will be Secured Parties under the Indenture
for purposes of securing the Issuer’s obligations to the CDS Counterparties, the Supersenior Swap
Counterparty and the Investment Adviser, respectively. See “—Certain Additional Risks with Respect to
CDS Assets—Payments to CDS Counterparties May Result in Insufficient Funds for the Notes.” To the
extent that such payments to CDS Counterparties exceed assumed levels, Noteholders could experience
reductions or delays in the payments on the Notes.
In addition, in the case of an Event of Default, the Controlling Class generally will be entitled to
determine the remedies to be exercised under the Indenture, subject to the constraints described in “—
Controlling Class May Not Be Able to Effect a Liquidation of the Collateral in an Event of Default.” The
Supersenior Swap Counterparty will be deemed to be the Controlling Class until the Supersenior Swap is
terminated. For the avoidance of doubt, all references to “Notes” in connection with the Controlling Class,
“Notes Outstanding” in connection with the Controlling Class, “Holders of Notes” of the Controlling Class
or in connection with the Controlling Class, etc., will be deemed to be references to the Supersenior Swap
Counterparty as the Controlling Class until the Supersenior Swap is terminated, as applicable and to the
extent the context requires. Following the termination of the Supersenior Swap, Holders of the Class II
Notes will be the Controlling Class so long as any Class II Notes remain Outstanding. Thereafter, the
Holders of the Class III Notes will be the Controlling Class for so long as any Class III Notes remain
Outstanding and thereafter, the Holders of the Class IV Notes will be the Controlling Class for as long as any
Class IV Notes remain Outstanding and thereafter, the Holders of the Class V Notes will be the Controlling
Class for as long as any Class V Notes remain Outstanding and thereafter, the Holders of the Class VI Notes
will be the Controlling Class for as long as any Class VI Notes remain Outstanding and thereafter, the
Holders of the Class VII Notes will be the Controlling Class for as long as any Class VII Notes remain
Outstanding and thereafter, the Holders of the Subordinated Notes will be the Controlling Class for as long
as any Subordinated Notes remain Outstanding. Remedies pursued by any Class of Notes could be adverse
to the interests of the Holders of the other Classes of Notes. There is no guarantee or assurance that,
following any liquidation of the Collateral and the application of the proceeds thereof, any funds will remain
to make any distributions to the Holders of the Subordinated Notes (or the Rated Notes, this risk being borne
in inverse order of seniority). See “Description of the Notes—Events of Default.”
The Issuer will have only nominal equity capitalization in the form of its Ordinary Shares and the
Co-Issuer will have only nominal equity capitalization in the form of its common equity of U.S.$100. To the
extent that any elimination, deferral or reduction in payments on the Notes occurs, such elimination, deferral
or reduction will be borne (i) first, by the Holders of the Subordinated Notes, (ii) second, by the Holders of
the Class VII Notes, (iii) third, by the Holders of the Class VI Notes, (iv) fourth, by the Holders of the Class
V Notes, (v) fifth, by the Holders of the Class IV Notes, (vi) sixth, by the Holders of the Class III Notes and
seventh, by the Holders of the Class II Notes. Thus, the greatest risk of loss relating to defaults on the
Collateral Assets is borne by the Holders of the Subordinated Notes.
To the extent that a default occurs with respect to any Collateral Asset and the Trustee sells, terminates
or otherwise disposes of such Collateral Asset, it is not likely that the proceeds of such sale or other
disposition will be equal to the unpaid principal and interest on such Collateral Asset. In particular, if a
Credit Event occurs in respect of a CDS Asset, the proceeds of a sale of the Deliverable Obligation delivered
by the CDS Counterparty to the Issuer (if the CDS Counterparty elects physical settlement) if it were to be
liquidated are likely to be less than the Principal Balance of the CDS Asset. In addition, if an early
termination occurs in respect of a CDS Asset, a CDS Issuer Termination Payment may be payable by the
Issuer to the related CDS Counterparty in accordance with the Priority of Payments.
The application of Collateral Principal Collections to make a distribution on the Subordinated Notes
will also be subject to the payment of any termination payment or partial termination payment required to be
made in accordance with the terms of any Hedge Agreements in accordance with the Priority of Payments on
any Payment Date. Any Hedge Agreements entered into by the Issuer following the Closing Date may
provide that such Hedge Agreements will be subject to full or partial termination following the payment in
full of the Rated Notes on any Payment Date. To the extent that the amount of such payments are greater
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30
than assumed projections, the Holders of the Subordinated Notes (and the Holders of the Rated Notes to the
extent that such payments are senior to such Class or Classes of Rated Notes in accordance with the Priority
of Payments) could experience reductions or delays in the payments of the Notes in reverse order of
seniority.
3. Leveraged Nature of the Notes. The Notes represent leveraged investments in the Collateral
Assets and other underlying Collateral. Therefore, changes in the value of the Notes of the respective Classes
would be anticipated to be greater than the change in the value or payment performance of the underlying
Collateral Assets, which themselves are subject to credit, liquidity and interest rate risks. Utilization of
leverage is a speculative investment technique and involves certain risks to investors in the Notes, including
the risk that they may not be paid in full. The use of leverage generally magnifies an investor’s opportunities
for gain and risk of loss. In addition, the Notes represent a leveraged investment because the Collateral
Principal Balance, which includes the notional balance of the CDS Assets, will be substantially greater than
the principal amount of the Notes and any Draw made under the Supersenior Swap will reduce the likelihood
of repayment of the principal of the Notes and may reduce the returns on the Notes. As a result, the Notes
will be exposed to credit risk on assets with a Principal Balance substantially greater than the principal
amount of the Notes.
Moreover, the Subordinated Notes in particular represent a highly leveraged investment in the
Collateral. Therefore, the market value of the Subordinated Notes is anticipated to be significantly affected
by, among other things, changes in the market value of the Collateral, changes in the distributions on the
Collateral, defaults and recoveries on the Collateral, capital gains and losses on the Collateral, prepayments
on Collateral and the availability, prices and interest rates of Collateral for reinvestment and other risks
associated with the Collateral as described herein. Accordingly, the Subordinated Notes may not be paid in
full, and Holders of the Subordinated Notes may lose their entire investment. Furthermore, the leveraged
nature of the Subordinated Notes may magnify the adverse impact on the Subordinated Notes of changes in
the market value of the Collateral, changes in the distributions on the Collateral, defaults and recoveries on
the Collateral, capital gains and losses on the Collateral, prepayments on Collateral and the availability,
prices and interest rates of Collateral.
4. Controlling Class May Not Be Able to Effect a Liquidation of the Collateral in an Event of
Default. Provided that all of the CDS Assets that can be terminated have been or will be terminated and all
amounts due and payable by the Issuer thereunder have been or will be paid in full or a sufficient reserve
therefor has been established (and, in the case of any CDS Assets that cannot be terminated, the reasonable
reserve therefor has been or will be established), the Holders of at least 66⅔ percent of the outstanding
principal balance of the Notes of the Controlling Class Outstanding will be able to direct a sale or liquidation
of the Collateral only in connection with the occurrence of (A) an Event of Default that occurs as a result of
a default for five Business Days in the payment, when due and payable, of any interest on any Class II Note,
Class III Note or Class IV Note, the Supersenior Swap Commitment Fee or the Supersenior Swap Drawing
Fee, (B) an Event of Default in the payment of principal of any Rated Note when due and payable, or (C) an
Event of Default that occurs as a result of the Senior Par Value Coverage Ratio falling below 95 percent on
any date of determination (provided that, in calculating the Senior Par Value Coverage Ratio for purposes of
the Event of Default described in this clause (C), the Par Value Coverage Amount will be determined
without taking into account any of the reductions contained in the definition thereof or elsewhere in the
Indenture). Otherwise, a sale or liquidation of the Collateral in connection with an Event of Default will only
occur if (a) provided that all of the CDS Assets that can be terminated have been or will be terminated and
all amounts due and payable by the Issuer thereunder have been or will be paid in full or a sufficient reserve
therefore has been or will be established (and, in the case of any CDS Assets that cannot be terminated, the
reasonable reserve therefor has been or will be established), the Holders of at least 66⅔ percent of the
outstanding principal balance of each Class of Rated Notes Outstanding voting as separate Classes direct the
sale of the Collateral or (b) the Trustee determines that all of the CDS Assets that can be terminated have
been or will be terminated and all amounts due and payable by the Issuer thereunder have been or will be
determined and the anticipated proceeds of a sale or other liquidation of the Collateral (after deducting
reasonable expenses relating to such sale or liquidation and any termination payments to be made by the
Issuer in connection therewith) would be sufficient to discharge in full (i) the amounts then due and unpaid
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in respect of the principal of and interest on the Class II Notes, the Class III Notes, the Class IV Notes, the
Class V Notes, the Class VI Notes and the Class VII Notes (including any Defaulted Interest and the interest
thereon and any Class V Cumulative Applicable Periodic Interest Shortfall Amount, any Class VI
Cumulative Applicable Periodic Interest Shortfall Amount and any Class VII Cumulative Applicable
Periodic Interest Shortfall Amount), (ii) any amounts then required to be paid under the CDS Assets,
including any termination payments, (iii) any amounts required to be paid under any Hedge Agreements,
(iv) unpaid fees and administrative expenses including any accrued and unpaid Trustee Fee and Senior
Investment Advisory Fee and (v) without duplication of any amounts described in the foregoing clauses
(i) through (iv), all other amounts under the Transaction Documents that are, pursuant to the Priority of
Payments, payable prior to the payments of the principal of, and interest on, any Notes (without regard to
any cap or limitation on any amounts payable therein) and the Holders of a majority of the outstanding
principal balance of the Notes of the Controlling Class Outstanding agree with such determination. See
“Description of the Notes—Events of Default.”
5. Limited Liquidity and Restrictions on Transfer of the Notes. There is currently no market for
any Class of Notes being offered hereby and, as a result, a purchaser must be prepared to hold the Notes for
an indefinite period of time or until the maturity or early redemption thereof. The Notes will be owned by a
relatively small number of investors, and no assurance can be given that any secondary market for the Notes
will develop, and it may be difficult for Holders of the Notes to determine the value of the Notes at any
particular time. Holders of the Notes may find it difficult or uneconomic to liquidate their investment at any
particular time.
The Notes have not been and will not be registered under the Securities Act, under any U.S. state
securities or “Blue Sky” laws or under the securities laws of any other jurisdiction and are being issued and
sold in reliance upon exemptions from registration provided by such laws. No Notes may be sold or
transferred unless (i) such sale or transfer is exempt from the registration requirements of the Securities Act
(for example, in reliance on exemptions provided by Rule 144A, Regulation S or Section 4(2) of the
Securities Act for purchases of the Notes) and applicable state securities laws and (ii) such sale or transfer
does not cause either of the Co-Issuers to become subject to the registration requirements of the Investment
Company Act. See “Transfer Restrictions.”
6. Average Life and Prepayment Considerations. The average life of each Class of Notes is
expected to be shorter than the number of years until the Stated Maturity Date. See “Maturity and
Prepayment Considerations.”
The average life of each Class of Notes will be affected by the financial condition of the Reference
Entities, the CDS Counterparties and the obligors under or issuers of the Cash Assets, and will be affected by
the terms of the CDS Assets and by the characteristics of the Cash Assets and the Reference Obligations,
including the existence and frequency of exercise of any prepayment, optional redemption or amortization
features, the redemption price, the actual default rate and the actual level of recoveries on any Defaulted
Securities, the frequency of tender or exchange offers for the Cash Assets and the Reference Obligations,
and any sales, terminations and settlement of and reinvestment in Collateral Assets. See “Maturity and
Prepayment Considerations” and “Security for the Notes.”
7. Projections, Forecasts and Estimates. Any projections, forecasts and estimates provided to
prospective purchasers of the Notes are forward looking statements. Projections are necessarily speculative
in nature, and it can be expected that some or all of the assumptions underlying the projections will not
materialize or will vary significantly from actual results. Accordingly, the projections are only an estimate.
Actual results may vary from the projections, and the 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, market, financial or legal uncertainties, differences in
the actual allocation as between Cash Assets, Credit Linked Securities and CDS Assets from those assumed
or differences in the actual allocation among asset categories of the Cash Assets and the Reference
Obligations from those assumed, the timing of acquisitions of the Cash Assets and the Credit Linked
Securities and of entering into CDS Assets, the timing and frequency of defaults on the Cash Assets and the
Reference Obligations (or defaults by CDS Counterparties), mismatches between the timing of accrual and
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receipt of Collateral Interest Collections and Collateral Principal Collections from the Collateral Assets
(particularly during the Ramp-Up Period), Used Supersenior Swap Amounts, any default by the Supersenior
Swap Counterparty in funding Draws under the Supersenior Swap and the effectiveness of any Hedge
Agreement, among others. Consequently, no representation is made by the Issuer, the Co-Issuer, the
Investment Adviser, the Trustee, the Collateral Administrator, the Managers and the Placement Agents or
any of their respective Affiliates or any other person or entity that any particular results will actually be
achieved by the Issuer.
None of the Issuer, the Co-Issuer, the Investment Adviser, the Trustee, the Collateral Administrator, the
Managers, the Placement Agents or any of their respective Affiliates has any obligation to update or
otherwise revise any projections, including any revisions to reflect changes in economic conditions or other
circumstances arising after the date hereof or to reflect the occurrence of unanticipated events, even if the
underlying assumptions do not come to fruition.
8. Optional Redemption of Notes; Auction Call Redemption; Potential Illiquidity and Volatility
of Collateral Market Value. Two forms of potential liquidity for the Subordinated Notes are the right to
direct an Optional Redemption after the Non-Call Period and the requirement that the Trustee conduct an
Auction Call Redemption of the Rated Notes. There can be no assurance, however, that an Optional
Redemption or an Auction Call Redemption will be effected. See “Description of the Notes—Early
Redemption of the Notes” and “—Auction Call Redemption”
If any Rated Notes are Outstanding on the first Auction Date (which relates to the Payment Date in
August of 2014), then an auction of the Collateral Assets will be conducted on such Auction Date and each
Auction Date thereafter by the Trustee (at the expense of the Issuer and with the assistance of the Investment
Adviser on behalf of the Issuer) and provided that certain conditions are satisfied, including that sufficient
proceeds are generated to pay the Total Redemption Amount and the Auction Redemption Targeted Internal
Rate of Return to the Subordinated Notes, no later than five Business Days immediately preceding the
Payment Date immediately following the Auction Date, the Collateral Assets will be sold or terminated, the
Notes will be redeemed in whole but not in part, and the Available Supersenior Swap Amount will be
reduced to zero and the Supersenior Swap terminated. If such conditions are not satisfied and the auction is
not conducted successfully on such Auction Date, (i) the Trustee will conduct auctions on each Auction Date
thereafter until no Rated Notes are Outstanding and (ii) Collateral Interest Collections that would otherwise
have been paid to the Holders of the Subordinated Notes will instead be used in accordance with the Priority
of Payments to first, pay any outstanding Used Supersenior Swap Amount, second, pay the principal of the
Class VII Notes, third, pay the principal of the Class VI Notes, fourth, pay the principal of the Class V
Notes, fifth, pay the principal of the Class IV Notes, sixth, pay the principal of the Class III Notes, seventh,
pay the principal of the Class II Notes and eighth, make a deposit to the Class I Reserve Account to reduce
the Available Supersenior Swap Amount to zero, in accordance with the Priority of Payments. See
“Description of the Notes—Auction Call Redemption.”
An Optional Redemption or an Auction Call Redemption will affect the average life of the Notes and
may reduce the yield to maturity of the Notes. A failure of an auction will divert payments away from the
Subordinated Notes to pay principal of the more senior Classes. See “Description of the Notes—Auction
Call Redemption.”
A Redemption or an Auction Call Redemption would result in a liquidation and sale or termination of
the Collateral Assets into then-existing markets. The market value of the Collateral Assets will generally
fluctuate with, among other things, changes in prevailing interest rates, general economic conditions, the
condition of certain financial markets, U.S. and international political events, developments or trends in any
particular industry and the financial condition of the Reference Entities, the CDS Counterparties, and the
obligors under or issuers of the Cash Assets. A decrease in the market value of the Collateral Assets would
adversely affect the Sale Proceeds that could be obtained upon the sale or termination of the Collateral
Assets and ultimately the ability of the Issuer to pay in full or redeem the Notes following any sale,
termination or other disposition of the Collateral. A Redemption or a successful Auction Call Redemption
could require the Investment Adviser, on behalf of the Issuer, to liquidate positions more rapidly than would
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otherwise be desirable which could adversely affect the Sale Proceeds obtained and could cause termination
payments to be payable by the Issuer.
In the case of the Class P Notes, on any Redemption Date or the Accelerated Payment Date, the Trustee
will disburse (solely from the Class P Treasury Strip Component Account) to the Holders of the Class P
Notes, pro rata, based on their respective portions of the Class P Notes, the redemption price of the Class P
Treasury Strip Collateral as a distribution in kind of each item in the Class P Treasury Strip Component
Account.
9. Principal Prepayment of Rated Notes Upon Coverage Test Failure. If either the Senior Interest
Coverage Test or Senior Par Value Coverage Test is not satisfied on the Calculation Date prior to a Payment
Date, amounts that otherwise would have been paid to the Holders of the Class V Notes, the Class VI Notes,
the Class VII Notes or the Subordinated Notes will be applied to pay any outstanding Used Supersenior
Swap Amount, then to reduce the Available Supersenior Swap Amount to zero (by deposit to the Class I
Reserve Account) and then to pay the outstanding principal of the Class II Notes, and then the Class III
Notes and then the Class IV Notes, in each case, to the extent necessary to restore the applicable Senior
Coverage Test to the minimum required level or until each such Class is paid in full, if earlier. In addition, if
either of the Senior Interest Coverage Test or the Senior Par Value Coverage Test remains unsatisfied after
such application of Available Funds, the Synthetic Notional Proceeds that otherwise would have been
available for reinvestment in additional CDS Assets pursuant to the Synthetic Applications Sequence will be
applied to reduce the Available Supersenior Swap Amount to the extent necessary to restore the applicable
Senior Coverage Test to the minimum required level or until the Available Supersenior Swap Amount is
reduced to zero, if earlier.
If either the Class V Interest Coverage Test or Class V Par Value Coverage Test is not satisfied on the
Calculation Date immediately preceding a Payment Date, amounts that otherwise would have been paid to
the Holders of the Class VI Notes, the Class VII Notes and the Subordinated Notes will be applied to pay
any outstanding Used Supersenior Swap Amount, then to reduce the Available Supersenior Swap Amount to
zero (by deposit to the Class I Reserve Account) and then to pay the outstanding principal of the Class II
Notes, the Class III Notes, the Class IV Notes and the Class V Notes (including for the avoidance of doubt
any Class V Cumulative Applicable Periodic Interest Shortfall Amount), in each case, to the extent
necessary to restore the applicable Class V Coverage Test to the minimum required level or until each such
Class is paid in full, if earlier. In addition, if either of the Class V Interest Coverage Test or the Class V Par
Value Coverage Test remains unsatisfied after such application of Available Funds, the Synthetic Notional
Proceeds that otherwise would have been available for reinvestment in additional CDS Assets pursuant to
the Synthetic Applications Sequence will be applied to reduce the Available Supersenior Swap Amount to
the extent necessary to restore the applicable Class V Coverage Test to the minimum required level or until
the Available Supersenior Swap Amount is reduced to zero, if earlier.
If either the Class VI Interest Coverage Test or Class VI Par Value Coverage Test is not satisfied on the
Calculation Date immediately preceding a Payment Date, amounts that otherwise would have been paid to
the Holders of the Class VII Notes and the Subordinated Notes will be applied to pay any outstanding Used
Supersenior Swap Amount, then to reduce the Available Supersenior Swap Amount to zero (by deposit to
the Class I Reserve Account) and then to pay the outstanding principal of the Class II Notes, the Class III
Notes, the Class IV Notes, the Class V Notes (including for the avoidance of doubt any Class V Cumulative
Applicable Periodic Interest Shortfall Amount) and the Class VI Notes (including for the avoidance of doubt
any Class VI Cumulative Applicable Periodic Interest Shortfall Amount), in each case, to the extent
necessary to restore the applicable Class VI Coverage Test to the minimum required level or until each such
Class is paid in full, if earlier. In addition, if either of the Class VI Interest Coverage Test or the Class VI Par
Value Coverage Test remains unsatisfied after such application of Available Funds, the Synthetic Notional
Proceeds that otherwise would have been available for reinvestment in additional CDS Assets pursuant to
the Synthetic Applications Sequence will be applied to reduce the Available Supersenior Swap Amount to
the extent necessary to restore the applicable Class VI Coverage Test to the minimum required level or until
the Available Supersenior Swap Amount is reduced to zero, if earlier.
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If the Class VII Interest Diversion Test is not satisfied on the Calculation Date immediately preceding a
Payment Date, amounts that otherwise would have been paid to the Holders of the Class VI Notes and the
Subordinated Notes will be applied to redeem Class VII Notes to the extent necessary to restore the Class
VII Interest Diversion Test to the minimum required level or until the Class VII Notes are redeemed in full,
if earlier.
This deleveraging could result in an elimination, deferral or reduction in the amounts available to make
interest payments or principal repayments to the Holders of the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes, the Class VI Notes and the Class VII Notes and distributions to Holders
of the Subordinated Notes. In addition in these circumstances, the amount of any Synthetic Notional
Proceeds or Cash that otherwise could be reinvested will be instead applied to reduce the Available
Supersenior Swap Amount which could have an adverse effect on the yield and returns to Holders of the
Notes. See “Security for the Notes—The Coverage Tests.”
10. Principal Prepayment of Class VI Notes and Class VII Notes, Respectively, From Amounts
Otherwise Distributable to Subordinated Notes. On any Payment Date from and including the Initial
Payment Date through and including the Payment Date occurring in August of 2011, if the Subordinated
Notes receive a Cash-on-Cash Return of 12 percent on such Payment Date, Collateral Interest Collections in
a pro rata amount equal to the lesser of (1) all amounts remaining and (2) U.S.$180,000 for the Class VI
Notes and an amount equal to the lesser of (1) all amounts remaining and (2) U.S.$37,500 for the Class VII
Notes will be applied to pay principal of the Class VI Notes and Class VII Notes, respectively, in accordance
with the Priority of Payments for Collateral Interest Collections. See “Description of the Notes—Priority of
Payments—Collateral Interest Collections.”
11. Mandatory Amortization of Rated Notes Upon Rating Confirmation Failure. The Investment
Adviser’s ability to acquire or enter into assets, on behalf of the Issuer, during the Ramp-Up Period that will
satisfy the Coverage Tests, the Collateral Quality Tests and the Portfolio Percentage Limitations as of the
Effective Date will depend on a number of factors beyond the Investment Adviser’s control, including the
condition of certain financial markets, the ability of the Issuer to enter into CDS Assets, general economic
conditions and U.S. and international political events, and thus there can be no assurance that such targets
will be met. Within eight Business Days following the Effective Date, the Co-Issuers will request each
Rating Agency rating the Rated Notes to confirm each of the ratings it assigned to such Class of Rated Notes
on the Closing Date. There can be no assurance that a Rating Agency will confirm the initial rating it
assigned to a Class of Rated Notes.
If a Rating Confirmation Failure occurs, the Issuer will be obligated, on the next and succeeding
Payment Dates, to pay principal, to the extent of Available Funds and in accordance with the Priority of
Payments to pay any outstanding Used Supersenior Swap Amount, then to reduce the Available Supersenior
Swap Amount to zero (by deposit to the Class I Reserve Account), and then to pay the outstanding principal
of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and the
Class VII Notes, sequentially in order of seniority and then to apply Synthetic Notional Proceeds in
accordance with the Synthetic Applications Sequence to reduce the Available Supersenior Swap Amount to
zero, in each case in the amounts necessary for each of S&P and Moody’s to confirm their respective ratings
of such Rated Notes assigned on the Closing Date or, if earlier, until the outstanding principal balance of
each Class of Rated Notes and the Available Supersenior Swap Amount are reduced to zero. Therefore, the
occurrence of a Rating Confirmation Failure may result in an early repayment of the Rated Notes, but there
can be no assurance that Collateral Interest Collections and Collateral Principal Collections will be sufficient
to pay principal of the Rated Notes, or that sufficient Synthetic Notional Proceeds will be available to reduce
the Available Supersenior Swap Amount, so that the initial ratings of the Rated Notes can be confirmed.
This application of Available Funds and Synthetic Notional Proceeds could result in an elimination, deferral
or reduction of amounts available for payment to the Holders of the junior classes of Notes, and by
decreasing leverage, could adversely impact the returns on the Subordinated Notes. In addition, the
occurrence of a Rating Confirmation Failure (whether or not Rating Confirmation is ultimately
obtained) may adversely impact the price at which the Holders of the Notes will be able to sell their Notes.
The Holders of the Rated Notes also may not be able to invest the principal paid due to a Rating
Confirmation Failure in one or more investments providing a return equal to or greater than the return the
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Holders of the Rated Notes expected to obtain from their investment in the Rated Notes which could
adversely impact the returns to the Holders of the Rated Notes.
12. Special Amortization of Rated Notes. If the Investment Adviser elects, in its sole discretion, to
declare a Special Amortization of the Rated Notes sequentially in order of seniority on one or more Payment
Dates because the Investment Adviser has been unable, for a period of at least 30 consecutive days, to
identify Collateral Assets that would meet the Reinvestment Criteria in sufficient amounts to permit the
reinvestment of, as applicable, all or a portion of (x) the Collateral Principal Collections then deposited in
the Collection Account or (y) Synthetic Notional Proceeds available for reinvestment in accordance with the
Synthetic Applications Sequence on the preceding Payment Date or arising thereafter in additional Collateral
Assets, the application of Collateral Principal Collections and Synthetic Notional Proceeds in such manner
will shorten the average lives of the Rated Notes and could result in an elimination, deferral or reduction of
amounts available to make payments on the junior classes of Notes and, by decreasing leverage, could
adversely impact the returns to the Subordinated Notes. The Holders of the Rated Notes also may not be able
to invest the principal paid due to a Special Amortization in one or more investments providing a return
equal to or greater than the return the Holders of the Rated Notes expected to obtain from their investment in
the Rated Notes which could adversely impact the returns to the Holders of the Rated Notes.
13. Nature of the Collateral Assets; Credit and Liquidity Risks. The Collateral is subject to various
types of risks including, but not limited to, credit and liquidity risks. The Collateral Assets pledged to secure
the Notes will be Structured Finance Securities (including RMBS Securities, CMBS Securities and ABS
Securities (including CDO Securities)) and REIT Debt Securities and Synthetic Assets referencing such
types of securities, all as described herein. To the extent that a default occurs with respect to any Cash Asset
or Synthetic Asset or a default or other adverse event occurs with respect to any Reference Obligation or any
CDS Counterparty and the Investment Adviser directs the Trustee to sell, terminate or otherwise dispose of
the related Collateral Asset, it is not likely that the proceeds of such sale or other disposition will be equal to
the unpaid principal and interest on the Cash Asset or Reference Obligation, as the case may be and/or, in
the case of CDS Assets, the Issuer may have been required to use assets to make payments to CDS
Counterparties. This is often referred to as credit risk. The actual default rates of the Cash Assets or
Synthetic Assets or of Reference Obligations may exceed any hypothetical default rates assumed by
investors in determining whether to purchase the Notes. An increased perception of defaults and potential
defaults among investors may reduce the demand for securities such as the Cash Assets or Reference
Obligations, or for instruments such as the Synthetic Assets, any of which could have a material adverse
effect on the ability to sell or terminate any Collateral Assets. This is referred to as liquidity risk. The market
value of the Collateral Assets may fluctuate from time to time and none of the Issuer, the Co-Issuer, the
Trustee, the Investment Adviser, the Managers or the Placement Agents or any of their respective Affiliates
is under any obligation to maintain the market value of the Collateral Assets at any particular level. None of
the Issuer, the Co-Issuer, the Trustee, the Investment Adviser, the Managers, the Placement Agents, the
Supersenior Swap Counterparty or any of their respective Affiliates has at any time any liability to the
Holders of the Notes as to the amount or value of, or any decrease in the value of, the Collateral Assets from
time to time.
Certain of the Cash Assets and Reference Obligations (or of the assets providing all or a part of the
source of payments on such Cash Assets or Reference Obligations) may consist of consumer loans, and such
loans and/or the originators of such loans may be subject to special rules, disclosure and licensing
requirements, predatory lending legislation and other provisions of federal, state and local consumer
protection laws, including, among others, the federal Truth-in-Lending Act, Regulation Z, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act and related statutes. Failure to comply with these federal, state or local consumer protection
laws and related statutes could subject lenders to specific statutory liabilities. In some cases, this liability
may affect the subsequent assignees of such obligations, including the obligor or the issuer of such Cash
Assets or Reference Obligations. In particular, a lender’s failure to comply with the federal Truth-in-Lending
Act could subject such lender and its assignees to monetary penalties and could result in rescission.
Numerous class action lawsuits have been filed in multiple states alleging violations of these statutes and
seeking damages, rescission and other remedies. These suits have named the originators and certain holders,
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including the issuers, of related asset-backed securities. If any issuer of a Cash Asset or Reference
Obligation were to be named as a defendant in a class action lawsuit, the costs of defending or settling such
lawsuit or a judgment could reduce the amount available for distribution on the related Cash Assets or
Reference Obligations, and, in the latter case, could result in a payment obligation of the Issuer under a
related Synthetic Asset.
Although the Issuer intends to invest primarily in Structured Finance Securities and REIT Debt
Securities, and to do so primarily in the form of CDS Assets referencing such types of securities, the Issuer
may find that, as a practical matter, these investment opportunities are not available to it for a variety of
reasons such as the limitations imposed by the Reinvestment Criteria. For instance, at any time there may be
a limited universe of investments that would satisfy the Reinvestment Criteria given the Collateral Assets
then held by the Issuer. As a result, the Issuer may at times find it difficult to purchase suitable investments.
If the Issuer is unable to purchase or enter into sufficient suitable Collateral Assets before the Effective Date
a Rating Confirmation Failure may occur, and thereafter the Coverage Tests may not be satisfied, which may
result in principal of all or a portion of the Rated Notes being repaid on each Payment Date during the
continuation of any such failure and in the permanent reduction of the Available Supersenior Swap Amount
by the deposit of amounts to the Class I Reserve Account and by the amount of any Synthetic Notional
Proceeds arising during the continuation of any such failure.
The ability of the Issuer to sell or terminate Collateral Assets is subject to certain restrictions under the
Indenture including those described herein under “Security for the Notes—Substitute Collateral Assets and
Reinvestment Criteria.”
Structured Finance Securities. Structured Finance Securities are generally debt securities that entitle
the holders thereof to receive payments of interest and principal that depend primarily on the cash flow from
or sale proceeds of a specified pool of assets, either fixed or revolving, that by their terms convert into Cash
within a finite time period, together with rights or other assets designed to assure the servicing or timely
distribution of proceeds to holders of such securities. Each Structured Finance Security that is included in the
Collateral Assets or that is a Reference Obligation underlying a Synthetic Asset must be of a Specified Type.
See “Security for the Notes— Structured Finance Securities.”
Exposure to Structured Finance Securities entails various risks: credit risks, liquidity risks, prepayment
risks, interest rate risks, market risks, operations risks, structural risks, geographical concentration risks,
basis risks and legal risks. Structured Finance Securities are subject to the significant credit risks inherent in
the underlying collateral and to the risk that the servicer fails to perform. Accordingly, such securities
generally include one or more credit enhancements, which are designed to raise the overall credit quality of
the security above that of the underlying collateral. Structured Finance Securities are subject to risks
associated with their structure and execution, including the process by which principal and interest payments
are allocated and distributed to investors, how credit losses affect the issuing vehicle and the return to
investors in such Structured Finance Securities, whether the collateral represents a fixed set of specific assets
or accounts, whether the underlying collateral assets are revolving or closed-end, under what terms
(including maturity of the structured finance instrument) any remaining balance in the accounts may revert
to the issuing entity and the extent to which the entity that is the actual source of the collateral assets is
obligated to provide support to the issuing vehicle or to the investors in such Structured Finance Securities.
In addition, concentrations of Structured Finance Securities of a particular type, as well as concentrations of
Structured Finance Securities issued or guaranteed by affiliated obligors, serviced by the same servicer or
backed by underlying collateral located in a specific geographic region, may subject the Structured Finance
Securities to additional risk.
A significant portion of the Collateral Assets will consist of Structured Finance Securities, or Synthetic
Assets referencing Structured Finance Securities, that are subordinate in right of payment and rank junior to
other securities that are secured by or represent an ownership interest in the same pool of assets. In addition,
many of the related transactions have structural features that divert payments of interest and/or principal to
more senior classes when the delinquency or loss experience of the pool exceeds certain levels. As a result,
such securities have a higher risk of loss as a result of delinquencies or losses on the underlying assets. In
certain circumstances, payments of interest may be reduced or eliminated for one or more payment dates.
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Additionally, as a result of cash flow being diverted to payments of principal of more senior classes, the
average life of such securities may lengthen. Subordinate Structured Finance Securities generally do not
have the right to call a default or vote on remedies following a default unless more senior securities have
been paid in full. As a result, a shortfall in payments to subordinate investors in Structured Finance
Securities will generally not result in a default being declared on the transaction nor in an acceleration or
restructuring of the obligations thereunder. Furthermore, because subordinate Structured Finance Securities
may represent a relatively small percentage of the size of an asset pool being securitized, the impact of a
relatively small loss on the overall asset pool may be substantial on the holders of such subordinate security.
See “Security for the Notes—Structured Finance Securities.”
RMBS Securities are securities backed by ownership of, or participation interests in, pools of one-tofour-family residential mortgage loans that entitle the holders to receive the cash flow from such pools,
including, without limitation, Residential A Mortgage Securities, Residential B/C Mortgage Securities,
Home Equity Loan Securities, NIM Securities and Agency MBS Securities. RMBS Securities are subject to
particular risks, including prepayment risks, as they generally do not contain prepayment penalties and a
reduction in interest rates will increase the prepayments on the RMBS Securities resulting in a reduction in
yield to maturity for holders of such securities. Legal risks can arise as a result of the procedures followed in
connection with the origination of the mortgage loans or the servicing thereof which may be subject to
various federal and state laws (including, without limitation, predatory lending laws), public policies and
principles of equity regulating interest rates and other charges, require certain disclosures, require licensing
of originators, prohibit discriminatory lending practices, regulate the use of consumer credit information and
debt collection practices and may limit the servicer’s ability to collect all or part of the principal of or
interest on a residential mortgage loan, entitle the borrower to a refund of amounts previously paid by it or
subject the servicer to damages and sanctions. Specifically, provisions of federal predatory lending laws,
such as the federal Truth-in-Lending Act (as supplemented by the Home Ownership and Equity Protection
Act of 1994) and Regulation Z, and various state predatory lending laws provide that a purchaser or assignee
of specified types of residential mortgage loans (including an issuer of RMBS Securities) may be held liable
for violations by the originator of such mortgage loans. Under such assignee liability provisions, a borrower
is generally given the right to assert against a purchaser of its mortgage loan any affirmative claims and
defenses to payment such borrower could assert against the originator of the loan or, where applicable, the
home improvement contractor that arranged the loan. Liability under such assignee liability provisions
could, therefore, result in a disruption of cash flows allocated to the holders of RMBS Securities where
either the issuer of such RMBS Securities is liable in damages or is unable to enforce payment by the
borrower. In most but not all cases, the amount recoverable against a purchaser or assignee under such
assignee liability provisions is limited to amounts previously paid and still owed by the borrower. Moreover,
sellers of residential mortgage loans to an issuer of RMBS Securities typically represent that the loans have
been originated in accordance with all applicable laws and in the event such representation is breached, the
seller typically must repurchase the offending loan. Notwithstanding these protections, an issuer of RMBS
Securities may be exposed to an unquantifiable amount of potential assignee liability because, first, the
amount of potential assignee liability under certain predatory lending laws is unclear and has yet to be
litigated, and, second, in the event a predatory lending law does not prohibit class action lawsuits, it is
possible that an issuer of RMBS Securities could be liable in damages for more than the original principal
amount of the offending loans held by it and must then seek contribution from other parties, who may no
longer exist or have adequate funds available.
CMBS Securities are generally securities backed by obligations (including certificates of participation
in obligations) that are principally secured by mortgages on real property or interests therein having a
multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or
warehouse properties, hotels, nursing homes and senior living centers and may include, without limitation,
CRE CDO Securities, CMBS Conduit Securities, CMBS Credit Tenant Lease Securities and CMBS Large
Loan Securities. CMBS Securities are subject to particular risks, including lack of standardized terms,
shorter maturities than residential mortgage loans and payment of all or substantially all of the principal only
at maturity rather than regular amortization of principal. Additional risks may be presented by the type and
use of a particular commercial property. Special risks are presented by hospitals, nursing homes, hospitality
properties and certain other property types. Commercial property values and net operating income are
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subject to volatility, which may result in net operating income becoming insufficient to cover debt service on
the related mortgage loan. The repayment of loans secured by income-producing properties is typically
dependent upon the successful operation of the related real estate project rather than upon the liquidation
value of the underlying real estate. Furthermore, the net operating income from and value of any commercial
property is subject to various risks, including changes in general or local economic conditions and/or specific
industry segments; declines in real estate values; declines in rental or occupancy rates; increases in interest
rates, real estate tax rates and other operating expenses; changes in governmental rules, regulations and fiscal
policies; acts of God; terrorist threats and attacks and social unrest and civil disturbances. The exercise of
remedies and successful realization of liquidation proceeds relating to CMBS Securities may be highly
dependent on the performance of the servicer or special servicer. There may be a limited number of special
servicers available, particularly those that do not have conflicts of interest.
ABS Securities are generally securities (other than RMBS Securities or CMBS Securities) backed by
consumer receivables, commercial receivables or securities and may include, without limitation, Automobile
Lease Securities, Automobile Loan Securities, CDO Securities, Credit Card Securities and Other ABS
Securities. The structure of an ABS Security and the terms of the investors’ interest in the collateral can vary
widely depending on the type of collateral, the desires of investors and the use of credit enhancements.
Although the basic elements of all ABS Securities are similar, individual transactions can differ markedly in
both structure and execution. Important determinants of the risks associated with holding ABS Securities
include the relative seniority or subordination of the class of ABS Securities, the relative allocation of
principal and interest payments in the priorities by which such payments are made under the governing
documents, how credit losses affect the issuing vehicle and the return to investors, whether collateral
represents a fixed set of specific assets or accounts, whether the underlying collateral assets are revolving or
closed-end, under what terms (including maturity of the asset-backed instrument) any remaining balance in
the accounts may revert to the issuing company and the extent to which the company that is the actual source
of the collateral assets is obligated to provide support to the issuing vehicle or to the investors. In addition,
certain ABS Securities (particularly subordinated ABS Securities) provide that the non-payment of interest
in Cash on such securities will not constitute an event of default in certain circumstances and the holders of
such securities will not have available to them any associated default remedies. Interest not paid in Cash will
often be capitalized and added to the outstanding principal balance of the related security. Any such deferral
will reduce the yield on such ABS Securities. ABS Securities also may include CDO Securities.
CDO Securities are limited recourse obligations of the issuer thereof payable solely from the underlying
securities owned by the issuer or proceeds thereof. Consequently, holders of CDO Securities must rely solely
on distributions on the collateral underlying such CDO Securities or the proceeds thereof for payment. Such
assets may consist of investment grade debt securities, high yield debt securities, loans, structured finance
securities, synthetic securities and other debt instruments. Investments in assets through the purchase of
synthetic securities present risks in addition to those resulting from direct purchases of those assets because
the buyer of such synthetic security usually will have a contractual relationship only with the synthetic
security counterparty and not the obligor on the reference obligation of such synthetic security. The buyer of
a synthetic security will not benefit from any collateral supporting the reference obligation of such synthetic
security, will not have any remedies that would normally be available to the holder of such reference
obligation and will be subject to the credit risk of the synthetic security counterparty as well as the obligor
on such reference obligation. High yield debt securities are generally unsecured (and loans may be
unsecured) and may be subordinated to certain other obligations of the issuer thereof. The lower rating of
high yield securities and below-investment grade loans reflects a greater possibility that adverse changes in
the financial condition of an issuer or in general economic conditions or both may impair the ability of the
issuer to make payments of principal or interest. Such investments may be speculative. As a result of
increases in the default rates, there would be a decrease in the amount of credit support available for CDO
Securities backed by such corporate debt securities and loans since the issue date thereof. See “—Default
Rates of Collateral Assets.” Diminished credit support as a result of increases in the default rates of and
rating downgrades reported on corporate debt securities or loans could increase the likelihood that payments
may not be made to holders of CDO Securities that are secured by corporate debt securities and loans.
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REIT Debt Securities. REIT Debt Securities are generally unsecured debt obligations issued by
publicly held real estate investment trusts. Risks of REIT Debt Securities may include (among others):
(i) limited liquidity and limited secondary market support, (ii) substantial market price volatility resulting
from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior
lenders, (iv) the operation of optional redemption or amortization provisions during periods of declining
interest rates, (v) the possibility that income of the issuer of the REIT Debt Security may be insufficient to
meet its debt service and (vi) the declining creditworthiness and potential for insolvency of the issuer of the
REIT Debt Security during periods of rising interest rates and economic downturn. An economic downturn
or an increase in interest rates could severely disrupt the market for REIT Debt Securities and adversely
affect the value of outstanding REIT Debt Securities and the ability of the issuers thereof to repay principal
and interest. Real estate investment trusts generally are permitted to invest solely in real estate or real estaterelated assets and the financial performance of any REIT Debt Security may be affected by the risks
described above with respect to commercial mortgage loans and commercial real estate related securities and
similar risks, including (i) risks of delinquency and foreclosure on real properties, the cash flow on which is
used to support payments on such REIT Debt Security, and risks of loss in the event thereof, (ii) risks of
change in management strategy and the execution thereof, (iii) dependence upon the successful operation of
and net income from real property, (iv) risks that may be presented by the type and use of a particular
commercial property, (v) the difficulty of converting certain property to an alternative use and
(vi) concentration of property types or geographical concentration. Issuers of REIT Debt Securities may be
highly leveraged and may not have access to many traditional methods of financing. In addition, the risk of
loss due to default by the issuer may be significantly greater for the holders of REIT Debt Securities because
such securities are unsecured. As a result of the limited liquidity of certain REIT Debt Securities, the prices
of REIT Debt Securities may experience significant and rapid decline and the Issuer may have difficulty
disposing of certain REIT Debt Securities because there may be a thin trading market for such securities.
Synthetic Assets. The Collateral Assets are expected to be predominantly in the form of Synthetic
Assets consisting of Credit Linked Securities and CDS Assets. The Reference Obligations in respect of the
Synthetic Assets will consist of debt obligations that satisfy the provisions of the definition of “Reference
Obligation” and the definition of “Collateral Assets” and the Eligibility Criteria including the proviso thereto
(other than clauses (ii), (iv), (xviii)(C), (D), (E), and (F) and (xxi) thereof). Exposure to such types of assets
as Reference Obligations under Synthetic Assets presents risks in addition to those resulting from direct
purchases of such types of assets. With respect to CDS Assets, the Issuer will have a contractual relationship
only with the CDS Counterparty, and not the Reference Entity obligated under the Reference Obligation
unless a Credit Event occurs and the CDS Counterparty delivers the Reference Obligation to the Issuer. Prior
to any such delivery, the Issuer generally will have no right directly to enforce compliance by the Reference
Entity with the terms of the Reference Obligation or any rights of set-off against the Reference Entity, nor
will the Issuer generally have any voting or other consensual rights of ownership with respect to the
Reference Obligation. Prior to any such delivery, the Issuer also will not directly benefit from any collateral
supporting the Reference Obligation and will not have the benefit of the remedies that would normally be
available to a holder of such Reference Obligation. In addition, in the event of the insolvency of the CDS
Counterparty, the Issuer will be treated as a general creditor of such counterparty, and will not have any
claim of title with respect to the Reference Obligation. Consequently, the Issuer will be subject to the credit
risk of the CDS Counterparty, as well as that of the Reference Entity. As a result, concentrations of CDS
Assets entered into with any one CDS Counterparty will subject such CDS Assets to an additional degree of
risk with respect to defaults by such CDS Counterparty. The Managers, the Placement Agents and/or one or
more of their Affiliates may act as a CDS Counterparty with respect to all or a portion of the CDS Assets,
which relationship may create not only a significant concentration risk but also certain conflicts of interest.
See “—Managers and Placement Agents’, Supersenior Swap Counterparty’s and Initial CDS Counterparty’s
Conflicts of Interest.”
14. Certain Additional Risks with respect to CDS Assets.
Credit Exposure to Reference Obligations; Required Payments by the Issuer; Volatility of
Deliverable Obligations. The CDS Assets will be structured as credit default swaps. The obligation of the
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Issuer to make payments to CDS Counterparties under the CDS Assets will create significantly leveraged
exposure to the credit of a number of Reference Entities.
In general, following the occurrence of any CDS Shortfall Event under a Reference Obligation, the
Issuer may be required to make a CDS Shortfall Payment to the CDS Counterparty. Following the
occurrence of a Credit Event in respect of the Reference Obligation, the CDS Counterparty may elect to
physically settle the related CDS Asset in whole or in part, and, if in part, may do so on multiple occasions.
In such case, the Issuer will be obligated to make a Physical Settlement Payment to the CDS Counterparty,
generally in the amount of the relevant notional amount of the CDS Asset, in exchange for delivery of the
Reference Obligation as the Deliverable Obligation, or the appropriate proportionate shares of such notional
amount and Deliverable Obligation, respectively, if physical settlement is elected in part. To the extent that
physical settlement is elected, the Issuer will no longer be required to make CDS Shortfall Payments. Certain
events constitute both a CDS Shortfall Event and a Credit Event, in which case it is at the option of the CDS
Counterparty whether CDS Shortfall Payments will be made from time to time or whether physical
settlement will be elected and, if so, whether physical settlement will be in whole or in part. Where only
CDS Shortfall Payments are made, and physical settlement is not elected, the Issuer does not receive a
Deliverable Obligation. In this circumstance, the CDS Counterparty will be entitled to elect between
continuing to receive CDS Shortfall Payments from time to time and physical settlement without
consideration of what alternative would be optimal for the Holders of the Notes. Under existing market
conditions, it is common for the aggregate notional exposure to any particular reference obligation to be
many multiples of the outstanding amount of the reference obligation, which may make it difficult or
expensive to obtain securities of the type constituting Reference Obligations for physical delivery and
accordingly may cause physical settlement to occur later or in smaller amounts than expected. In addition,
the Physical Settlement Payment to the CDS Counterparty upon the occurrence of a Credit Event is expected
to be in an amount greater than the recoveries, if any, on the Deliverable Obligation. See “Security for the
Notes—CDS Assets” and “— Additional Requirements; Settlements and Reimbursements.”
Under the CDS Assets, the Issuer will obtain funds for the purpose of making CDS Interest Payments,
CDS Loss Payments and CDS Issuer Termination Payments (other than CDS Subordinated Issuer
Termination Payments) on any Business Day from Collateral Interest Collections, Collateral Principal
Collections, funds on deposit in the Class I Reserve Account, funds on deposit in the CDS Reserve Account
and funds drawn from the Available Supersenior Swap Amount, in each case, as and to the extent required in
accordance with the CDS Payment Priority.
CDS Assets may provide for either ongoing CDS Shortfall Payments or for physical settlement by the
Issuer’s payment of the Physical Settlement Payment and the CDS Counterparty’s delivery of the Reference
Obligation as the Deliverable Obligation. If the Deliverable Obligation received with respect to a CDS Asset
does not satisfy the Eligibility Criteria (other than clauses (xvi), (xvii), (xviii)(C), (D) and (F) and
(xxi) through (xxvi) thereof), such security will not be considered a Collateral Asset and will be deemed to
have a Principal Balance of zero for all purposes.
The credit and market risks inherent in ownership of any debt security are likely to be heightened in the
case of the Deliverable Obligations, because the Reference Entity is likely to be in default under the
Deliverable Obligation at the time that it is delivered to the Issuer in settlement of a CDS Asset, and the
Reference Entity may be insolvent at such time. In either case, the Deliverable Obligation Sale Proceeds that
the Issuer would receive upon sale of the Deliverable Obligation as a result are expected to be less, and the
time period required for the Issuer to sell the Deliverable Obligation is expected to be longer, than if the
Reference Entity were not in default or insolvent. A decrease in the market value of the Deliverable
Obligations would adversely affect the Deliverable Obligation Sale Proceeds that could be obtained upon the
sale of the Deliverable Obligations and ultimately the ability of the Issuer to pay in full or redeem the Notes.
As a result, the Issuer may be required to sell a Deliverable Obligation under adverse market conditions
and the proceeds of such sale, if any, may be lower than if such requirement did not exist.
Limited Provision of Information about Reference Obligations. Although the Noteholders will have
the right to obtain from the Trustee a list of the Reference Obligations, the Noteholders will not otherwise
have the right to obtain from the Issuer, the Trustee or the Investment Adviser information on the Reference
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Obligations or information regarding any obligation of any Reference Entity. The CDS Counterparties will
have no obligation to keep the Investment Adviser, the Issuer, the Trustee or the Noteholders informed as to
matters arising in relation to any Reference Obligation, including whether or not circumstances exist under
which there is a possibility of the occurrence of a Credit Event.
None of the Issuer, the Trustee, the Investment Adviser and the Noteholders will have the right to
inspect any records of the CDS Counterparties or the Reference Entities, and the CDS Counterparties will be
under no obligation to disclose any further information or evidence regarding the existence or terms of any
Reference Obligation or any matters arising in relation thereto or otherwise regarding any Reference Entity,
any guarantor or any other person, other than the obligation of a CDS Counterparty to provide publicly
available information to the Issuer of the occurrence of a Credit Event.
No Legal or Beneficial Interest in Reference Obligations. The CDS Assets do not constitute a
purchase or other acquisition or assignment of any interest in any Reference Obligation. Consequently, under
the CDS Assets, the Issuer will have a contractual relationship only with the respective CDS Counterparties,
and not with any Reference Entity, except upon delivery of a Deliverable Obligation following the
occurrence of a Credit Event. Moreover, the CDS Counterparties will not grant the Issuer or the Trustee any
security interest in any such Reference Obligation. The Issuer and the Trustee, therefore, will have rights
solely against the CDS Counterparties in accordance with the terms of the respective CDS Assets and will
have no recourse against any Reference Entities unless and until a Credit Event has occurred and a
Deliverable Obligation is delivered to the Issuer. Moreover, no Deliverable Obligation will be delivered to
the Issuer except to the extent that physical settlement is elected by the CDS Counterparty. Under the CDS
Assets, none of the Issuer, the Trustee, the Noteholders or any other entity will have any rights to acquire
from the CDS Counterparties (or to require the CDS Counterparties to transfer, assign or otherwise dispose
of) any interest in any Reference Obligation, unless and until a Credit Event has occurred and a Deliverable
Obligation is delivered to the Issuer in connection with physical settlement at the election of the applicable
CDS Counterparty.
Effect of CDS Shortfall Events and Credit Events on Performance of the Notes. Under the CDS
Assets, the Issuer will have credit exposure to a portfolio of entities, each of which are organized under the
laws of the United States or an Eligible SPV Jurisdiction or is a Qualifying Foreign Obligor. The initial
required level of collateral assumed to be securing the Notes has been established by the Rating Agencies
based on assumed levels of (i) occurrences of CDS Shortfall Events and Credit Events on the CDS Assets,
(ii) CDS Shortfall Payments and Physical Settlement Payments required to be made as a result of such
events, and (iii) recoveries on Deliverable Obligations. There can be no assurance that such levels will be
proved to be correct. Payments on the Notes will be adversely affected by the occurrence of CDS Shortfall
Events and Credit Events even if the assumptions used in rating the Rated Notes prove to be correct. To the
extent that a Credit Event occurs with respect to any CDS Asset and the Investment Adviser, on behalf of the
Issuer, sells or otherwise disposes of any Deliverable Obligation in accordance with the provisions of the
Indenture, it is unlikely that the proceeds of such sale or disposition will be equal to the Principal Balance of
the CDS Asset. If the CDS Counterparty does not elect to require physical settlement and only CDS
Shortfall Payments are made, the Issuer will not receive any Deliverable Obligation. In addition, if (a) the
CDS Shortfall Events or Credit Events in respect of the CDS Assets exceed such assumed levels or occur
earlier than assumed, (b) CDS Shortfall Payments and Physical Settlement Payments exceed assumed levels
or occur earlier than assumed, (c) recoveries on Deliverable Obligations fall below the assumed levels, or
(d) the time required for the Investment Adviser to sell the Deliverable Obligation exceeds the assumed
liquidation period, payment of the Notes would be adversely affected. None of the Issuer, the Co-Issuer, the
Trustee, the Investment Adviser, the Managers, the Placement Agents or any of their respective Affiliates
makes any representation that the relevant assumptions used are reasonable. Moreover, the Reference
Entities will include obligors located in countries other than the United States. The recoveries on Deliverable
Obligations of Reference Entities that are Qualifying Foreign Obligors may be less than the recoveries
experienced on Deliverable Obligations of Reference Entities in the United States, and there is less data
available on which to base assumptions regarding the default and recovery rates on Deliverable Obligations
with Reference Entities located outside the United States. Prospective purchasers of the Notes should
consider and determine for themselves the likely levels of CDS Shortfall Events and Credit Events, CDS
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Shortfall Payments, Physical Settlement Payments, and recoveries on Deliverable Obligations during the
term of the Notes.
The concentration of the portfolio of CDS Assets in any one industry or geographic region will subject
the Notes to a greater degree of risk of loss resulting from defaults within such industry or geographic
region. See “Security for the Notes—CDS Assets.”
Payments to CDS Counterparties May Result in Insufficient Funds for the Notes. Each CDS
Shortfall Payment, CDS Loss Payment and CDS Issuer Termination Payment (other than a CDS
Subordinated Issuer Termination Payment) payable by the Issuer to a CDS Counterparty under a CDS Asset
will reduce the Available Funds of the Issuer and/or will reduce available Collateral Interest Collections and
Collateral Principal Collections and the amount in the Class I Reserve Account, the CDS Reserve Account
and/or the Available Supersenior Swap Amount (until they reach zero), and any such required payments may
cause the Issuer to fail the Coverage Tests and may reduce the amount in the Collection Account below the
level at which certain expenses of the Issuer (including certain Administrative Expenses, certain
Administrative Indemnities, the Supersenior Swap Commitment Fee, the Supersenior Swap Drawing Fee,
the Structuring Fee and the Senior Investment Advisory Fee), certain payments payable to Hedge
Counterparties, certain deposits required to be made to the Class I Reserve Account or the CDS Reserve
Account, or the full interest due on the Rated Notes can be paid, in each case, in accordance with the Priority
of Payments, in which event an Event of Default may result. The remedies available to Noteholders for an
Event of Default will be extremely limited. If there are insufficient funds in Collateral Principal Collections
(in the case of a CDS Loss Payment or CDS Issuer Termination Payment (other than a CDS Subordinated
Issuer Termination Payment)) or Collateral Interest Collections (in the case of a CDS Interest Payment), or
insufficient amount of the Class I Reserve Investments were traded at par or above or an insufficient amount
of the CDS Reserve Investments were traded at par or above for the Issuer to make a CDS Interest Payment,
CDS Loss Payment or CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment) to a CDS Counterparty, in each case when due on any Business Day prior to the Supersenior Swap
Termination Date, payment of such amount will be made by the Issuer with funds received from Draws
pursuant to the Supersenior Swap. Pursuant to the Used Supersenior Swap Amount Repayment Priority and
the Priority of Payments, the Issuer will be obligated to repay Used Supersenior Swap Amounts during and
after the Reinvestment Period, with interest thereon at the Supersenior Swap Drawing Fee Rate, prior to
making any payments of interest on or principal of the Class II Notes, the Class III Notes, the Class IV
Notes, Class V Notes, the Class VI Notes or the Class VII Notes or distributions in respect of the
Subordinated Notes except in certain limited circumstances set forth in the Priority of Payments. The Issuer
will also be obligated to make deposits to the Class I Reserve Account to reduce the Available Supersenior
Swap Amount to zero in certain circumstances described under “Description of the Notes—The Supersenior
Swap” prior to making any payments of interest on or principal of the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes, the Class VI Notes or the Class VII Notes or distributions in respect of
the Subordinated Notes except in certain limited circumstances set forth in the Priority of Payments.
Accordingly, in such circumstances, the Holders of the Class II Notes, the Class III Notes, the Class IV
Notes, the Class V Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes may suffer a
complete loss of the principal invested.
The Supersenior Swap cannot be drawn upon to pay any CDS Subordinated Issuer Termination
Payments. Instead, any such amounts will be payable, prior to the Stated Maturity Date of the Notes or their
earlier redemption, only from the Collection Account in accordance with the Priority of Payments. Such
payments made by the Issuer will reduce amounts otherwise payable to the Holders of the Subordinated
Notes. To the extent that amounts in the Collection Account are and continue to be insufficient to pay any
such amounts, any such CDS Counterparties will have no claim to payment of such amounts until the Stated
Maturity Date of the Notes, or their earlier redemption or acceleration after an Event of Default, at which
time any such CDS Counterparties will have a claim for payment of such termination payments from funds
on deposit in the Collection Account in accordance with the Priority of Payments as set forth in the
Indenture. Payments of such amounts will be made to the CDS Counterparties prior to any payments to the
Holders of the Subordinated Notes. In addition, if any Event of Default has occurred and is continuing, the
Supersenior Swap cannot be drawn to pay any Senior Interest Shortfall.
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Termination of the CDS Assets. In the circumstances specified in each CDS Asset, the Issuer or the
CDS Counterparty may terminate the CDS Asset and in some cases other CDS Assets entered into by the
CDS Counterparty and the Issuer, including events of default under such CDS Asset, or if certain payments
to be made under the CDS Asset are subject to the imposition of a withholding tax. CDS Assets may be
terminated by the CDS Counterparties if, among other things, the Issuer fails to make a payment under a
CDS Asset, and the Issuer will be likely to owe a termination payment in such case. The Issuer also may be
required to make a payment to a CDS Counterparty if the Issuer terminates a CDS Asset, including in the
circumstances where the Issuer must terminate all CDS Assets under a Master Agreement in connection with
the liquidation of the Collateral following an Event of Default under the Indenture, or in connection with a
Redemption in whole of all of the Notes or an Auction Call Redemption. As a result of such termination
payments, the Issuer may not have sufficient available funds to pay interest on all Classes of the Rated Notes
or make distributions in respect of the Subordinated Notes.
The Master Agreements that the Issuer enters into in respect of CDS Assets will provide for certain
“events of default” (as defined in the Master Agreement) to apply to the CDS Counterparty. Such events of
default in the Initial CDS Agreement are Failure to Pay or Deliver, Credit Support Default, Merger Without
Assumption and Bankruptcy (in each case as defined in the ISDA 1992 Master Agreement), and other
Master Agreements, if any, relating to CDS Assets also are expected to include such events and may include
other then-standard ISDA “events of default.” If the event of default is a Failure to Pay or Deliver, Credit
Support Default, Merger Without Assumption or Bankruptcy with respect to any CDS Counterparty, the
Issuer may designate an Early Termination Date (as defined in the Master Agreement) with respect to all
CDS Assets and will use “Market Quotation” and “Second Method” with netting between transactions, such
that the amount payable by the CDS Counterparty to the Issuer would be the net amount, if any, determined
to be payable to the Issuer in respect of all CDS Assets, and termination payments determined to be payable
by the Issuer to a CDS Counterparty as to which such CDS Counterparty is the defaulting party or sole
affected party will be payable on a subordinated basis in accordance with the Priority of Payments. Under
the Initial CDS Agreement, the above stated terms apply, and the Issuer currently expects to obtain
comparable terms in any such other Master Agreements.
Under each Master Agreement there also will be certain termination events applicable to one or both
parties which, if they occur, may give either or both parties the right to cause early termination with respect
to the CDS Assets affected by such occurrence, and either or both parties may be an affected party. Upon the
occurrence of a termination event, the Issuer or the CDS Counterparty, as applicable, may designate an Early
Termination Date. The Issuer or the CDS Counterparty, as applicable, will use “Market Quotation” and
“Second Method” with netting between transactions pursuant to which a payment will be made on a net
basis by one party to the other. Under this method of determining payments, either party under the relevant
Master Agreement may be required to make a payment to the other, such that a non-affected party may be
required to make a payment to an affected party.
Termination payments determined to be payable by the Issuer to a CDS Counterparty as to which such
CDS Counterparty is the defaulting party or sole affected party will be payable on a subordinated basis in
accordance with the Priority of Payments. The Issuer will not be permitted to Draw on the Available
Supersenior Swap Amount to pay a termination payment when such termination payment is a CDS
Subordinated Issuer Termination Payment. Each CDS Counterparty will agree that such CDS Subordinated
Issuer Termination Payments determined to be payable by the Issuer to a CDS Counterparty will be payable
on a subordinated basis pursuant to the Priority of Payments.
The ability of the Issuer to meet its obligations under the Notes will also be dependent upon the
creditworthiness of the CDS Counterparties. See “—Counterparty Risk—Downgrade or Default by
Counterparties” below.
15. Netting of Payments; Reallocation. Subject to certain exceptions described below and under “—
Subordination of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI
Notes, the Class VII Notes and the Subordinated Notes,” the Issuer intends the treatment of amounts payable
to or by the Issuer in connection with CDS Assets to be consistent, to the extent practicable, with the
treatment of such amounts arising in connection with Cash Assets, as Collateral Interest Collections or
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Collateral Principal Collections. Accordingly, with respect to payments under CDS Assets that may be
owing by either party to the other on any date (other than CDS Issuer Termination Payments and CDS
Counterparty Termination Payments), payments in respect of Interest-Related Amounts will not be netted
against payments in respect of Principal-Related Amounts or vice versa. Resulting net amounts payable to
the Issuer will be treated as Collateral Interest Collections or Collateral Principal Collections, as applicable,
and resulting amounts payable by the Issuer will be paid from the respective sources, as described herein,
from which Interest Related Amounts and Principal-Related Amounts, respectively, are permitted to be paid.
However, the treatment of CDS Issuer Termination Payments and CDS Counterparty Termination Payments
will be different from that described above, and will vary with the context in which the termination occurred.
Payments in connection with the early termination of a credit default swap transaction customarily are
determined as a single net amount owing by one party to the other. Thus, a CDS Issuer Termination Payment
or CDS Counterparty Termination Payment will be determined on the basis of a market quotation process
likely to take into account a positive or negative mark-to-market component, as well as accrued and unpaid
amounts owing by one party to the other at the time of such valuation, or expected to be due and payable on
the next payment date under the relevant CDS Asset, thereby effectively netting amounts that if payable to or
by the Issuer on a payment date under a CDS Asset, and not in connection with an early termination date,
would be treated by the Issuer as discrete Interest-Related Amounts or Principal-Related Amounts. In the
case of negotiated terminations of CDS Assets, such as would occur in connection with discretionary sales,
or full or partial reductions of the notional amount of such CDS Assets (and not in the contexts discussed
below that involve liquidation of substantially all of the Collateral or terminations where there is a defaulting
or affected party), the Investment Adviser may designate a portion of the relevant CDS Issuer Termination
Payment or CDS Counterparty Termination Payment, as applicable, as constituting an accrued Premium
Amount. Such Designated Accrued Premium will be treated as an Interest-Related Amount and the other
components of the CDS Issuer Termination Payment or CDS Counterparty Termination Payment
collectively as a Principal-Related Amount. Because a termination payment may net Designated Accrued
Premium with components treated as principal in character, it may effectively reduce the amount payable by
the Issuer from Collateral Principal Collections or received by the Issuer as Collateral Interest Collections, as
applicable. Accordingly, the Issuer will, if necessary, reallocate funds from Collateral Principal Collections
to Collateral Interest Collections, pursuant to the reallocation procedures described herein. See “Security for
the Notes—Netting of Payments; Reallocation.” This process is intended to preserve the receipt of accrued
Premium Amounts as Collateral Interest Collections; however, to the extent it may not reflect other InterestRelated Amounts factored into the determination of a termination payment, such as a CDS Interest Shortfall
or CDS Interest Reimbursement not yet due and payable at the time of termination, it may to some extent
overstate or understate the Premium Amount that would have been received had the early termination not
occurred. In addition, reallocations will not be made on Payment Dates, and to the extent the Issuer does not
have sufficient funds to make reallocations or has not made reallocations within the Due Period in which a
reallocation amount arose, any remaining portion will not be reallocated. As a result, there could be greater
amounts distributed as Collateral Interest Collections or Collateral Principal Collections, as the case may be,
than otherwise would have been the case.
In connection with any Auction Call Redemption, Optional Redemption or Tax Redemption, or the
liquidation of the Collateral following an Event of Default under the Indenture, and in connection with the
early termination of CDS Assets in connection with an event of default or termination event under the
relevant Master Agreement, the Issuer will treat CDS Issuer Termination Payments and CDS Counterparty
Termination Payments as consisting entirely of Principal-Related Amounts. In those contexts, the Issuer
does not believe there will be any adverse effect of such treatment, because the proceeds of substantially all
assets will be distributed. In the case of amounts payable to or by the Issuer in connection with early
terminations due to an event of default or termination event by either party to a Master Agreement in respect
of CDS Assets, the Issuer does not believe it practicable to allocate between Interest-Related Amounts and
Principal-Related Amounts. However, as a result, Collateral Interest Collections or Collateral Principal
Collections, as the case may be, may be less than would otherwise have been the case.
16. The Supersenior Swap Counterparty is not Obligated to Fund Senior Interest Shortfalls
under the Supersenior Swap if there is an Event of Default under the Indenture. A condition precedent
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to each Draw to cover a Senior Interest Shortfall under the Supersenior Swap is that no Event of Default has
occurred and is continuing on the date of a Draw for that purpose. If an Event of Default occurs under the
Indenture and thus the conditions to such a Draw are not satisfied, the Issuer may default in its obligation to
pay Senior Interest Shortfalls.
17. Risks with respect to Class I Reserve Investments and CDS Reserve Investments. Funds on
deposit in the Class I Reserve Account will be invested in Class I Reserve Investments and funds on deposit
in the CDS Reserve Account will be invested in CDS Reserve Investments. If a payment is owed to a CDS
Counterparty or the Issuer is required to repay Used Supersenior Swap Amounts to the Supersenior Swap
Counterparty on any Business Day, the Trustee may (in accordance with the CDS Payment Priority and/or
the Used Supersenior Swap Amount Repayment Priority) have to sell one or more Class I Reserve
Investments in the Class I Reserve Account or one or more CDS Reserve Investments in the CDS Reserve
Account, and the Issuer will not be entitled to the accrued investment earnings thereon.
In addition, on any Business Day, in order to make a CDS Loss Payment, a CDS Interest Payment or a
CDS Issuer Termination Payment (other than any CDS Subordinated Issuer Termination Payment) to the
CDS Counterparty, the Issuer will use (i) Collateral Principal Collections (in the case of a CDS Loss
Payment or a CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment)) or Collateral Interest Collections (in the case of a CDS Interest Payment) on deposit in the
Collection Account on such date, (ii) CDS Reserve Investments on deposit in the CDS Reserve Account,
(iii) Class I Reserve Investments on deposit in the Class I Reserve Account and (iv) to the extent permitted,
funds drawn under the Supersenior Swap, in each case, as and to the extent required in accordance with the
CDS Payment Priority. If the market value of a CDS Reserve Investment or a Class I Reserve Investment is
less than its par amount, the Issuer may not sell such investments to make any such CDS Payment or any
Draw Repayment Amounts, but may, in certain circumstances, at the instruction of the CDS Counterparty
deliver or transfer such investments in place of such payment. Otherwise, the Issuer will be required to Draw
under the Supersenior Swap to the extent permitted thereunder and under the CDS Payment Priority, to make
such CDS Payment. The Investment Adviser will have no right to override such a requirement and there can
be no assurance that the market value of such investments will not decline further by the time such
investments are permitted to be sold and the proceeds applied.
On or before the Business Day immediately preceding each Payment Date, the Trustee will withdraw
cash from the Class I Reserve Account and sell Class I Reserve Investments such that the amount of cash
and sale proceeds equals the Excess Class I Reserve Amount, if any, as of the related Calculation Date and
such amount will be deposited to the Collection Account as Collateral Interest Collections or Collateral
Principal Collections, as applicable; provided that, after such Excess Class I Reserve Amount is calculated
on the related Calculation Date, such Excess Class I Reserve Amount, if any, will not be available for CDS
Payments or Draw Repayment Amounts until after application of the Priority of Payments on the related
Payment Date. On or before the Business Day immediately preceding each Payment Date, the Trustee will
withdraw cash from the CDS Reserve Account and sell CDS Reserve Investments such that the amount of
cash and sale proceeds equals the Excess CDS Reserve Amount, if any, as of the related Calculation Date
and such amount will be deposited to the Collection Account as Collateral Principal Collections; provided
that, after such Excess CDS Reserve Amount is calculated on the related Calculation Date, such Excess CDS
Reserve Amount, if any, will not be available for CDS Payments or Draw Repayment Amounts until after
application of the Priority of Payments on the related Payment Date.
18. Credit Ratings. Credit ratings of debt securities represent the rating agencies’ opinions regarding
their credit quality and are 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, they
may not fully reflect the true risks of an investment. Also, 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 Investment Adviser only as preliminary indicators of investment quality (although there can be no
assurance that the Investment Adviser will be successful in its evaluation of investment quality).
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19. Relationship to Prior Investment Results. The prior investment results of the Investment Adviser
and the services associated with the Investment Adviser or any other entity or person described herein are
not indicative of the Issuer’s future investment results. The nature of, and risks associated with, the Issuer’s
future investments may differ substantially from those investments and strategies undertaken historically by
such persons and entities. There can be no assurance that the Issuer’s investments will perform as well as the
past investments of any such persons or entities. In addition, TCW may resign as the Investment Adviser
under certain circumstances. See “The Investment Advisory Agreement.”
20. Yield; Reinvestment Risk. Subject to the limits described under “Description of the Notes—
Priority of Payments” and “Security for the Notes—Substitute Collateral Assets and Reinvestment Criteria,”
Collateral Principal Collections and Sale Proceeds received on the Collateral Assets during the Reinvestment
Period will be reinvested in Substitute Collateral Assets or temporarily reinvested in Eligible Investments
pending such reinvestment in Substitute Collateral Assets in accordance with the Priority of Payments. In
any such case, there may be significant lags between the receipt of Collateral Principal Collections, Sale
Proceeds, or receipt of termination payments, as the case may be, and the reinvestment thereof in Substitute
Collateral Assets, and Eligible Investments will generally carry a lower rate of interest or yield. Similarly, if
the Principal Balance of CDS Assets is lower than the sum of the Available Supersenior Swap Amount plus
the Class I Reserve Balance, the Supersenior Swap Commitment Fees will be payable for such unutilized
capacity. The impact, including any adverse impact, of such disposal, potential reinvestment or noninvestment in Collateral Assets on the Holders of the Notes would be greatest on the Subordinated Notes due
to the leveraged nature of such Subordinated Notes. See “Security for the Notes— Substitute Collateral
Assets and Reinvestment Criteria.”
The yield to maturity of each Class of Notes will be affected by the timing of purchases and entry into
Collateral Assets during the Ramp-Up Period and the Reinvestment Period and by the rates of repayment
and amortizations of the Collateral Assets and the timing of reinvestment in Substitute Collateral Assets and
the rates available at the time of reinvestment as well as by Used Supersenior Swap Amounts outstanding
from time to time under the Supersenior Swap and the timing of any redemption of the Notes pursuant to a
Redemption or an Auction Call Redemption. The longer the period of time before reinvestment in Collateral
Assets, the greater the adverse impact may be on the aggregate interest and premiums collected, thereby
lowering yields. The yield to maturity of each Class of Notes will also be affected by rates of delinquencies
and defaults on the Collateral Assets or Reference Obligations and related liquidations or terminations of the
Collateral Assets, sales of Collateral Assets and purchases of or entry into Substitute Collateral Assets
having different scheduled payments and payment characteristics and by the effects of the Coverage Tests on
payments of principal of the Rated Notes pursuant to the Priority of Payments. The yield to Holders of the
Notes of any Class may be adversely affected to the extent that the Co-Issuers incur any significant
unexpected expenses not absorbed by Notes of another, more subordinated Class.
The earnings with respect to such Substitute Collateral Assets will depend, among other factors, on
reinvestment rates available in the marketplace at the time, on the availability of investments satisfying the
Reinvestment Criteria and acceptable to the Investment Adviser and on the ability of the Issuer to enter into
CDS Assets. The need to satisfy such Reinvestment Criteria and identify acceptable investments may require
the purchase of Substitute Collateral Assets having lower yields than those initially acquired or require that
such Collateral Principal Collections be maintained temporarily in Eligible Investments, which may reduce
the yield on the Collateral. Also, there can be no assurance that the Issuer will be able to enter into CDS
Assets with favorable terms or otherwise on the terms acceptable to the Investment Adviser or terms in
compliance with the Indenture. The Issuer’s inability to reinvest in CDS Assets could adversely impact the
returns on the Subordinated Notes and may cause the Investment Adviser to choose to declare a Special
Amortization. Furthermore, issuers of Collateral Assets may be more likely to exercise any rights they may
have to redeem such obligations when interest rates or spreads are declining. Any decrease in the yield on
the Collateral Assets will have the effect of reducing the amounts available to make payments of principal of
and interest on the Rated Notes and distributions on the Subordinated Notes.
21. Default Rates of Collateral Assets. The Issuer is not aware of a central source for relevant data or
standardized method for measuring default rates of Structured Finance Securities or REIT Debt Securities
(including synthetic securities or credit derivative transactions referencing such obligations). Furthermore,
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historical performances of these types of securities are not necessarily indicative of future performances of
such market. In certain circumstances, it is possible that investors in some Classes of Notes, particularly the
Subordinated Notes, will not recover their original investment. The credit risk associated with the Collateral
Assets will be heightened to the extent the Collateral Assets are concentrated in particular issuers, industries,
countries or regions that are adversely affected by the factors described in “—Nature of the Collateral
Assets; Credit and Liquidity Risks.” Prospective purchasers of the Notes should consider and assess for
themselves the likely level of defaults, the likely level and timing of recoveries on the Collateral Assets in
the collateral pool and the likely levels of interest rates during the term of the Notes.
22. Counterparty Risk. The CDS Assets, the Supersenior Swap and any Hedge Agreements involve
the Issuer entering into contracts with counterparties. It is contemplated that MSCS or an Affiliate thereof
will be the initial Supersenior Swap Counterparty and the Initial CDS Counterparty. Pursuant to such
contracts, the counterparties agree to make payments or provide funding, as applicable, to the Issuer as
described therein and the Issuer will be exposed to credit risk and performance of the counterparties with
respect to such payment or funding obligations. Unless the counterparty is required to collateralize its
obligations to the Issuer and has actually done so, the Issuer will be treated as a general unsecured creditor in
the event of the insolvency of the counterparty. Consequently, the performance of the Issuer is dependent not
only on the credit quality of the Collateral Assets (and in respect of the CDS Assets the credit quality of the
Reference Entities) but also on the credit quality of the counterparties to perform their obligations to the
Issuer. See “—Nature of the Collateral Assets; Credit and Liquidity Risks.”
Downgrade or Default by Counterparties. If the counterparty (or its guarantor, if any) under a CDS
Asset, the Supersenior Swap or any Hedge Agreement no longer satisfies the applicable ratings required by
each Rating Agency, a “termination event” will occur under the CDS Asset, the Supersenior Swap or Hedge
Agreement, as applicable, unless, within a specified number of days thereafter, the counterparty either
transfers its obligations thereunder to a replacement counterparty with the requisite ratings, obtains a
guarantee of its obligations by a guarantor with the requisite ratings or (if permitted at the applicable ratings
level) posts credit support in the manner required thereunder. There can be no assurance that the
counterparty will take any of such actions within the specified time frame, in which case the Issuer will be
subject to additional credit risk that could result in reductions or delays in payments on the Notes. There may
also be no replacement counterparty or guarantor available with the required ratings. In particular, MSCS
(the “Initial CDS Counterparty”) will be the CDS Counterparty under CDS Assets with a Principal
Balance of U.S.$325,000,000 as of the Closing Date, which will comprise all of the CDS Assets entered into
or otherwise acquired as of the Closing Date; provided, that any references to the rights of the Initial CDS
Counterparty and any requirement for notice or consent of the Initial CDS Counterparty shall be inapplicable
following the termination of all CDS Assets with the Initial CDS Counterparty and payment of amounts due
thereunder. The concentration of the Collateral in CDS Assets with respect to which the Initial CDS
Counterparty is the counterparty will mean that an insolvency or default by the Initial CDS Counterparty
under the related CDS Assets, including a failure to post additional collateral upon a downgrade or
withdrawal of its ratings, could result in reductions or delays on payments on the Notes.
Supersenior Swap Counterparty Failure to Fund Draws. On any Business Day to but excluding the
Supersenior Swap Termination Date, if the Supersenior Swap Counterparty fails to fund a Draw under the
Supersenior Swap for any reason (unless it is not required to do so pursuant to the netting provisions of the
Supersenior Swap) when the conditions to funding Draws are satisfied, the Trustee will send a notice of
default to the Supersenior Swap Counterparty on the third Business Day following the day the related Draw
Notice was delivered. If the Supersenior Swap Counterparty were to fail to fund a Draw, an Event of Default
would not occur under the Notes immediately but may subsequently occur if the Issuer consequently defaults
in its obligations to make payments of interest on any Class II Notes, Class III Notes or Class IV Notes or
CDS Interest Payments, CDS Loss Payments or CDS Issuer Termination Payments to CDS Counterparties
and such CDS Counterparties exercise rights, if any, to cease making payments to the Issuer under the
affected CDS Assets and/or terminate such CDS Assets. In these circumstances the Issuer would have
recourse solely to the Collateral in accordance with the Priority of Payments in order to fund any amounts
becoming due and payable by it under the Class II Notes, the Class III Notes and the Class IV Notes or
pursuant to any CDS Asset. To the extent the CDS Counterparty and the Supersenior Swap Counterparty are
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the same entities, payments owed by the Supersenior Swap Counterparty in respect of payments to be made
to the CDS Counterparty may be netted against each other, to the extent permitted under the Master
Agreement governing such CDS Asset and Supersenior Swap. Any payments required to be made by the
Supersenior Swap Counterparty under the Supersenior Swap that were so netted shall be deemed to have
been made (and the Used Supersenior Swap Amount shall be increased accordingly) and any payments
required to be made by the Issuer under the CDS Assets that were so netted shall be deemed to have been
made.
23. Sale of Collateral Upon Default of the Notes or Termination of CDS Assets and Hedge
Agreements. The market value of the Collateral Assets will generally fluctuate with, among other things,
changes in market rates of interest, general economic conditions, world political events, developments or
trends in any particular industry, the conditions of financial markets and the financial condition of the
Reference Entities, the obligors under or issuers of the Cash Assets, the CDS Counterparties and any Hedge
Counterparties. Therefore, if an Event of Default occurs with respect to the Notes, there can be no assurance
that the proceeds of any sale or termination, as applicable, by the Trustee of Collateral Assets will be
sufficient to pay in full amounts payable by the Issuer, including amounts payable by the Issuer in respect of
the principal of and interest on the Rated Notes and distributions on the Subordinated Notes.
24. Lender Liability Considerations; Equitable Subordination. In recent years, a number of United
States judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various
evolving legal theories (collectively termed “lender liability”). Generally, lender liability is founded upon
the premise that an institutional 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 resulting in the
creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Because of the nature
of the privately-placed assets that may be included as Collateral Assets, the Issuer may be subject to
allegations of lender liability.
Courts in some cases have applied the doctrine of equitable subordination to subordinate the claim of a
lending institution 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 the
Collateral Assets, the Issuer may be subject to claims from creditors of an issuer or obligor that its Collateral
Assets that are held by the Issuer should be equitably subordinated.
The preceding discussion is based upon principles of United States federal and state laws. Insofar as
Collateral Assets that are obligations of non-United States obligors are concerned, the laws of certain foreign
jurisdictions may impose liability upon lenders or bondholders under factual circumstances similar to those
described above, with consequences that may or may not be analogous to those described above under
United States federal and state laws.
25. Interest Rate Risk. The Rated Notes and the Used Supersenior Swap Amount will bear interest
based on LIBOR (interpolated for the first applicable Periodic Interest Accrual Period) and the Supersenior
Swap Commitment Fee will accrue at a fixed rate, in any case, determined as described herein. A portion of
the Collateral Assets that the Issuer purchases or enters into will consist of debt securities and obligations
that bear interest based on LIBOR for U.S. Dollar deposits in Europe with a specified index maturity or other
floating rate indices and a portion of such Collateral Assets will consist of debt securities and obligations
that bear interest at a fixed rate. As a result, there may be a fixed/floating interest rate mismatch between the
Rated Notes and the underlying Collateral Assets and changes in the level of LIBOR or other floating rate
indices could adversely impact the Issuer’s ability to make payments on the Rated Notes. In addition, there
may be a timing mismatch between the floating interest rates on the Rated Notes and the floating interest
rates on the Collateral Assets that bear interest at a floating rate as the interest on such Collateral Assets may
adjust more or less frequently, on different dates and based on different indices than the interest rates on the
Rated Notes.
The Issuer, at the direction of the Investment Adviser, may enter into Hedge Agreements to mitigate a
portion of the timing mismatch between the floating interest rates on the Rated Notes and the floating
interest rates on some of the Collateral Assets; provided that any Hedge Agreement other than a replacement
Hedge Agreement will be subject to the prior written consent of the Supersenior Swap Counterparty, which
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consent will not be unreasonably withheld or delayed. No assurance can be made, however, that any Hedge
Agreements will eliminate all material interest rate risks or timing risks to the Issuer. Despite the Issuer
having the benefit of the subordination of the Subordinated Notes to the payments of interest on the Rated
Notes, there can be no assurance that the Collateral Assets and the Eligible Investments will in all
circumstances generate sufficient Collateral Interest Collections to make timely payments of interest on the
Rated Notes or provide any particular rate of return on the Subordinated Notes. In addition, the Hedge
Agreements may be subject to termination by the Issuer or the applicable Hedge Counterparty upon the
occurrence of certain events and a substantial termination payment could be payable by the Issuer to the
Hedge Counterparty. In addition, after the payment in full of the Rated Notes, if any Hedge Agreements
remain in place, the Issuer is required to use Collateral Principal Collections to terminate such Hedge
Agreements prior to making any distributions of Collateral Principal Collections to the Holders of the
Subordinated Notes.
The Collateral Assets are subject to prepayment risk and extension risk which may result in a mismatch
between the payments received from the Collateral Assets and payments made by the Hedge Counterparties
under any Hedge Agreements. On or after the Closing Date, subject to certain conditions specified in the
Indenture, the Issuer may enter into Hedge Agreements or increase the notional amount of an existing Hedge
Agreement, subject to obtaining consent from the Supersenior Swap Counterparty and with Rating Agency
Confirmation. The Issuer may also sell all or a portion of any Hedge Agreement, terminate such Hedge
Agreement or reduce the notional amount of any Hedge Agreement, subject to obtaining Rating Agency
Confirmation. Depending on prevailing interest rates at the time of any such termination or notional amount
reduction, the Issuer could be required to make substantial payments to Hedge Counterparties.
If a Hedge Agreement is terminated early and the Issuer is the defaulting party, the termination
payment owed by the Issuer will be paid to the Hedge Counterparty before any payments are made to the
Holders of the Notes.
26. Acquisition of Collateral Assets On or Prior to the Closing Date; Events Occurring On or
Prior to the Closing Date. On or prior to the Closing Date, the Issuer is expected to have purchased or
entered into Collateral Assets having an aggregate Principal Balance equal to at least 90 percent in the
aggregate of the Expected Effective Date Balance. Such Collateral Assets were selected by the Investment
Adviser subject to the consent of the Warehouse Provider and purchased or entered into with funds provided
by the Warehouse Provider, which funds, will be repaid on the Closing Date together with financing costs
specified in the warehousing documents. The purchase price of such Collateral Assets will be the value (in
certain cases, net of any hedging costs and expenses) on the date such Collateral Assets were acquired or
entered into by the Issuer (at the direction of the Investment Adviser). Such values may be greater than the
market values on the Closing Date, which may have an adverse effect on the ability of the Issuer to make
payments on the Notes. Any losses associated with the sale of any securities or other assets acquired by the
Issuer pursuant to such arrangements that are ineligible on the Closing Date for inclusion in the Issuer’s
portfolio will be borne by the Issuer and will reduce the net proceeds of the offering and sale of the Notes
available to invest in Collateral Assets.
Holders of the Notes will assume the risk of market value and credit quality changes in the Collateral
Assets from the date such Collateral Assets are acquired or entered into prior to the Closing Date but will not
receive the benefit of interest earned on the Collateral Assets during such period. To the extent that the
Issuer is unable to settle the purchase of any Collateral Asset that is originally scheduled to be purchased by
the Issuer on or prior to the Closing Date, the Issuer will not be entitled to the payments on such Collateral
Asset until it is actually settled and there will be less funds available to make payments on the Notes, which
could result in a reduction or delay in the payments on the Notes in reverse order of seniority.
27. The Issuer. The Issuer is a recently formed Cayman Islands entity and has no prior operating
history or prior business other than in connection with the purchase of or entering into binding agreements to
purchase or enter into Collateral Assets prior to the Closing Date. The Issuer will have no significant assets
other than the Collateral, which has been pledged to the Trustee to secure the Issuer’s obligations to the
Secured Parties. The Issuer will not engage in any business activity other than the issuance of the Notes and
its Ordinary Shares as described herein, the acquisition and disposition of and investment and reinvestment
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in Collateral as described herein, certain activities conducted in connection with the payment of amounts in
respect of the Notes and the management of the Collateral and the Class P Treasury Strip Collateral and
other activities incidental to the foregoing. Income derived from the Collateral (or in the case of the Class P
Notes, the Class P Treasury Strip Collateral) securing the Notes will be the Issuer’s only source of Cash.
28. The Co-Issuer. The Co-Issuer is a recently formed Delaware corporation and has no prior
operating history or prior business. The Co-Issuer does not have and will not have any substantial assets. The
Co-Issuer will not engage in any business activity other than the co-issuance of the Rated Notes (other than
the Class VII Notes). The Co-Issuer will not be an obligor on the Class VII Notes, the Subordinated Notes or
the Class P Notes.
29. Operational Risk. The Investment Adviser is authorized under the Investment Advisory
Agreement and the Indenture to select and manage the Issuer’s Collateral and to provide information and
certain directions to the Trustee in connection with the payments of amounts due to CDS Counterparties and
reallocations relating to termination payments under CDS Assets from available sources. See “The
Investment Advisory Agreement.” The Trustee will be responsible for making payments to CDS
Counterparties from Collateral Interest Collections, Collateral Principal Collections, funds deposited in the
Class I Reserve Account and funds deposited in the CDS Reserve Account in accordance with the CDS
Payment Priority and, if such funds do not satisfy the payment due, by making Draws on the Available
Supersenior Swap Amount. A failure to provide a Draw Notice under the Supersenior Swap promptly after
receipt of notice from a CDS Counterparty of a payment due could result in the Issuer failing to make
payments when due under a CDS Asset, which could result in a default under that CDS Asset and,
depending on the terms of that CDS Asset, cross-default to other CDS Assets with that CDS Counterparty.
The Trustee will also make other types of Draws on the Available Supersenior Swap Amount upon notice of
the occurrence of certain events or, in some cases, as directed by the Issuer or the Investment Advisor (on
behalf of the Issuer), and will calculate and report information relating to the amortization or termination of
the CDS Assets based on information provided by the CDS Counterparties and relating to the Available
Supersenior Swap Amount at any time. These calculations, including in particular the calculations related to
the Available Synthetic Notional Proceeds Amount and the application of Synthetic Notional Proceeds,
Excess Class I Reserve Amounts and Excess CDS Reserve Amounts and the treatment of CDS Issuer
Termination Payments and CDS Counterparty Termination Payments and, in particular, related reallocations,
are highly complex formulas which determine amounts available for reinvestment, amounts available for
distribution under the Priority of Payments (including reallocations between Collateral Interest Collections
and Collateral Principal Collections) and amounts and sources available for making payments to CDS
Counterparties. If the Issuer desires to amend any of these provisions or calculations to correct any
ambiguity or otherwise clarify or change any of these calculations, there can be no assurance that the
requisite percentage of the Holders of the applicable Class or Classes of Notes or the Rating Agencies or
other parties whose consent is required for amendment, including the Supersenior Swap Counterparty, the
Investment Adviser and the Initial CDS Counterparty in certain circumstances, would provide their consent.
30. Potential Conflicts of Interest Involving the Investment Adviser; Dependence on Investment
Adviser and Key Personnel; Removal of Investment Adviser.
Conflicts of Interest Involving the Investment Adviser. Notwithstanding certain provisions of the
Advisers Act, and internal policies of the Investment Adviser that are meant to reduce the possibility of, or
effect of, conflicts of interest, the size and scope of activities of the Investment Adviser may create various
potential and actual conflicts of interest that may arise from the advisory, investment and other activities of
the Investment Adviser, its Affiliates and their respective clients and employees.
Various potential and actual conflicts of interest may arise from the overall investment activities of the
Investment Adviser and/or its Affiliates. The Investment Adviser and its Affiliates may, for their own
account or for accounts for which they have investment discretion, invest in securities or enter into credit
default swaps that would be appropriate investments for the Issuer or pursuant to which the Investment
Advisor or such Affiliate would hold a short exposure with respect to one or more Reference Obligations
subject to the CDS Assets; such investments may be the same as or different from those made or entered into
on behalf of the Issuer. The Investment Adviser and/or its Affiliates have no affirmative obligation to offer
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any investment to the Issuer, or to inform the Issuer of any investment opportunity, before offering such
investment or opportunity to other funds or accounts that the Investment Adviser or its Affiliates manage or
advise. In addition, Affiliates and clients of the Investment Adviser may invest in securities or other
investments (or make loans) or enter into credit default swaps that are senior to, or have interests different
from or adverse to, the Collateral Assets and Reference Obligations. The Investment Adviser may at certain
times be simultaneously seeking to purchase or sell or enter into or terminate investments for the Issuer and
any similar entity for which the Investment Adviser serves as manager in the future, or for its clients or
Affiliates. The effects of some of these actions may be adverse to the market from which the Investment
Adviser seeks to buy or enter into, or to which the Investment Adviser seeks to sell or terminate, securities
and credit default swaps on behalf of the Issuer.
The Investment Adviser and its Affiliates may also have equity and other investments in, may be
lenders to, and may have other ongoing relationships with, the issuers of the Collateral Assets or the related
Reference Obligations. As a result, officers or affiliates may possess information relating to the Collateral
Assets or Reference Obligations that is not known to the individuals at the Investment Adviser responsible
for monitoring the Collateral Assets and Reference Obligations and performing other obligations under the
Investment Advisory Agreement.
No provision in the Investment Advisory Agreement prevents the Investment Adviser or any of its
Affiliates from rendering services of any kind to any person or entity, including the issuer of any obligation
included in the Collateral or the issuer of any Reference Obligation and their respective affiliates, the
Trustee, the Supersenior Swap Counterparty, the Holders of the Notes, any CDS Counterparty and the Hedge
Counterparties. Without limiting the generality of the foregoing, the Investment Adviser, its Affiliates and
the directors, officers, employees and agents may, among other things: (a) serve as directors, partners,
officers, employees, agents, nominees or signatories for any issuer of any obligation included in the
Collateral or any issuer of Reference Obligations; (b) receive fees for services rendered to the issuer of any
obligation included in the Collateral or any issuer of Reference Obligations or any affiliate thereof; (c) be
retained to provide services unrelated to the Investment Advisory Agreement to the Issuer or its Affiliates
and be paid therefor; (d) be a secured or unsecured creditor of, or hold an equity interest in, any issuer of any
obligation included in the Collateral or any issuer of Reference Obligations; (e) sell or terminate any
Collateral Asset or Eligible Investment to, or purchase or enter into any Collateral Asset from, the Issuer
while acting in the capacity of principal or agent; and (f) serve as a member of any “creditors’ board” with
respect to any obligation included in the Collateral or any Reference Obligation which has become or may
become a Defaulted Security. Services of this kind may lead to conflicts of interest with the Investment
Adviser, and may lead individual officers or employees of the Investment Adviser to act in a manner adverse
to the Co-Issuers.
The Investment Adviser and its Affiliates currently provide and, in the future, will continue to provide
services including advisory services relating to investing in, lending to, or being affiliated with, clients that
include issuers of securities similar to or the same as the Collateral Assets or Reference Obligations and
affiliates of such issuers. In providing services to other clients, the Investment Adviser and its Affiliates may
recommend activities that would compete with or otherwise adversely affect the Issuer. In the course of
managing the Collateral Assets held by the Issuer, the Investment Adviser may consider its relationships
with other clients (including companies the securities of which are pledged to secure the Notes and any
issuers of Reference Obligations) and its Affiliates. The Investment Adviser may decline to make a
particular investment for the Issuer in view of such relationships. In connection with business activities with
or on behalf of others, the Investment Adviser will be free, in its sole discretion, to make recommendations
to others, or effect transactions on behalf of itself or for others, that may be the same as or different from
those effected on behalf of the Issuer, and the Investment Adviser may furnish investment management and
advisory services to others that may have investment policies similar to those followed by the Investment
Adviser with respect to the Issuer and that may own securities of the same class, or which are the same type,
as the Collateral Assets or Reference Obligations. The Investment Adviser is under no obligation to make
consistent recommendations to, or to effect similar transactions for, all or any of its clients.
In connection with its activities, the Investment Adviser and its Affiliates may from time to time come
into possession of material non-public information that limits the ability of the Investment Adviser to make
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an investment, and the Issuer’s investments may be constrained as a consequence of the Investment
Adviser’s inability to use such information for advisory purposes or otherwise to take actions that would be
in the best interest of the Issuer. In addition to legal prohibitions on the use of certain information, the
Investment Adviser also has the option to refrain from directing the purchase or sale of securities or other
investments issued by persons of which the Investment Adviser, its Affiliates or any of its or their officers,
directors or employees are directors or officers or persons for which the Investment Adviser or its Affiliates
act as financial adviser or underwriter. If the Investment Adviser exercises that option, the Issuer will forego
the opportunities presented by such purchase or sale.
The Investment Adviser may also, at certain times, be seeking to effect purchases and sales of assets on
behalf of the Issuer and on behalf of other clients for whom it serves as investment adviser or for any other
clients or Affiliates. The Investment Adviser may aggregate sales and purchase orders of securities and other
assets placed with respect to the Collateral with similar orders being made simultaneously for other clients or
other accounts managed by the Investment Adviser or with accounts of the Affiliates of the Investment
Adviser, if in the Investment Adviser’s judgment such aggregation will result in an overall economic benefit
to the Issuer, taking into consideration the advantageous selling or purchase price, brokerage commission
and other expenses. However, no provision of the Investment Advisory Agreement requires the Investment
Adviser or its Affiliates to execute orders as part of concurrent authorizations or to aggregate orders.
In the selection of brokers, dealers and CDS Counterparties, the Investment Adviser may take into
account considerations other than the price offered by such brokers, dealers and counterparties, including
method and timing of trade execution, general market trends, research and other brokerage services
furnished to the Investment Adviser or its Affiliates by brokers, dealers and counterparties. Benefits received
by the Investment Adviser that serve as the basis for using a particular broker or dealer may not accrue
directly to the Issuer, and may be used by the Investment Adviser in connection with the Investment
Adviser’s other advisory services or investment operations.
The Investment Adviser, it’s Affiliates, and funds or accounts for which the Investment Adviser or its
Affiliates act as an investment adviser may own Notes. The Investment Adviser may have a conflict of
interest as between the interests of the Issuer and of any fund or account that owns Notes and for which it or
an Affiliate acts as an investment adviser. In addition, the Investment Adviser may rebate a portion of its
Investment Advisory Fee to any account which owns a Note and for which the Investment Adviser acts as
investment adviser.
The Issuer, acting through the Investment Adviser, may engage in securities transactions with Permitted
SG Affiliates and other Affiliates of the Investment Adviser. Subject to the Eligibility Criteria and the
Portfolio Percentage Limitations, and to other provisions of the Indenture and the Investment Advisory
Agreement, the Investment Adviser will be permitted under the Indenture to acquire a security or an
obligation, or enter into a CDS Asset, on behalf of the Issuer to be included in the Collateral from its
Permitted SG Affiliates as principal or agent, or from funds or accounts for which any Permitted SG
Affiliate acts as investment adviser, or to sell an obligation to the Permitted SG Affiliates of the Investment
Adviser as principal or agent or to funds or accounts for which any Permitted SG Affiliate acts as investment
adviser. In addition, it is possible that, subject to the Eligibility Criteria and the Portfolio Percentage
Limitations set forth herein, and to other provisions of the Indenture and the Investment Advisory
Agreement, the Investment Adviser may acquire an obligation, or enter into a CDS Asset, on behalf of the
Issuer to be included in the Collateral from itself or from any of its Affiliates that are not Permitted SG
Affiliates or from funds or accounts for which the Investment Adviser or any of its Affiliates that are not
Permitted SG Affiliates acts as investment adviser, or sell an obligation or terminate such CDS Asset on
behalf of the Issuer to itself or to any of its Affiliates that are not Permitted SG Affiliates or to funds or
accounts for which the Investment Adviser or any of its Affiliates that are not Permitted SG Affiliates acts as
an investment adviser; provided that any such acquisition or disposition must be approved or ratified by the
board of directors of the Issuer.
In the foregoing situations, the Investment Adviser and its Permitted SG Affiliate or other Affiliate may
have a potentially conflicting division of loyalties and responsibilities regarding both parties in the
transaction. If an affiliate of the Investment Adviser acts as broker in an agency cross transaction, such
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person may receive commissions from one or both of the parties in the transaction. While the Investment
Adviser anticipates that any such commissions charged will be at competitive market rates, the Investment
Adviser may have interests in such transactions that are adverse to those of the Issuer, such as an interest in
obtaining favorable commissions.
The Investment Adviser and/or certain affiliates of the Investment Adviser may, but are not required to
purchase any Notes on or after the Closing Date. It should not be assumed that the Investment Adviser, its
Affiliates and funds or accounts for which the Investment Adviser or its Affiliates act as an investment
adviser that purchase Notes on the Closing Date, if any, will continue to hold such Notes.
All Notes, if any, beneficially owned by the Investment Adviser or any Affiliate thereof (other than the
Supersenior Swap Counterparty or the Initial CDS Counterparty, but only to the extent the Supersenior Swap
Counterparty or the Initial CDS Counterparty ever become Affiliates of the Investment Adviser) or by an
account or fund for which the Investment Adviser or such Affiliate acts as the investment adviser (and for
which the Investment Adviser or an Affiliate has discretionary voting authority (the “Investment Adviser
Notes”)) will be disregarded and deemed not to be outstanding with respect to any vote or consent of the
Holders on any termination or removal of the Investment Adviser for Cause including, without limitation,
any vote or consent with respect to a successor investment adviser following a removal of the Investment
Adviser for Cause; provided, however, that the Investment Adviser will notify the Trustee of any Investment
Adviser Notes. However, the Investment Adviser and its Affiliates will be entitled to vote the Notes held by
them and by such accounts with respect to all other matters. The interests of the Investment Adviser may not
in all cases be aligned with those of the Noteholders.
Dependence on the Investment Adviser and Key Personnel Thereof. The Issuer has no employees and is
dependent on the employees of the Investment Adviser to make decisions on the Issuer’s behalf in
accordance with the terms of the Indenture and the Investment Advisory Agreement. As a result, the success
of the Issuer will be highly dependent on the financial and managerial expertise of the investment
professionals of the Investment Adviser. In the event that one or more of the investment professionals of the
Investment Adviser were to leave the Investment Adviser or were reassigned internally, the Investment
Adviser would have to re-assign responsibilities internally and/or hire one or more replacement employees.
The loss or reassignment of key personnel of the Investment Adviser could have a material adverse effect on
the performance of the Issuer.
In addition, under certain conditions, TCW Asset Management Company may resign or be removed as
the Investment Adviser. If at any time the Investment Adviser resigns or is otherwise terminated, such
resignation or termination, and the appointment of a successor investment adviser, may under certain
circumstances become effective without the approval of the Noteholders or the Rating Agencies. Investors in
the Notes are therefore at risk that an Investment Adviser other than TCW Asset Management Company
could be appointed as the Investment Adviser without an affirmative vote. In addition, any removal or
replacement of the Investment Adviser could cause disruption in the investment strategy of the Issuer. See
“The Investment Advisory Agreement” and “The Investment Adviser.”
Selection of Successor Investment Adviser. Upon any removal or resignation of the Investment Adviser
while any of the Notes are Outstanding, the Holders of at least a majority of the Subordinated Notes may
appoint an institution as replacement investment adviser which is not affiliated with the Investment Adviser
(however, in the case of any resignation, a replacement investment adviser affiliated with the Investment
Adviser may be appointed) provided that the Holders of at least a majority of the Notes of the Controlling
Class Outstanding do not disapprove such institution within 30 days of notice of such appointment and
Rating Agency Confirmation is obtained. If, however, the Holders of at least a majority of the Notes of the
Controlling Class Outstanding do not disapprove such replacement investment adviser within such 30 days
and a replacement investment adviser mutually acceptable to the Holders of at least a majority of the
Subordinated Notes and the Holders of at least a majority of the Notes of the Controlling Class Outstanding
cannot be appointed (or with respect to which Rating Agency Confirmation cannot be obtained) within 30
days, then commencing on such 30th day (the “Static Pool Commencement Date”), no Collateral Assets
may be sold or terminated by the Issuer and no Substitute Collateral Assets may be acquired or entered into
by the Issuer until a replacement investment adviser mutually acceptable to the Holders of at least a majority
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of the Subordinated Notes and the Holders of at least a majority of the Notes of the Controlling
Class Outstanding is appointed and Rating Agency Confirmation is obtained.
In the event the Investment Adviser shall have been terminated or resigns, if a successor investment
adviser is not selected in accordance with the Investment Advisory Agreement within 60 days after the
Investment Adviser receives notice of termination or gives notice of resignation, then the Investment
Adviser may petition any court of competent jurisdiction for the appointment of a successor investment
adviser without the approval of any of the Issuer, the Noteholders or the Rating Agencies.
The successor investment adviser is required to be (except in the case of an appointment made by a
court) an established institution that (x) has demonstrated an ability to professionally and competently
perform duties similar to those imposed upon the Investment Adviser under the Investment Advisory
Agreement, (y) is legally qualified and has the capacity to act as Investment Adviser under the Investment
Advisory Agreement, as successor to the Investment Adviser and will agree to assume in writing all of the
Investment Adviser’s duties and obligations pursuant to the Investment Advisory Agreement, and (z) has
prior experience serving as an investment adviser in structured finance transactions involving collateral
similar to the Collateral.
No removal will be effective until such time as a successor investment adviser has been appointed and
has agreed to assume in writing all of the Investment Adviser’s duties and obligations pursuant to the
Investment Advisory Agreement.
Relation to Prior Investment Results. The prior investment results of the Investment Adviser and the
services associated with the Investment Adviser or any other entity or person described herein are not
indicative of the Issuer’s future investment results. The nature of, and risks associated with, the Issuer’s
future investments may differ substantially from those investments and strategies undertaken historically by
such persons and entities. There can be no assurance that the Issuer’s investments will perform as well as the
past investments of any such persons or entities.
31. Managers’, Placement Agents’, Supersenior Swap Counterparty’s and Initial CDS
Counterparty’s Conflicts of Interest. Morgan Stanley or an Affiliate thereof will be the Managers, the
Placement Agents, the Supersenior Swap Counterparty, the Initial CDS Counterparty, and may become a
Hedge Counterparty in the future, and will have certain voting rights, consent rights and other similar rights
under the Indenture and certain other Transaction Documents in such capacities. Morgan Stanley and its
Affiliates may also 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 or Reference Obligations and
may own either equity securities or debt obligations (including the debt obligations that constitute Collateral
Assets or Reference Obligations) issued by such issuers. Morgan Stanley 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 the Investment
Adviser and purchasers of the Notes. Morgan Stanley 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 or Reference Obligations. It is expected that the Issuer will from time to time purchase, enter into,
terminate or sell some of the Collateral Assets from or through Morgan Stanley or one or more of its
Affiliates.
In addition to acting as the Managers, the Placement Agents, the Supersenior Swap Counterparty and
the Initial CDS Counterparty, Morgan Stanley or one or more of its Affiliates may also be the CDS
Counterparty under any CDS Assets that are in addition to the Initial CDS Agreement or the Hedge
Counterparty under one or more Hedge Agreements. Morgan Stanley and any of its Affiliates may act in its
own commercial interest in the various capacities described above without regard to whether its interests
conflict with those of the Noteholders or any other party. Morgan Stanley will not take any responsibility
for, and have no obligations in respect of, the Co-Issuers.
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32. Potential Conflicts of Interest Involving the Trustee. Investors Bank & Trust Company will act
as the Trustee, as the Principal Note Paying Agent and as the Collateral Administrator. In addition, IBTC
will also act as the Note Transfer Agent, as the Note Registrar and as the Note Calculation Agent and as the
accountholder. Furthermore, IBTC acts as the trustee with respect to certain of the Collateral Assets owned
or entered into by the Issuer on the Closing Date, and/or with respect to certain of the related Reference
Obligations. Nevertheless, IBTC and any of its Affiliates providing services in connection with the
contemplated transactions will have only the duties and responsibilities expressly provided in each capacity
and will not, by virtue of its or any Affiliate acting in any other capacity, be deemed to have duties or
responsibilities or be deemed to be held to a standard of care other than as expressly provided with respect to
each such capacity.
In certain circumstances, the Trustee or an Affiliate may receive compensation in connection with the
Trustee’s (or such Affiliate’s) investment in certain Class I Reserve Investments, CDS Reserve Investments,
Eligible CDS Collateral, Initial CDS Counterparty CSA Eligible Credit Support or Eligible Investments on
behalf of the Issuer from the managers of such Class I Reserve Investments, CDS Reserve Investments,
Eligible CDS Collateral, Initial CDS Counterparty CSA Eligible Credit Support or Eligible Investments, as
applicable.
33. Concentration Risk. Concentration with respect to any particular obligor, region or industry will
be limited as set forth in the Reinvestment Criteria. However, there can be no assurance that the
Reinvestment Criteria will be adequate to protect investors in the Notes from economic downturns in any
one industry or region or by any particular obligor or Reference Entity. In addition, the Reinvestment
Criteria only apply on the date of purchase of or entering into such Collateral Asset and therefore, may not
provide adequate protection against concentration in any particular obligor, region or industry after the
purchase or entering into of such Collateral Asset.
34. Insolvency Considerations With Respect to an Issuer of Cash Assets and Reference
Obligations. An issuer of Structured Finance Securities generally is structured as a bankruptcy remote entity
without creditors (other than the holders of securities thereof and service providers, including hedge
counterparties, credit enhancers and insurers, with respect to such securities) distinct from the originator, the
depositor or the servicer to reduce the likelihood that it will become subject to bankruptcy proceedings in the
event the originator, the depositor or the servicer is the subject of a bankruptcy proceeding. The structural
and legal risks of Structured Finance Securities include the possibility that, in a bankruptcy or similar
proceeding involving the originator, the depositor or the servicer (often the same entity or affiliates), the
assets of the issuer of the Structured Finance Security could be treated as never having been truly sold by the
originator and could be substantively consolidated with those of the originator or the transfer of such assets
to the issuer of the Structured Finance Security could be voided as a fraudulent transfer. Challenges based on
such doctrines could result also in cash flow delays and reductions. Other similar risks relate to the degree to
which cash flows on the assets of the issuer of the Structured Finance Security may be commingled with
those on the originator’s other assets.
If a court in a lawsuit brought by an unpaid creditor or representative of creditors of an issuer of a Cash
Asset or Deliverable Obligation, such as a trustee in bankruptcy, were to find that the issuer did not receive
fair consideration or reasonably equivalent value for incurring the indebtedness constituting the Cash Asset
or Deliverable Obligation and, after giving effect to such indebtedness, the issuer (i) was insolvent, (ii) was
engaged in a business for which the remaining assets of such issuer 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
mature, such court could determine to invalidate, in whole or in part, such indebtedness as a fraudulent
transfer, to subordinate such indebtedness to existing or future creditors of the issuer or to recover amounts
previously paid by the issuer in satisfaction of such indebtedness. In the event of the insolvency of an issuer
of a Cash Asset or Reference Obligation, payments made on such Cash Asset or Reference Obligation 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.
In general, if payments on a Cash Asset or Reference Obligation are avoidable, whether as fraudulent
transfers or preferences, such payments can be recaptured either from the initial recipient (such as the
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Issuer) or from subsequent transferees of such payments (such as the Holders of the Notes). To the extent
that any such payments are recaptured from the Issuer, the resulting loss will be borne in the first instance by
the Holders of the Subordinated Notes, then by the Holders of the Class VII Notes, then by the Holders of
the Class VI Notes, then by the Holders of the Class V Notes, then by the Holders of the Class IV Notes,
then by the Holders of the Class III Notes and then by the Holders of the Class II Notes. However, a court in
a bankruptcy or insolvency proceeding would be able to direct the recapture of any such payment from a
Holder of Notes only to the extent that such court has jurisdiction over such Holder or its assets. However, it
is unlikely that avoidable payments could be recaptured directly from a Holder that has given value in
exchange for its Notes in good faith and without knowledge that the payments were avoidable. Since there is
no judicial precedent relating to structured securities such as the Notes, there can be no assurance that a
Holder of the Notes will be able to avoid recapture on this basis.
If an issuer of a Cash Asset or Reference Obligation is the subject of a bankruptcy proceeding,
payments to the Issuer with respect to such Cash Asset or Reference Obligation may be delayed or
diminished as a result of the exercise of various powers of the bankruptcy court including the following:
(i) an “automatic stay,” under which the Issuer will not be able to institute proceedings or otherwise enforce
its rights against the issuer or obligor with respect to such Cash Asset or Reference Obligation without
permission from the court, (ii) conversion by the bankruptcy court of such Cash Asset or Reference
Obligation into more junior debt or into an equity obligation of the obligor or the issuer thereof,
(iii) modification of the terms of the Cash Asset or Reference Obligation by the bankruptcy court, including
reduction or delay of the interest or principal payments thereon and (iv) grant of a priority lien to a new
money lender to the obligor or the issuer of the Cash Asset or Reference Obligation.
35. Illiquidity of Collateral Assets; Restrictions on Transfer. There may be a limited trading market
for many of the Collateral Assets purchased by the Issuer, and in certain instances there may be effectively
no trading market therefor. The Issuer’s investment in illiquid Collateral Assets may restrict its ability to
dispose of such investments if they become Defaulted Securities or Credit Risk Securities in a timely fashion
and for attractive prices as well as its ability to take advantage of market opportunities if such Collateral
Assets become Credit Improved Securities or may otherwise be sold pursuant to a Discretionary Sale,
although the Issuer is generally prohibited by the Indenture from selling Collateral Assets except under
certain limited circumstances described under “Security for the Notes—Substitute Collateral Assets and
Reinvestment Criteria.” Illiquid Collateral Assets may trade at a discount from comparable, more liquid
investments and in the case of Collateral Assets structured as credit default swaps, the Issuer may be
required to make a CDS Issuer Termination Payment in connection with any trade (which likely would take
the form of a termination, as further described below). In addition, illiquid Collateral Assets may adversely
affect the Issuer’s ability to carry out a Redemption or an Auction Call Redemption.
In addition, it is expected that some of the Cash Assets and most of the Synthetic Assets will not have
been registered under the Securities Act or registered or qualified under the securities laws of any state or
other jurisdiction, and no person or entity will be obligated to register any such Collateral Assets under the
Securities Act or to obtain any registration or qualification under any such other securities laws.
Consequently, the Issuer’s transfer of such Collateral Assets will be subject to satisfaction of legal
requirements applicable to transfers that do not require registration under the Securities Act or registration or
qualification under any applicable state securities or other laws and upon satisfaction of certain other
provisions of the respective agreements pursuant to which the Cash Assets or the Reference Obligations
were issued. It is expected that such transfers will also be subject to satisfaction of certain other restrictions.
The existence of such transfer restrictions will negatively affect the liquidity of, and consequently the price
that may be realized upon a sale or termination of, such Collateral Assets.
36. Illiquidity of CDS Assets. The credit default swap market with respect to Structured Finance
Securities and REIT Debt Securities is relatively new, and the liquidity of this market is less than that of
other asset classes. The CDS Assets entered into by the Issuer will have a limited trading market, if any.
Under the terms that the Issuer has obtained under the Initial CDS Agreement, except for certain limited
circumstances, the Issuer is permitted to terminate any CDS Asset by novation to a specified dealer without
the consent of the Initial CDS Counterparty. Because under certain limited circumstances the Issuer is not
permitted to terminate or assign other CDS Assets without the consent of the applicable CDS Counterparty,
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the terms of the respective CDS Assets may not permit the Issuer to terminate or assign such CDS Assets in
a timely fashion and for a fair price without such consent and, accordingly, the Issuer’s ability to take
advantage of market opportunities may be restricted. The interests of the CDS Counterparty may conflict
with the interests of the Issuer or the Noteholders and the requirement to obtain the CDS Counterparty’s
consent (if any) in connection with terminating or assigning CDS Assets may limit the Investment Adviser’s
ability to trade proactively and reinvest in CDS Assets in pursuit of the Issuer’s investment objectives. See
“—Managers’, Placement Agents’, Supersenior Swap Counterparty’s and Initial CDS Counterparty’s
Conflicts of Interest”. Accordingly, should such required consents not be obtained, the Noteholders may be
materially and adversely affected. In addition, in the credit default swap market with respect to Structured
Finance Securities and REIT Debt Securities, it is common for the aggregate notional exposure of the
marketplace to be many multiples of the outstanding amount of any particular reference obligation. It is not
known how this excess of exposure over supply may affect liquidity and valuation of credit default swaps if
adverse economic developments were to occur in the financial and credit markets generally, or with respect
to particular reference obligors or reference obligations. This low liquidity and potential difficulties of
valuation in the credit default swap market may limit the Investment Adviser’s ability to trade proactively
and reinvest in CDS Assets. In addition, upon termination of a CDS Asset, the Issuer may have to pay CDS
Issuer Termination Payments to the CDS Counterparty. The amount of termination payments would
generally be determined by the CDS Counterparty as the replacement cost. The illiquidity and restrictions on
transfer and termination of the CDS Assets also may affect the amount and the timing of receipt of proceeds
from the termination of CDS Assets in connection with the exercise of remedies following an Event of
Default.
37. Changes in Tax Law; No Gross-Up for Notes. Under the Eligibility Criteria, a Collateral Asset
will be eligible for purchase or entering into by the Issuer if, at the time it is purchased or entered into, as
applicable, either the payments thereon are not subject to withholding taxes imposed by any jurisdiction or
the obligor or the issuer thereof is required to make “gross-up” payments that cover the full amount of any
such withholding taxes. In the case of Collateral Assets and Reference Obligations issued by U.S. obligors
after July 18, 1984, payments thereon generally are exempt under current United States tax law from the
imposition of United States withholding tax. See “Income Tax Considerations U.S. Federal Income Tax
Considerations—United States Federal Income Tax Treatment of the Issuer—Withholding Taxes.” The
Issuer also expects that payments received on the Collateral Assets, Eligible Investments, the Supersenior
Swap and under any Hedge Agreements generally will not be subject to withholding taxes imposed by the
United States or reduced by withholding taxes imposed by other countries from which such payments are
sourced, absent a change in law or other causes. However, there can be no assurance that, as a result of any
change in any applicable law, treaty, rule or regulation or interpretation thereof, the payments on the
Collateral Assets would not in the future become subject to withholding taxes imposed by the United States
of America or another jurisdiction. In that event, if the obligors of such Collateral Assets or Reference
Obligations were not then required to make “gross-up” payments that cover the full amount of any such
withholding taxes, the amounts available to make payments to the Holders of the Notes would accordingly
be reduced. There can be no assurance that remaining payments on the Collateral would be sufficient to
make timely payments of interest on and payment of principal at the Stated Maturity Date of the Rated Notes
and distributions to the Subordinated Notes by the Final Subordinated Maturity Date. Upon the occurrence
and continuation of a Tax Event, the Issuer will on any Payment Date, whether during or after the
Reinvestment Period, at the direction of the Holders of at least a majority of the outstanding principal
balance of the Subordinated Notes simultaneously redeem in whole but not in part, at the applicable
Redemption Prices, the Rated Notes in accordance with the procedures described under “Description of the
Notes—Redemption Procedures” herein. The imposition of unanticipated withholding taxes could materially
impair the Issuer’s ability to make payments on the Notes.
The Issuer expects that payments in respect of the Notes will ordinarily not be subject to any
withholding tax in the Cayman Islands, the United States or any other jurisdiction. See “Income Tax
Considerations.” In the event that any withholding tax is imposed on payments on the Notes, the Holders of
such Notes will not be entitled to receive “grossed-up” amounts to compensate for such withholding tax.
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38. Trade or Business. The Issuer expects to conduct its affairs so that its net income will not become
subject to U.S. federal income tax. There can be no assurance, however, that its net income will not become
subject to U.S. federal income tax as the result of unanticipated activities by the Issuer (or the Investment
Adviser acting on behalf of the Issuer), changes in law, contrary conclusions by United States tax authorities
or other causes which cause the Issuer to be deemed to be engaged in a U.S. trade or business and, therefore,
subject to federal income taxation. The imposition of unanticipated tax on the Issuer’s net income could
materially impair the Issuer’s ability to make payments on the Notes.
39. PFIC Status; Potential Phantom Income. The Issuer will be a passive foreign investment
company for U.S. federal income tax purposes. In order to avoid certain adverse tax rules, U.S. Holders of
Subordinated Notes may wish to make an election to treat the Issuer as a qualified electing fund (“QEF”). A
U.S. Holder who makes such an election will be required to recognize currently its proportionate share of the
Issuer’s income, which may be greater, in any given year, than the amount of cash distributed to the U.S.
Holder with respect to its Notes. In this regard, prospective purchasers of Subordinated Notes should be
aware that it is possible that a significant amount of the Issuer’s income, as determined for U.S. federal
income tax purposes, will not be distributed on a current basis for a number of potential reasons, including
the investment by the Issuer in instruments which bear original issue discount, reinvestment by the Issuer of
a portion of its income, and the retirement of all or portions of certain Classes of Rated Notes. In addition, if
any portion of a Class of Rated Notes is not paid upon maturity, the Issuer in some circumstances may
recognize cancellation of indebtedness income without any corresponding offsetting losses (due to tax
character differences or otherwise). Thus, U.S. Holders of the Subordinated Notes that make a QEF election
may owe tax on a significant amount of “phantom” income. In certain cases in which a QEF does not
distribute all of its earnings in a taxable year, U.S. Holders may be permitted to elect to defer payment of
some or all of these taxes subject to an interest charge. The Issuer also may be a controlled foreign
corporation, in which case a different tax regime will apply and, among other potential consequences, a U.S.
Holder who is treated as owning 10 percent or more of the Issuer’s voting securities may be treated as
receiving annually a deemed dividend (taxable as ordinary income) in an amount equal to its share of the
Issuer’s income for the tax year, as determined for U.S. federal income tax purposes, without regard to the
amount actually distributed to such U.S. Holder and consequently, such U.S. Holder would have to
recognize such deemed dividend as “phantom” income. See “Income Tax Considerations.”
40. No Subordinated Note Basis Recovery Until Retirement or Other Disposition. The tax basis in
the Subordinated Notes of a U.S. Holder that makes a QEF election with respect to its Subordinated Notes
will generally be increased by the amount of the Issuer’s income included in the U.S. Holder’s gross income,
and will be decreased by any amount already so included that is distributed to such Holder. A U.S. Holder
that does not make a QEF election will generally not reduce its basis in its Subordinated Notes unless the
Issuer makes a payment with respect to the Subordinated Notes in amounts in excess of the current and
accumulated earnings and profits of the Issuer that is not an “excess distribution.” Accordingly, as a practical
matter, because the applicable U.S. federal income tax rules generally do not permit the amortization of basis
of a security treated as a share in a corporation, it is not anticipated that a U.S. Holder’s original tax basis in
its Subordinated Notes will be reduced other than in years where the cash payments with respect to the
Subordinated Notes exceed the Issuer’s income, which may happen only in the later years, or not at all.
Therefore, potential purchasers of the Subordinated Notes should be aware that although they may be
required to recognize ordinary income annually based on their share of the Issuer’s earnings for such year,
they may recognize a loss only upon the retirement or other disposition of their Subordinated Notes and such
loss generally will be capital in character.
41. Absence of Other Regulatory Oversight; Investment Company Act Considerations. While the
Co-Issuers may be considered similar in some ways to an investment company, they are not required and do
not intend to register as such under the Investment Company Act, and, accordingly, investors in the Notes
are not afforded the protections of the Investment Company Act (which, among other matters, requires
investment companies to have at least 40 percent disinterested directors, requires securities held in custody at
all times to be segregated and marked to clearly identify the owner of such securities and regulates the
relationship between the advisor and the investment company). The Co-Issuers have not so registered in
reliance on an exemption from registration as an investment company under the Investment Company Act
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for investment companies organized under the laws of a jurisdiction other than the United States or any state
thereof (a) whose investors that are U.S. Persons are solely Qualified Purchasers, and (b) which do not make
a public offering of their securities in the United States. To enforce the restrictions on transfers of interests in
the Notes, the Indenture permits the Issuer to demand that the Holder of any interest in a Note sell such
interest if such Holder is a U.S. Person who is determined not to have been both a Qualified Purchaser and a
QIB or, with respect to Subordinated Notes only, both a Qualified Purchaser and an Accredited Investor, at
the time of acquisition of such interest in a Note, to a Holder permitted under the Indenture and, in each case,
if the Holder does not comply with such demand within 30 days thereof, the Issuer may sell such Note on
such terms as the Issuer may choose. In addition, the Indenture also permits the Issuer to demand that the
Holder of any interest in a Note offered in reliance on Regulation S to sell to a Holder permitted under the
Indenture any interest in such Note offered in reliance on Regulation S held by such Holder who is
determined to be a U.S. Person and, if the Holder does not comply with such demand within 30 days thereof,
the Issuer may sell such Holder’s interest in such Note offered in reliance on Regulation S on such terms as
the Issuer may choose. Counsel for the Co-Issuers will opine in connection with the sale of the Notes, that
none of the Issuer, the Co-Issuer or the pool of Collateral is on the Closing Date an investment company
required to be registered under the Investment Company Act assuming, for the purposes of such opinion, that
the Notes are being offered by or through Morgan Stanley in the manner contemplated by this Final Offering
Memorandum and that certain factual representations by the Co-Issuers, the Managers, the Placement
Agents and the Noteholders are correct. No opinion or no-action position has been requested of or received
from the United States Securities and Exchange Commission (the “Commission”) with respect to the
foregoing matters.
If the Commission or a court of competent jurisdiction were to find that the Issuer or the Co-Issuer is
required, but failed, to register as an investment company in violation of the Investment Company Act,
possible consequences include, but are not limited to, the following: (i) the Commission could apply to a
district court to enjoin the violation; (ii) investors in the Issuer or the Co-Issuer could sue the Issuer or the
Co-Issuer, as the case may be, and recover any damages caused by the violation; and (iii) any contract to
which the Issuer or the Co-Issuer, as the case may be, is a party that is made in, or whose performance
involves a, violation of the 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 non-enforcement and would not be inconsistent with the purposes of the Investment Company Act.
Should the Issuer or the Co-Issuer be subjected to any or all of the foregoing, the Issuer or the Co-Issuer, as
the case may be, and the Noteholders would be materially and adversely affected.
42. ERISA Considerations. Each purchaser or transferee of the Rated Notes (other than the Class VII
Notes) that is, or is acting on behalf of, a Benefit Plan Investor that is subject to ERISA, Section 4975 of the
Code or Similar Law will be deemed or required to represent and warrant that its acquisition, holding and
disposition of such Notes will not constitute or otherwise result in a non-exempt prohibited transaction under
ERISA, Section 4975 of the Code or Similar Law.
The Issuer intends to restrict ownership of the ERISA Restricted Notes so that no assets of the
Issuer will be deemed to be “plan assets” subject to ERISA and/or Section 4975 of the Code as such term is
defined in the Plan Asset Regulation issued by the United States Department of Labor. If the assets of the
Issuer were deemed to be “plan assets,” certain transactions that the Issuer might enter into, or may have
entered into, in the ordinary course of business might constitute non-exempt prohibited transactions under
ERISA and/or Section 4975 of the Code and might have to be rescinded.
Accordingly, the Issuer intends to prohibit Plans (as defined below) from acquiring or holding any
ERISA Restricted Note or any interest therein. However, there can be no assurance that at any time no Plan
will hold an interest in a ERISA Restricted Note.
Therefore, except as expressly permitted by the Issuer, each initial investor and subsequent
transferee in the ERISA Restricted Notes will be deemed to represent and warrant and, in certain cases, will
represent and warrant in writing that, during the period it holds any interest in a ERISA Restricted Note, it is
not and is not acting on behalf of (a) an employee benefit plan (as defined in Section 3(3) of ERISA) that is
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subject to Title I of ERISA, (b) a plan (as defined in Section 4975(e)(1) of the Code) that is subject to
Section 4975 of the Code and (c) any other entity, including without limitation, an insurance company
general account, whose underlying assets include assets of the plans described in (a) or (b) above by reason
of such plan’s investment in the entity (each of (a), (b) and (c), a “Plan”). Except as expressly permitted by
the Issuer, none of the Trustee, as Note Registrar and transfer agent, or the Issuer will recognize any
purchase or transfer of such ERISA Restricted Note to a purchaser or transferee that is or is using the assets
of a Plan to acquire or hold such ERISA Restricted Notes. If at any time a purchaser or transferee of a
ERISA Restricted Note becomes or uses the assets of a Plan to acquire or hold a ERISA Restricted Note,
such purchaser or transferee will promptly notify each of the Issuer and the Trustee, as transfer agent, and
the Indenture will entitle the Issuer to require such transferee to dispose of such ERISA Restricted Note as
soon as practicable following such notification.
Each purchaser or transferee of the ERISA Restricted Notes will be deemed to represent and
warrant and, in certain cases, will represent and warrant in writing that, during the period such purchaser or
transferee holds any interest in such Note, either that (i) it is not, nor is it using the assets of, a Benefit Plan
Investor that is subject to ERISA, Section 4975 of the Code or any Similar Law to acquire and hold such
Notes or (ii) its acquisition, holding and disposition of such Notes will not constitute or otherwise result in a
non-exempt prohibited transaction under ERISA, Section 4975 of the Code or Similar Law.
See “ERISA Considerations” herein for a more detailed discussion of certain ERISA-related
considerations with respect to an investment in the Notes.
43. Anti-Money Laundering Provisions. The Issuer and the Administrator are subject to anti-money
laundering laws and regulations in the United States which impose specific requirements with respect to the
obligation “to know your client.” Except in relation to certain categories of institutional investors, the Issuer
will require a detailed verification of each initial 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. If the Issuer were found in violation of the anti-money laundering provisions, the
Issuer could be subject to substantial criminal penalties. Payment of any such penalties could materially
adversely affect the timing and amount of payments to Holders of the Notes.
44. Emerging Requirements of the European Community. As part of the harmonization of
securities markets in Europe, the European Commission has finalized the terms of a directive known as the
Transparency Directive (which is expected to be implemented by member states in 2006) that will, among
other things, impose continuing financial reporting obligations on issuers that have certain types of securities
admitted to trading on an E.U. regulated market, including the Irish Stock Exchange. In addition, the Market
Abuse Directive harmonizes the rules on insider trading and market manipulation in respect of securities
admitted to trading on an E.U. regulated market and requires issuers of such securities to disclose any
non-public price-sensitive information as soon as possible, subject to certain limited exemptions. The listing
of Notes on the Irish Stock Exchange would subject the Issuer to regulation under these directives, although
the requirements applicable to the Issuer are not yet fully clarified.
45. Certain Legal Investment Considerations. None of the Issuer, the Co-Issuer, the Investment
Adviser, the Initial CDS Counterparty, the Supersenior Swap Counterparty, the Managers or the Placement
Agents makes any representation as to the proper characterization of the Notes for legal investment or other
purposes, as to the ability of particular investors to purchase Notes for legal investment or other purposes or
as to the ability of particular investors to purchase Notes under applicable investment restrictions. All
institutions the activities of which are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult their own legal advisors in determining
whether and to what extent the Notes are subject to investment, capital or other restrictions. Without limiting
the generality of the foregoing, none of the Issuer, the Co-Issuer, the Investment Adviser, the Initial CDS
Counterparty, the Supersenior Swap Counterparty, the Managers or the Placement Agents makes any
representation as to the characterization of the Notes as a U.S.-domestic or foreign (non-U.S.) investment
under any state insurance code or related regulations, and they are not aware of any published precedent that
addresses such characterization. Although they are not making any such representation, the Co-Issuers
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understand that the New York State Insurance Department, in response to a request for guidance, has been
considering the characterization (as U.S.-domestic or foreign (non-U.S.)) of certain collateralized debt
obligation securities co-issued by a non-U.S. issuer and a U.S. co-issuer. There can be no assurance as to the
nature of any advice or other action that may result from such consideration. The uncertainties described
above (and any unfavorable future determinations concerning legal investment or financial institution
regulatory characteristics of the Securities) may affect the liquidity of the Notes.
46. Class P Subordinated Note Component. Holders of the Class P Notes should be aware that each
Risk Factor discussing potential risks in connection with the Subordinated Notes is generally applicable to
the Class P Notes, to the extent of the Class P Subordinated Note Component. For a detailed description of
the risk factors associated with the Class P Notes, see the section entitled "Description of the Class P Notes –
Risk Factors."
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DESCRIPTION OF THE NOTES
General
The Notes will be issued by the Issuer and the Rated Notes (other than the Class VII Notes) will be
co-issued by the Co-Issuers pursuant to the Indenture and will be secured pursuant to the Indenture. The
following summary describes certain provisions of the Notes and the Indenture. This summary does not
purport to be complete and is subject to, and qualified in its entirety by reference to, the provisions of the
Indenture.
Status and Security
The Notes will be limited recourse debt obligations of the Issuer and the Rated Notes (other than the
Class VII Notes) will be non-recourse debt obligations of the Co-Issuer, in each case secured as described
below. Except as otherwise specified under the Priority of Payments and as described herein, the Supersenior
Swap Commitment Fee and the Supersenior Swap Drawing Fee will be senior in right of payment on each
Payment Date to the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI
Notes, the Class VII Notes and the Subordinated Notes; the Class II Notes will be senior in right of payment
on each Payment Date to the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes, the
Class VII Notes, and the Subordinated Notes; the Class III Notes will be senior in right of payment on each
Payment Date to the Class IV Notes, the Class V Notes, the Class VI Notes, the Class VII Notes and the
Subordinated Notes; the Class IV Notes will be senior in right of payment on each Payment Date to the
Class V Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes; the Class V Notes will
be senior in right of payment on each Payment Date to the Class VI Notes, the Class VII Notes and the
Subordinated Notes; the Class VI Notes will be senior in right of payment on each Payment Date to the
Class VII Notes and the Subordinated Notes; and the Class VII Notes will be senior in right of payment on
each Payment Date to the Subordinated Notes. See “—Priority of Payments.” Payments to CDS
Counterparties (except CDS Subordinated Issuer Termination Payments) are senior in payment to any
Class of the Notes. In addition, amounts due to any Hedge Counterparty (excluding any termination
payments of the type payable to a Hedge Counterparty pursuant to clause (xv) of the Priority of Payments for
Collateral Principal Collections)) will be senior in right of payment on each Payment Date to the Rated
Notes and the Subordinated Notes.
The Indenture limits the amount of Notes that can be issued thereunder to (i) U.S.$55,000,000
aggregate principal balance of Class II Senior Floating Rate Notes Due 2046, (ii) U.S.$49,500,000 aggregate
principal balance of Class III Senior Floating Rate Notes Due 2046, (iii) U.S.$11,000,000 aggregate
principal balance of Class IV Senior Floating Rate Notes Due 2046, (iv) U.S.$11,500,000 aggregate
principal balance of Class V Mezzanine Floating Rate Deferrable Notes Due 2046, (v) U.S.$24,000,000
aggregate principal balance of Class VI Mezzanine Floating Rate Deferrable Notes Due 2046,
(vi) U.S.$5,000,000 aggregate principal balance of Class VII Mezzanine Floating Rate Deferrable Notes Due
2046, (vii) U.S.$19,000,000 aggregate principal balance of Subordinated Notes Due 2046 and (viii)
U.S.$5,910,000 aggregate principal balance of Class P Notes Due 2046.
Under the terms of the Indenture, dated the Closing Date (the “Indenture”), among the Issuer, the
Co-Issuer and the Trustee, the Issuer will grant to the Trustee, on behalf of and for the benefit of the Secured
Parties, a perfected security interest under the laws of the State of New York in the Collateral Assets, the
Eligible Investments, the Supersenior Swap, any Hedge Agreements and substantially all of the other assets
and property of the Issuer to secure, as applicable, the Issuer’s or the Co-Issuers’ obligations under the
Notes, the Indenture, the Supersenior Swap, the CDS Assets, the Collateral Administration Agreement and
any Hedge Agreements (provided that the Issuer’s rights under any Hedge Agreement, the Supersenior Swap
or any CDS Asset shall not be granted for the benefit of the respective applicable Hedge Counterparty,
Supersenior Swap Counterparty or CDS Counterparties, as the case may be) and as otherwise specified by
the Indenture. See “Security for the Notes.”
Payments of interest on and principal of the Rated Notes and distributions on the Subordinated Notes
will be made solely from the proceeds of the Collateral in accordance with the Priority of Payments. The
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aggregate amount that will be available for payment on the Notes (other than the Class P Notes) and for
payments under the CDS Assets and any Hedge Agreements and of fees and expenses of the Co-Issuers on
any Payment Date generally will be an amount equal to the sum of (i) the total amount of payments and
collections in respect of the Collateral Assets (including any Sale Proceeds) received during the preceding
Due Period, and not reinvested in Substitute Collateral Assets or retained in the Collection Account for
subsequent reinvestment, and reinvestment income and (ii) any such amounts received in prior Due Periods
that are not disbursed on a previous Payment Date as well as, solely to the extent and for the purposes
described herein, amounts on deposit in the Class I Reserve Account and the CDS Reserve Account and
Draws on the Supersenior Swap. To the extent these amounts are insufficient to meet payments due in
respect of the Notes, the CDS Assets, any Hedge Agreements, and fees and expenses, following receipt of
proceeds from the liquidation of the Collateral, the obligations of the Co-Issuers or the Issuer, as applicable,
to pay such deficiency will be extinguished and will not thereafter revive.
Interest on the Rated Notes
The Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and
the Class VII Notes will bear interest from the Closing Date and such interest will be payable, subject to the
availability of funds and to the Priority of Payments, quarterly in arrears on August 10th, November 10th,
February 10th and May 10th of each year (or, if such day is not a Business Day, on the next succeeding
Business Day) (each, a “Payment Date”), commencing on November 10, 2006 (the “Initial Payment
Date”) and ending on the Stated Maturity Date. The interest that will be payable on the Rated Notes of each
Class on each Payment Date will be the interest that has accrued during the related Periodic Interest Accrual
Period on the outstanding principal balance of such Class of Rated Notes after giving effect to the aggregate
payments of principal made on all previous Payment Dates in accordance with the Priority of Payments. All
payments of interest on the Rated Notes will be made on each Payment Date in accordance with the Priority
of Payments.
Periodic Interest on each Class of Rated Notes will accrue with respect to each Periodic Interest
Accrual Period at a per annum rate as follows:
Class of Notes
Applicable Periodic Interest Rate
Class II Notes
Three-Month LIBOR plus 0.42% percent
Class III Notes
Three-Month LIBOR plus 0.48% percent
Class IV Notes
Three-Month LIBOR plus 0.55% percent
Class V Notes
Three-Month LIBOR plus 1.20% percent
Class VI Notes
Three-Month LIBOR plus 3.00% percent
Class VII Notes
Three-Month LIBOR plus 6.25% percent
Interpolated LIBOR will be used for the first Periodic Interest Accrual Period relating to the Rated
Notes, and Three-Month LIBOR will apply for subsequent Periodic Interest Accrual Periods.
Periodic Interest on the Rated Notes will be calculated on the basis of a 360-day year and the actual
number of days elapsed in the applicable Periodic Interest Accrual Period.
The Note Calculation Agent will, with respect to each Periodic Interest Accrual Period, determine the
Class II Note Interest Rate, the Class III Note Interest Rate, the Class IV Note Interest Rate, the Class V
Note Interest Rate, the Class VI Note Interest Rate and the Class VII Note Interest Rate and will calculate
the amount of interest payable in respect of each Class of Rated Notes (each such amount, a “Payment
Amount”). The Payment Amount will be calculated for the relevant Periodic Interest Accrual Period by
multiplying the Applicable Periodic Interest Rate for each Class of Notes by the outstanding principal
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balance of such Class of Notes at the close of business on the first day of the Periodic Interest Accrual
Period, multiplying the resulting figure by the actual number of days in such Periodic Interest Accrual
Period, dividing by 360 and rounding to the nearest cent with half a cent being rounded upwards.
For purposes of calculating the Class II Note Interest Rate, the Class III Note Interest Rate, the Class IV
Note Interest Rate, the Class V Note Interest Rate, the Class VI Note Interest Rate and the Class VII Note
Interest Rate, the Co-Issuers will appoint Investors Bank & Trust Company as note calculation agent (in
such capacity, the “Note Calculation Agent”). “LIBOR” shall be determined by the Note Calculation
Agent in accordance with the following provisions:
(i)
On the second London Banking Day before each Periodic Interest Accrual Period, (a “LIBOR
Determination Date”) “Three-Month LIBOR” for such Periodic Interest Accrual Period shall
equal the rate, as obtained by the Note Calculation Agent, for three-month U.S. Dollar deposits
which appears on Moneyline Telerate Page 3750 or such other page as may replace Moneyline
Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date as
reported by Bloomberg Financial Markets Commodities News.
(ii)
If, on any LIBOR Determination Date, such rate does not appear on Moneyline Telerate Page
3750, the Note Calculation Agent shall determine the arithmetic mean of the offered quotations of
the Reference Banks given to leading banks in the London interbank market for the relevant
designated maturity for U.S. Dollar deposits in an amount determined by the Note Calculation
Agent by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the
LIBOR Determination Date made by the Note Calculation Agent to the Reference Banks. If, on
any LIBOR Determination Date, at least two of the Reference Banks provide such quotations,
Three-Month LIBOR or LIBOR, as applicable, shall equal such arithmetic mean of such
quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks
provides such quotations, Three-Month LIBOR or LIBOR, as applicable, shall be deemed to be
the arithmetic mean of the offered quotations that at least two leading banks in The City of New
York selected by the Note Calculation Agent (after consultation with the Investment Adviser) are
quoting on the relevant LIBOR Determination Date for the relevant designated maturity for U.S.
Dollar deposits in an amount determined by the Note Calculation Agent by reference to the
principal London offices of leading banks in the London interbank market; provided, however,
that if the Note Calculation Agent is required but is unable to determine a rate in accordance with
at least one of the procedures provided above, Three-Month LIBOR or LIBOR shall be ThreeMonth LIBOR or LIBOR, as applicable, as determined on the previous LIBOR Determination
Date. As used herein, “Reference Banks” means four major banks in the London interbank
market selected by the Note Calculation Agent.
For purposes of the first Periodic Interest Accrual Period, the Applicable Periodic Interest Rate will be
interpolated between three-month and four-month U.S. Dollar deposits in Europe on the second London
Banking Day preceding the Closing Date.
As soon as possible after 11:00 a.m. (New York time) on each LIBOR Determination Date, but in no
event later than 11:00 a.m. (New York time) on the Business Day immediately following each LIBOR
Determination Date, the Note Calculation Agent will calculate the Applicable Periodic Interest Rates for the
Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and the Class
VII Notes for the next Periodic Interest Accrual Period and the amount payable for such Periodic Interest
Accrual Period in respect of any Outstanding Class II Notes, Class III Notes, Class IV Notes, Class V Notes,
Class VI Notes and Class VII Notes, rounded to the nearest cent, with half a cent being rounded upward, on
the related Payment Date and will communicate such dates and amounts to the Co-Issuers, the Trustee, the
Investment Adviser, the Supersenior Swap Counterparty, DTC, Euroclear, Clearstream, the Note Paying
Agents and the Irish Paying Agent (if and for so long as any Class of Notes are listed on the Irish Stock
Exchange). The Note Calculation Agent will also specify to the Co-Issuers and the Supersenior Swap
Counterparty the quotations upon which the Class II Note Interest Rate, the Class III Note Interest Rate, the
Class IV Note Interest Rate, the Class V Note Interest Rate, the Class VI Note Interest Rate and the Class
VII Note Interest Rate are based, and in any event the Note Calculation Agent must notify the Co-Issuers
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before 5:00 p.m. (New York time) on each applicable LIBOR Determination Date if it has not determined
and is not in the process of determining such rate and amount, together with its reasons for the delay.
The Note Calculation Agent will cause the Applicable Periodic Interest Rate and the Payment Amounts
applicable for each Class of Rated Notes to be communicated to the Issuer, the Co-Issuer, the Trustee, the
Principal Note Paying Agent, the Investment Adviser, the Supersenior Swap Counterparty, DTC, Euroclear,
Clearstream and the Irish Paying Agent (if and for so long as any Class of Notes is listed on the Irish Stock
Exchange) by the Business Day immediately following each LIBOR Determination Date. The determination
of the Applicable Periodic Interest Rate and the Payment Amount for each other Class of Rated Notes by the
Note Calculation Agent will (in the absence of manifest error) be final and binding upon all parties.
The Note Calculation Agent may be removed by the Co-Issuers at any time; provided that for so long as
IBTC is the Trustee, it also shall be the Note Calculation Agent. If the Note Calculation Agent is unable or
unwilling to act as such or fails to determine for any Periodic Interest Accrual Period the Applicable Periodic
Interest Rate, the Payment Amounts for each Class of Rated Notes or is removed by the Co-Issuers, the CoIssuers will promptly appoint a replacement note calculation agent that is engaged in accepting Eurodollar
deposits and does not control or is not controlled by or under common control with the Co-Issuers or their
Affiliates. The Note Calculation Agent may not resign its duties without a successor having been duly
appointed.
On any Payment Date on which any of the Rated Notes are Outstanding, if any of the Coverage Tests
were not satisfied as of the related Calculation Date, (x) amounts that would otherwise be available (i) to
make distributions to the Holders of the Subordinated Notes, (ii) for the acquisition of additional Collateral
Assets, (iii) for the payment of certain fees and expenses, (iv) in the case of a failure to satisfy the Senior
Interest Coverage Test or the Senior Par Value Coverage Test, for interest payments on the Class V Notes,
the Class VI Notes and the Class VII Notes, (v) in the case of a failure to satisfy the Class V Interest
Coverage Test or the Class V Par Value Coverage Test, for interest payments on the Class VI Notes and the
Class VII Notes, (vi) in the case of a failure to satisfy the Class VI Interest Coverage Test or the Class VI Par
Value Coverage Test, for interest payments on the Class VII Notes, will instead be applied on such Payment
Date in accordance with the Priority of Payments to the extent necessary to satisfy such Coverage Test as of
the related Calculation Date, first, pay any outstanding Used Supersenior Swap Amount, second, to make a
deposit to the Class I Reserve Account to reduce the Available Supersenior Swap Amount until such
Coverage Test is satisfied as of the related Calculation Date or the Available Supersenior Swap Amount is
reduced to zero, if earlier, and third to principal payments on each Class of Rated Notes, starting with the
most senior Class of Rated Notes then Outstanding and (y) Synthetic Notional Proceeds that otherwise
would be available to reinvest in additional CDS Assets will instead be applied in accordance with the
Synthetic Applications Sequence to reduce the Available Supersenior Swap Amount (if any), in either case
until such Coverage Test is satisfied as of the related Calculation Date or the Available Supersenior Swap
Amount is reduced to zero and the Rated Notes are paid in full, if earlier. In the case of a failure to satisfy
the Class VII Interest Diversion Test, Collateral Interest Collections that otherwise would have been
available for certain payments of the Subordinate Investment Advisory Fee, certain payments of principal on
the Class VI Notes and for payment of certain available remaining amounts to Holders of the Subordinated
Notes will instead be used to redeem Class VII Notes until such Class VII Interest Diversion Test is satisfied
or, if earlier, the Class VII Notes are paid in full (all in accordance with the Priority of Payments).
So long as any Class II Notes, Class III Notes or Class IV Notes are Outstanding, to the extent that
funds are not available in accordance with the Priority of Payments on any Payment Date to pay the full
amount of interest on the Class V Notes (including application instead to satisfy the Senior Coverage Tests),
the amount available will be paid and any unpaid amount of interest will not be due and payable on such
Payment Date, but any amount of unpaid interest for the applicable Periodic Interest Accrual Period on the
Class V Notes will be included in the Class V Cumulative Applicable Periodic Interest Shortfall Amount and
will be added to the principal balance of the Class V Notes and paid thereafter in accordance with the
Priority of Payments. So long as the Class II Notes, the Class III Notes or the Class IV Notes are
Outstanding, the failure to pay interest on the Class V Notes will not be an Event of Default under the
Indenture. The Class V Cumulative Applicable Periodic Interest Shortfall Amount will accrue interest,
compounded quarterly on each Payment Date, at the applicable interest rate on such Class V Notes until such
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Class V Cumulative Applicable Periodic Interest Shortfall Amount is paid in accordance with the Priority of
Payments.
So long as any Class II Notes, Class III Notes, Class IV Notes or Class V Notes are Outstanding, to the
extent that funds are not available in accordance with the Priority of Payments on any Payment Date to pay
the full amount of interest on the Class VI Notes (including application instead to satisfy the Senior
Coverage Tests and the Class V Coverage Tests), the amount available will be paid and any unpaid amount
of interest will not be due and payable on such Payment Date, but any amount of unpaid interest for the
applicable Periodic Interest Accrual Period on the Class VI Notes will be included in the Class VI
Cumulative Applicable Periodic Interest Shortfall Amount and will be added to the principal balance of the
Class VI Notes and paid thereafter in accordance with the Priority of Payments. So long as the Class II
Notes, the Class III Notes, the Class IV Notes or the Class V Notes are Outstanding, the failure to pay
interest on the Class VI Notes will not be an Event of Default under the Indenture. The Class VI Cumulative
Applicable Periodic Interest Shortfall Amount will accrue interest, compounded quarterly on each Payment
Date, at the applicable interest rate on such Class VI Notes until such Class VI Cumulative Applicable
Periodic Interest Shortfall Amount is paid in accordance with the Priority of Payments.
So long as any Class II Notes, Class III Notes, Class IV Notes, Class V Notes or Class VI Notes are
Outstanding, to the extent that funds are not available in accordance with the Priority of Payments on any
Payment Date to pay the full amount of interest on the Class VII Notes (including application instead to
satisfy the Senior Coverage Tests, the Class V Coverage Tests and the Class VI Coverage Tests), the amount
available will be paid and any unpaid amount of interest will not be due and payable on such Payment Date,
but any amount of unpaid interest for the applicable Periodic Interest Accrual Period on the Class VII Notes
will be included in the Class VII Cumulative Applicable Periodic Interest Shortfall Amount and will be
added to the principal balance of the Class VII Notes and paid thereafter in accordance with the Priority of
Payments. So long as the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes or the
Class VI Notes are Outstanding, the failure to pay interest on the Class VII Notes will not be an Event of
Default under the Indenture. The Class VII Cumulative Applicable Periodic Interest Shortfall Amount will
accrue interest, compounded quarterly on each Payment Date, at the applicable interest rate on such
Class VII Notes until such Class VII Cumulative Applicable Periodic Interest Shortfall Amount is paid in
accordance with the Priority of Payments.
Interest will cease to accrue on each Class II Note, Class III Note, Class IV Note, Class V Note,
Class VI Note or Class VII Note or, in the case of a partial repayment, on such part, from the date of
repayment or the Stated Maturity Date of the Notes unless payment of principal is improperly withheld or
unless default otherwise occurs with respect to such payments of principal. See “—Principal of the Rated
Notes.” To the extent lawful and enforceable, interest on Defaulted Interest with respect to any Note will
accrue at the interest rate applicable to such Note until paid as provided herein. “Defaulted Interest” means
any interest due and payable in respect of any Class II Note, Class III Note or Class IV Note or, if no Class II
Notes, Class III Notes or Class IV Notes are Outstanding, in respect of any Class V Note or, if no Class II
Notes, Class III Notes, Class IV Notes or Class V Notes are Outstanding, in respect of any Class VI Note or,
if no Class II Notes, Class III Notes, Class IV Notes, Class V Notes or Class VI Notes are Outstanding, in
respect of any Class VII Note or any interest on such Defaulted Interest, that (in each case) is not punctually
paid or duly provided for on the applicable Payment Date (including the Stated Maturity Date) of the
applicable Rated Note; provided that for so long as any Class II Notes, Class III Notes or Class IV Notes are
Outstanding, any interest payable in respect of the Class V Notes that is not punctually paid on the
applicable Payment Date will not be considered Defaulted Interest, but rather shall be added to the Class V
Cumulative Applicable Periodic Interest Shortfall Amount; provided further, that for so long as any Class II
Notes, Class III Notes, Class IV Notes or Class V Notes are Outstanding, any interest payable in respect of
the Class VI Notes that is not punctually paid on the applicable Payment Date will not be considered
Defaulted Interest, but rather shall be added to the Class VI Cumulative Applicable Periodic Interest
Shortfall Amount; provided further, that for so long as any Class II Notes, Class III Notes, Class IV Notes,
Class V Notes or Class VI Notes are Outstanding, any interest payable in respect of the Class VII Notes that
is not punctually paid on the applicable Payment Date will not be considered Defaulted Interest, but rather
shall be added to the Class VII Cumulative Applicable Periodic Interest Shortfall Amount.
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Stated Maturity of the Notes
The stated maturity of each Class of Notes is the Payment Date occurring in August of 2046 (the
“Stated Maturity Date”), unless such Class of Notes is previously redeemed or repaid as described herein.
The average life of each Class of Notes is expected to be shorter, in each case, than the number of years until
the Stated Maturity Date for the Notes. See “Risk Factors—Average Life and Prepayment Considerations”
and “Maturity and Prepayment Considerations.”
Principal of the Rated Notes
Principal of the Rated Notes will be paid in accordance with the Priority of Payments. Subject to the
Priority of Payments, unless a Rating Confirmation that requires a redemption of some of the Rated Notes or
a Rating Confirmation Failure occurs, a Coverage Test is not satisfied on a Calculation Date, a Special
Amortization is designated by the Investment Adviser or a Tax Redemption occurs, no principal will be paid
on the Rated Notes (other than the limited payment of principal of the Class VI Notes and Class VII Notes in
accordance with clause (xx) of the Priority of Payments for Collateral Interest Collections) during the
Reinvestment Period (and, at the option of the Investment Adviser, during the first Due Period after the
Reinvestment Period to the extent described under “—Priority of Payments”). Instead, Collateral Principal
Collections (including Sale Proceeds) to the extent not used to pay Used Supersenior Swap Amounts or to
make payments under CDS Assets will be used to purchase or enter into Substitute Collateral Assets meeting
the Reinvestment Criteria (see “Security for the Notes—Substitute Collateral Assets and Reinvestment
Criteria”). On each Payment Date on and after the Payment Date following the end of the Reinvestment
Period, an amount equal to the amount of Collateral Principal Collections received during the related Due
Period will be deposited into the Class I Reserve Account to reduce the Available Supersenior Swap Amount
to zero, and then applied to pay the principal of the Rated Notes sequentially in the order of seniority in
accordance with and to the extent of the Priority of Payments.
On any Payment Date with respect to which any of the Coverage Tests is not satisfied as of the related
Calculation Date, (x) Collateral Interest Collections and Collateral Principal Collections will be used to pay
any outstanding Used Supersenior Swap Amount, then deposited into the Class I Reserve Account to reduce
the Available Supersenior Swap Amount and then applied to pay principal of the Rated Notes sequentially in
order of seniority, in each case, until such Coverage Tests are satisfied or, if earlier, the applicable Class of
Rated Notes is paid in full and/or the Available Supersenior Swap Amount is reduced to zero and (y) if such
application of Collateral Interest Collections and Collateral Principal Collections is insufficient to satisfy the
Coverage Tests, Synthetic Notional Proceeds will be applied in accordance with the Synthetic Applications
Sequence, to reduce the Available Supersenior Swap Amount until such Coverage Tests are satisfied or, if
earlier, the Available Supersenior Swap Amount is reduced to zero.
On any Payment Date from and including the Initial Payment Date through and including the Payment
Date occurring in August of 2011 on which the holders of the Subordinated Notes receive a Cash-on-Cash
Return of 12 percent, Collateral Interest Collections available in accordance with the Priority of Payments
will be used to redeem pro rata, the Class VI Notes by an amount equal to (1) the lesser of the amount
outstanding and (2) U.S.$180,000, and the Class VII Notes by an amount equal to (1) the lesser of the
amount outstanding and (2) U.S.$37,500.
Principal also will be paid to Holders of Rated Notes (i) during or after the Non-Call Period, in
connection with a Tax Redemption or (ii) after the Non-Call Period, in connection with an Optional
Redemption or Auction Call Redemption. The outstanding principal balance of the Rated Notes will be due
and payable on the Stated Maturity Date.
Any payment of principal of the Rated Notes of any Class will be made by the Note Paying Agents on a
pro rata basis among the Holders of Rated Notes of such Class according to the respective outstanding
principal balances immediately prior to such payment.
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Payments on Subordinated Notes
The Subordinated Notes are subordinated in right of payment to the Rated Notes and to the payments of
all other amounts due under the Indenture, including expenses of the Co-Issuers, amounts due under the CDS
Assets, the Supersenior Swap Commitment Fee, the Supersenior Swap Drawing Fee, amounts owed to any
Hedge Counterparties, fees and expenses of the Trustee and the Investment Adviser and repayments of Used
Supersenior Swap Amounts.
Distributions, if any, will be made on the Subordinated Notes in accordance with the Priority of
Payments on each Payment Date through the Final Subordinated Maturity Date. The Holders of the
Subordinated Notes will not be entitled to receive interest payments at a stated rate. Instead, any amounts
remaining after the payment of all other items ranking senior in the Priority of Payments, including certain
payments of principal on the Class VI Notes and the Class VII Notes from Collateral Interest Collections,
will be distributed to the Holders of the Subordinated Notes on each Payment Date. See “—Priority of
Payments.” The failure to make distributions to the Holders of the Subordinated Notes on any Payment Date
will not be an Event of Default. All amounts distributed on the Subordinated Notes will be paid to the
Holders of the Subordinated Notes on a pro rata basis according to the outstanding principal balance of the
Subordinated Notes held by each Holder. Following the liquidation of the Collateral and the distribution of
available remaining funds following a redemption or payment of the Rated Notes and payment of all other
obligations of the Co-Issuers (other than amounts payable on the Subordinated Notes) (whether before, on or
after the Final Subordinated Maturity Date), the Subordinated Notes will be redeemed whether or not any
amounts are available for distribution to the Subordinated Notes.
The Supersenior Swap
General
In order to provide the Issuer with funds to meet its obligations under the CDS Assets, the Issuer will
enter into a Supersenior Swap Agreement (the “Supersenior Swap”), with MSCS (the “Supersenior Swap
Counterparty”), under which the Supersenior Swap Counterparty will agree to make available to the Issuer
up to $325,000,000 (such amount, as it may be reduced from time to time by the Investment Adviser, acting
on behalf of the Issuer, the “Maximum Notional Amount”), subject to the terms and conditions described
therein. The Issuer will not make a Draw under the Supersenior Swap on the Closing Date. The Supersenior
Swap is scheduled to terminate on the Stated Maturity Date (the “Scheduled Supersenior Swap
Termination Date”). The date on which the Supersenior Swap terminates (the “Supersenior Swap
Termination Date”) will be the earliest to occur of (i) the Scheduled Supersenior Swap Termination Date,
(ii) the date on which any Optional Redemption, Tax Redemption or Auction Call Redemption occurs, and
(iii) the Business Day immediately following the date on which funds are applied in the Liquidation Priority.
The proceeds of Draws on the Available Supersenior Swap Amount by the Issuer will not be invested in
Collateral Assets but instead will be used to make payments to CDS Counterparties and to cover Senior
Interest Shortfalls, in each case as described herein.
Draws Under the Supersenior Swap in Order to Make Certain Payments
On any Business Day up to but excluding the Supersenior Swap Termination Date (except with respect
to Draws described in (4) below, which can only be made in anticipation of a Payment Date), the Issuer may
draw on the Available Supersenior Swap Amount to obtain funds for the following purposes (each such
draw, a “Draw”) such Draws:
(1) to pay any CDS Loss Payment due and payable to a CDS Counterparty as and to the extent a Draw
on the Available Supersenior Swap Amount is required to make such payment pursuant to the
CDS Payment Priority;
(2) to pay any CDS Interest Payment due and payable to a CDS Counterparty as and to the extent a
Draw on the Available Supersenior Swap Amount is required to make such payment pursuant to
the CDS Payment Priority;
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(3) to pay any CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment) due and payable to a CDS Counterparty as and to the extent a Draw on the Available
Supersenior Swap Amount is required to make such payment pursuant to the CDS Payment
Priority; or
(4) so long as no Event of Default has occurred and is continuing, on any Payment Date that a Senior
Interest Shortfall exists, to pay any accrued and unpaid interest on the Class II Notes, the Class III
Notes, or the Class IV Notes, as applicable, in order of seniority in an amount equal to such Senior
Interest Shortfall pursuant to the Priority of Payments; provided that any such Draw may not
exceed the lesser of (x) the amount of the Senior Interest Shortfall and (y) the Cash Settlement
Ceiling Amount as of the date of the related Draw Notice.
All amounts drawn for the purposes specified in clauses (1), (2) and (3) above to pay CDS Loss
Payments, CDS Interest Payments or CDS Issuer Termination Payments (other than CDS Subordinated
Issuer Termination Payments) in accordance with the CDS Priority of Payments will be paid to the
applicable CDS Counterparty and all amounts drawn for the purposes specified in clause (4) in respect of a
Senior Interest Shortfall in accordance with the Priority of Payments will be deposited to the Note Payment
Account as Collateral Interest Collections to cover such Senior Interest Shortfall.
The Trustee will make the Draws described above by delivering a Draw Notice for settlement on the
Business Day following the delivery of such Draw Notice in the case of a Draw for CDS Payments and on
the second Business Day following the delivery of such Draw Notice in the case of a Draw for a Senior
Interest Shortfall.
Mechanics of Draws Under the Supersenior Swap
The Trustee will Draw on the Available Supersenior Swap Amount for any of the purposes described
above pursuant to a written notice (a “Draw Notice”) in substantially the form required by the Supersenior
Swap by no later than 11:00 a.m. (New York time) one Business Day prior to the requested Draw date in the
case of Draws for CDS Payments, or two Business Days prior to the requested Draw date in the case of
Draws for Senior Interest Shortfalls (the “Draw Date”) either by facsimile or electronic mail to the address
provided by the Supersenior Swap Counterparty in the Supersenior Swap. If the Trustee fails to promptly
deliver a Draw Notice, the Investment Adviser or any CDS Counterparty may notify the Trustee to deliver
such Draw Notice and the Trustee will deliver such Draw Notice promptly following such notice; provided,
that if the Trustee fails to deliver a Draw Notice promptly following notification to do so by either the
Investment Adviser or any CDS Counterparty, then the Investment Adviser, acting on behalf of the Issuer,
may (but shall have no obligation to) deliver such Draw Notice to the Supersenior Swap Counterparty (with
a copy to the Trustee) and shall not incur any liability for delivering such Draw Notice in good faith. Each
Draw Notice must set forth: (i) the use of the proceeds of such Draw and the specific provision of the
Indenture pursuant to which such Draw is made, (ii) the Available Supersenior Swap Amount immediately
prior to giving effect to the Draw and (iii) a confirmation that the conditions precedent set forth in the
Supersenior Swap are satisfied as of the Draw Date.
Subject to the delivery of a Draw Notice at least one Business Day prior to the related Draw Date in the
case of Draws for CDS Payments, or two Business Days prior to the related Draw Date in the case of Draws
for Senior Interest Shortfalls and the satisfaction of the other conditions set forth in the Supersenior Swap, as
of such date, the Supersenior Swap Counterparty will fund each Draw on the related Draw Date by wire
transfer of immediately available funds to the Collection Account in accordance with the wire transfer
instructions set forth in the Draw Notice by 11:00 a.m. (New York time) on the related Draw Date; provided,
however, that to the extent that such a Draw is netted against a payment owed by the Issuer to the CDS
Counterparty, no funds will be wired and the Draw will be deemed to have been funded in the amount so
netted.
Replacement Supersenior Swap Counterparty
Prior to the Maximum Notional Amount being reduced to zero, and as except otherwise provided
herein, the Issuer will not terminate the Supersenior Swap and/or enter into a replacement supersenior swap
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unless it (i) has obtained a commitment from a substitute supersenior swap counterparty willing to enter into
a substitute supersenior swap that provides for, among other things, the Substitute Supersenior Swap Terms,
(ii) has obtained Rating Agency Confirmation with respect to such replacement and (iii) has obtained a
written consent thereto from the Initial CDS Counterparty. The “Substitute Supersenior Swap Terms”
means the terms of any substitute supersenior swap to be entered into by the Issuer upon termination of the
Supersenior Swap, which terms shall be substantially the same as the terms of the Supersenior Swap and
shall, in addition, provide the Issuer with a right to Draw on the Available Supersenior Swap Amount in full
when the substitute supersenior swap counterparty (or an entity that irrevocably and unconditionally
guarantees the obligations of such substitute liquidity provider, if any) has a short-term unsecured debt rating
or counterparty rating (or its equivalent) of below “A-1+” by S&P or below “P-1” by Moody’s (in each case,
without credit watch for possible downgrade) or a long-term unsecured debt or counterparty rating below
“Aa3” by Moody’s (which if rated “Aa3” by Moody’s is not on credit watch for possible downgrade by
Moody’s).
If the Supersenior Swap is terminated, the Issuer’s obligations to pay any unpaid Supersenior Swap
Commitment Fees, as well as any unpaid Supersenior Swap Drawing Fees and any outstanding Used
Supersenior Swap Amount, will, in accordance with the terms of the Supersenior Swap, continue until all
such amounts have been paid in full. No other payment will be owed by either the Issuer or the Supersenior
Swap Counterparty upon such termination.
Supersenior Swap Commitment Fee; Supersenior Swap Drawing Fee
A commitment fee (the “Supersenior Swap Commitment Fee”) will accrue at a rate equal to 0.18
percent per annum (the “Supersenior Swap Commitment Fee Rate”) on the Average Available
Supersenior Swap Amount for the Periodic Interest Accrual Period then most recently ended. The
Supersenior Swap Commitment Fee will be payable to the Supersenior Swap Counterparty quarterly in
arrears on each Payment Date, subject to and in accordance with the Priority of Payments; provided that the
Supersenior Swap Commitment Fee will not accrue or be payable for any period in which the Supersenior
Swap Counterparty is in default of its obligations fund a Draw under the Supersenior Swap. The Supersenior
Swap Commitment Fee will be calculated based upon the Average Available Supersenior Swap Amount
multiplied by the Supersenior Swap Commitment Fee Rate multiplied by the actual number of days during
each applicable Periodic Interest Accrual Period divided by 360. The Supersenior Swap Commitment Fee
that is due on any Payment Date will be paid prior to the payment of any interest that is due and payable on
such Payment Date in respect of the Notes. Any Supersenior Swap Commitment Fee that is accrued but
unpaid on any Payment Date in accordance with the Priority of Payments will accrue interest thereon at a
rate equal to Supersenior Swap Drawing Fee Rate (subject to the above provisions on default and nonaccrual if the Supersenior Swap Counterparty is in default under the Supersenior Swap). “Average
Available Supersenior Swap Amount” for any Periodic Interest Accrual Period is (x) the sum of the
amount of the Available Supersenior Swap Amount for each day during the Periodic Interest Accrual Period
divided by (y) the actual number of days in the Periodic Interest Accrual Period.
A drawing fee (the “Supersenior Swap Drawing Fee”) will accrue at a rate equal to LIBOR plus 0.33
percent per annum (the “Supersenior Swap Drawing Fee Rate”) on the Average Used Supersenior Swap
Amount for the Periodic Interest Accrual Period then most recently ended. The Supersenior Swap Drawing
Fee will be payable to the Supersenior Swap Counterparty quarterly in arrears on each Payment Date,
subject to and in accordance with the Priority of Payments; provided that the Supersenior Swap Drawing Fee
will not accrue or be payable for any period in which the Supersenior Swap Counterparty is in default of its
obligations to fund a Draw under the Supersenior Swap. The Supersenior Swap Drawing Fee will be
calculated based upon the Average Used Supersenior Swap Amount multiplied by the Supersenior Swap
Drawing Fee Rate multiplied by the actual number of days during each applicable Periodic Interest Accrual
Period divided by 360. The Supersenior Swap Drawing Fee that is due on any Payment Date will be paid
prior to the payment of any interest that is due and payable on such Payment Date in respect of the Notes.
Any Supersenior Swap Drawing Fee that is accrued but unpaid on any Payment Date in accordance with the
Priority of Payments will accrue interest thereon at a rate equal to Supersenior Swap Drawing Fee Rate
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(subject to the above provisions on default and non-accrual if the Supersenior Swap Counterparty is in
default under the Supersenior Swap). “Average Used Supersenior Swap Amount” for any Periodic Interest
Accrual Period is (x) the sum of the amount of the Used Supersenior Swap Amount for each day during the
Periodic Interest Accrual Period divided by (y) the actual number of days in the Periodic Interest Accrual
Period.
Amount Available for Draws under the Supersenior Swap
The maximum amount available to be drawn on the Supersenior Swap at any time will be an amount
equal to (i) in the case of a CDS Interest Payment, CDS Loss Payment or CDS Issuer Termination Payment
(other than a CDS Subordinated Issuer Termination Payment), the Available Supersenior Swap Amount and
(ii) in the case of a Senior Interest Shortfall, the lesser of the Available Supersenior Swap Amount and the
Available Synthetic Notional Proceeds Amount as of the related Calculation Date (before giving effect to the
Synthetic Applications Sequence). “Available Supersenior Swap Amount” means the amount equal to (i)
the Maximum Notional Amount, minus (ii) the Used Supersenior Swap Amount, minus (iii) the aggregate of
all amounts deposited into the Class I Reserve Account since the Closing Date, whether or not remaining in
such account (excluding any investment earnings thereon), minus (iv) the aggregate amount of Synthetic
Notional Proceeds applied on all prior Payment Dates in accordance with the Synthetic Applications
Sequence other than reductions to the Available Synthetic Notional Proceeds Amount pursuant to clause (i)
of the Synthetic Applications Sequence, minus (v) the Used Supersenior Swap Adjustment Amount. In no
event may any Draw be made under the Supersenior Swap if, after giving effect thereto, (i) the Used
Supersenior Swap Amount would exceed the Maximum Notional Amount or (ii) the Draw would exceed the
Available Supersenior Swap Amount immediately before giving effect to such Draw.
Reductions to the Maximum Notional Amount
The Investment Adviser, acting on behalf of the Issuer in its sole discretion, may reduce the Maximum
Notional Amount irrevocably on any Payment Date by an amount not to exceed the amount (not less than
zero) equal to (x) the sum of the Available Supersenior Swap Amount, the Class I Reserve Balance and the
CDS Reserve Account Balance minus (y) the CDS Asset Balance, determined in each case as of the related
Calculation Date. Any reductions to the Maximum Notional Amount will be permanent.
Payments of Used Supersenior Swap Amounts and deposits to the Class I Reserve Account will rank
prior to the payment of principal of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V
Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes in the manner set forth in the
Used Supersenior Swap Amount Repayment Priority and the Priority of Payments.
Class I Reserve Account
The Trustee will establish and maintain a segregated non-interest bearing trust account to be designated
as the “Class I Reserve Account” for the benefit of and on behalf of the Secured Parties, to which funds
will be deposited from time to time subject to and in accordance with the Priority of Payments. Amounts on
deposit from time to time in the Class I Reserve Account will be invested in Class I Reserve Investments
selected by the Investment Adviser. Investment earnings on amounts on deposit in the Class I Reserve
Account will constitute Collateral Interest Collections and will be withdrawn and deposited into the
Collection Account. Any deposits to the Class I Reserve Account will permanently reduce the Available
Supersenior Swap Amount in the amount of such deposit.
If on any Business Day, the Issuer is required to make (i) a CDS Interest Payment, (ii) a CDS Loss
Payment, or (iii) a CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment) pursuant to a CDS Asset, the Trustee will apply cash on deposit in the Class I Reserve Account
and the sale proceeds from the sale of any Class I Reserve Investments as and to the extent required in
accordance with the CDS Payment Priority.
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Issuer’s Rights Upon Failure by Supersenior Swap Counterparty to Fund a Draw
The Trustee may, and shall if directed in writing by the affected CDS Counterparties as described in
“Security for the Notes—Early Termination of CDS Assets,” pursue remedies at law or in equity to require
the Supersenior Swap Counterparty to fund the aggregate amount of the Draws that the Supersenior Swap
Counterparty fails to fund and to compensate the Issuer for the reasonable costs and expenses (including
reasonable attorneys’ fees and expenses) incurred by or on behalf of the Issuer as a result of such failure,
subject to the terms of the Indenture (including for the avoidance of doubt, the Trustee’s rights of
indemnification thereunder). The Supersenior Swap Commitment Fee and the Supersenior Swap Drawing
Fee will not accrue or be payable to the Supersenior Swap Counterparty from and including the date on
which the Supersenior Swap Counterparty fails to fund a Draw to but excluding the date on which the
Supersenior Swap Counterparty remedies such failure. Any voting or consent right or similar right of the
Supersenior Swap Counterparty pursuant to the Indenture will be inapplicable if and for so long as the
Supersenior Swap Counterparty has defaulted in its obligation to fund Draws following satisfaction of the
applicable conditions precedent thereto if such default remains unremedied following the second Business
Day after the Supersenior Swap Counterparty’s receipt of written notice of such default, and in any event
such rights and any requirement for notice or other communication required to be delivered to the
Supersenior Swap Counterparty pursuant to the Indenture will be inapplicable following the termination of
the Supersenior Swap in accordance with its terms and the payment of all amounts payable to the
Supersenior Swap Counterparty thereunder.
Limited Recourse
The obligations of the Issuer under the Supersenior Swap will be limited to the proceeds of the
Collateral as applied in accordance with the Priority of Payments, the CDS Priority and the Used
Supersenior Swap Amount Repayment Priority.
Reinvestment Period
The “Reinvestment Period” will be the period beginning on the Closing Date and continuing through
the earlier to occur of: (i) the end of the Due Period immediately preceding the Payment Date occurring in
August 2010 and (ii) the occurrence of an Event of Default that results in acceleration of the Notes; provided
that if such acceleration is rescinded in accordance with the Indenture, this clause (ii) shall not be applicable
with respect to that particular Event of Default and acceleration. No principal will be payable in respect of
any Notes during the Reinvestment Period except in the event that a Principal Prepayment, a Tax
Redemption, a Special Amortization, the payment of principal of the Class VI Notes and Class VII Notes in
accordance with clause (xx) under the Priority of Payments for Collateral Interest Collections, a Rating
Confirmation or a Rating Confirmation Failure takes place.
On any day during the Reinvestment Period (and, in the case of the first Due Period after the
Reinvestment Period, at the option of the Investment Adviser, as described in the Priority of Payments for
Collateral Principal Collections), the Issuer, at the direction of the Investment Adviser, will apply Collateral
Principal Collections and Collateral Interest Collections to purchase or enter into Substitute Collateral Assets
or purchase Eligible Investments pending reinvestment in Substitute Collateral Assets (and in the case of a
Payment Date, will apply Collateral Principal Collections and Collateral Interest Collections available in
accordance with the Priority of Payments to purchase or enter into Substitute Collateral Assets or purchase
Eligible Investments pending reinvestment in Substitute Collateral Assets). On any day during the
Reinvestment Period, the Issuer, at the direction of the Investment Adviser, may, subject to the satisfaction
of certain requirements set forth in “Security for the Notes—Substitute Collateral Assets and Reinvestment
Criteria,” reinvest Synthetic Notional Proceeds and in the case of a Payment Date, will apply Synthetic
Notional Proceeds in accordance with the Synthetic Applications Sequence prior to any such reinvestment.
See “—Priority of Payments” and “Security for the Notes—Substitute Collateral Assets and Reinvestment
Criteria.”
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Early Redemption of the Notes
Optional Redemption. After the period commencing on the Closing Date and ending on the Business
Day preceding the Payment Date in August 2009 (the “Non-Call Period”), the Rated Notes will be subject
to optional redemption in whole but not in part (an “Optional Redemption”) on any Payment Date (the
“Optional Redemption Date”) by the Issuer, at the direction of the Holders of at least 66⅔ percent of the
outstanding principal balance of the Subordinated Notes, at the applicable Redemption Price; provided that
(i) Sale Proceeds from the sale or termination of the Collateral in connection with any proposed redemption,
together with all other Available Funds (as determined by the Trustee), are expected to be sufficient to pay in
full the Total Redemption Amount (determined as specified in “—Redemption Procedures”) in accordance
with the Priority of Payments, (ii) the Rated Notes are simultaneously redeemed, (iii) all the CDS Assets that
by their terms are permitted and/or required to be terminated, to the extent not otherwise liquidated are
terminated and any amounts due under the CDS Assets are paid or deposited to the Class I Reserve Account
and (iv) any Hedge Agreements and the Supersenior Swap are terminated (and the Available Supersenior
Swap Amount is reduced to zero and any amounts due thereunder are paid). Provided that all of the CDS
Assets have been terminated and all amounts due and payable by the Issuer thereunder have been
determined, on any Payment Date on or after redemption of the Rated Notes and payment of, or
establishment of a reasonable reserve for, all other amounts payable by the Issuer in accordance with the
Priority of Payments and the payment of all other amounts payable in connection with, or establishment of a
reasonable reserve for, the termination of the CDS Assets, upon the written direction of the Holders of at
least 66⅔ percent of the outstanding principal balance of the Subordinated Notes, the Subordinated Notes
will be redeemed at their Redemption Price.
Tax Redemption. Upon the occurrence and during the continuation of a Tax Event, the Issuer is
required to redeem the Rated Notes in whole but not in part (such a redemption, a “Tax Redemption”), if so
directed in writing by the Holders of at least a majority of the outstanding principal balance of the
Subordinated Notes, on any Payment Date, whether during or after the Reinvestment Period, on which such
Tax Event is continuing at the applicable Redemption Price; provided that (i) Sale Proceeds from the
liquidation of the Collateral in connection with any proposed redemption, together with all other Available
Funds (as determined by the Trustee), are expected to be sufficient to pay in full the Total Redemption
Amount (determined as specified in “—Redemption Procedures”) in accordance with the Priority of
Payments, (ii) the Rated Notes are simultaneously redeemed, (iii) all the CDS Assets that by their terms are
permitted and/or required to be terminated, to the extent not otherwise liquidated are terminated and any
amounts due under the Synthetic Assets are paid or deposited to the Class I Reserve Account and (iv) any
Hedge Agreements and the Supersenior Swap are terminated and amounts due thereunder are paid. Each
Rated Note redeemed in connection with a Tax Redemption will be redeemed at its applicable Redemption
Price. In connection with a Tax Redemption, the Available Supersenior Swap Amount will be reduced to
zero and the Supersenior Swap will be terminated. Provided that all of the CDS Assets have been terminated
and all amounts due and payable by the Issuer thereunder have been determined, on any Payment Date on or
after redemption of the Rated Notes and the payment of all other fees and expenses payable in accordance
with the Priority of Payments or establishment of a reasonable reserve for such fees and expenses, upon the
written direction of the Holders of at least a majority of the outstanding principal balance of the
Subordinated Notes, the Subordinated Notes will be redeemed at their Redemption Price.
Redemption Procedures
In the event of an Optional Redemption or a Tax Redemption (each, a “Redemption”), the Investment
Adviser will direct the Trustee to sell or terminate, as applicable, Collateral Assets in accordance with the
Indenture; provided that the Sale Proceeds therefrom, any termination payments scheduled to be received by
the Issuer under any Synthetic Assets or Hedge Agreements on or prior to the Redemption Date and all other
funds in the Collection Account, the Interest Reserve Account, the Class I Reserve Account and the CDS
Reserve Account (other than Class I Reserve Investments held in the Class I Reserve Account or CDS
Reserve Investments held in the CDS Reserve Account for the purpose of making payments under the CDS
Assets, if any, that cannot be terminated), and the Expense Reserve Account (after the payment of, or
establishment of a reasonable reserve for, all administrative and other fees and expenses, the Investment
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Advisory Fee and any other amounts payable by the Issuer and the Co-Issuer, as the case may be, pursuant to
the Priority of Payments, including in connection with CDS Assets, if any, that could not be terminated in
connection with the Redemption and for which amounts in the Class I Reserve Account are not sufficient;
provided, that the amount of such reserve is subject to the prior written consent of the Initial CDS
Counterparty (which consent shall not be unreasonably withheld) are expected to be at least sufficient to pay
the Total Redemption Amount in accordance with the Priority of Payments (after application of the CDS
Payment Priority and the Used Supersenior Swap Amount Repayment Priority), determined in accordance
with the procedures described below; and provided, further, that such Sale Proceeds are received by the
Trustee at least one Business Day prior to the scheduled Redemption Date and are used, to the extent
necessary, to make such payments.
Rated Notes
In the event of any Redemption of the Rated Notes, the Issuer will, at least 45 days prior to the Optional
Redemption Date or the Tax Redemption Date, as the case may be (unless the Trustee agrees to a shorter
notice period), notify the Trustee, the Investment Adviser, the Supersenior Swap Counterparty, the CDS
Counterparties and any Hedge Counterparty, of such Optional Redemption Date or Tax Redemption Date, as
the case may be, the applicable Record Date, the outstanding principal balance of Rated Notes to be
redeemed on such Optional Redemption Date or Tax Redemption Date, as the case may be, and the
applicable Redemption Price of such Rated Notes.
Notice of a Redemption will be given by the Trustee by first-class mail, postage prepaid, mailed not
less than 10 Business Days prior to the applicable Redemption Date, to each Holder of Rated Notes at such
Holder’s address in the Note Register maintained by the Note Registrar in accordance with the provisions of
the Indenture and to the Supersenior Swap Counterparty and the Investment Adviser. Failure to give notice
of redemption, or any defect therein, to any Holder of any Rated Note selected for redemption will not
impair or affect the validity of the redemption of any other Rated Notes. Rated Notes called for redemption
must be surrendered at the office of any Note Paying Agent appointed under the Indenture in order to receive
the Redemption Price. If any Notes are listed on the Irish Stock Exchange, the Trustee will also deliver
notice of such redemption to the Irish Paying Agent who shall forward such notice to the Irish Stock
Exchange.
The Rated Notes will not be optionally redeemed unless either:
1. at least seven Business Days before the scheduled Optional Redemption Date or Tax Redemption
Date, the Investment Adviser has furnished to the Trustee evidence, in form satisfactory to the Trustee, that
the Issuer has entered into a binding agreement or agreements with an institution or institutions (or guarantor
or guarantors of the obligations),
(a) with regard to which Rating Agency Confirmation has been received, or
(b) (i) whose long-term senior unsecured debt obligations (other than such obligations whose rating is
based on the credit of a person other than such institution) have a credit rating from Moody’s of at
least “A1” or whose short-term unsecured debt obligations have a credit rating from Moody’s of
“P-1,” and (ii) whose short-term unsecured debt obligations have a credit rating from S&P of at
least “A-1,”
in each case, to purchase, not later than the Business Day immediately preceding the Redemption Date, in
immediately available funds, all or part of the Collateral Assets at a purchase price at least equal to an
amount sufficient, together with the Class I Reserve Investments and the CDS Reserve Investments (other
than Class I Reserve Investments held in the Class I Reserve Account or CDS Reserve Investments held in
the CDS Reserve Account for the purpose of making payments under the CDS Assets which are not being
terminated) and Eligible Investments (other than any Eligible Investments (i) held in any CDS Issuer
Account and (ii) required to establish a reasonable reserve for any CDS Assets that cannot be terminated
after giving effect to Class I Reserve Investments and CDS Reserve Investments available for such purpose
(subject to the prior written consent of the Initial CDS Counterparty as to the amount of such reserve, which
consent shall not be unreasonably withheld)) maturing on or prior to the scheduled redemption date and any
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termination payments scheduled to be received by the Issuer under the CDS Assets and any Hedge
Agreements on or prior to the scheduled redemption date, to pay any outstanding Used Supersenior Swap
Amount, all administrative and other fees and expenses, Remaining Structuring Fee, the Investment
Advisory Fee and any other amounts payable under “—Priority of Payments,” prior to any payments to the
Holders of the Subordinated Notes, to pay any amounts payable under the CDS Assets and any Hedge
Agreements and to redeem the Rated Notes on the scheduled redemption date at the applicable Redemption
Price, or
2. prior to selling or terminating any Collateral Assets or any other Collateral, the Investment Adviser
certifies to the Trustee and each Rating Agency that the expected proceeds from such sale or termination,
together with the Class I Reserve Investments and the CDS Reserve Investments (other than Class I Reserve
Investments held in the Class I Reserve Account or CDS Reserve Investments held in the CDS Reserve
Account for the purpose of making payments under the CDS Assets, if any, that cannot be terminated) and
Eligible Investments (other than any Eligible Investments (i) held in any CDS Issuer Account and
(ii) required to establish a reasonable reserve for any CDS Assets that cannot be terminated after giving
effect to Class I Reserve Investments and CDS Reserve Investments available for such purpose (subject to
the prior written consent of the Initial CDS Counterparty as to the amount of such reserve, which consent
shall not be unreasonably withheld)) maturing on or prior to the scheduled redemption date and any
termination payments scheduled to be received by the Issuer under the CDS Assets and any Hedge
Agreements on or prior to the scheduled redemption date, are sufficient to pay any outstanding Used
Supersenior Swap Amount, all administrative and other fees and expenses, the Remaining Structuring Fee,
the Investment Advisory Fee and any other amounts payable under “—Priority of Payments” prior to any
payments to the Holders of the Subordinated Notes, to pay any amounts payable under the CDS Assets and
any Hedge Agreements and to redeem the Rated Notes on the scheduled redemption date at the applicable
Redemption Price.
All notices of redemption will state:
(a) the applicable Redemption Date;
(b) the Redemption Price for such Class of Rated Notes;
(c) that all the Rated Notes of the relevant Class are being paid in full and that interest on such Rated
Notes will cease to accrue on the date specified in the notice; and
(d) the place or places where such Rated Notes to be redeemed are to be surrendered for payment of
the applicable Redemption Price which will be the office of the Note Registrar or the office of any
Note Paying Agent.
The notice of redemption delivered to the Supersenior Swap Counterparty will include a separate
statement setting forth the aggregate amount of the accrued and unpaid Supersenior Swap Commitment Fee,
Supersenior Swap Drawing Fee and such other amounts as may be payable to the Supersenior Swap
Counterparty, if any, in accordance with the Priority of Payments on the Redemption Date.
Any such notice of redemption may be withdrawn by the Issuer up to the sixth Business Day prior to a
Redemption Date by written notice to the Trustee, the Rating Agencies, the Supersenior Swap Counterparty
and the Investment Adviser only if the Investment Adviser is unable to deliver such sale agreement or
agreements or certifications, as the case may be, in form satisfactory to the Trustee. Notice of any such
withdrawal shall be given, at the cost of the Co-Issuers, by the Trustee to each Holder of Rated Notes at such
Holder’s address in the Note Register maintained by the Note Registrar under the Indenture by overnight
courier guaranteeing next day delivery (or second day delivery outside the United States) not later than the
third Business Day prior to such Redemption Date. Any Hedge Agreement or CDS Asset in place at the time
of such redemption notice shall remain in effect until such notice is no longer capable of being withdrawn
under the Indenture.
Amounts due and payable on the Rated Notes on or prior to a Redemption Date will continue to be
payable to the Holders of such Rated Notes as of the relevant Record Date according to their terms. The
Issuer will deposit, or cause to be deposited, the funds required for an Optional Redemption or a Tax
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Redemption, as the case may be, in the Collection Account on or before the Business Day prior to a
Redemption Date. Collateral Principal Collections and Collateral Interest Collections received in connection
with any redemption will be payable as set forth in the Priority of Payments.
Subordinated Notes
Notice of redemption of the Subordinated Notes after a Redemption of the Rated Notes will be given by
the Trustee by first-Class mail, postage prepaid, mailed not less than 10 Business Days prior to the Final
Subordinated Maturity Date, to the Supersenior Swap Counterparty and each Holder of Subordinated Notes
at such Holder’s address in the Note Register maintained by the Note Registrar under the Indenture.
Subordinated Notes must be surrendered for payment of the applicable Redemption Price at the office of the
Note Registrar or the office of any Note Paying Agent. If any Subordinated Notes are listed on the Irish
Stock Exchange, the Trustee will also deliver notice of such redemption to the Irish Paying Agent who shall
forward such notice to the Irish Stock Exchange.
No redemption of the Subordinated Notes will be made in connection with a Redemption until the
applicable Redemption Prices have been paid with respect to the Rated Notes and all other fees and expenses
have been paid or a reasonable reserve has been established therefor.
All notices of redemption of the Subordinated Notes will state:
(a) the Final Subordinated Maturity Date;
(b) the Redemption Price for the Subordinated Notes; and
(c) the place or places where the Subordinated Notes are to be surrendered for the payment of the
Redemption Price for the Subordinated Notes which will be the office of the Note Registrar or the
office of any Note Paying Agent.
Any such notice of redemption with respect to the Subordinated Notes may be withdrawn by the Issuer
up to the sixth Business Day prior to the Final Subordinated Maturity Date, by written notice to the Trustee,
the Supersenior Swap Counterparty, the Rating Agencies and the Investment Adviser only (x) if notice of the
redemption of the Rated Notes is withdrawn or (y) at the written direction of the Holders of at least (i) with
respect to a Tax Redemption, a majority and (ii) with respect to an Optional Redemption, 66⅔ percent of the
outstanding principal balance of the Subordinated Notes. Notice of any such withdrawal shall be given, at
the cost of the Issuer, by the Trustee to each Holder of Subordinated Notes at such Holder’s address in the
Note Register maintained by the Note Registrar under the Indenture by overnight courier guaranteeing next
day delivery (or second day delivery outside the United States) not later than the third Business Day prior to
the Final Subordinated Maturity Date.
Auction Call Redemption
In accordance with the procedures set forth in the Indenture (the “Auction Procedures”), the Trustee
will, on behalf of the Secured Parties, at the expense of the Issuer and with the assistance of the Investment
Adviser, conduct an auction (an “Auction”) of the Collateral Assets if any Rated Notes are Outstanding on
the date 15 Business Days prior to the Payment Date occurring in August 2014 or the date 15 Business Days
prior to any Payment Date thereafter until no Rated Notes are Outstanding (each such date, an “Auction
Date”). Any of the Investment Adviser, the Holders of the Subordinated Notes, the Trustee, the Supersenior
Swap Counterparty, any CDS Counterparty or their respective Affiliates may, but will not be required to, bid
at the Auction. The Trustee will sell and transfer or terminate the Collateral Assets at the Auction; provided
that:
(i)
the Auction has been conducted in accordance with the Auction Procedures;
(ii)
the Trustee has received bids for the Collateral Assets from at least two prospective purchasers
identified by the Investment Adviser (including the winning bidder) that are institutions whose
short term unsecured debt obligations have a rating of at least “P-1” by Moody’s and “A-1” by
S&P (“Qualified Bidders”);
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(iii)
the Investment Adviser certifies that bids from one or more Qualified Bidders would result in the
sale of all or a portion of the Collateral Assets for a purchase price (paid in Cash) which together
with the amounts received from the termination of any CDS Assets and the balance of Class I
Reserve Investments and CDS Reserve Investments (other than Class I Reserve Investments held
in the Class I Reserve Account or CDS Reserve Investments held in the CDS Reserve Account for
the making of payments under the CDS Assets, if any, that cannot be terminated) and Eligible
Investments held by the Issuer (other than Eligible Investments held in any CDS Issuer
Account) will be at least equal to the Total Redemption Amount plus such additional amount as
necessary for the Holders of the Subordinated Notes to receive the Auction Redemption Targeted
Internal Rate of Return; and
(iv)
each Qualified Bidder selected by the Investment Adviser enters into a written agreement with the
Issuer (which the Issuer will execute if the conditions set forth above and in the Indenture are
satisfied which execution will constitute certification by the Issuer that such conditions have been
satisfied) that obligates it to purchase all or a portion of the Collateral Assets and provides for
payment in full (in Cash) of the purchase price to the Trustee on or prior to the fifth Business Day
following the relevant Auction Date.
If all of the conditions set forth in clauses (i) through (iv) have been met, the Trustee will (x) sell and
transfer the Collateral Assets, without representation, warranty or recourse, to the applicable selected
Qualified Bidder in accordance with and upon completion of the Auction Procedures and/or (y) sell or
terminate all remaining CDS Assets. The Trustee will deposit the purchase price received for or proceeds
from the sale or termination of, the Collateral Assets in the Collection Account, and the Rated Notes will be
redeemed on the Payment Date immediately following the relevant Auction Date at their respective
Redemption Prices (such redemption, the “Auction Call Redemption”). If any of the conditions set forth in
clauses (i) through (iv) are not met with respect to any Auction or if any selected Qualified Bidder fails to
pay the purchase price before the sixth Business Day following the relevant Auction Date, (a) the Auction
Call Redemption will not occur on the Payment Date following the relevant Auction Date, (b) the Trustee
will give notice of the withdrawal, (c) the Trustee will decline to consummate such sale and, subject to
clause (d) below, may not solicit any further bids or otherwise negotiate any further sale or termination of
Collateral Assets in relation to such Auction and (d) unless the Rated Notes are redeemed in full prior to the
next succeeding Auction Date, the Trustee will conduct another Auction on the next succeeding Auction
Date. In addition, if the Auction is not successful on the Payment Date occurring in August 2014 and on
subsequent dates thereafter, Collateral Interest Collections remaining after application of amounts in clauses
(i) through (xxi) of the Priority of Payments (after application of the CDS Payment Priority and the Used
Supersenior Swap Amount Repayment Priority) will be applied to first, pay any outstanding Used
Supersenior Swap Amount, second, pay principal of the Class VII Notes until paid in full, third, pay
principal of the Class VI Notes until paid in full, fourth, pay principal of the Class V Notes until paid in full,
fifth, pay principal of the Class IV Notes until paid in full, sixth pay the principal of the Class III Notes until
paid in full, seventh, pay principal of the Class II Notes until paid in full and eighth, make a deposit to the
Class I Reserve Account to reduce the Available Supersenior Swap Amount to zero, in accordance with the
Priority of Payments.
Notice of an Auction Call Redemption will be given by the Trustee by first-class mail, postage prepaid,
mailed not less than 10 Business Days prior to the Payment Date immediately following the relevant Auction
Date, to the Supersenior Swap Counterparty and each Holder of Notes at such Holder’s address in the Note
Register maintained by the Note Registrar in accordance with the provisions of the Indenture. Failure to give
notice of redemption, or any defect therein, to any Holder of any Note selected for redemption will not
impair or affect the validity of the redemption of any other Notes. Notes called for redemption must be
surrendered at the office of any Note Paying Agent appointed under the Indenture in order to receive the
Redemption Price. If any Notes are listed on the Irish Stock Exchange, the Trustee will also deliver notice of
such redemption to the Irish Paying Agent who shall forward such notice to the Irish Stock Exchange.
All notices of redemption with respect to the Notes will state: (a) the Payment Date on which the
Auction Call Redemption will occur, (b) the Redemption Price for each Class of Notes, (c) that all the Notes
are being paid in full and that interest on such Notes shall cease to accrue on the date specified in the notice
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and (d) the place or places where such Notes to be redeemed at the Redemption Price are to be surrendered
for payment which shall be the office of the Note Registrar or the office of any Note Paying Agent.
Principal Prepayments
On any Payment Date on which any of the Coverage Tests was not satisfied on the immediately
preceding Calculation Date, Principal Prepayments on the Class II Notes, the Class III Notes, the Class IV
Notes, the Class V Notes, the Class VI Notes and the Class VII Notes will be made as follows:
If the Senior Par Value Coverage Test or the Senior Interest Coverage Test is not satisfied as of the
related Calculation Date, Collateral Interest Collections, after payment of amounts set forth in clauses
(i) through (vii) under the Priority of Payments for Collateral Interest Collections and, to the extent
insufficient, Collateral Principal Collections, after payment of amounts set forth in clauses (i) through
(iv) under the Priority of Payments for Collateral Principal Collections, will be used to pay any outstanding
Used Supersenior Swap Amount, then deposited into the Class I Reserve Account until the Available
Supersenior Swap Amount has been reduced to zero and, when the Available Supersenior Swap Amount has
been reduced to zero, to pay principal of the Class II Notes and, when the Class II Notes have been paid in
full, to pay principal of the Class III Notes and, when the Class III Notes have been paid in full, to pay
principal of the Class IV Notes, in each case until each such Senior Coverage Test is satisfied as of the
related Calculation Date or the Class IV Notes have been paid in full, if earlier.
If the Class V Par Value Coverage Test or the Class V Interest Coverage Test is not satisfied as of the
related Calculation Date, Collateral Interest Collections, after payment of amounts set forth in clauses
(i) through (ix) under the Priority of Payments for Collateral Interest Collections and, to the extent
insufficient, Collateral Principal Collections, after payment of amounts set forth in clauses (i) through
(vi) under the Priority of Payments for Collateral Principal Collections, will be used to pay any outstanding
Used Supersenior Swap Amount, then deposited into the Class I Reserve Account until the Available
Supersenior Swap Amount has been reduced to zero and, when the Available Supersenior Swap Amount has
been reduced to zero, to pay principal of the Class II Notes and, when the Class II Notes have been paid in
full, to pay principal of the Class III Notes and, when the Class III Notes have been paid in full, to pay
principal of the Class IV Notes and, when the Class IV Notes have been paid in full, to pay principal of the
Class V Notes, in each case until each such Class V Coverage Test is satisfied as of the related Calculation
Date or the Class V Notes have been paid in full, if earlier.
If the Class VI Par Value Coverage Test or the Class VI Interest Coverage Test is not satisfied as of the
related Calculation Date, Collateral Interest Collections, after payment of amounts set forth in clauses
(i) through (xii) under the Priority of Payments for Collateral Interest Collections and, to the extent
insufficient, Collateral Principal Collections, after payment of amounts set forth in clauses (i) through
(ix) under the Priority of Payments for Collateral Principal Collections, will be used to pay any outstanding
Used Supersenior Swap Amount, then deposited into the Class I Reserve Account until the Available
Supersenior Swap Amount has been reduced to zero and, when the Available Supersenior Swap Amount has
been reduced to zero, to pay principal of the Class II Notes and, when the Class II Notes have been paid in
full, to pay principal of the Class III Notes and, when the Class III Notes have been paid in full, to pay
principal of the Class IV Notes and, when the Class IV Notes have been paid in full, to pay principal of the
Class V Notes and, when the Class V Notes have been paid in full, to pay principal of the Class VI Notes, in
each case until each such Class VI Coverage Test is satisfied as of the related Calculation Date or the Class
VI Notes have been paid in full, if earlier.
If the Class VII Interest Diversion Test is not satisfied as of the related Calculation Date, Collateral
Interest Collections, that otherwise would have been available for payment of the Subordinate Investment
Advisory Fee, of principal on the Class VI Notes and for payment of certain available amounts to Holders of
Subordinated Notes (in accordance with the Priority of Payments) will instead be used to redeem Class VII
Notes, until such Class VII Interest Diversion Coverage Test is satisfied as of the related Calculation Date
or, if earlier, the Class VII Notes have been paid in full.
In addition, in any of the cases described above, if the application of Collateral Interest Collections and
Collateral Principal Collections is not sufficient to satisfy the relevant Coverage Tests (other than the Class
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VII Interest Diversion Test), then an amount of Synthetic Notional Proceeds up to the Available Synthetic
Notional Proceeds Amount as of the related Calculation Date (after giving effect to any reductions under
clause (i) of the Synthetic Applications Sequence) will be applied in accordance with the Synthetic
Applications Sequence to reduce the Available Supersenior Swap Amount (if any) until such Coverage Tests
are satisfied or the Available Supersenior Swap Amount is reduced to zero, if earlier.
On any Payment Date from and including the Initial Payment Date through and including the Payment
Date occurring in August 2011 on which the Holders of the Subordinated Notes receive a Cash-on-Cash
Return of 12 percent, Collateral Interest Collections available therefor in accordance with the Priority of
Payments will be used to redeem pro rata, the Class VI Notes by an amount equal to the lesser of (1) the
amount outstanding and (2) U.S.$180,000, and the Class VII Notes by an amount equal to the lesser of (1)
the amount outstanding and (2) U.S.$37,500.
Special Amortization of the Rated Notes
During the Reinvestment Period, one or more Classes of the Rated Notes may be repaid (provided that,
prior to any payment of principal on the Rated Notes, Used Supersenior Swap Amounts will be repaid and
the Available Supersenior Swap Amount shall have been reduced to zero), at the direction of the Investment
Adviser, in whole or in part, sequentially in order of seniority by the Issuer and the Available Supersenior
Swap Amount may be reduced (such payment or reduction, a “Special Amortization”) on one or more
Payment Dates pursuant to the Priority of Payments (after application of the CDS Payment Priority and the
Used Supersenior Swap Amount Repayment Priority on the related Calculation Date) if, at any time during
the related Due Period, (A) the Investment Adviser has been unable, for a period of at least 30 consecutive
days, to identify Collateral Assets that would meet the Reinvestment Criteria in sufficient amounts to permit
the reinvestment in additional Collateral Assets of all or a portion of the Collateral Principal Collections then
on deposit in the Collection Account and all or a portion of any Synthetic Notional Proceeds and (B) the
Investment Adviser elects, in its sole discretion, to designate all or a portion of (x) such Collateral Principal
Collections for payment of principal of the Rated Notes and/or the reduction of the Available Supersenior
Swap Amount by deposit to the Class I Reserve Account by notification to the Trustee (the amount of such
designated Collateral Principal Collections, the “Cash Special Amortization Amount”) and/or (y) such
designated Synthetic Notional Proceeds (the “Synthetic Special Amortization Amount”) for application to
reduce the Available Supersenior Swap Amount. On the first Payment Date following any date on which
such direction is given, (x) Available Funds remaining after giving effect to clauses (i) through (xi) under the
Priority of Payments for Collateral Principal Collections in an amount up to the Cash Special Amortization
Amount will be used to pay any outstanding Used Supersenior Swap Amount, then deposited into the Class I
Reserve Account to reduce the Available Supersenior Swap Amount to zero, and then applied to pay
principal of the Rated Notes, sequentially in order of seniority in accordance with clause (xii) under the
Priority of Payments for Collateral Principal Collections and (y) following such application, an amount equal
to the Synthetic Special Amortization Amount will be applied to reduce the Available Supersenior Swap
Amount to zero, in accordance with the Synthetic Applications Sequence. The Investment Adviser may
withdraw any notice designating a Special Amortization on or prior to the related Calculation Date.
Mandatory Redemption of the Rated Notes Upon Rating Confirmation Failure
Within eight Business Days following the Effective Date, the Issuer will request each Rating Agency
rating the Rated Notes to confirm that it has not reduced or withdrawn the rating it assigned to such Class of
Rated Notes on the Closing Date. If necessary in connection with obtaining the Rating Confirmation from
each Rating Agency, the Investment Adviser, on behalf of the Issuer, may propose a reasonable plan to the
Rating Agencies to receive such Rating Confirmation. If the Issuer does not obtain such Rating Confirmation
within 30 days following the Effective Date or such later date that such Rating Agencies may determine, on
each Payment Date thereafter, the Issuer is required, to the extent of Available Funds in accordance with the
Priority of Payments (after application of the CDS Payment Priority and the Used Supersenior Swap Amount
Repayment Priority on the related Calculation Date) to (a) pay any outstanding Used Supersenior Swap
Amount, (b) deposit funds to the Class I Reserve Account to the extent necessary to reduce the Available
Supersenior Swap Amount to zero, and then pay principal of the Class II Notes, the Class III Notes, the
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Class IV Notes, the Class V Notes, the Class VI Notes and the Class VII Notes, sequentially in order of
seniority and/or (c) reduce the Available Supersenior Swap Amount by applying Synthetic Notional
Proceeds to the extent of the Available Synthetic Notional Proceeds Amount, in accordance with the
Synthetic Applications Sequence, in the amounts necessary for each of S&P and Moody’s to confirm their
respective ratings of such Rated Notes assigned on the Closing Date or, if earlier, until the outstanding
principal balance of each Class of Rated Notes and the Available Supersenior Swap Amount is reduced to
zero.
Cancellation
All Notes that are redeemed, repurchased or paid and surrendered (including pursuant to any
prepayment) for cancellation as described herein will forthwith be canceled and may not be reissued or
resold.
Prescription
Claims for principal and interest on the Rated Notes or distributions on the Subordinated Notes on
redemption will become void unless the relevant Note is surrendered for payment within two years of the
earliest of (i) the Stated Maturity Date, (ii) the Redemption Date relating to such Note or (iii) the Payment
Date on which an Auction Call Redemption occurs.
No Gross-Up on Notes
All payments of principal and interest in respect of the Rated Notes and any distributions on the
Subordinated Notes made by the Co-Issuers (or, with respect to the Class VII Notes and the Subordinated
Notes, the Issuer) will be made free and clear of, and without withholding or deduction for, any present or
future taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected,
withheld or assessed by any governmental authority having power to tax (“Taxes”), unless such withholding
or deduction is required by the applicable law, as modified by the practice of any relevant governmental
revenue authority. If the Co-Issuers (or, with respect to the Class VII Notes and the Subordinated Notes, the
Issuer) are so required to deduct or withhold any Taxes from the payments of principal and interest in respect
of the Rated Notes or distributions in respect of the Subordinated Notes, then the Co-Issuers or the Issuer, as
applicable, will make such payments net of such Taxes and will not be obligated to pay any additional
amounts in respect of such withholding or deduction.
As a condition to the payment of any such amount without the imposition of withholding tax, each Note
Paying Agent may require certification acceptable to it to enable it and the Co-Issuers to determine their
duties and liabilities with respect to any Taxes or other charges that they may be required to pay, deduct or
withhold in respect of any Note or the Holder thereof under any present or future law or regulation of the
Cayman Islands or the United States or law or regulation of any political subdivision thereof or taxing
authority therein or to comply with any reporting or other requirements under such law or regulation.
Payments
All payments in respect of the Notes will be made to the person in whose name the relevant Note is
registered 15 days prior to the applicable Payment Date or, if later, the date on which the relevant Note was
issued (the “Record Date”). Payments on the Notes will be payable by wire transfer in same day, freely
transferable funds to a U.S. Dollar account maintained by DTC or its nominee (in the case of the Global
Notes), or to each Holder of any Certificated Note or Physical Note, to the extent practicable or otherwise by
U.S. Dollar check in immediately available funds drawn on a bank in the United States sent by mail either to
DTC or its nominee (in the case of the Global Notes) or to each Holder of a Certificated Note or a Physical
Note at such Holder’s address appearing in the Note Register.
Final payments in respect of principal of the Rated Notes and final distribution in respect of the
Subordinated Notes will be made only against surrender of the Notes at the office of the Note Registrar or
the office of any Note Paying Agent; provided, however, that if there is delivered to the Co-Issuers and the
Trustee such security or indemnity as may be required by them to save each of them harmless and an
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undertaking thereafter to surrender such Note, then, in the absence of notice to the Co-Issuers or the Trustee
that the applicable Note has been acquired by a bona fide purchaser, such final payment or distribution, as
applicable, will be made without presentation or surrender. None of the Co-Issuers, the Trustee, the Note
Paying Agents, the Managers, the Placement Agents, the Investment Adviser or any of their respective
Affiliates will have any responsibility or liability for any aspects of the records maintained by DTC or its
nominee or any of its participants including Euroclear or Clearstream (or any of their respective direct or
indirect participants) relating to, or for payments made thereby on account of beneficial interests in, Rule
144A Global Notes and Regulation S Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Issuer or the Co-Issuers, as applicable, expect that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Regulation S Global Note or Rule 144A Global Note held by
DTC or its nominee, will immediately credit the applicable participants’ accounts with payments in amounts
proportionate to their respective beneficial interests in such Global Notes as shown on the records of DTC or
its nominee. The Issuer or the Co-Issuers, as applicable, also expect that payments by participants to owners
of beneficial interests in such Global Notes held through such 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 such
participants.
The Trustee, on behalf of the Co-Issuers, will inform the Irish Paying Agent, so long as any Notes are
listed on the Irish Stock Exchange, of the outstanding principal balance of the Notes following each Payment
Date and if any Class of Rated Notes does not receive scheduled payments of principal or interest on a
Payment Date. The Trustee, on behalf of the Co-Issuers, will inform the Irish Paying Agent, so long as any
Notes are listed on the Irish Stock Exchange, of the amount of any distributions on the Subordinated Notes
on each Payment Date.
Priority of Payments
On any Payment Date, in accordance with a Note Valuation Report prepared by the Issuer (or the
Collateral Administrator on behalf of the Issuer) as of the related Calculation Date, the Available Funds will
be calculated, after giving effect to the payment of any CDS Payments in accordance with the CDS Payment
Priority and the payment of any Draw Repayment Amount in accordance with the Used Supersenior Swap
Amount Repayment Priority, and segregated into Collateral Interest Collections and Collateral Principal
Collections and such amounts (together with any Excess Class I Reserve Amount and any Excess CDS
Reserve Amount released in the form of Cash, which shall be treated as Collateral Principal Collections),
will be applied in the priority set forth below under “—Collateral Interest Collections” and “—Collateral
Principal Collections,” respectively, such priority of applications, together with the Liquidation Priority,
collectively referred to as the “Priority of Payments.”
On Business Days including Payment Dates, (i) Collateral Interest Collections and Collateral Principal
Collections may be used, (ii) Cash and Class I Reserve Investments may be released from the Class I
Reserve Account and (iii) Cash and CDS Reserve Investments may be released from the CDS Reserve
Account to make CDS Payments in accordance with the CDS Payment Priority and to pay Draw Repayment
Amounts in accordance with the Used Supersenior Swap Amount Repayment Priority; provided that,
following the calculation of Available Funds on each Calculation Date, such Available Funds will not be
available for CDS Payments or Draw Repayment Amounts until after such Available Funds have been
applied in accordance with the Priority of Payments on the relevant Payment Date; provided, further, that the
foregoing shall not apply to Collateral Interest Collections and Collateral Principal Collections received after
the relevant Calculation Date, as such Collateral Interest Collections and Collateral Principal Collections are
not included in such Available Funds (and will be designated as collections for the following period). See
“Security for the Notes—CDS Assets.”
Notwithstanding anything to the contrary in the Indenture or any other Transaction Document, the
Trustee may, on any Business Day, utilize Collateral Interest Collections on deposit in the Collection
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Account to make payments due under any Deemed Floating Asset Hedge (other than termination payments
due thereunder).
Collateral Interest Collections
Unless the Liquidation Priority applies, on each Payment Date, Collateral Interest Collections will be
distributed in the following order of priority:
(i)
to pay, in the following order: (a) taxes and filing fees and registration fees (including, without
limitation, annual return fees) payable by the Co-Issuers, if any; and then (b) the amount of any
due and unpaid Trustee Fee; and then (c) the amount of any due and unpaid Administrator Fee;
and then (d) any Administrative Expenses in the order provided in the definition thereof (other
than amounts due and unpaid to the Supersenior Swap Counterparty under the Supersenior Swap,
the Senior Investment Advisory Fee, the Subordinate Investment Advisory Fee, and the Incentive
Investment Advisory Fee, but including other amounts payable to the Investment Adviser under
the Investment Advisory Agreement); and then (e) (i) prior to the Payment Date occurring in
November, 2010, if the Notes are not being redeemed on such Payment Date, to the payment to
the Morgan Stanley Parties of the Structuring Fee or (ii) if the Notes are redeemed on or before the
Payment Date occurring in November, 2010, to the payment to the Morgan Stanley Parties of the
Remaining Structuring Fee and then (f) any Administrative Indemnities in the order provided in
the definition thereof; and then (g) to deposit to the Expense Reserve Account the amount needed
to bring the amount on deposit therein equal to U.S.$30,000 (unless the Investment Adviser in its
sole discretion directs that a lesser amount be deposited to the Expense Reserve Account);
provided, that the cumulative amount paid under (a) through (d) (excluding, in all cases any
Administrative Expenses or Administrative Indemnities due or accrued with respect to the actions
taken on or prior to the Closing Date) may not (other than in connection with a Redemption or an
Auction Call Redemption) exceed the sum of 0.02% percent of the Collateral Principal Balance as
of the first day of the related Due Period and U.S.$120,000 per annum;
(ii)
to pay the Senior Investment Advisory Fee with respect to such Payment Date and any Senior
Investment Advisory Fee with respect to a previous Payment Date that was not paid on a previous
Payment Date (plus interest on any portion of the Senior Investment Advisory Fee that is accrued
and unpaid in respect of a prior Payment Date (including any portion of the Senior Investment
Advisory Fee voluntarily deferred in respect of a prior Payment Date) at Three-Month LIBOR
over the related Due Period);
(iii)
to pay to the Supersenior Swap Counterparty, pro rata (1) the Supersenior Swap Commitment Fee
(plus interest on any portion of the Supersenior Swap Commitment Fee that is accrued and unpaid
in respect of a prior Payment Date at a rate equal to the Supersenior Swap Drawing Fee Rate over
the related Periodic Interest Accrual Period) and (2) the Supersenior Swap Drawing Fee, (which in
each case will be paid to any replaced Supersenior Swap Counterparty and any substitute
Supersenior Swap Counterparty pro rata according to the amount due to each of them);
(iv)
pro rata to (1) pay to any Hedge Counterparty, amounts due to such Hedge Counterparty under
any Hedge Agreement, excluding any termination payment payable to a Hedge Counterparty of
the type described in clause (xvi) under “—Collateral Principal Collections” and (2) deposit funds
to the Class I Reserve Account or the CDS Reserve Account in the amount of any withdrawals
therefrom to pay CDS Interest Payments, to the extent not returned to the Class I Reserve Account
or the CDS Reserve Account on a prior Payment Date;
(v)
to pay Periodic Interest on the Class II Notes (including any Defaulted Interest on the Class II
Notes and any interest on such Defaulted Interest);
(vi)
to pay Periodic Interest on the Class III Notes (including any Defaulted Interest on the Class III
Notes and any interest on such Defaulted Interest);
(vii)
to pay Periodic Interest on the Class IV Notes (including any Defaulted Interest on the Class IV
Notes and any interest on such Defaulted Interest);
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(viii)
if either of the Senior Coverage Tests is not met as of the preceding Calculation Date, to first, pay
any outstanding Used Supersenior Swap Amount, second, make a deposit to the Class I Reserve
Account in an amount such that the Senior Coverage Test is satisfied as of such Calculation Date
(or, if sooner, up to the amount sufficient to reduce the Available Supersenior Swap Amount to
zero), third, to pay principal of the Class II Notes then Outstanding until such Senior Coverage
Test is satisfied as of such Calculation Date (or, if sooner, until the outstanding principal balance
of such Class II Notes is reduced to zero), fourth, to pay principal of the Class III Notes then
Outstanding until such Senior Coverage Test is satisfied as of such Calculation Date (or, if sooner,
until the outstanding principal balance of such Class III Notes is reduced to zero) and, fifth, to pay
principal of the Class IV Notes then Outstanding until such Senior Coverage Test is satisfied as of
such Calculation Date (or, if sooner, until the outstanding principal balance of such Class IV Notes
is reduced to zero);
(ix)
to pay Periodic Interest on the Class V Notes (including any Defaulted Interest on the Class V
Notes and any interest on such Defaulted Interest);
(x)
if either of the Class V Coverage Tests is not met as of the preceding Calculation Date to, first,
pay any outstanding Used Supersenior Swap Amount, second, to make a deposit to the Class I
Reserve Account in an amount such that the Class V Coverage Test is satisfied as of such
Calculation Date (or, if sooner, up to the amount sufficient to reduce the Available Supersenior
Swap Amount to zero), third, to pay principal of the Class II Notes then Outstanding until such
Class V Coverage Test is satisfied as of such Calculation Date (or, if sooner, until the outstanding
principal balance of such Class II Notes is reduced to zero), fourth, to pay principal of the Class III
Notes then Outstanding until such Class V Coverage Test is satisfied as of such Calculation Date
(or, if sooner, until the outstanding principal balance of such Class III Notes is reduced to zero),
fifth, to pay principal of the Class IV Notes then Outstanding until such Class V Coverage Test is
satisfied as of such Calculation Date (or, if sooner, until the outstanding principal balance of such
Class IV Notes is reduced to zero) and sixth, to pay principal of the Class V Notes then
Outstanding until such Class V Coverage Test is satisfied as of such Calculation Date (or, if
sooner, until the outstanding principal balance of such Class V Notes is reduced to
zero) (including, for the avoidance of doubt, any Class V Cumulative Applicable Periodic Interest
Shortfall Amount);
(xi)
to pay the Class V Cumulative Applicable Periodic Interest Shortfall Amount, if any;
(xii)
to pay Periodic Interest on the Class VI Notes (including any Defaulted Interest on the Class VI
Notes and any interest on such Defaulted Interest);
(xiii)
(A) if either of the Class VI Coverage Tests is not met as of the preceding Calculation Date, to
first, pay any outstanding Used Supersenior Swap Amount, second, to make a deposit to the
Class I Reserve Account in an amount such that the Class VI Coverage Test is satisfied as of such
Calculation Date (or, if sooner, up to the amount sufficient to reduce the Available Supersenior
Swap Amount to zero), third, to pay principal of the Class II Notes then Outstanding until such
Class VI Coverage Test is satisfied as of such Calculation Date (or, if sooner, until the outstanding
principal balance of such Class II Notes is reduced to zero), fourth, to pay principal of the Class III
Notes then Outstanding until such Class VI Coverage Test is satisfied as of such Calculation Date
(or, if sooner, until the outstanding principal balance of such Class III Notes is reduced to zero),
fifth, to pay principal of the Class IV Notes then Outstanding until such Class VI Coverage Test is
satisfied as of such Calculation Date (or, if sooner, until the outstanding principal balance of such
Class IV Notes is reduced to zero), sixth, to pay principal of the Class V Notes then Outstanding
until such Class VI Coverage Test is satisfied as of such Calculation Date (or, if sooner, until the
outstanding principal balance of such Class V Notes is reduced to zero) (including, for the
avoidance of doubt, any Class V Cumulative Applicable Periodic Interest Shortfall Amount) and
seventh, to pay principal of the Class VI Notes then Outstanding until such Class VI Coverage
Test is satisfied as of such Calculation Date (or, if sooner, until the outstanding principal balance
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of such Class VI Notes is reduced to zero) (including, for the avoidance of doubt, any Class VI
Cumulative Applicable Periodic Interest Shortfall Amount); and
(B) if a Rating Confirmation Failure with respect to the Effective Date has occurred or in
connection with a Proposed Plan for obtaining Rating Confirmation, to pay any outstanding Used
Supersenior Swap Amount, and then to deposit funds to the Class I Reserve Account to the extent
necessary to reduce the Available Supersenior Swap Amount to zero, and then to pay principal on
the Class II Notes, then the Class III Notes, then the Class IV Notes, then the Class V Notes, and
then the Class VI Notes, in each case in the amounts necessary for each of S&P and Moody’s to
confirm their respective ratings of such Rated Notes assigned on the Closing Date or, if earlier,
until the outstanding principal balance of each Class of Rated Notes and/or the Available
Supersenior Swap Amount is reduced to zero;
(xiv)
to pay the Class VI Cumulative Applicable Periodic Interest Shortfall Amount, if any;
(xv)
to pay Periodic Interest on the Class VII Notes (including any Defaulted Interest on the Class VII
Notes and any interest on such Defaulted Interest);
(xvi)
if the Class VII Interest Diversion Test is not met as of the preceding Calculation Date, to pay
principal of the Class VII Notes then Outstanding until such Class VII Interest Diversion Test is
satisfied as of such Calculation Date (or, if sooner, until the outstanding principal balance of such
Class VII Notes is reduced to zero);
(xvii)
to pay the Class VII Cumulative Applicable Periodic Interest Shortfall Amount, if any;
(xviii)
to pay the Subordinate Investment Advisory Fee with respect to such Payment Date and any due
and unpaid Subordinate Investment Advisory Fee with respect to a previous Payment Date that
was not paid on a previous Payment Date;
(xix)
on any Payment Date occurring through and including the Payment Date occurring in August
2011, to pay to the Holders of the Subordinated Notes a Cash-on-Cash Return of 12 percent;
(xx)
pro rata (A) on any Payment Date through and including the Payment Date occurring in August
2011, to pay principal of the Class VI Notes in an amount equal to the lesser of (1) all amounts
remaining and (2) U.S.$180,000; and
(B) on any Payment Date through the Payment Date occurring in August 2011, to pay principal of
the Class VII Notes in an amount equal to the lesser of (1) all amounts remaining and
(2) U.S.$37,500;
(xxi)
to pay any due and unpaid Trustee Fee, Administrator Fee, any due and unpaid expenses or
indemnities owed to the Trustee, the Investment Adviser, the Collateral Administrator and the
Note Paying Agents and Administrative Expenses (other than the Senior Investment Advisory Fee,
the Subordinate Investment Advisory Fee and the Incentive Investment Advisory Fee, but
including other amounts payable to the Investment Adviser under the Investment Advisory
Agreement) and any amounts due and unpaid to the Supersenior Swap Counterparty other than
payment of, Used Supersenior Swap Amounts, Supersenior Swap Commitment Fees and
Supersenior Swap Drawing Fees (which will be paid to any replaced Supersenior Swap
Counterparty and any substitute Supersenior Swap Counterparty pro rata according to the amount
due to each of them) and any other Administrative Expenses and Administrative Indemnities in
the same order and manner and to the extent, in each case, not paid in full under clause (i) above;
(xxii)
on any Payment Date occurring on and after August 2014, to first, pay any outstanding Used
Supersenior Swap Amount, second, to pay the outstanding principal balance of the Class VII
Notes then Outstanding until the outstanding principal balance of the Class VII Notes is reduced to
zero; third, pay principal of the Class VI Notes then Outstanding until the outstanding principal
balance of the Class VI Notes is reduced to zero; fourth, pay principal of the Class V Notes then
Outstanding until the outstanding principal balance of the Class V Notes is reduced to zero; fifth,
pay principal of the Class IV Notes then Outstanding until the outstanding principal balance of the
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Class IV Notes is reduced to zero; sixth, pay principal of the Class III Notes then Outstanding until
the outstanding principal balance of the Class III Notes is reduced to zero; seventh, pay principal
of the Class II Notes then Outstanding until the outstanding principal balance of the Class II Notes
is reduced to zero and eighth, make a deposit to the Class I Reserve Account up to the amount
sufficient to reduce the Available Supersenior Swap Amount to zero; and
(xxiii)
first, to the payment to the Holders of the Subordinated Notes of any remaining amounts up to an
amount sufficient to achieve an Internal Rate of Return of 18% per annum on such Payment Date
for the period from the Closing Date up to and including such Payment Date, second, to the
payment to the Investment Adviser of the Incentive Investment Advisory Fee and any interest
thereon to the extent the Incentive Investment Advisory Fee and any interest thereon has not
already been paid with respect to such Payment Date, and third, to the payment to the Holders of
the Subordinated Notes of any remaining amounts.
Collateral Principal Collections
Unless the Liquidation Priority applies, on each Payment Date Collateral Principal Collections
(including any amount released from the Class I Reserve Account on such Payment Date as an Excess
Class I Reserve Amount and any amount released from the CDS Reserve Account on such Payment Date as
an Excess CDS Reserve Amount) will be distributed in the following order of priority after giving effect to
the application of Collateral Interest Collections as described above under “—Collateral Interest
Collections”:
(i)
to pay (A) first, the amounts specified in clause (i) under “—Collateral Interest Collections” (and
in the same manner and order of priority) to the extent not reduced to zero after the application of
Collateral Interest Collections provided for under “—Collateral Interest Collections”; and
(B) second, in the same order of priority specified therein, the amounts specified in clauses (ii),
(iii), and (iv) (and in the same manner and order of priority) to the extent not reduced to zero after
the application of Collateral Interest Collections provided for under “—Collateral Interest
Collections;”
(ii)
to pay amounts specified in clause (v) under “—Collateral Interest Collections” (and in the same
manner and order of priority) to the extent not reduced to zero after the application of Collateral
Interest Collections provided for under “—Collateral Interest Collections;”
(iii)
to pay amounts specified in clause (vi) under “—Collateral Interest Collections” (and in the same
manner and order of priority) to the extent not reduced to zero after the application of Collateral
Interest Collections provided for under “—Collateral Interest Collections;”
(iv)
to pay amounts specified in clause (vii) under “—Collateral Interest Collections” (and in the same
manner and order of priority) to the extent not reduced to zero after the application of Collateral
Interest Collections provided for under “—Collateral Interest Collections;”
(v)
if either of the Senior Coverage Tests is not satisfied on the related Calculation Date after giving
effect to the payment of amounts specified in clause (viii) under “—Collateral Interest
Collections,” to the payment of such amounts (in the same manner and order of priority) to the
extent necessary for such Senior Coverage Tests to be satisfied as of such Calculation Date or, if
sooner, until the Used Supersenior Swap Amount, the Available Supersenior Swap Amount, the
outstanding principal balance of the Class II Notes, the outstanding principal balance of the
Class III Notes and the outstanding principal balance of the Class IV Notes, respectively, have
been reduced to zero;
(vi)
if the Class V Notes are the most senior Class of Notes Outstanding, to pay amounts specified in
clause (ix) under “—Collateral Interest Collections” to the extent not reduced to zero after the
application of Collateral Interest Collections provided for under “—Collateral Interest
Collections;”
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(vii)
if either of the Class V Coverage Tests is not satisfied on the related Calculation Date after giving
effect to the payment of amounts specified in clause (x) under “—Collateral Interest Collections,”
to the payment of such amounts (in the same manner and order of priority) to the extent necessary
for such Class V Coverage Tests to be satisfied as of such Calculation Date, or, if sooner, until the
Used Supersenior Swap Amount, the Available Supersenior Swap Amount, the outstanding
principal balance of the Class II Notes, the outstanding principal balance of the Class III Notes, the
outstanding principal balance of the Class IV Notes and the outstanding principal balance of the
Class V Notes, respectively, have been reduced to zero;
(viii)
if the Class VI Notes are the most senior Class of Notes Outstanding, to pay amounts specified in
clause (xii) under “—Collateral Interest Collections” to the extent not reduced to zero after the
application of Collateral Interest Collections provided for under “—Collateral Interest
Collections;”
(ix)
if either of the Class VI Coverage Tests is not satisfied on the related Calculation Date after giving
effect to the payment of amounts specified in clause (xiii) under “—Collateral Interest
Collections,” to the payment of such amounts (in the same manner and order of priority) to the
extent necessary for such Class VI Coverage Tests to be satisfied as of such Calculation Date
and/or for each of S&P and Moody’s to confirm their respective ratings, as applicable, or, if
sooner, until the Used Supersenior Swap Amount, the Available Supersenior Swap Amount, the
outstanding principal balance of the Class II Notes, the outstanding principal balance of the
Class III Notes, the outstanding principal balance of the Class IV Notes, the outstanding principal
balance of the Class V Notes and the outstanding principal balance of the Class VI Notes,
respectively, have been reduced to zero;
(x)
if the Class VII Notes are the most senior Class of Notes Outstanding, to pay amounts specified in
clause (xv) “—Collateral Interest Collections”, in such order, to the extent not reduced to zero
after the application of Collateral Interest Collections provided for under “—Collateral Interest
Collections”;
(xi)
(A) during the Reinvestment Period (so long as a Special Amortization has not been elected), to
reinvest in Collateral Assets that are Cash Assets or Credit Linked Securities, subject to the
Eligibility Criteria or to make deposits into the CDS Reserve Account as Designated CDS
Principal Proceeds for the purposes of collateralizing the Issuer’s obligations under any additional
CDS Assets to be acquired by the Issuer in accordance with the Indenture and (B) during the first
Due Period after the Reinvestment Period, at the option of the Investment Adviser, to reinvest the
Sale Proceeds of Credit Improved Securities or Credit Risk Securities sold during the last Due
Period of the Reinvestment Period and are currently invested in Eligible Investments in Collateral
Assets that are Cash Assets or Credit Linked Securities, subject to the Eligibility Criteria;
(xii)
during the Reinvestment Period, if a Special Amortization is elected by the Investment Adviser, to
apply the Cash Special Amortization Amount, if any, first, to pay any outstanding Used
Supersenior Swap Amount, second, to make a deposit to the Class I Reserve Account to reduce
the Available Supersenior Swap Amount to zero and third, to pay the principal of the Class II
Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and the
Class VII Notes, sequentially, until reduced to zero;
(xiii)
after the Reinvestment Period, to deposit funds to the Class I Reserve Account until the Available
Supersenior Swap Amount is reduced to zero and then to pay the principal of first, the Class II
Notes until the principal of the Class II Notes is reduced to zero, second, the Class III Notes until
the principal of the Class III Notes is reduced to zero, third, the Class IV Notes until the principal
of the Class IV Notes is reduced to zero, fourth, the Class V Notes until the principal of the Class
V Notes is reduced to zero, fifth, the Class VI Notes until the principal of the Class VI Notes is
reduced to zero and sixth, the Class VII Notes until the principal of the Class VII Notes is reduced
to zero;
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(xiv)
after the Reinvestment Period, to pay any amounts specified in clause (xxi) under “— Collateral
Interest Collections” (and in the same manner and order of priority) to the extent not reduced to
zero after the application of Collateral Interest Collections provided for under “—Collateral
Interest Collections;”
(xv)
after the Reinvestment Period, to pay to the Investment Adviser the Subordinate Investment
Advisory Fee with respect to such Payment Date and any due and unpaid Subordinate Investment
Advisory Fee with respect to a previous Payment Date that was not paid on a previous Payment
Date to the extent not paid in full by the application of Collateral Interest Collections provided for
under clause (xviii) under “—Collateral Interest Collections;”
(xvi)
after the Reinvestment Period, to pay, pro rata, (i) any CDS Subordinated Issuer Termination
Payments, (ii) any termination payments payable to Hedge Counterparties if the related
termination occurred in respect of an event of default or termination event as to which a Hedge
Counterparty was the defaulting party or sole affected party and (iii) costs of a replacement Hedge
Agreement, to the extent provided in the Indenture; and
(xvii)
after the Reinvestment Period, first, to the payment to the Holders of the Subordinated Notes of
any remaining amounts up to an amount sufficient to achieve an Internal Rate of Return of 18%
per annum on such Payment Date for the period from the Closing Date up to and including such
Payment Date (to the extent not already paid in full under clause (xxiii) under “—Collateral
Interest Collections”), second, to the payment to the Investment Adviser of the Incentive
Investment Advisory Fee and any interest thereon (to the extent not already paid in full under
clause (xxiii) under “—Collateral Interest Collections”) and third, to the payment to the Holders of
the Subordinated Notes of any remaining amounts.
Synthetic Applications Sequence
On each Payment Date (after giving effect to the Priority of Payments for Collateral Interest Collections
and the Priority of Payments for Collateral Principal Collections) an amount of Synthetic Notional Proceeds
that will be up to the Available Synthetic Notional Proceeds Amount will be applied as follows (such
application, the “Synthetic Applications Sequence”):
(i)
the Available Synthetic Notional Proceeds Amount will be reduced by an amount equal to the
amount of any Draws on such Payment Date to pay a Senior Interest Shortfall;
(ii)
if either of the Senior Coverage Tests is not satisfied on the related Calculation Date and remains
unsatisfied after giving effect to the application of amounts specified in clause (v) under “—
Collateral Principal Collections,” to reduce the Available Supersenior Swap Amount until such
Senior Coverage Tests are satisfied or, if sooner, until the Available Supersenior Swap Amount
has been reduced to zero;
(iii)
if either of the Class V Coverage Tests is not satisfied on the related Calculation Date and remains
unsatisfied after giving effect to the application of amounts specified in clause (vii) under “—
Collateral Principal Collections” and clause (ii) above, to reduce the Available Supersenior Swap
Amount until such Class V Coverage Tests are satisfied or, if sooner, until the Available
Supersenior Swap Amount has been reduced to zero;
(iv)
if either (x) either of the Class VI Coverage Tests is not satisfied on the related Calculation Date
and in any such case remains unsatisfied after giving effect to the application of amounts specified
in clause (ix) under “—Collateral Principal Collections” and clause (ii) or (iii) above or (y) a
Rating Confirmation Failure has occurred, to reduce the Available Supersenior Swap Amount
until such Class VI Coverage Tests are satisfied and/or each of S&P and Moody’s has confirmed
its respective ratings, as applicable, in the case of a Rating Confirmation Failure or, in either case,
if sooner, until the Available Supersenior Swap Amount has been reduced to zero;
(v)
during the Reinvestment Period, if a Special Amortization is elected by the Investment Adviser, if
there is any Available Supersenior Swap Amount remaining after giving effect to the application
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of amounts specified in clause (xii) under “—Collateral Principal Collections,” to reduce the
Available Supersenior Swap Amount by an amount up to the Synthetic Special Amortization
Amount or to zero, whichever occurs first; and
(vi)
after the Reinvestment Period, if there is Available Supersenior Swap Amount remaining after
giving effect to the application of amounts specified in clause (xiii) under “—Collateral Principal
Collections,” to reduce the Available Supersenior Swap Amount to zero.
During the Reinvestment Period, Synthetic Notional Proceeds may be reinvested at any time, including
during a Due Period and prior to the application of the Synthetic Applications Sequence in accordance with
the provisions of the Indenture other than the Synthetic Applications Sequence; provided that any Synthetic
Notional Proceeds applied pursuant to the Synthetic Applications Sequence or otherwise reinvested will no
longer be available for reinvestment; provided further that, an amount of Synthetic Notional Proceeds equal
to any portion of the Available Synthetic Notional Proceeds Amount remaining after giving effect to the
Synthetic Applications Sequence on each Payment Date during the Reinvestment Period, will remain
available for reinvestment in CDS Assets.
“Available Synthetic Notional Proceeds Amount” means, with respect to any Payment Date, an
amount equal to (a) all Synthetic Notional Proceeds (without duplication), minus (b) all Synthetic Notional
Proceeds that have been reinvested in CDS Assets (without duplication), minus (c) the aggregate amount of
all Synthetic Notional Proceeds that have been applied pursuant to the Synthetic Applications Sequence on
prior Payment Dates (without duplication), minus (d) an amount of Synthetic Notional Proceeds equal to the
aggregate of all of the Excess Class I Reserve Amounts and all of the Excess CDS Reserve Amounts, if any,
in respect of each Payment Date prior to and including such Payment Date (if applicable, and without
duplication), and minus (e) the aggregate sum of all amounts (without duplication) determined as follows in
respect of each elective reduction (if any) of the Maximum Notional Amount by the Investment Adviser: the
amount, if any, determined at the time of any such reduction, by which (x) the sum as of such date of the
CDS Asset Balance and the Available Synthetic Notional Proceeds Amount (determined on a pro forma
basis as if such date were a Payment Date) exceeds (y) the sum of (1) the amount of the Available
Supersenior Swap Amount and (2) the Class I Reserve Balance and (3) the CDS Reserve Account Balance
immediately after giving effect to such reduction.
“Excess Class I Reserve Amount” means, with respect to any Payment Date occurring after the
Effective Date, an amount determined by the Trustee as of the Calculation Date equal to the lesser of (x) the
Class I Reserve Balance and (y) the amount, if any, by which (A) the sum of (1) the Class I Reserve Balance
and (2) the Available Supersenior Swap Amount and (3) the CDS Reserve Account Balance exceeds (B) the
sum of (1) the CDS Asset Balance and (2) the Available Synthetic Notional Proceeds Amount (before giving
effect to the subtraction under clause (d) of the definition of Available Synthetic Notional Proceeds Amount
for such Payment Date, and before giving effect to the Synthetic Applications Sequence on such date) if such
Payment Date occurs during the Reinvestment Period or is the first Payment Date thereafter; provided that in
any event the Trustee shall determine the Excess Class I Reserve Amount prior to making any release from
the Class I Reserve Account during the period between the Calculation Date and the related Payment Date
and shall not make any such release to the extent that it would reduce the Excess Class I Reserve Amount
below such amount as of the Calculation Date.
“Excess CDS Reserve Amount” means, with respect to any Payment Date occurring after the
Available Supersenior Swap Amount and the Class I Reserve Balance have been reduced to zero, an amount
determined by the Trustee as of the Calculation Date equal to the amount, if any, by which the CDS Reserve
Account Balance exceeds the CDS Asset Balance; provided that in any event the Trustee shall determine the
Excess CDS Reserve Amount prior to making any release from the CDS Reserve Account during the period
between the Calculation Date and the related Payment Date and shall not make any such release to the extent
that it would reduce the Excess CDS Reserve Amount below such amount as of the Calculation Date.
“Synthetic Notional Proceeds” means, at any time, the sum (without duplication) of (A) cumulative
reductions of the Principal Balance of any CDS Assets, resulting from a reduction in whole or in part of the
respective notional amounts thereof due to (x) payment of outstanding principal of the related Reference
Obligation (other than in connection with a CDS Principal Shortfall) or (y) the termination or sale of a CDS
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Asset but, in the case of termination or sale, only to the extent the related reduction of the CDS Asset
Balance exceeds the amount of, as applicable, any CDS Issuer Termination Payment or amount payable by
the Issuer in connection with a sale or termination (other than those paid with Collateral Principal
Collections), in each case based upon information provided by the related CDS Counterparty, plus (B) the
cumulative amount of Designated CDS Principal Proceeds, minus (C) the cumulative amount of Designated
CDS Reserve Account Proceeds, plus (D) the aggregate amount of all Draw Repayment Amounts paid from
Collateral Principal Collections less the Used Supersenior Swap Adjustment Amount.
These terms and calculations are intended to assure that the Issuer has, in the aggregate, sufficient funds
and Class I Reserve Investments and CDS Reserve Investments to cover its obligations under the CDS
Assets, but also that it not be required to maintain more Available Supersenior Swap Amount, or a higher
balance in the Class I Reserve Account, than necessary. As the notional amounts of CDS Assets reduce,
calculations will be made by the Trustee in connection with each Payment Date to determine the extent to
which Available Supersenior Swap Amount may be reduced, funds and Class I Reserve Investments released
from the Class I Reserve Account as Excess Class I Reserve Amounts and funds and CDS Reserve
Investments released from the CDS Reserve Account as Excess CDS Reserve Amounts. Such funds, and the
proceeds of any Class I Reserve Investments that can be sold for not less than par, will then be applied as
Collateral Principal Collections pursuant to the Priority of Payments. To the extent Class I Reserve
Investments are not in the form of securities that can be sold for an amount at least equal to par, upon release
they will be treated as Collateral Assets or Eligible Investments. In general, Excess Class I Reserve Amounts
or Excess CDS Reserve Amounts will not arise to the extent that the Synthetic Notional Proceeds are
permitted to be, and are, reinvested in CDS Assets. Accordingly, during the Reinvestment Period there are
not expected to be significant releases from the Class I Reserve Account as Excess Class I Reserve Amounts
or from the CDS Reserve Account as Excess CDS Reserve Amounts.
Liquidation Priority
The distribution of Collateral Interest Collections and Collateral Principal Collections after the
occurrence of an Event of Default and acceleration of the Notes and liquidation of the Collateral (including
the termination of all CDS Assets that by their respective terms are permitted and/or required to be
terminated and liquidation of Class I Reserve Investments and CDS Reserve Investments) will occur on each
Business Day (after making any CDS Payments in accordance with the CDS Payment Priority and paying
any Draw Repayment Amounts in accordance with the Used Supersenior Swap Amount Repayment
Priority) in the following order of priority (the “Liquidation Priority”):
(i)
to pay all indemnities due and unpaid to the Trustee (including for the avoidance of doubt,
reasonable out of pocket expenses);
(ii)
to pay, without duplication, the amounts specified in clauses (i) (a) through (i)(g) in that order of
the Priority of Payments for Collateral Interest Collections, provided that the cumulative amount
paid thereunder (excluding any amount paid with respect to the amounts specified in clause (i)(e)
in the Priority of Payment for Collateral Interest Collections), may not exceed the cap specified
therein;
(iii)
to pay the Senior Investment Advisory Fee (plus interest on any portion of the Senior Investment
Advisory Fee that is accrued and unpaid in respect of a prior Payment Date (including any portion
of the Senior Investment Advisory Fee voluntarily deferred by the Investment Adviser in respect
of a prior Payment Date) at Three-Month LIBOR over the related Due Period);
(iv)
provided that the Initial CDS Counterparty is no longer the same entity as the CDS Counterparty
and only to the extent not already paid pursuant to the CDS Payment Priority, to pay any amounts
due to CDS Counterparties under CDS Assets (except any CDS Subordinated Issuer Termination
Payment) (which if such payments are due and payable to two or more counterparties will be paid
pro rata among the counterparties regardless of the order in which they notified the Trustee that
such amounts were due and payable);
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(v)
to pay, pro rata, (a) the Supersenior Swap Commitment Fee (plus interest on any portion of the
Supersenior Swap Commitment Fee that is accrued and unpaid in respect of a prior Payment Date
at a rate equal to the Supersenior Swap Drawing Fee Rate), (b) amounts due to any Hedge
Counterparties under Hedge Agreements (except any termination payment payable pursuant to
clause (xiv) of this Liquidation Priority), (c) the Supersenior Swap Drawing Fee and (d) to make a
deposit to the Class I Reserve Account until the Available Supersenior Swap Amount has been
reduced to zero;
(vi)
to pay the accrued and unpaid interest on the Class II Notes (including any Defaulted Interest
thereon and any interest on such Defaulted Interest), and then to pay the outstanding principal
balance of the Class II Notes in full;
(vii)
to pay the accrued and unpaid interest on the Class III Notes (including any Defaulted Interest
thereon and any interest on such Defaulted Interest), and then to pay the outstanding principal
balance of the Class III Notes in full;
(viii)
to pay the accrued and unpaid interest on the Class IV Notes (including any Defaulted Interest
thereon and any interest on such Defaulted Interest), and then to pay the outstanding principal
balance of the Class IV Notes in full;
(ix)
to pay the accrued and unpaid interest on the Class V Notes (including any Class V Cumulative
Applicable Periodic Interest Shortfall Amount), and then to pay the outstanding principal balance
of the Class V Notes in full;
(x)
to pay the accrued and unpaid interest on the Class VI Notes (including any Class VI Cumulative
Applicable Periodic Interest Shortfall Amounts), and then to pay the outstanding principal balance
of the Class VI Notes in full;
(xi)
to pay the accrued and unpaid interest on the Class VII Notes (including any Class VII Cumulative
Applicable Periodic Interest Shortfall Amounts), and then to pay the outstanding principal balance
of the Class VII Notes in full;
(xii)
to pay the amounts specified in clause (xxi) of the Priority of Payments for Collateral Interest
Collections in the order specified therein;
(xiii)
to pay the Subordinate Investment Advisory Fee;
(xiv)
to pay, pro rata, (a) any CDS Subordinated Issuer Termination Payments and (b) any termination
payments payable to Hedge Counterparties if the related termination occurred in respect of an
event of default or termination event as to which a Hedge Counterparty was the defaulting party or
sole affected party; and
(xv)
first, to the payment to the Holders of the Subordinated Notes of any remaining amounts up to an
amount sufficient to achieve an Internal Rate of Return of 18% per annum on such Payment Date
for the period from the Closing Date up to and including such Payment Date, second, to the
payment to the Investment Adviser of the Incentive Investment Advisory Fee and any interest
thereon to the extent the Incentive Investment Advisory Fee and any interest thereon has not
already been paid with respect to such Payment Date, and third, to the payment to the Holders of
the Subordinated Notes of any remaining amounts.
Events of Default
An “Event of Default” is defined in the Indenture as:
(i)
a default which continues for a period of five Business Days in the payment, when due and
payable, of the Supersenior Swap Commitment Fee or the Supersenior Swap Drawing Fee, or any
interest on any Class II Note, Class III Note or Class IV Note or, if there are no Class II Notes,
Class III Notes or Class IV Notes Outstanding, any interest on any Class V Note or, if there are no
Class II Notes, Class III Notes, Class IV Notes or Class V Notes Outstanding, any interest on any
Class VI Note, or, if there are no Class II Notes, Class III Notes, Class IV Notes, Class V Notes or
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Class VI Notes Outstanding, any interest on any Class VII Note (provided that if a default in
payment is solely the result of an administrative error or omission by the Trustee, the Collateral
Administrator, the Administrator, any Note Paying Agent or the Note Registrar, such five
Business Days shall be calculated beginning on the earlier of (x) the date such party became aware
of such administrative error or omission and (y) five Business Days after such default in payment
resulting solely from an administrative error or omission);
(ii)
a default in the payment of principal on any Rated Note when the same becomes due and payable,
at the Stated Maturity Date or any date set for redemption of such Rated Note;
(iii)
the failure on any Payment Date to disburse amounts available in accordance with the Priority of
Payments (except as provided in paragraphs (i) and (ii) above) and a continuation of such failure
for three Business Days (or, in the case of a default in payment resulting solely from an
administrative error or omission by the Trustee, the Collateral Administrator, the Administrator,
any Note Paying Agent or the Note Registrar, such default continues for a period of five Business
Days from the earlier of (x) the date such party became aware of such administrative error or
omission and (y) five Business Days after such default in payment resulting solely from an
administrative error or omission);
(iv)
on any date of determination, the Senior Par Value Coverage Ratio is less than 95 percent;
provided that, in calculating the Senior Par Value Coverage Ratio for purposes of this clause (iv),
the Par Value Coverage Amount will be determined without taking into account any of the
reductions contained in the definition thereof or elsewhere in the Indenture;
(v)
either of the Co-Issuers or the pool of Collateral becomes an investment company required to be
registered under the Investment Company Act and such requirement has not been eliminated after
a period of 45 days;
(vi)
a default in the performance, or breach, of any other covenant or warranty of the Co-Issuers under
the Indenture (it being understood that the non-compliance with any of the Collateral Quality
Tests, the Portfolio Percentage Limitations or the Coverage Tests or failure to satisfy the
conditions to the acquisition or execution of a Collateral Asset, including the conditions set forth
in the definition of Eligibility Criteria and Reinvestment Criteria not being satisfied will not, in
and of itself, constitute a default or breach) or of any representation or warranty of the Co-Issuers
made in the Indenture, or if any certificate or writing delivered pursuant thereto proves to be
incorrect in any material respect when made, which default or breach has a material adverse effect
on any Holder of Notes, and continues for a period of 30 days (or, in the case of default, breach or
failure of a representation or warranty regarding the Collateral, 15 days) of the earlier of
knowledge by the Co-Issuers or the Investment Adviser or notice to the Co-Issuers and the
Investment Adviser by the Trustee or to the Co-Issuers, the Investment Adviser and the Trustee by
the Holders of at least 25 percent of the aggregate outstanding amount of the Notes of any
Class Outstanding, specifying such default, breach or failure and requiring it to be remedied and
stating that such notice is a “Notice of Default” under the Indenture;
(vii)
one or more final judgments being rendered against the Issuer or the Co-Issuer which exceed, in
the aggregate, U.S.$5,000,000 (after excluding any portion of the judgment that is payable by a
party other than the Issuer or the Co-Issuer pursuant to an insurance policy or other
agreement) and which remains unstayed, undischarged and unsatisfied for 30 or more days after
such judgment(s) becomes nonappealable, unless adequate funds have been reserved or set aside
for payment thereof; or
(viii)
certain events of bankruptcy, insolvency or reorganization of either of the Co-Issuers as set forth
in the Indenture.
The failure of the obligor of the Class P Treasury Strip to pay any amount due and payable under the
Class P Treasury Strip (a “Class P Treasury Strip Default”) will not constitute an Event of Default under
the Indenture.
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Upon the occurrence of an Event of Default, the Issuer or the Co-Issuer will promptly, but in any event
within three Business Days, notify the Trustee, the Investment Adviser, the Note Paying Agents, the Note
Transfer Agents, the CDS Counterparties, the Supersenior Swap Counterparty, the Morgan Stanley Parties
any Hedge Counterparties and each Rating Agency then rating a Class of Rated Notes in writing of the
occurrence of such Event of Default, and the Trustee will notify the Noteholders of the occurrence of such
Event of Default as soon as practicable, but in any event within three Business Days, after receipt of notice
thereof from the Issuer or the Co-Issuer, as applicable.
If an Event of Default occurs and is continuing (other than an Event of Default described in clause
(viii) under “⎯Events of Default” above), the Trustee may or, if so directed in writing by the Holders of a
majority of the outstanding principal balance of the Notes of the Controlling Class, must (A) declare the
principal of and accrued and unpaid interest on all the Notes to be immediately due and payable and
(B) terminate the Reinvestment Period, whereupon such Notes shall become due and payable at their
outstanding principal balance plus accrued and unpaid interest thereon, without further action or formality. If
an Event of Default described in clause (viii) above under “⎯Events of Default” occurs, such an
acceleration of the Notes and the termination of the Reinvestment Period will occur automatically and will
not require any action by the Trustee or any Noteholder. Any declaration of acceleration (and thereby, the
termination of the Reinvestment Period) may under certain circumstances be rescinded as described below
by the Holders of at least a majority of the outstanding principal balance of Notes of the Controlling Class.
If an Event of Default occurs and is continuing, the Trustee will retain the Collateral intact and collect
all payments in respect of the Collateral and continue making payments pursuant to the Priority of Payments
unless (A) the Trustee determines (which determination may be based upon a certificate from the Investment
Adviser) that all of the CDS Assets that can be terminated have been or will be terminated and all amounts
due and payable by the Issuer thereunder have been or will be determined and that the anticipated proceeds
of a sale or other liquidation or termination of the Collateral (after deducting reasonable expenses relating to
such sale or liquidation and any termination payments to be made by the Issuer in connection therewith) (the
“Anticipated Liquidation Proceeds”) would be sufficient to discharge in full (i) the amounts then due and
unpaid in respect of interest and principal on the Class II Notes, the Class III Notes, the Class IV Notes, the
Class V Notes, the Class VI Notes and the Class VII Notes (including any Defaulted Interest and the interest
thereon and any Class V Cumulative Applicable Periodic Interest Shortfall Amount, Class VI Cumulative
Applicable Periodic Interest Shortfall Amount or Class VII Cumulative Applicable Periodic Interest
Shortfall Amount), (ii) the accrued and unpaid Supersenior Swap Commitment Fee and the Supersenior
Swap Drawing Fee and the Used Supersenior Swap Amount, (iii) any amounts required to be paid under the
CDS Assets, (iv) any amounts required to be paid under any Hedge Agreement, (v) the Remaining
Structuring Fee, (vi) unpaid fees, Administrative Expenses and Administrative Indemnities including any
accrued and unpaid Trustee Fee and Senior Investment Advisory Fee and (vii) without duplication of any
amounts described in the foregoing clauses (i) through (vi), all other amounts under the Indenture (including,
without limitation, all amounts that as of such date of determination would be required to be deposited into
the Class I Reserve Account to reduce the Available Supersenior Swap Amount to zero) and any termination
payment required to be paid to the Supersenior Swap Counterparty to terminate the Supersenior Swap) that
are, pursuant to the Priority of Payments, payable prior to the payments of the principal of, and interest on,
any Notes (without regard to any cap or limitation on any amounts payable therein) and the Holders of a
majority of the outstanding principal balance of the Notes of the Controlling Class Outstanding agree with
such determination or (B) provided that all of the CDS Assets that can be terminated have been or will be
terminated and all amounts due and payable by the Issuer thereunder have been or will be paid in full or a
sufficient reserve therefor has been or will be established, (x) the Holders of at least 66⅔ percent of the
outstanding principal balance of each Class of Rated Notes Outstanding voting as separate Classes, or (y) in
the case of (A) an Event of Default which occurs as a result of a default which continues for a period of five
Business Days in the payment, when due and payable, of the Supersenior Swap Commitment Fee or the
Supersenior Swap Drawing Fee, the Class II Notes, the Class III Notes or the Class IV Notes, (B) an Event
of Default described in clause (ii) above under “⎯Events of Default” (other than an Event of Default arising
from the non-payment of the principal of the Notes that has become due and payable solely by virtue of an
acceleration of the Notes following any other Event of Default) or (C) an Event of Default that occurs as a
result of the Senior Par Value Coverage Ratio being below 95 percent on any date of determination, the
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Holders of at least 66⅔ percent of the outstanding principal balance of the Notes of the Controlling
Class Outstanding, and in each case subject to the provisions of the Indenture, direct the sale and liquidation
of the Collateral (provided that, in calculating the Senior Par Value Coverage Ratio for purposes of the Event
of Default described in this clause (C), the Par Value Coverage Amount will be determined without taking
into account any of the reductions contained in the definition thereof or elsewhere in the Indenture).
After the occurrence of an Event of Default and acceleration of the Notes and liquidation of the
Collateral (including termination of all CDS Assets), all Collateral Interest Collections and all Collateral
Principal Collections will be distributed, and all termination payments and other amounts owing with respect
to the CDS Assets and other obligations of the Issuer will be paid, pursuant to the Liquidation Priority. See
“— Liquidation Priority.”
The Holders of a majority of the outstanding principal balance of the Notes of the Controlling
Class Outstanding will have the right to direct the Trustee in writing in the conduct of any proceedings or in
the sale of any or all of the Collateral, but only if (i) such direction will not conflict with any rule of law or
provision of the Indenture (including the limitations described in the paragraph above) and (ii) the Trustee
determines that such action will not involve it incurring any liability or expense (unless the Trustee is
indemnified to its satisfaction against any such liability or expense).
Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event of Default
with respect to the Notes occurs and is continuing, the Trustee is under no obligation to exercise any of the
rights or powers under the Indenture at the request of any Holders of Notes, unless such Holders have
offered to the Trustee reasonable security or indemnity satisfactory to the Trustee.
Only the Trustee may pursue the remedies available under the Indenture with respect to an Event of
Default and no Holder of a Note will have the right to institute any proceeding with respect to an Event of
Default under the Indenture, its Note or otherwise unless (i) such Holder previously has given to the Trustee
written notice of an Event of Default, (ii) except in the case of a default in the payment of principal or
interest, the Holders of at least 25 percent of the outstanding principal balance of the Notes of the
Controlling Class Outstanding have made a written request upon the Trustee to institute such proceedings in
its own name as Trustee and such Holders have offered the Trustee indemnity satisfactory to the Trustee,
(iii) the Trustee has for 30 days failed to institute any such proceeding, and (iv) no direction inconsistent
with such written request has been given to the Trustee during such 30-day period by the Holders of a
majority of the outstanding principal balance of the Notes of the Controlling Class Outstanding.
Any declaration of acceleration of maturity of the Notes may be rescinded and annulled by the Holders
of a majority of the outstanding principal balance of the Notes of the Controlling Class Outstanding before a
judgment or decree for the payment of money due has been obtained by the Trustee or the Collateral has
been sold, terminated or foreclosed in whole or in part, by notice to the Investment Adviser, the Co-Issuers,
the Supersenior Swap Counterparty, the Trustee, the Hedge Counterparties, the CDS Counterparties and the
Rating Agencies, if (a) the Issuer or the Co-Issuer has paid or deposited with the Trustee a sum sufficient to
pay, in accordance with the Priority of Payments, the principal and accrued interest (including all Defaulted
Interest and the interest thereon and any Class V Cumulative Applicable Periodic Interest Shortfall Amount,
Class VI Cumulative Applicable Periodic Interest Shortfall Amount or Class VII Cumulative Applicable
Periodic Interest Shortfall Amount) with respect to the Outstanding Notes (other than amounts that have
become due solely as a result of such acceleration), the Supersenior Swap Commitment Fee, the Supersenior
Swap Drawing Fee, the Senior Investment Advisory Fee and any other due and unpaid Trustee Fee,
Administrative Expenses; Administrative Indemnities, fees, amounts (if any) due to the CDS Counterparties
and the Investment Adviser, amounts (if any) due to the Hedge Counterparties, amounts (if any) due to the
Supersenior Swap Counterparty, amounts (if any) due to the Morgan Stanley Parties with respect to the
Structuring Fee or the Remaining Structuring Fee and other amounts that, under the Transaction Documents
and pursuant to the Priority of Payments, are payable prior to the payment of the principal of and interest on
the Outstanding Notes, (b) the Hedge Agreement has not been terminated by the Issuer or the Issuer has
entered into a new Hedge Agreement to hedge the interest rate risk with respect to the Rated Notes and
(c) the Trustee has determined that all Events of Default, other than the non-payment of the Supersenior
Swap Commitment Fee, the Supersenior Swap Drawing Fee, or the interest on or principal of the
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Outstanding Notes that have become due solely by such acceleration, have been cured and the Holders of a
majority of the outstanding principal balance of the Notes of the Controlling Class Outstanding by notice to
the Trustee have agreed with such determination (which agreement may not be unreasonably withheld or
delayed). Any rescission or annulment of a declaration of acceleration will not extend to any subsequent
declaration of acceleration.
During any period following the acceleration of the Notes but prior to the liquidation of the Collateral,
any proceeds realized upon the maturity or payment of Eligible Investments will be reinvested in Eligible
Investments and any proceeds (exclusive of interest) realized upon the maturity or payment of Class I
Reserve Investments will be invested in Eligible Investments in the same manner as such proceeds would be
invested if the Notes had not been accelerated.
In determining whether the Holders of the requisite percentage of Notes have given any direction,
notice or consent, Notes owned by the Issuer, the Co-Issuer or any Affiliate thereof will be disregarded and
deemed not to be Outstanding; provided, however, that if such direction, notice or consent concerns the
removal of the Investment Adviser for Cause, Investment Adviser Notes will be disregarded and deemed not
to be Outstanding. Any such notice will be deemed to have been given on the fourth day after the mailing of
such notice.
The Trustee may on behalf of the Holders of all of the Notes waive any past Event of Default and its
consequences upon receiving a request in writing by the Holders of a majority of the outstanding principal
balance of the Notes of the Controlling Class Outstanding to do so; provided, however, that, the Trustee may
not waive (a) a default which continues for a period of more than five Business Days in the payment, when
due and payable, of the Supersenior Swap Commitment Fee or the Supersenior Swap Drawing Fee, or any
interest on any Class II Note, Class III Note or Class IV Note or, if there are no Class II Notes, Class III
Notes or Class IV Notes Outstanding, any Class V Note or, if there are no Class II Notes, Class III Notes,
Class IV Notes or Class V Notes Outstanding, any Class VI Note or if there are no Class II Notes, Class III
Notes, Class IV Notes, Class V Notes or Class VI Notes Outstanding, any Class VII Note; (b) a default in
the payment of principal, when due and payable, of any Rated Note; (c) the failure on any Payment Date to
disburse amounts available in accordance with the Priority of Payments and continuation of such failure for a
period of three Business Days; (d) certain events of bankruptcy or insolvency with respect to the Co-Issuers
as set forth in the Indenture; or (e) a default in respect of a provision of the Indenture that cannot be modified
or amended without the waiver or consent of the Holder of each Outstanding Note adversely affected
thereby; and (f) a default in respect of any covenant or provision hereof for the individual protection or
benefit of the Trustee (without the Trustee’s express written consent thereto).
Upon any such waiver, such Event of Default will cease to exist, and any Event of Default with respect
to the Indenture arising from such Event of Default will be deemed to have been cured, but no such waiver
will extend to any subsequent or other Event of Default or impair any right related to such other Event of
Default.
Any such authorization, waiver or modification must be notified to the Holders of the Notes or the
Holders of any Class or Classes of Notes and, so long as the Rated Notes are rated by S&P, S&P, in each
case, as soon as practicable, but in any event within 10 Business Days after such authorization, waiver or
modification.
Notices
Notices to the Holders of the Notes will be given by overnight courier or first-Class mail, postage
prepaid, to the registered Holders of Notes at their respective addresses appearing in the Note Register.
In addition, for so long as any of the Notes are listed on the Irish Stock Exchange, notices to the
Holders of such Notes (excluding the Note Valuation Reports and the Monthly Reports) will also be
submitted to the Irish Paying Agent to be published in the Irish Stock Exchange’s Official List.
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Modification of the Indenture
Except as provided below, with the written consent of the Holders of not less than a majority of the
outstanding principal balance of the Outstanding Notes of each Class materially and adversely affected
thereby, the consent of each CDS Counterparty and Hedge Counterparty (if such CDS Counterparty or
Hedge Counterparty is adversely affected thereby), the Morgan Stanley Parties (but only if the Morgan
Stanley Parties would be adversely affected thereby) and the Supersenior Swap Counterparty (only if the
Available Supersenior Swap Amount has not been permanently reduced to zero and the Supersenior Swap
Counterparty is adversely affected thereby) and Rating Agency Confirmation, the Trustee and the Co-Issuers
may execute a supplemental indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture or modify in any manner the rights of the Holders of the Notes of such Class.
The Trustee may determine whether or not the Holders of Notes would be adversely affected by such change
(after giving notice of such change to the Holders of Notes and may in such determination rely on an opinion
of counsel of nationally recognized standing delivered to it by the party requesting such amendment). Such
determination will be conclusive and binding on all present and future Holders.
Without the written consent of the Holders of 100 percent of the outstanding principal balance of each
adversely affected Class of Notes, the consent of the Supersenior Swap Counterparty (but only if the
Available Supersenior Swap Amount has not been permanently reduced to zero and the rights and interests
of the Supersenior Swap Counterparty under the Transaction Documents would be adversely affected
thereby), each CDS Counterparty and any Hedge Counterparty (only if such CDS Counterparty or Hedge
Counterparty is adversely affected thereby) the Morgan Stanley Parties (but only if the Morgan Stanley
Parties would be adversely affected thereby) and Rating Agency Confirmation, no supplemental indenture
may (i) change the Stated Maturity Date of the Notes or scheduled redemption of the principal of or the due
date of any installment of interest on the Notes, reduce the principal balance thereof, or the rate of interest
thereon, or reduce the Supersenior Swap Drawing Fee or Supersenior Swap Commitment Fee Rate or change
the date of payment of the Supersenior Swap Drawing Fee or the Supersenior Swap Commitment Fee, or
change the redemption price with respect to any Note, or change the earliest date on which Notes may be
redeemed, change the provisions of the Indenture relating to the application of proceeds of any Collateral to
the payment of principal of or interest on Rated Notes or the payment of distributions on the Subordinated
Notes or change any place where, or the coin or currency in which, Notes or the principal thereof or interest
thereon is payable, change the definition of “Non-Call Period” or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity Date thereof (or, in the case of redemption,
on or after the redemption date), (ii) modify the percentage of the outstanding principal balance of Holders
of Notes of each Class whose consent is required for the authorization of any supplemental indenture or for
any waiver of compliance with certain provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the Collateral, except as otherwise permitted by the Indenture,
(iv) permit the creation of any lien or security interest ranking prior to or on a parity with the security interest
of the Indenture with respect to any part of the Collateral or terminate such security interest on any property
at any time subject thereto (other than in accordance with the Indenture) or deprive the Holder of any Note
of the security afforded by the security interest of the Indenture, (v) reduce the percentage of Holders of
Notes of each Class whose consent is required to request the Trustee to preserve the Collateral or rescind the
Trustee’s election to preserve the Collateral or to sell or liquidate the Collateral pursuant to the Indenture,
(vi) modify any of the provisions of the Indenture with respect to supplemental indentures except to increase
the percentage of Outstanding Notes whose Holders’ consent is required for any such action, (vii) modify the
definition of the term “Outstanding,” the Priority of Payments or the Synthetic Applications Sequence,
including as set forth in the Indenture, (viii) modify any of the provisions of the Indenture in such a manner
as to affect the calculation of the amount of any payment of interest on or principal of any Rated Note or
modify any amount distributable to the Holders of the Subordinated Notes on any Payment Date or to affect
the right of the Holders of Notes to the benefit of any provisions for the redemption of such Notes contained
therein, (ix) provide for the subsequent issuance of notes of one or more series that are prior in right of
payment to the Notes pursuant to the Indenture and to which the Notes may be expressly subordinated, in
each case by the terms of any such supplemental indenture, (x) amend any provision of the Indenture or any
other agreement entered into by the Issuer or the Co-Issuer with respect to the transactions contemplated by
the Indenture relating to non-petition for bankruptcy, or (xi) amend any provision of the Indenture or any
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other agreement entered into by the Issuer or the Co-Issuer with respect to the transactions contemplated by
the Indenture that provides that the obligations of the Issuer or Co-Issuer, as the case may be, are limited
recourse obligations of the Co-Issuers or the Issuer, respectively, payable solely from the Collateral in
accordance with the terms of the Indenture (items (i) through (xi) above collectively, the “Reserved
Matters”).
The Co-Issuers and the Trustee may also enter into one or more supplemental indentures, without
obtaining the consent of Holders of the Notes, or of the Supersenior Swap Counterparty (unless the
Available Supersenior Swap Amount has not been permanently reduced to zero and the rights or interests of
the Supersenior Swap Counterparty under the Transaction Documents could reasonably expected to be
materially adversely affected thereby) or of the Morgan Stanley Parties (unless the rights of interests of the
Morgan Stanley Parties could reasonably be expected to be materially adversely affected thereby) or any
CDS Counterparty or Hedge Counterparty (unless the rights or interests of any such CDS Counterparty or
Hedge Counterparty under the Transaction Documents could reasonably expected to be materially adversely
affected thereby) for the following limited purposes: (i) to evidence the assumption by any such successor of
the covenants of the Co-Issuers with respect to the Notes or the Indenture, (ii) to add to the covenants of the
Co-Issuers or the Trustee for the benefit of the Holders of the Notes, (iii) to convey, assign, transfer or
pledge any additional property to the Trustee, (iv) to add to the conditions, limitations or restrictions on the
authorized amount, terms and purposes of the issue, authentication and delivery of the Notes, (v) to effect the
appointment of a successor trustee, (vi) to reduce the permitted minimum denomination of the Notes, (vii) to
take any action necessary or advisable to prevent the Issuer, any Note Paying Agent or the Trustee from
being subject to 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, (viii) to modify the restrictions on and procedures for resale and
other transfers of the Notes in accordance with any change in any applicable law or regulation (or
interpretation thereof) or enable the Co-Issuers to rely upon any less restrictive exemption from registration
under the Securities Act or Investment Company Act or remove restrictions on resale and transfer to the
extent not required thereunder, (ix) to make any change required by the stock exchange on which any
Class of Notes is listed, if any, in order to permit or maintain such listing, (x) to correct or amplify the
description of any property at any time subject to the security interest created by the Indenture, (xi) to
conform the Indenture to the description contained in the Final Offering Memorandum, or (xii) to otherwise
correct, amend or cure any ambiguity or inconsistency or defect or correct any typographical error; provided
that any modification pursuant to clauses (i) through (xii) shall only be made if Rating Agency Confirmation
is obtained.
The Trustee is authorized by the Indenture to join in the execution of any such supplemental indenture
and to make any further appropriate agreements and stipulations which may be therein contained, but the
Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee’s own
rights, duties, liabilities or indemnities under the Indenture or otherwise, except to the extent required by
law.
The Co-Issuers will not consent to or enter into any supplemental indenture or any amendment to any
other document related thereto that: (i) modifies provisions related to the bankruptcy or insolvency of the
Co-Issuers or (ii) modifies provisions stating that the obligations of the Issuer are limited recourse debt
obligations of the Issuer or that the obligations of the Co-Issuer are non-recourse debt obligations of the CoIssuer payable solely from the proceeds of the Collateral in accordance with the terms of the Indenture. The
Co-Issuers will not consent to any supplemental indenture that would have a material adverse effect on any
Hedge Counterparty without the consent of such Hedge Counterparty. The Trustee (i) will, for so long as any
of the Notes are listed on the Irish Stock Exchange, notify the Irish Paying Agent who will forward such
notice to the Irish Stock Exchange of any material modifications to the Indenture and (ii) will, as promptly as
possible following the execution of any supplemental indenture (whether or not required to be approved by
the Noteholders), deliver a copy of such supplemental indenture to the Repository for posting on the
Repository.
The Trustee may, without the consent of the Holders of any relevant Class or Classes of Notes, agree to
any modification of the Indenture or any other Transaction Document (other than in respect of a Reserved
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Matter) which is, in the opinion of the Trustee, proper to make if, in the opinion of the Trustee (based upon
an opinion of counsel), such modification will not have a material adverse effect on the interests of Holders
of any Class or Classes of Notes and to any modification of any Class or Classes of Notes, the Indenture or
any other Transaction Document which is of a formal, minor or technical nature or is to correct a manifest
error. The Trustee may, without the consent of the Holders of any relevant Class or Classes of Notes, waive
any non-material breach of the Indenture.
The Indenture contains provisions for convening meetings of Holders of the Notes, or of the Holders of
any Class or Classes of Notes, to consider matters affecting their interests, including the modification of any
provision of the Indenture, and for the adoption of “extraordinary resolutions.”
In the event the Noteholders are entitled or required to make a request or give their consent or approval
under the Indenture or any other Transaction Document, then such a request, consent or approval must be
obtained in writing and the Trustee will be entitled to make such regulations as it sees fit and appropriate in
the circumstances in order to receive a request or obtain their consent or approval including, but not limited
to, setting a record date for the receipt of a written request or the obtaining of their consent or approval and
may request that any relevant Notes are blocked in the relevant clearing system. A written request or consent
that has been signed by or on behalf of the requisite percentage of Noteholders or Class of Noteholders (as
set out in the Transaction Documents) will take effect as if it were an “extraordinary resolution.” Where a
written request or consent is required from a percentage of the Controlling Class, the Holders of the
Subordinated Notes or the Holders of all of the Notes, then such written request or consent must be obtained
from the requisite percentage of the Noteholders of the Controlling Class, the Holders of the Subordinated
Notes or of all Noteholders in aggregate (regardless of their Class), as the case may be, and will, unless
specifically provided otherwise, be binding on all the Classes of Notes Outstanding.
The Investment Adviser will comply with all the terms and conditions of the Indenture affecting the
duties and functions to be performed by it under the Investment Advisory Agreement. The Investment
Adviser will not be bound by any supplemental indenture that modifies the rights or increases the obligations
of the Investment Adviser unless the Investment Adviser has consented to such supplemental indenture in
writing (which consent will not be unreasonably withheld or delayed, provided, that the Investment Adviser
may withhold consent for any reason if such supplemental indenture affects the amount or priority of
payment of the Investment Adviser’s fees).
Consolidation, Merger or Transfer of Assets
The Issuer or the Co-Issuer, as applicable, will not be permitted to 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 other entity except in accordance with the limited circumstances set forth in the Indenture.
No Petitions for Bankruptcy
The Indenture, each Synthetic Asset under which the Issuer has any payment obligations and each
Hedge Agreement will provide that the parties to such agreements may not cause the Issuer or the Co-Issuer
to petition for bankruptcy before one year and one day or, if longer, the applicable preference period then in
effect, have elapsed since the final payments to the Holders of any Class of Notes. The shareholders of the
Issuer may voluntarily wind up the Issuer only by special resolution of the Ordinary Shares. The Share
Trustee, as registered holder of the Ordinary Shares under the Declaration of Trust, has covenanted not to
exercise the votes attaching to the Ordinary Shares to wind up the Issuer before one year and one day or, if
longer, the applicable preference period then in effect, after all Notes have ceased to be Outstanding and the
directors of the Issuer have confirmed to the Share Trustee that the Issuer does not intend to issue any
additional Notes.
Note Paying Agents, Irish Paying Agent and Irish Listing Agent
Investors Bank & Trust Company will be the Principal Note Paying Agent under the Indenture. The
Co-Issuers and their Affiliates may maintain other banking relationships in the ordinary course of business
with the Principal Note Paying Agent. The payment of the fees and expenses of the Principal Note Paying
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Agent relating to the Notes is solely the obligation of the Issuer and, except for the Class VII Notes and the
Subordinated Notes, the Co-Issuer.
The Indenture contains provisions for the indemnification of the Principal Note Paying Agent for any
loss, liability or expense incurred without gross negligence, willful misconduct, default or bad faith on its
part arising out of or in connection with the acceptance or administration of the Indenture.
For so long as any of the Notes are listed on the Irish Stock Exchange and the rules of such exchange so
require, the Issuer and, except for the Class VII Notes and the Subordinated Notes, the Co-Issuer will
maintain a paying agent in Dublin, Ireland. Under a paying agency agreement with the Issuer, Custom House
Administration and Corporate Services Limited has been initially appointed paying agent (the “Irish Paying
Agent”) in respect of such Notes. The Issuer may terminate the appointment of the Irish Paying Agent and
the Irish Paying Agent may resign, at any time, by giving at least 30 days’ notice to the respective other
party. In the event that the Irish Paying Agent is replaced at any time during such period, notice of the
appointment of any replacement will be given to the Company Announcements Office of the Irish Stock
Exchange.
McCann FitzGerald Listing Services Limited will be the Irish Listing Agent for the Notes (the “Irish
Listing Agent”).
Trustee
Investors Bank & Trust Company will be the trustee (the “Trustee”) under the Indenture. The Trustee
will be obligated to act for the benefit of the Secured Parties. The payment of the fees and expenses of the
Trustee relating to the Notes is solely the obligation of the Co-Issuers. Pursuant to the Indenture, the Trustee
will hold the assets of the Issuer in the Trustee’s name as agent for, and for the benefit of, the Secured
Parties and will carry out its duties and obligations, including with respect to the disposition and liquidation
of the assets of the Issuer, in accordance with the directions delivered pursuant to the Indenture.
The Trustee will make a Draw on the Available Supersenior Swap Amount by directing the Supersenior
Swap Counterparty to fund Draws and will perform certain other responsibilities under the Supersenior
Swap described herein under “—The Supersenior Swap.” The Trustee will also be responsible for
determining the manner in which amounts on deposit in the Class I Reserve Account and the CDS Reserve
Account will be applied on any Business Day to pay amounts payable in respect of CDS Assets and making
Draws on the Available Supersenior Swap Amount to make such payments.
The Indenture contains provisions for the indemnification of the Trustee for any loss, liability or
expense incurred without negligence, willful misconduct, default or bad faith on its part arising out of or in
connection with the acceptance or administration of the Indenture.
The Trustee may be removed by the Issuer acting at the direction of the Holders of a majority of the
outstanding principal balance of each Class of Notes Outstanding, with or without cause, by an instrument or
concurrent instruments in writing delivered to the Investment Adviser, the Administrator, the Trustee and
each Rating Agency; provided that upon the removal or resignation of IBTC as Trustee under the Indenture,
IBTC will be removed as the Collateral Administrator under the Collateral Administration Agreement. The
removal of the Trustee will not be effective until a successor trustee has been appointed pursuant to the terms
of the Indenture and approved by the written consent of the Holders of a majority of the outstanding
principal balance of each Class of Notes.
Collateral Administrator
Investors Bank & Trust Company will be the collateral administrator (the “Collateral
Administrator”) under 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 Administration Agreement contains provisions for the indemnification of the Collateral
Administrator for any loss, liability or expense incurred without negligence, willful misconduct, default or
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bad faith on its part arising out of or in connection with the acceptance or administration of the Collateral
Administration Agreement.
Governing Law of the Transaction Documents and the Notes
Each of the Indenture, the Account Control Agreement, the Investment Advisory Agreement, the
Collateral Administration Agreement, the CDS Assets, the Supersenior Swap, any Hedge Agreements and
the Notes states or will state that it will be governed by, and construed in accordance with, the laws of the
State of New York.
Under the Indenture, the Account Control Agreement, the Investment Advisory Agreement, the
Collateral Administration Agreement, the CDS Assets, the Supersenior Swap, any Hedge Agreements and
the Notes, the Issuer has submitted or will submit irrevocably to the jurisdiction of the courts of the State of
New York and the courts of the United States of America in the State of New York (in each case sitting in
the County of New York) for the purposes of hearing and determining any suit, action or proceedings or
settling any disputes arising out of or in connection with the Indenture, the Account Control Agreement, the
Investment Advisory Agreement, the Collateral Administration Agreement, the CDS Assets, the Supersenior
Swap, such Hedge Agreements and the Notes.
Reports
As set forth in the Indenture, the Trustee will supply, in a timely fashion to the Issuer and the
Investment Adviser any information relating to the Collateral Assets regularly maintained by the Trustee that
the Issuer, the Trustee or the Investment Adviser may from time to time request. In addition, the Issuer will
prepare or cause to be prepared a “Note Valuation Report,” determined as of each Calculation Date, and the
Issuer will deliver or make available or cause the Note Valuation Report to be delivered or made available to
each of the Trustee, the CDS Counterparties, the Supersenior Swap Counterparty and each Hedge
Counterparty (if any), the Principal Note Paying Agent, the Investment Adviser, each Rating Agency and
DTC (accompanied by a request that it be transmitted to the Holders of Notes on the books of DTC) by no
later than the close of business on the Business Day preceding the related Payment Date. The Note Valuation
Report will provide certain information, including information regarding the Collateral Quality Tests, the
Portfolio Percentage Limitations, the Coverage Tests, the payments to be made as of such Payment Date,
and account information. In addition, no later than the first Business Day after the tenth day of each month
(other than the months in which a Payment Date occurs, in which case, no later than the date the related Note
Valuation Report is delivered) commencing November of 2006, the Issuer will prepare or cause to be
prepared a “Monthly Report,” which Monthly Report will be delivered or made available to the Trustee, the
CDS Counterparties, any Hedge Counterparties, the Supersenior Swap Counterparty, the Investment
Adviser, each Rating Agency (so long as any Notes are rated), and, upon written request to the Trustee, to
any Holder of a Note. The Monthly Report will contain information including information regarding the
Collateral Assets (individually and collectively), account information, and information regarding the
Collateral Quality Tests, the Portfolio Percentage Limitations and the Coverage Tests.
Form, Denomination and Registration of the Notes
General
Interests in each Class of Rated Notes will be issued and may be transferred only in minimum
denominations of U.S.$500,000 in original principal balance, in each case, integral multiples of U.S.$1,000
in excess thereof and, in each case, with respect to interests in a Rule 144A Global Note or interests in a
Regulation S Global Note. The Subordinated Notes will be issued and may be transferred only in minimum
denominations of U.S.$250,000 (in original principal balance) and integral multiples of U.S.$1,000 in excess
thereof. After issuance, any Note may fail to be in such required minimum denomination due to repayment
of principal thereof in accordance with the Priority of Payments and any Class IV Note, Class V Note, Class
VI Note or Class VII Note may fail to be in an amount that is an integral multiple of U.S.$1,000 due to the
addition to the principal balance thereof of any Class V Cumulative Applicable Periodic Interest Shortfall
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Amount, Class VI Cumulative Applicable Periodic Interest Shortfall Amount or Class VII Cumulative
Applicable Periodic Interest Shortfall Amount, respectively.
Rule 144A Global Notes
The Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and,
other than with respect to the Class VII Notes and the Subordinated Notes issued in the form of Physical
Notes, the Class VII Notes and the Subordinated Notes initially sold in the United States or to U.S. Persons
(as defined in Regulation S) pursuant to Rule 144A under the Securities Act or another exemption from the
registration requirements of the Securities Act (other than Regulation S) will be represented by one or more
permanent Global Notes in definitive, fully registered form without interest coupons attached (the “Rule
144A Global Notes”). The Rule 144A Global Notes will be deposited with the Trustee as custodian for The
Depository Trust Company (“DTC”) and will be registered in the name of Cede & Co. (“Cede”), as
nominee of DTC.
All or a portion of an interest in a Rule 144A Global Note may be transferred to a person taking
delivery in the form of an interest in a Rule 144A Global Note in accordance with the applicable procedures
of DTC (in addition to procedures and restrictions set forth under the Indenture); provided that any
remaining principal balance of the transferor’s interest in the Rule 144A Global Note will either equal zero
or meet the required minimum denominations; provided, further, that such transfer is made to a U.S. Person
that is a qualified institutional buyer (“QIB”) within the meaning of Rule 144A under the Securities Act and
a Qualified Purchaser in a transaction that meets the requirements of Rule 144A under the Securities Act and
that the transferee, by purchase of such interest in the Rule 144A Global Notes, will be deemed to have made
all representations, warranties and acknowledgments applicable to transfer or purchase of an interest in a
Rule 144A Global Note described under “Transfer Restrictions.” “Qualified Purchaser” means a “qualified
purchaser” within the meaning of Section 3(c)(7) of the Investment Company Act.
In addition, all or a portion of an interest in a Rule 144A Global Note may be transferred to a person
taking delivery in the form of an interest in a Regulation S Global Note or exchanged for an interest in a
Regulation S Global Note, in accordance with the applicable procedures of DTC, Clearstream and Euroclear
(in addition to procedures and restrictions set forth under the Indenture) and only upon receipt by the Trustee
of a written certification from the transferor (in the case of a transfer) or the Holder (in the case of an
exchange) in the form provided in the Indenture to the effect that the transfer is being made to a person
whom the transferor reasonably believes is not a U.S. Person and that such transfer is being made in an
offshore transaction in accordance with Regulation S and in accordance with any applicable securities laws
of any state of the United States or any other jurisdiction; provided that the transferee, by purchase of such
interest in the Regulation S Global Note, will be deemed to have represented that, among other things, the
transfer or exchange is being made to a person who is not a U.S. Person in an offshore transaction in
accordance with Regulation S and only in a denomination greater than or equal to the required minimum
denominations; provided, further, that any remaining principal balance of the transferor’s interest in the Rule
144A Global Note will either equal zero or meet the required minimum denominations.
Any interest in a Rule 144A Global Note that is transferred to a person who takes delivery in the form
of an interest in a Regulation S Global Note will, upon transfer, cease to be an interest in such Rule 144A
Global Note and become an interest in the Regulation S Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to interests in a Regulation S Global Note
for as long as it remains such an interest. No service charge will be made for any registration of transfer or
exchange of an interest in a Rule 144A Global Note, but the Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
To enforce the restrictions on transfers of interests in the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes, the
Indenture permits the Issuer to demand that the Holder sell to a Holder permitted under the Indenture any
interest in a Rule 144A Global Note held by a U.S. Person who is determined not to have been both a
Qualified Purchaser and a QIB at the time of acquisition of such Note and, if the Holder does not comply
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with such demand within 30 days thereof, the Issuer may sell such Holder’s interest in the Note on such
terms as the Issuer may choose.
Transfers of interests in the Rule 144A Global Notes are subject to certain additional restrictions. In
particular, each transferee of an interest in a Rule 144A Global Note will also be deemed to have made
certain additional acknowledgments, representations and warranties as provided in the Indenture. See
“Transfer Restrictions.”
Regulation S Global Notes
The Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes, the
Class VII Notes and, other than the Subordinated Notes issued in the form of Physical Notes, the
Subordinated Notes initially sold to Non-U.S. Persons in offshore transactions in reliance on Regulation S
under the Securities Act will be represented by one or more permanent Global Notes in definitive, fully
registered form without interest coupons attached (the “Regulation S Global Notes” and, together with the
Rule 144A Global Notes, the “Global Notes”). The Regulation S Global Notes will be deposited with the
Trustee acting as custodian for DTC and will be registered in the name of Cede & Co., as nominee of DTC,
for the respective accounts of Euroclear Bank S.A./N.V., as operator of the Euroclear system
(“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream”).
As used above, “offshore transaction” will have the meaning assigned to such term in Regulation S
under the Securities Act.
Interests in the Regulation S Global Notes may be held only through Euroclear or Clearstream and may
not be held by a U.S. Person at any time.
All or a portion of an interest in a Regulation S Global Note may be transferred to a person taking
delivery in the form of an interest in a Regulation S Global Note in accordance with the applicable
procedures of DTC, Clearstream or Euroclear (in addition to procedures and restrictions set forth under the
Indenture); provided that any remaining principal balance of the transferor’s interest in the Regulation S
Global Notes will either equal zero or meet the required minimum denominations; provided, further, that
such transfer is made to a person who is not a U.S. Person in an offshore transaction in reliance upon an
exemption from the registration requirements of the Securities Act under Regulation S and that the
transferee, by purchase of such interest in such Regulation S Global Notes, will be deemed to have made all
representations, warranties and acknowledgments applicable to transfer or purchase of an interest in a
Regulation S Global Note described under “Transfer Restrictions.”
In addition, all or a portion of an interest in a Regulation S Global Note may be transferred to a person
taking delivery in the form of an interest in a Rule 144A Global Note or exchanged for an interest in a Rule
144A Global Note in accordance with the applicable procedures of DTC, Clearstream or Euroclear (in
addition to procedures and restrictions set forth under the Indenture) and upon receipt by the Trustee of a
written certification from the transferor (in the case of a transfer) or the Holder (in the case of an
exchange) in the form provided in the Indenture to the effect that, among other things, the transfer or
exchange is to a person that is both (a) a QIB and (b) a Qualified Purchaser, and only in a denomination
greater than or equal to the required minimum denominations; provided that any remaining principal balance
of the transferor’s interest in the Regulation S Global Note will either equal zero or meet the required
minimum denominations.
Any interest in a Class II Note, Class III Note, Class IV Note, Class V Note, Class VI Note or Class VII
Note or Subordinated Note initially sold in the form of a Regulation S Global Note that is transferred to a
person taking delivery in the form of an interest in a Rule 144A Global Note will, upon transfer, cease to be
an interest in such Regulation S Global Note and become an interest in the Rule 144A Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to interests
in a Rule 144A Global Note for as long as it remains such an interest. No service charge will be made for
any registration of transfer or exchange of an interest in a Regulation S Global Note, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental charge payable in connection
therewith.
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To enforce the restrictions on transfers of interests in the Class II Notes, the Class III Notes, the
Class IV Notes, the Class V Notes, the Class VI Notes, the Class VII Notes and the Subordinated Notes, the
Indenture permits the Issuer to demand that the Holder of a Regulation S Global Note sell to a Holder
permitted under the Indenture any interest in a Regulation S Global Note held by such Holder who is
determined to be a U.S. Person and, if the Holder does not comply with such demand within 30 days thereof,
the Issuer may sell such Holder’s interest in the Regulation S Global Note on such terms as the Issuer may
choose.
Transfers of interests in the Regulation S Global Notes are subject to certain additional restrictions. In
particular, each transferee of an interest in a Regulation S Global Note will also be deemed to have made
certain additional acknowledgments, representations and warranties as provided in the Indenture. See
“Transfer Restrictions.”
Book-Entry Registration of the Global Notes
The registered owner of a Rule 144A Global Note or a Regulation S Global Note will be the only
person entitled to receive payments in respect of the Notes represented by such Global Note, and the CoIssuers will be discharged by payment to, or to the order of, the registered owner of such Global Note in
respect of each amount so paid. No person other than the registered owner of the relevant Global Note will
have any claim against the Co-Issuers in respect of any payment due on that Global Note. Members of, or
participants in, DTC as well as any other persons on whose behalf such participants may act (including
Euroclear and Clearstream and account holders and participants therein) will have no rights under the
Indenture with respect to such Global Notes held on their behalf by the Trustee as custodian for DTC, and
DTC may be treated by the Co-Issuers, the Trustee, the Note Registrar, any Note Paying Agent and any
agent of the Co-Issuers or the Trustee as the Holder of such Global Notes for all purposes whatsoever.
Except in the limited circumstances described in the next sentence, owners of beneficial interests in the
Global Notes will not be entitled to have Notes registered in their names, will not receive or be entitled to
receive definitive physical notes and will not be considered “Holders” of Notes under the Indenture or under
the terms of the Notes. If (i) DTC notifies the Co-Issuers that it is unwilling or unable to continue as
depository for the Global Notes or DTC, Euroclear or Clearstream ceases to be a “Clearing Agency”
registered under the Exchange Act, and a successor depository or clearing agency is not appointed by the
Co-Issuers within 90 days after receiving such notice or (ii) as a result of any amendment to or change in the
laws or regulations of the Cayman Islands, or of any authority therein or thereof having power to tax, or in
the interpretation or administration of such laws or regulations that become effective on or after the Closing
Date, the Issuer, the Trustee or any Note Paying Agent becomes aware that it is or will be required to make
any deduction or withholding from any payment in respect of the Global Notes that would not be required if
the Global Notes were not represented by a Global Note, the Issuer will issue or cause to be issued notes in
the form of definitive physical notes in exchange for the applicable Global Notes to the beneficial owners of
such Global Notes in the manner set forth in the Indenture.
Investors may hold their interests in a Rule 144A Global Note directly through DTC if they are
participants in DTC, or indirectly through organizations that are participants in DTC. Investors may hold
their interests in a Regulation S Global Note directly through Clearstream or Euroclear, if they are
participants in Clearstream or Euroclear, or indirectly through organizations that are participants in
Clearstream or Euroclear. Clearstream and Euroclear will hold interests in the Regulation S Global Notes on
behalf of their participants through their respective depositories, which in turn will hold the interests in such
Global Notes in customers’ securities accounts in the depositories’ names on the books of DTC.
Payments of principal of and interest on a Rule 144A Global Note and a Regulation S Global Note will
be made to DTC or its nominee, as the registered owner thereof. The Co-Issuers, the Trustee, any Note
Paying Agent, the Managers, the Placement Agents, the Investment Adviser and any of their respective
Affiliates will not have any responsibility or liability for any aspect of the records maintained by DTC or its
nominee or any of its direct or indirect participants, including Euroclear or Clearstream (or any of their
respective direct or indirect participants) relating to or payments made on account of beneficial ownership
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interests in a Global Note or for maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.
The Issuer or the Co-Issuers, as applicable, expect that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Rule 144A Global Note or a Regulation S Global Note
representing a Class II Note, a Class III Note, a Class IV Note, a Class V Note, a Class VI, a Class VII Note
or a Subordinated Note held by DTC or its nominee, will immediately credit the applicable participants’
accounts with payments in amounts proportionate to their respective beneficial interests in the stated initial
principal balance of such Note as shown on the records of DTC or its nominee. The Co-Issuers expect that
payments by participants (i.e., direct participants) to owners of beneficial interests in a Global Note held
through such participants (i.e., indirect 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 such participants.
Transfers between 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 act only on behalf of
participants, who in turn act on behalf of indirect participants and certain banks, the ability of a person
holding a beneficial interest in a Global Note to pledge its interest to a person or entity that does not
participate in the DTC system, or otherwise take actions in respect of its interest, may be affected by the lack
of a physical note 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 applicable to the Notes described above and under
“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 through DTC in accordance
with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depository;
provided, however, that 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 through 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 Regulation S 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 Regulation S 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 through DTC.
DTC has advised the Co-Issuers that it will take any action permitted to be taken by a Holder of the
Notes only at the direction of one or more participants to whose account with DTC an interest in a Global
Note is credited and only in respect of that portion of the principal balance of the applicable Notes as to
which the participant or participants has or have given direction.
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 New York Uniform
Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the
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
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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 also 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”).
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to
facilitate transfers of interests in the 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. None of the Co-Issuers, the Trustee, the Managers, the Placement Agents or the
Note Paying Agents 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.
Subordinated Notes in the form of Physical Notes
The Subordinated Notes initially offered to persons that are U.S. Persons and both Accredited Investors
and Qualified Purchasers will be issued to the beneficial owners thereof in the form of one or more physical
certificates in definitive, fully registered form only (“Physical Notes”), registered in the name of the
beneficial owner thereof and only in minimum denominations of U.S.$250,000 in the case of the
Subordinated Notes; provided that any remaining principal balance of Subordinated Notes represented by the
transferor’s interest in the Subordinated Notes shall either equal zero or at least U.S.$250,000.
Subject to the restrictions on transfer set forth in the Indenture, any Holder of Subordinated Notes in the
form of Physical Notes may transfer such Subordinated Notes or exchange a certificate representing such
Subordinated Notes in whole or in part (in a number equal to any authorized denomination) by surrendering
the certificate representing such Subordinated Notes at the Corporate Trust Office of the Trustee, together
with an executed instrument of assignment and an investor certificate substantially in the form attached to
the Indenture. In exchange for any certificate representing Subordinated Notes in the form of Physical Notes
properly presented for transfer with all necessary accompanying documentation, the Trustee, as transfer
agent, will, within five Business Days of such request if made at the Corporate Trust Office of the Trustee,
or within 10 Business Days if made at the office of a transfer agent, deliver at the Corporate Trust Office of
the Trustee or the office of the transfer agent, as the case may be, to the transferee or send by first-Class mail
at the risk of the transferee to such address as the transferee may request, a certificate representing
Subordinated Notes in the form of Physical Notes, as the case may be, for a like amount of Subordinated
Notes as may be requested. The presentation for transfer of any certificates representing Subordinated Notes
in the form of Physical Notes will not be valid unless made at the Corporate Trust Office of the Trustee or at
the office of a transfer agent by the registered Holder in person, or by a duly authorized attorney-in-fact. The
Holder of a Subordinated Note will not be required to bear the costs and expenses of effecting any transfer or
registration of transfer, except that the relevant Holder will be required to bear (i) the expenses of delivery
by other than regular mail (if any) and (ii) if the Issuer so requires, the payment of a sum sufficient to cover
any duty, stamp tax or governmental charge or insurance charges that may be imposed in relation to such
transfer.
The Indenture permits the Issuer to demand that the Holder sell to a Holder permitted under the
Indenture, any interest in a Subordinated Note in the form of a Physical Note held by such Holder who is
determined not to have been a Non-U.S. Person or a U.S. Person that was both a QIB and a Qualified
Purchaser or an Accredited Investor and a Qualified Purchaser, at the time of acquisition of such
Subordinated Notes and, if the Holder does not comply with such demand within 30 days thereof, the Issuer
may sell such Holder’s interest in the Subordinated Note on such terms as the Issuer may choose.
The Trustee shall record the transfer of ownership in the register maintained by it and also notify the
Note Registrar of any transfer of an interest in the Subordinated Notes in the form of a Physical Note. The
Note Registrar shall record the transfer of ownership in the Note Register in accordance with the Indenture.
The Issuer, the Note Registrar and the Trustee shall not be required to issue or register the transfer or any
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Subordinated Note or the exchange of any Subordinated Note in the form of a Physical Note during a period
beginning at the opening of business 15 days before any Payment Date.
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RATINGS OF THE NOTES
It is a condition to the issuance of the Notes on the Closing Date that (i) the Class II Notes be rated
“Aaa” by Moody’s Investors Service, Inc. (“Moody’s”) and “AAA” by Standard & Poor’s, a division of The
McGraw-Hill Companies, Inc. (“S&P” and, together with Moody’s, the “Rating Agencies”); (ii) the
Class III Notes be rated at least “Aa2” by Moody’s and “AA” by S&P; (iii) the Class IV Notes be rated at
least “Aa3” by Moody’s and “AA-” by S&P; (iv) the Class V Notes be rated at least “A2” by Moody’s and
“A” by S&P; (v) the Class VI Notes be rated at least “Baa2” by Moody’s and “BBB” by S&P; and (vi) the
Class VII Notes be rated at least “Ba1” by Moody’s and “BB+” by S&P.
The Subordinated Notes will not be rated.
A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency. In the event that a rating initially assigned to any
Class of Rated Notes is subsequently lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Rated Notes.
The Issuer will inform the Irish Paying Agent, so long as any Notes are listed on the Irish Stock
Exchange, if the ratings assigned to such Notes as of the Closing Date are reduced or withdrawn.
Within eight Business Days following the Effective Date, the Issuer will request each Rating Agency
rating the Rated Notes to confirm that it has not reduced or withdrawn the rating it assigned to such Class of
Rated Notes on the Closing Date. If the Co-Issuers do not obtain such confirmation within 30 days following
the Effective Date, a Rating Confirmation Failure will occur. See “Description of the Notes—Mandatory
Redemption of the Rated Notes Upon Rating Confirmation Failure.”
The ratings assigned to the Rated Notes by each Rating Agency are based upon that Rating Agency’s
assessment of the probability that the Collateral Assets will provide sufficient funds to pay such Notes
(based upon the respective interest rate and principal balance), 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 through the
subordination of the Subordinated Notes and certain Classes of Notes through the Priority of Payments as
described herein), and the Reinvestment Criteria that must be satisfied or improved in the manner described
herein in order to reinvest in additional Collateral Assets.
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.
Moody’s
The rating assigned by Moody’s to each Class of Rated Notes addresses the ultimate cash receipt by the
holders of the Rated Notes of all required interest and principal payments on the Rated Notes as required by
the Indenture.
S&P
The ratings assigned to the Rated Notes by S&P address (i) the timely payment of interest on the
Class II Notes, the Class III Notes and the Class IV Notes, (ii) the ultimate payment of interest on the Class
V Notes, the Class VI Notes and the Class VII Notes by their Stated Maturity Date and (iii) the ultimate
payment of principal of each Class of Rated Notes by their Stated Maturity Date.
S&P will rate the Rated Notes in a manner similar to the manner in which it rates other structured
issues. This requires an analysis of the following: (i) credit quality of the Collateral Assets securing the
Notes; (ii) cash flow used to pay liabilities and the priorities of these payments; and (iii) legal considerations.
Based on these analyses, S&P determines the necessary level of credit enhancement needed to achieve a
desired rating.
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S&P’s analysis includes the application of its proprietary default expectation computer model, the
“S&P CDO Monitor,” which is used to estimate the default rate that the portfolio is likely to experience,
and which will be provided by S&P to the Investment Adviser and the Trustee after the Effective Date. 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 takes into consideration the rating of each issuer or obligor, the number of issuers or
obligors, the issuer or obligor industry concentration and the remaining weighted average maturity of each of
the Collateral Assets (other than Defaulted Securities) and Eligible 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 Investments included in the portfolio. The risks posed by these variables are
accounted for by effectively adjusting the necessary default level needed to achieve a desired rating. The
higher the desired rating, the higher the level of defaults the portfolio must withstand.
Credit enhancement to support a particular rating is then provided based, in part, on the results of the
S&P CDO Monitor, as well as other more qualitative considerations such as legal issues and management
capabilities.
Credit
enhancement
is
typically
provided
by
a
combination
of
overcollateralization/subordination, cash collateral/reserve account, excess spread/interest and amortization.
A transaction specific cash flow model (the “Transaction-Specific Cash Flow Model”) is used by S&P to
evaluate the portfolio and determine whether it can withstand an estimated level of defaults while fully
repaying the Class of debt under consideration.
There can be no assurance that actual losses on the Collateral Assets will not exceed those assumed in
the application of the S&P CDO Monitor or that recovery rates and the timing of recovery with respect
thereto will not differ from those assumed in the Transaction-Specific Cash Flow Model. The Co-Issuers
make no representation as to the expected rate of defaults on the portfolio or as to the expected timing of any
defaults that may occur.
S&P’s ratings of the Rated Notes will be established under various assumptions and scenario analyses.
There can be no assurance, and the Investment Adviser and the Managers, the Placement Agents make no
representation, that actual defaults on the Collateral Assets will not exceed those used in S&P’s analysis, or
that recovery rates with respect thereto (and, consequently, loss rates) will not differ from those used in
S&P’s analysis.
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DESCRIPTION OF THE CLASS P NOTES
General
The Issuer will issue U.S.$5,910,000 Class P Notes due October 6, 2043 (the "Class P Notes"). The
Class P Notes will be issued by the Issuer pursuant to the Indenture.
The Class P Notes will consist of two components: (1) a component initially consisting of the Class P
Treasury Strip allocable to, and represented by, the Class P Notes (the "Class P Treasury Strip
Component") and (2) a component initially consisting of Subordinated Notes in the aggregate principal
amount of U.S. $2,000,000 allocable to, and represented by, the Class P Notes (the "Class P Subordinated
Note Component").
The aggregate principal amount of the Subordinated Notes included in the Class P Subordinated Note
Component is included in, and is not in addition to, the aggregate principal amount of the Subordinated
Notes issued by the Issuer as described elsewhere in this Final Offering Memorandum.
Except as otherwise described herein, the terms and conditions of the Class P Notes (including amounts
due and payable thereunder) will be with respect to the Class P Treasury Strip Component, the terms and
conditions of the Class P Treasury Strip and with respect to the Class P Subordinated Note Component, the
terms and conditions of the Subordinated Notes.
Class P Risk Factors
General
An investment in the Class P Notes involves certain risks. In addition to the risks particular to the
Class P Notes described in the following paragraphs, the risk of ownership of the Class P Notes will be with
respect to the Class P Treasury Strip Component, the risks of ownership of the Class P Treasury Strip and
with respect to the Class P Subordinated Note Component, the risks of ownership of the Subordinated Notes.
As a result, all of the risks described under "Risk Factors" also will be applicable to an investment in the
Class P Notes.
Non transferability of Components
The Components are not separately transferable while they are Components of the Class P Notes. See
"Description of the Class P Notes—Form, Denomination and Registration of the Class P Notes—Exchange
of Class P Notes for Underlying Components."
Limited Liquidity
There is currently no market for the Class P Notes. Although the Managers and/or the Placement
Agents may from time to time make a market in the Class P Notes, they are not under any obligation to do
so. In the event that the Managers and/or the Placement Agents commence any market-making, they may
discontinue the same at any time. There can be no assurance that a secondary market for the Class P Notes
will develop, or if a secondary market does develop, that it will provide the Holders of the Class P Notes
with liquidity of investment or that it will continue for the life of the Class P Notes. In addition, the Class P
Notes are subject to certain transfer restrictions and can only be transferred to certain transferees as
described under "Class P Transfer Restrictions." Consequently, an investor in the Class P Notes must be
prepared to hold the Class P Notes for an indefinite period of time or until their Stated Maturity.
The Class P Treasury Strip Component is secured only by the Class P Treasury Strip Collateral and is
not secured by the Collateral. In the event that the Class P Treasury Strip Collateral is not sufficient to pay
the principal amount of the Class P Treasury Strip Component of the Class P Notes, the Issuer will not have
any obligation whatsoever to pay such deficiency. None of the Issuer, the Investment Adviser, the Trustee
or the Managers or the Placement Agents has made any investigation of the issuer of the Class P Treasury
Strip. Investors in the Class P Notes should obtain a copy of the documents pertaining to the issuance of the
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Class P Treasury Strip, and make their own investigation of such issuer (including, without limitation, with
regard to its financial position and creditworthiness) and the terms of the Class P Treasury Strip.
Tax Consequences
There may be adverse tax consequences for an investor in the Class P Notes by reason of the attribution
to such investor of taxable income resulting from the Class P Treasury Strip Collateral. In particular, U.S.
Holders of the Class P Notes will likely be required to report for U.S. federal income tax purposes income
derived from the Class P Treasury Strip Collateral prior to the date the Holder receives a payment with
respect to the Class P Treasury Strip Collateral. Each investor or prospective investor should consult with its
tax advisor regarding the tax consequences of ownership of the Class P Notes. See "Certain Income Tax
Considerations" below.
Status and Security
With respect to the Class P Treasury Strip Component only, the Class P Notes are limited-recourse
obligations of the Issuer. The Class P Notes are payable solely from payments of interest, principal or other
distributions in respect of the Class P Treasury Strip Component and the Class P Subordinated Note
Component. The Class P Notes will be secured solely to the extent to which the underlying Class P
Subordinated Note Component and Class P Treasury Strip Component are secured. The Class P Notes will
be entitled to no other payments. If the Trustee is advised by any Holder of Class P Notes that such Holder
is not permitted under the documents related to the Class P Notes, applicable law or otherwise, to receive the
Class P Treasury Strip Collateral, as the case may be, "in kind" or any Holder of a Class P Note fails to
complete any documentation required for a transfer of the Class P Treasury Strip Collateral, the Issuer will
direct the Trustee to liquidate such Holder's portion of the Class P Treasury Strip Collateral in a sale
arranged by the Investment Adviser and such Holder's Class P Notes will be redeemed from the net proceeds
of the allocable amount of the Class P Treasury Strip Collateral and the Subordinated Notes represented by
the portion of the Class P Subordinated Note Component allocable to such Holder, will be delivered to such
Holder. In order for the Holders of the Class P Notes to obtain delivery of the Class P Treasury Strip
Collateral each Holder must be an eligible transferee of the Class P Treasury Strip Collateral pursuant to the
documents related to the Class P Notes and applicable law.
Interest
The Class P Notes do not bear a stated rate of interest. Instead, payments on the Class P Subordinated
Note Component and the Class P Treasury Strip Component will be paid to Holders of the Class P Notes as
described below under "Description of Class P Notes—Payments."
Redemption
On any Redemption Date, the Trustee will disburse (solely from the Class P Treasury Strip Component
Account) to the Holders of the Class P Notes, pro rata, based on their respective portions of the Class P
Notes, the redemption price of the Class P Strip Collateral in the form of a distribution in kind of each item
in the Class P Treasury Strip Component Account plus any amounts distributed on the Subordinated Notes
allocable to the Class P Subordinated Note Component.
Acts of Holders of Class P Notes
The Class P Notes will be treated as Subordinated Notes to the extent of the Class P Subordinated Note
Component, for purposes of any voting, requests, demands, authorizations, directions, notices, consents,
waivers or other actions under the Indenture and the Preference Share Fiscal and Paying Agency Agreement.
The Holder of any Class P Note will be entitled to vote, or to direct the voting of, the Class P Subordinated
Note Component and Class P Treasury Strip Component of such Class P Note.
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Payments
All amounts paid on any Payment Date with respect to the Class P Subordinated Note Component will be
deposited into such Class P Treasury Strip Component Account on behalf of, and for the benefit of, the
Holders of the Class P Notes. Funds standing to the credit of the Class P Treasury Strip Component
Account that constitute Class P Treasury Strip Collateral will be available for application to the amounts due
to the Holders of the Class P Notes as described in the Indenture. Funds standing to the credit of the Class P
Treasury Strip Component Account that constitute amounts paid with respect to the Class P Subordinated
Note Component will be available for distribution to the Class P Notes on the Payment Date on which such
funds were credited to the Class P Treasury Strip Component Account in accordance with the terms of the
Indenture.
Cancellation
All Class P Notes that are paid in full or redeemed and surrendered for cancellation will forthwith be
cancelled and may not be reissued or resold.
Form, Denomination And Registration Of The Class P Notes
General
The Class P Notes are being offered for sale (i) in the United States to Qualified Institutional Buyers in
reliance on the exemption from registration provided by Section 4(2) of the Securities Act and (ii) outside
the United States to persons that are not U.S. Persons in offshore transactions in reliance on Regulation S
and, in each case, in accordance with any applicable securities laws of any state of the United States and any
other relevant jurisdiction. Each Class P Note offered for sale to a U.S. Person will be offered only to
Qualified Purchasers. Prior to investing in the Class P Notes, a prospective investor or transferee must
obtain copies of the documentation pursuant to which the Class P Treasury Strip will have been issued from
the Trustee, the Managers or the Placement Agents or the transferor of such Class P Notes, and review the
documents pursuant to which the Class P Treasury Strip was issued in order to understand the terms of the
Class P Treasury Strip and to confirm that such investor is eligible to own the Class P Treasury Strip. The
Trustee is not obligated and has no responsibility to monitor or otherwise investigate an investor's eligibility.
Class P Rule 144A Certificated Notes and Class P Regulation S Certificated Notes
The Class P Notes initially sold or transferred in the United States or to U.S. Persons pursuant to
Section 4(2) or Rule 144A under the Securities Act will be issued in the form of physical certificates in
definitive, fully registered form (each, a "Class P Rule 144A Certificated Notes").
The Class P Notes sold to non-U.S. Persons in offshore transactions in reliance on Regulation S under
the Securities Act may be issued in the form of physical certificates, registered in the name of the beneficial
owners thereof, in definitive, fully registered form (each, a "Class P Regulation S Certificated Note").
The Class P Rule 144A Certificated Notes or the Class P Regulation S Certificated Notes will be
offered and may only be transferred to (i) a person who is not a U.S. Person in offshore transactions in
reliance on Regulation S under the Securities Act taking delivery in the form of a Class P Regulation S
Global Note or a Class P Regulation S Certificated Note or (ii) in the United States (a) to Qualified
Institutional Buyers in reliance on the exemption from registration under the Securities Act provided by
Rule 144A thereunder or (b) to Accredited Investors in reliance on the exemption from registration under the
Securities Act provided by Section 4(2), in each case who are also Qualified Purchasers (subject to provision
of certification and a legal opinion) taking delivery in the form of a Class P Rule 144A Certificated Note.
Transfers of Class P Rule 144A Certificated Notes or Class P Regulation S Certificated Notes may only be
effected by delivery to the Trustee and the Issuer of the required written certifications from the proposed
transferee regarding compliance with applicable transfer restrictions. See "Transfer Restrictions."
Subject to the restrictions on transfer set forth in the Indenture and the Class P Rule 144A Certificated
Notes or the Class P Regulation S Certificated Notes, Holders of the Class P Rule 144A Certificated Notes
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or the Class P Regulation S Certificated Notes may transfer or exchange such Class P Notes in whole or in
part (in a number equal to any authorized denomination) by surrendering such Class P Notes at the
Corporate Trust Office of the Trustee, together with an executed instrument of assignment and an investor
certificate substantially in the form attached to the Indenture. In exchange for any Class P Rule 144A
Certificated Notes or Regulation S Certificated Securities properly presented for transfer with all necessary
accompanying documentation, the Trustee will, within five Business Days of such request if made at the
Corporate Trust Office of the Trustee, or within ten Business Days if made at the office of a transfer agent,
deliver at the Corporate Trust Office of the Trustee or the office of the transfer agent as the case may be, to
the transferee or send by first-class mail at the risk of the transferee to such address as the transferee may
request, a Class P Rule 144A Certificated Note or a Class P Regulation S Certificated Note, for a like
number of Class P Notes as may be requested. The presentation for transfer of any Class P Rule 144A
Certificated Notes or Class P Regulation S Certificated Notes will not be valid unless made at the Corporate
Trust Office of the Trustee or at the office of a transfer agent by the registered Holder in person or by a duly
authorized attorney-in-fact. The Holder of a Class P Rule 144A Certificated Note or a Class P Regulation S
Certificated Note will not be required to bear the costs and expenses of effecting any transfer or registration
of transfer, except that the relevant Holder will be required to bear (i) the expenses of delivery by other than
regular mail (if any) and (ii) if the Co-Issuers so require, the payment of a sum sufficient to cover any duty,
stamp tax or governmental charge or insurance charges that may be imposed in relation thereto.
The Indenture permits the Issuer to demand that the Holder sell to a Holder permitted under the
Indenture, any interest in a Class P Rule 144A Certificated Note held by such Holder who is determined not
to have been both a Qualified Purchaser and either a Qualified Institutional Buyer or an Accredited Investor
at the time of acquisition of such certificate and, if the Holder does not comply with such demand within 30
days thereof, the Issuer may sell such Holder's interest in the certificate on such terms as the Issuer may
accept.
Class P Regulation S Global Notes
The Class P Notes sold to persons who are not U.S. Persons in offshore transactions in reliance on
Regulation S under the Securities Act may be initially represented by one or more Class P Temporary
Regulation S Global Notes. The Class P Temporary Regulation S Global Notes will be deposited with the
Trustee, acting as custodian for DTC and will be registered in the name of Cede & Co., as nominee of DTC,
for the respective accounts of Euroclear and/or Clearstream. Beneficial interests in Class P Temporary
Regulation S Global Notes will be subject to certain restrictions on transfer prior to the Exchange Date set
forth therein and in the Indenture as described herein under "Transfer Restrictions."
On or after the applicable Exchange Date, interests in Class P Temporary Regulation S Global Notes
will be exchangeable for interests in one or more Class P Permanent Regulation S Global Notes (together
with the Class P Temporary Regulation S Global Notes, the "Class P Regulation S Global Notes") upon
certification that the beneficial interests in such Class P Temporary Regulation S Global Notes are owned by
persons who are not U.S. Persons. On the exchange of a Class P Temporary Regulation S Global Note for a
Class P Permanent Regulation S Global Note, the Class P Permanent Regulation S Global Note will be
deposited with the Trustee as custodian for, and registered in the name of, a nominee of DTC for the
respective accounts of Euroclear and Clearstream.
Prior to the Exchange Date, pursuant to DTC's procedures, a Holder of a beneficial interest in a Class P
Temporary Regulation S Global Note will not be able to transfer such interest to a person that takes delivery
in the form of an interest in a Class P Rule 144A Certificated Note, as applicable.
"U.S. Person" and "offshore transaction" will have the meanings assigned to such terms in Regulation S
under the Securities Act.
Interests in the Class P Regulation S Global Notes may be held only through Euroclear or Clearstream
and may not be held by a U.S. Person at any time.
All or a portion of an interest in a Class P Regulation S Global Note may be transferred to a person
taking delivery in the form of an interest in a Class P Regulation S Global Note, in accordance with the
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applicable procedures of DTC, Clearstream or Euroclear (in addition to the procedures and restrictions set
forth in the Indenture); provided that any remaining principal amount of the transferor's interest in the Class
P Regulation S Global Notes will either equal zero or meet the required minimum denomination
requirement; provided further, that such transfer is made to a person who is not a U.S. Person in offshore
transactions in reliance on exemption from the registration requirements of the Securities Act under
Regulation S of the Securities Act and that the transferee, by purchase of such interest in such Class P
Regulation S Global Notes will be deemed to have made all representations, warranties and
acknowledgements applicable to transfers or purchases of an interest in a Class P Regulation S Global Note,
described under "Purchase and Transfer Restrictions."
All or a portion of an interest in a Class P Regulation S Global Note may be transferred to a Person
taking delivery in the form of a Class P Rule 144A Certificated Note or exchanged for a Class P Rule 144A
Certificated Note in accordance with the applicable procedures of DTC, Clearstream or Euroclear (in
addition to those in the Indenture) upon receipt by the Trustee of a certificate from the transferee in the form
provided in the Indenture to the effect that, among other things, the transfer or exchange is to a person that is
both (i)(a) a Qualified Institutional Buyer or (b) an Accredited Investor (subject to provision of certification
and a legal opinion) and (ii) a Qualified Purchaser, and only in amounts meeting the minimum denomination
requirements.
Any interest in a Class P Regulation S Global Note that is transferred to a person taking delivery in the
form of a Class P Rule 144A Certificated Note will, upon transfer, cease to be an interest in such Class P
Regulation S Global Note and become an interest in a Class P Rule 144A Certificated Note and, accordingly,
will thereafter be subject to all transfer restrictions and other procedures applicable to interests in a Class P
Rule 144A Certificated Note for as long as it remains such an interest. No service charge will be made for
any registration of transfer or exchange of an interest in a Class P Regulation S Global Note, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
The Indenture permits the Issuer to demand that the Holder sell to a Holder permitted under the
Indenture any interest in a Class P Regulation S Global Note held by such Holder who is determined to be a
U.S. Person and, if the Holder does not comply with such demand within 30 days thereof, the Issuer may sell
such Holder's interest in the Class P Regulation S Global Note.
Transfers of interests in the Regulation S Global Notes or the Regulation S Global Subordinated Notes
are subject to certain additional restrictions. In particular, each transferee of an interest in a Regulation S
Global Note or Regulation S Global Preference Share will also be deemed to have made certain additional
acknowledgments, representations and warranties as provided in the Indenture or the Preference Share Fiscal
and Paying Agency Agreement, as applicable. See "Transfer Restrictions."
Book-Entry Settlement of the Class P Regulation S Global Notes
The registered owner of a Class P Regulation S Global Note will be the only person entitled to receive
payments in respect thereof and the Issuer will be discharged by payment to, or to the order of, the registered
owner of such Class P Regulation S Global Note in respect of each amount so paid. No person other than
the registered owner of the relevant Class P Regulation S Global Note will have any claim against Issuer in
respect of any payment due on that Class P Regulation S Global Note. Members of, or participants in, DTC
as well as any other Persons on whose behalf such participants may act (including Euroclear and Clearstream
and account Holders and participants therein) will have no rights under the Indenture, with respect to such
Class P Regulation S Global Notes held on their behalf by the Trustee as custodian for DTC, and DTC will
be treated by the Issuer, the Trustee, the Managers, the Placement Agents, any Paying Agent and any agent
of the Issuer as the Holder of such Class P Regulation S Global Notes for all purposes whatsoever.
Except in the limited circumstances described in the next sentence, owners of beneficial interests in the
Class P Regulation S Global Notes will not be entitled to have Class P Regulation S Global Notes registered
in their names, will not receive or be entitled to receive definitive physical certificates and will not be
considered "Holders" of Class P Regulation S Global Notes under the Indenture. If (i) DTC notifies the
Trustee that it is unwilling or unable to continue as depository for the Class P Regulation S Global Notes or
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DTC, Euroclear or Clearstream ceases to be a Clearing Agency registered under the Exchange Act, and a
successor depository or clearing agency is not appointed by the Trustee within 90 days after receiving such
notice or (ii) as a result of any amendment to or change in the laws or regulations of the Cayman Islands, or
of any authority therein or thereof having power to tax, or in the interpretation or administration of such laws
or regulations which become effective on or after the Closing Date, the Issuer, the Trustee or any Note
Paying Agent becomes aware that it is or will be required to make any deduction or withholding from any
payment in respect of the Class P Regulation S Global Notes which would not be required if the Class P
Regulation S Global Notes were not represented by a global certificate, the Issuer will issue or cause to be
issued certificates in the form of definitive physical certificates in exchange for the applicable Class P
Regulation S Global Notes to the beneficial owners of such Class P Regulation S Global Notes in the
manner set forth in the Indenture.
Investors may hold their interests in a Class P Regulation S Global Note directly through Clearstream
or Euroclear, if they are participants in Clearstream or Euroclear, or indirectly through organizations which
are participants in Clearstream or Euroclear. Clearstream and Euroclear will hold interests in the Class P
Regulation S Global Notes on behalf of their participants through their respective depositories, which in turn
will hold the interests in such Class P Regulation S Global Notes in customers' securities accounts in the
depositories' names on the books of DTC.
Payments of principal of and interest on a Class P Regulation S Global Note will be made to DTC or its
nominee, as the registered owner thereof. The Issuer, the Trustee, any Note Paying Agent, the Managers, the
Placement Agents, the Investment Adviser and any of their respective Affiliates will not have any
responsibility or liability for any aspect of the records relating to or payments made on account of beneficial
ownership interests in a Class P Regulation S Global Note or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
The Issuer expects that DTC or its nominee — upon receipt of any payment of principal or interest in
respect of a Class P Regulation S Global Note representing a Class P Note held by it or its nominee — will
immediately credit participants' accounts with payments in amounts proportionate to their respective
beneficial interests in the stated initial principal amount of such Class P Note as shown on the records of
DTC or its nominee. The Issuer also expects that payments by participants to owners of beneficial interests
in a Class P Regulation S 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 such customers. The payments will be the responsibility of the
participants.
Transfers between 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 Class P Regulation S 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 holding a beneficial interest in a Class P Regulation S Global Note to pledge its interest to a person or
entity that does 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 applicable to the Class P Regulation S Global Notes
described above and under "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
through DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its
respective depository; provided, however, that 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
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in a Class P Regulation S Global Note through 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 Class P Regulation S 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 Class P
Regulation S 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 Class P Regulation S 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 through DTC.
DTC has advised the Issuer that it will take any action permitted to be taken by a Holder of the Class P
Regulation S Global Notes only at the direction of one or more participants to whose account with DTC an
interest in a Class P Regulation S Global Note is credited and only in respect of that portion of the principal
amount of the applicable Class P Regulation S Global Notes as to which the participant or participants has or
have given direction.
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to
facilitate transfers of interests in the Class P Regulation S 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. None of the Issuer, the Trustee and the Preference
Share Fiscal and Paying Agent 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.
Any purported transfer of a Class P Note not in accordance with the Indenture will be absolutely null
and void ab initio, will vest no rights in the purported transferee (such purported transferee, a "Disqualified
Transferee"), the last preceding Holder of such interest in such Class P Note that was not a Disqualified
Transferee will be restored to all rights as a Holder thereof retroactively to the date of transfer of such Class
P Note by such Holder and any such purported transfer of which the Issuer or the Note Registrar will have
notice may be disregarded by the Issuer or the Note Registrar as the case may be, for all purposes.
Exchange of Class P Notes for Underlying Components.
The Components are not separately transferable. A Holder of any Class P Note, however, may
exchange such Class P Note (in whole but not in part) for its ratable share of the Subordinated Notes and its
ratable share of the Class P Treasury Strip (subject to the Indenture). Upon an exchange in accordance with
the Indenture, a Holder of Class P Notes will receive its ratable share, based on the portion of the total
amount of Class P Notes held by such Holder of (1) a portion of the Class P Treasury Strip with a principal
amount equal to the Class P Notes Investor Balance allocable to such Holder and (2) a number of
Subordinated Notes equal to the portion of the Class P Subordinated Note Component allocable to such
Holder.
No exchange will be made unless the Holder has delivered to the Trustee a certificate in the form
specified by the Indenture. The Trustee, upon surrender of the Class P Notes with appropriate instructions,
will convert and will convert the Class P Notes into the applicable Subordinated Notes and Class P Treasury
Strip.
A Holder of Subordinated Notes (including such a Holder that will have received such Notes and/or
Subordinated Notes) will not have the right to exchange such Subordinated Notes for a Class P Note.
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Use of Proceeds
The net proceeds of the issuance of the Class P Notes will be used to purchase Subordinated Notes in
the aggregate principal amount of $2,000,0000 (which, will be issued directly as part of the Class P Notes
and not separately) and the Class P Treasury Strip.
Rating
It is a condition to the issuance of the Class P Notes that the Class P Notes be rated "Aaa" by Moody's.
The Moody’s rating of the Class P Notes address only the ultimate receipt of principal. The Moody’s rating
of the Class P Notes does not address any other distributions or payments thereon. No rating will apply to
the Class P Notes at any time after the Class P Notes Investor Balance for the relevant Class P Note will
have been reduced to zero.
Notices
Notices to the Holders of the Class P Notes will be given by first-class mail, postage prepaid, to the
registered Holders of the Class P Notes at their address appearing in the Class P Note Register.
Benefit Plan Investors
No Class P Note (or beneficial interest therein) may be acquired by or transferred to a Plan. See
"ERISA Considerations" and "Transfer Restrictions."
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SECURITY FOR THE NOTES
The collateral subject to the first priority perfected security interest of the Indenture will consist of
(i) the Collateral Assets acquired or entered into and Class I Reserve Investments, CDS Reserve Investments
and Eligible Investments acquired by the Issuer, (ii) the Collection Account, the Note Payment Account, the
Interest Reserve Account, the Class I Reserve Account, the Expense Reserve Account, the CDS Reserve
Account and all income from investment of funds in any such account, (iii) the Issuer’s rights under any
CDS Issuer Accounts, (iv) all Cash delivered to the Trustee for the benefit of the Secured Parties, (v) the
Issuer’s rights under the Supersenior Swap, (vi) the Issuer’s rights under any Hedge Agreements, (vii) the
Issuer’s rights under the Investment Advisory Agreement and the Collateral Administration Agreement,
(viii) any other assets and rights of the Issuer pledged to the Trustee pursuant to the Indenture (other than the
Class P Treasury Strip Collateral), and (ix) all proceeds of the foregoing (collectively, the “Collateral”). The
composition of the Collateral Assets will be determined by the selections of the Investment Adviser and
designed to meet the Collateral Quality Tests, the Portfolio Percentage Limitations and the Coverage Tests.
Collateral Accumulation on or Prior to the Closing Date
On or prior to the Closing Date, the Issuer is expected to have purchased or entered into Collateral
Assets having an aggregate Principal Balance equal to at least 90 percent in the aggregate of the Expected
Effective Date Balance. Such Collateral Assets were selected by the Investment Adviser subject to the
consent of Morgan Stanley Asset Funding Inc. (the “Warehouse Provider”) and purchased or entered into
with funds provided by the Warehouse Provider, which funds will be repaid on the Closing Date together
with a financing cost specified in the warehousing documents. The purchase price of such Collateral Assets
will be the value (in certain cases, net of any hedging costs and expenses) on the date such Collateral Assets
were acquired or entered into by the Issuer (at the direction of the Investment Adviser). Such values may be
greater than the market values on the Closing Date, which may have an adverse effect on the ability of the
Issuer to make payments on the Notes. Any losses associated with the sale of any securities or other assets
acquired by the Issuer pursuant to such arrangements that are ineligible on the Closing Date for inclusion in
the Issuer’s portfolio will be borne by the Issuer and will reduce the net proceeds of the offering and sale of
the Notes available to invest in Collateral Assets.
The remaining portion of the Expected Effective Date Balance is expected to be purchased or entered
into within 90 days of the Closing Date. A list of the portfolio of Collateral Assets owned or entered into or
expected to be acquired or entered into by the Issuer on the Closing Date may be obtained upon request from
the Managers or the Placement Agents.
The Collateral Assets to be acquired by the Issuer were selected by the Investment Adviser subject to
the consent of the Warehouse Provider to the extent acquired prior to the Closing Date. In addition, MSCS
may have acted as hedge counterparty under an interest rate hedge agreement. See “Risk Factors—
Acquisition of Collateral Assets On or Prior to the Closing Date; Events Occurring On or Prior to the
Closing Date.”
Collateral Assets
The Collateral Assets will consist of Cash Assets, Credit Linked Securities and CDS Assets.
A “Cash Asset” is a Structured Finance Security or REIT Debt Security of one of the Specified Types,
owned by the Issuer and pledged to the Trustee for the benefit of the Secured Parties that comply with the
Eligibility Criteria described herein.
A “Credit Linked Security” is a U.S. Dollar-denominated debt security issued by a trust or similar
special purpose entity (and not a corporate entity, bank or financial institution or any other operating
entity) (each, a “Credit Linked Security Issuer”) that enters into a credit default swap with a bank or
derivative dealer that meets the definition of “CDS Counterparty”, the returns on which (as determined by
the Investment Adviser) are linked to the credit performance of a single Reference Obligation that is a
Structured Finance Security or a REIT Debt Security of one of the Specified Types; provided that:
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(i)
such Credit Linked Security will not require the Issuer to make any payment to the related Credit
Linked Security Issuer after the initial purchase thereof by the Issuer,
(ii)
the Credit Linked Security Issuer owns and will own eligible investments in a principal amount at
least equal to the notional amount of such credit default swap,
(iii)
the related Credit Linked Security Issuer shall not be permitted to own or otherwise hold such
Reference Obligation,
(iv)
all fixed periodic payments made pursuant to the terms of such Credit Linked Security are at a
fixed interest rate, are at a variable interest rate based on an interest rate used for borrowings or
financings in domestic or international markets or are linked to the payments on a Reference
Obligation (which payments are themselves at a fixed interest rate or a variable interest rate based
on an interest rate used for borrowings or financings in domestic or international markets),
(v)
such Credit Linked Security will not constitute a commodity option, leverage transaction or
futures contract that is subject to the jurisdiction of the U.S. Commodities Futures Trading
Commission,
(vi)
Rating Agency Confirmation by S&P, the Moody’s Rating Factor, the Moody’s Recovery Rate,
the S&P Rating and the S&P Recovery Rate (set forth in Schedule B attached hereto) are received
by the Investment Adviser from the relevant Rating Agency for such Credit Linked Security, and
(vii)
no amounts receivable by the Issuer from the related Credit Linked Security Issuer will be subject
to withholding tax, unless such Credit Linked Security Issuer is required to make additional
payments sufficient to cover any withholding tax imposed at any time on payments made to the
Issuer.
A “CDS Asset” is an investment that is structured as a credit default swap having terms described in
“— CDS Assets.” Under a CDS Asset, the Issuer sells credit protection on a specified Reference Obligation
that is a Structured Finance Security or a REIT Debt Security of one of the Specified Types. The obligations
of the Issuer to the counterparty will not be Cash collateralized or secured with a pledge of any dedicated
assets. Instead, the Issuer will use Collateral Interest Collections, Collateral Principal Collections, amounts
in the CDS Reserve Account, amounts in the Class I Reserve Account, and amounts drawn under the
Supersenior Swap, in each case in the priority and to the extent described herein, to satisfy its obligations
under the CDS Assets.
At the end of the Ramp-Up Period, (i) approximately 35 percent by Principal Balance of the Collateral
Assets are expected to consist of Cash Assets and Credit Linked Securities and (ii) approximately 65 percent
by Principal Balance of the Collateral Assets are expected to consist of CDS Assets.
The portfolio of Collateral Assets on the Closing Date is expected to represent at least 90 percent (by
aggregate Principal Balance) of the Expected Effective Date Balance. Therefore, the purchase of and entry
into Collateral Assets during the Ramp-Up Period may on the Effective Date result in percentage
concentrations that differ significantly from those expected to exist on the Closing Date.
A debt obligation meeting the standards set forth below, whether pledged to the Trustee on the Closing
Date or during the Ramp-Up Period or acquired in substitution for securities previously pledged (a
“Substitute Collateral Asset”), will constitute a “Collateral Asset” and the Issuer will be required to use
commercially reasonable efforts to purchase or enter into Collateral Assets that, as of the Effective Date, will
satisfy the Collateral Quality Tests, the Portfolio Percentage Limitations and the Coverage Tests. On the
Closing Date, the portfolio of Collateral Assets and Eligible Investments is expected to satisfy the Par Value
Coverage Tests and the Collateral Quality Tests other than the S&P CDO Monitor Test and the Asset
Correlation Test. Collateral Assets will be held by the Accountholder on behalf of the Trustee pursuant to the
Account Control Agreement and the Indenture.
Except as provided below, a Collateral Asset will be eligible for purchase or entering into by the Issuer
and to be pledged to the Trustee if it meets the following eligibility criteria on the date the Issuer enters into
a commitment to purchase such Collateral Asset (collectively, the “Eligibility Criteria”), or with respect to
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Synthetic Assets, if each relevant Reference Obligation meets such Eligibility Criteria except those set forth
in clauses (ii), (iv), (xviii)(C), (D), (E) and (F) and (xxi):
(i)
it is issued by an issuer incorporated or organized under the laws of the United States or an
Eligible SPV Jurisdiction or it is issued by a Qualifying Foreign Obligor and, in any case is not an
asset issued by an Emerging Market Issuer;
(ii)
it is U.S. Dollar-denominated, and it is not convertible into, or payable in, any other currency;
(iii)
it is one of a Specified Type of Collateral Assets;
(iv)
it has a Moody’s Rating of “Ba2” or higher and an S&P Rating of “BB” or higher; provided, no
assigned rating from S&P contains a “p,” “pi,” “q,” “r” or “t” subscript;
(v)
the payments on such asset are not subject to withholding tax unless the obligor or the issuer
thereof is required to make “gross-up” payments sufficient to cover any withholding tax imposed
at any time on payments made to the Issuer with respect thereto;
(vi)
it was issued after July 18, 1984 and is in registered form for purposes of the Code
(“Registered”) (provided, that a certificate of interest in a grantor trust shall be deemed registered
only if each debt instrument held by the trust is Registered or if such certificate of interest is
Registered);
(vii)
either:
(A)
such asset was issued pursuant to an effective registration statement under the Securities
Act in a “firm commitment” underwriting; or
(B)
at its original issuance, such asset (x) was issued pursuant to an offering circular, private
placement memorandum or similar offering document and (y) is a privately placed security
eligible for resale under Rule 144A, Regulation S or another exemption under the Securities Act;
(viii)
its acquisition would not cause the Issuer or the pool of Collateral to be required to register as an
investment company under the Investment Company Act;
(ix)
it is not an asset that is ineligible under its Underlying Instruments to be purchased by the Issuer
and pledged to the Trustee;
(x)
it is not an asset the payments on which are subject to the risk of occurrence of certain natural
catastrophes specified in the Underlying Instruments;
(xi)
it provides for the payment of a fixed amount of principal at maturity, redemption or acceleration
(unless it is an Interest Only Security);
(xii)
its Underlying Instruments do not obligate the Issuer to make any future advances or any other
payment except the purchase price thereof unless it is a CDS Asset;
(xiii)
it is not an asset, other than an Interest Only Security or a NIM Security, with respect to which, in
the judgment of the Investment Adviser, the timely repayment of principal and interest is subject
to substantial non-credit related risks;
(xiv)
at the time of acquisition, it is not, and is not intended to become, an asset sponsored by the
Investment Adviser or an asset issued by an issuer to which the Investment Adviser provides
investment management or investment advisory services (other than a Structured Finance Security
that is not a CDO Security, to which any of the Permitted SG Affiliates provides investment
management or investment advisory services);
(xv)
it is not an Aerospace and Defense Security, a Manufactured Housing Loan Security, a Structured
Settlement Security, a Mutual Fund Fee Security, a Subprime Automobile Security, a Subprime
Credit Card Security, a Guaranteed Debt Security, a Portfolio CDO Security or a Trust Preferred
CDO Security;
(xvi)
it is not an asset that is, or used to be, a Written Down Security;
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(xvii)
it is not an asset that is a Credit Risk Security or a Defaulted Security;
(xviii)
it:
(A)
is not an asset issued by an issuer located in a country that imposes foreign exchange
controls that effectively limit the availability or use of U.S. Dollars to make when due the
scheduled payments of principal of and interest on such security;
(B)
is not, and does not provide for conversion or exchange into, Margin Stock at any time
over its life;
(C)
is not an asset that (i) was incurred in connection with a merger, acquisition,
consolidation or sale of all or substantially all of the assets of a person or entity or similar
transaction and (ii) by its terms is required to be repaid within one year of the incurrence thereof
with proceeds from additional borrowings or other refinancing;
(D)
is not the subject of (i) any offer by the issuer 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
Instruments) or to convert or exchange such security into or for cash, securities or any other type
of consideration or (ii) any solicitation by an issuer of such security or any other person to amend,
modify or waive any provision of such security or any related Underlying Instrument, and has not
been called for redemption;
(E)
is not an Equity Security; and
(F)
is not an asset that by the terms of its Underlying Instruments provides for conversion or
exchange (whether mandatory or at the option of the issuer or the holder thereof) into equity
capital at any time prior to its maturity;
(xix)
is not a financing by a debtor-in-possession in any insolvency proceeding;
(xx)
it is not a first loss tranche of any securitization;
(xxi)
it is not an asset (other than a Principal Only Security) that provides for the payment of interest in
Cash less frequently than semi-annually;
(xxii)
if it is a REIT Debt Security it has a rating of “Ba2” or higher by Moody’s or “BB” or higher by
S&P and is issued by a publicly-traded REIT with at least five years of operating history and a
public float (debt through equity) of at least U.S.$1 billion;
(xxiii)
if it is a Credit Linked Security the Reference Obligation of which is a CDO Security or a CDO
Security the underlying portfolio of which may have more than 15 percent concentration in
synthetic CDO Securities, the Controlling Class (so long as the Supersenior Swap Counterparty is
the Controlling Class) shall have consented in writing to the proposed acquisition by the Issuer of
such CDO Security;
(xxiv)
it is not a CDO Security the underlying portfolio of which may have more than 10 percent
concentration in corporate debt securities;
(xxv)
it is not a security which bears interest based on an inverse correlation with LIBOR, the prime rate
or other floating rate index;
(xxvi)
it is not a High-Yield CDO Security backed primarily by a pool of bonds; and
(xxvii)
it is not a security that currently has any deferred, capitalized or carried-forward interest; and
(xxviii)
if it is a Deemed Floating Collateral Asset, the Deemed Floating Asset Hedge entered into with
respect to such Deemed Floating Collateral Asset conforms to all requirements set forth in the
definition of “Deemed Floating Asset Hedge;”
provided that notwithstanding anything to the contrary herein, the Issuer may not purchase, acquire or
hold (whether as part of a “unit” with a Collateral Asset, in exchange for a Collateral Asset or
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otherwise) (i) any asset that is or could be treated for U.S. federal income tax purposes as an equity interest
in an entity that is treated as a grantor trust under the Code or as a “domestic partnership” under Section
7701(a)(30) of the Code unless the Issuer has received advice from an internationally recognized counsel to
the effect that the acquisition, ownership, enforcement and disposition of such asset will not subject the
Issuer to net income tax or cause the Issuer to be treated as engaged in a trade or business in the United
States for U.S. federal income tax purposes, (ii) any asset that would cause the Issuer to be subject to income
tax on a net income basis in any jurisdiction outside its jurisdiction of incorporation, or (iii) any asset the
gain from the disposition of which will be subject to U.S. federal income or withholding tax under Section
897 or Section 1445 of the Code and the Treasury Regulations promulgated thereunder. The Investment
Adviser will be deemed to have satisfied the requirements in clause (ii) above if the Investment Adviser
acquires the Collateral Assets only in compliance with Annex A in the Investment Advisory Agreement.
For the purpose of determining compliance with the Eligibility Criteria, the Structured Finance
Securities or REIT Debt Securities that are Cash Assets to be pledged, and the Structured Finance Securities
or REIT Debt Securities that are Reference Obligations underlying Synthetic Assets to be pledged, to the
Trustee on the Closing Date are divided into the following different “Specified Types”: ABS CDO
Securities, ABS Equipment Leasing Securities, Agency MBS Securities, Automobile Lease Securities,
Automobile Loan Securities, CMBS Conduit Securities, CMBS Credit Tenant Lease Securities, CMBS
Large Loan Securities, CRE CDO Securities, Credit Card Securities, Entertainment Securities, Healthcare
Securities, High-Yield CDO Securities, Home Equity Loan Securities, Investment-Grade CDO Securities,
REIT Debt Securities, Real Estate CDO Securities, Residential A Mortgage Securities, Residential B/C
Mortgage Securities, Restaurant and Food Service Securities, Small Business Loan Securities, Student Loan
Securities, Negatively Amortizing RMBS Assets and Timeshare Securities; provided, however, that after the
Closing Date, any other type of Structured Finance Security may be designated as a “Specified Type” in a
notice from the Investment Adviser to the Trustee so long as (i) a Rating Agency Confirmation is received
from Moody’s and S&P by the Issuer, the Trustee and the Investment Adviser and (ii) if (A)(x) more than
2.5 percent of the Collateral Principal Balance or (y) after the Reinvestment Period more than
U.S.$12,500,000 consist of such new Specified Type or (B)(x) more than 7.0 percent of the Collateral
Principal Balance or (y) after the Reinvestment Period more than U.S.$35,000,000 consists of all of such
new Specified Types, the Holders of a majority of the Controlling Class have consented to such designation,
and (iii) if such other type of Structured Finance Securities proposed to be designated as a “Specified Type”
is (A) a Credit Linked Security the Reference Obligation of which is a security that entitles the holders
thereof to receive payments that depend primarily on the cash flow from a portfolio of assets that are not
covered by the definition of CDO Security (any such security, the “Other CDO Security”) or (B) an Other
CDO Security the underlying portfolio of which may have more than 15 percent concentration in Credit
Linked Securities, the Controlling Class (so long as the Supersenior Swap Counterparty is part of the
Controlling Class) shall have consented in writing prior to such designation. If any type of Structured
Finance Security is designated as an additional Specified Type, the definition of each Specified Type in
existence prior to such designation will be construed to exclude such newly-designated Specified Type of
Collateral Asset.
Structured Finance Securities
Structured Finance Securities are, generally, debt securities that entitle the holders thereof to receive
payments of interest and principal that depend primarily on the cash flow from or sale proceeds of a
specified pool of assets, either fixed or revolving, that by their terms convert into cash within a finite time
period, together with rights or other assets designed to assure the servicing or timely distribution of proceeds
to holders of such securities. Financial assets backing Structured Finance Securities may include, without
limitation, credit card receivables, automobile lease receivables, automobile loan receivables, aircraft lease
receivables, car rental receivables, franchise loans, equipment lease receivables, equipment loan receivables,
small business loans, structured settlement receivables, student loan receivables, tax lien receivables,
timeshare mortgage loans, future flow receivables, mutual fund fee receivables, commercial mortgage loans
and residential mortgage loans.
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RMBS Securities
The Issuer expects that, on the Effective Date, the majority of Structured Finance Securities constituting
Cash Assets or Reference Obligations of CDS Assets will be RMBS Securities. RMBS Securities are
securities backed by ownership of, or participation interests in, pools of one-to-four-family residential
mortgage loans that entitle the holders to receive the cash flow from such pools, including, without
limitation, Residential A Mortgage Securities, Residential B/C Mortgage Securities, Home Equity Loan
Securities and Agency MBS Securities. RMBS Securities are subject to various risks, including credit risks,
liquidity risks, interest rate risks, market risks, operational risks, structural risks, geographical concentration
risks, basis risks and legal risks. Credit risk arises from losses due to defaults by the borrowers in the
underlying collateral and the servicer’s failure to perform. Market risks and structural risks arise from the
cash flow characteristics of the security. RMBS Securities are particularly susceptible to prepayment risks as
they generally do not contain prepayment penalties and a reduction in interest rates will increase the
prepayments on the RMBS Securities resulting in a reduction in yield to maturity for holders of such
securities. Legal risks can arise as a result of the procedures followed in connection with the origination of
the mortgage loans or the servicing thereof which may be subject to various federal and state laws
(including, without limitation, predatory lending laws), public policies and principles of equity regulating
interest rates and other charges, require certain disclosures, require licensing of originators, prohibit
discriminatory lending practices, regulate the use of consumer credit information and debt collection
practices and if not complied with may limit the servicer’s ability to collect all or part of the principal of or
interest on a residential mortgage loan, entitle the borrower to a refund of amounts previously paid by it or
subject the servicer to damages and sanctions. See “Risk Factors—Nature of the Collateral Assets; Credit
and Liquidity Risks.”
CMBS Securities
CMBS Securities are securities that entitle the holders thereof to receive payments that depend
primarily on the cash flow from a specified pool of commercial mortgage loans, either fixed or floating, that
by their terms convert into Cash within a finite period, together with rights or other assets designed to assure
the servicing or timely distribution of proceeds to holders of the CMBS Securities.
Issuers of CMBS Securities are primarily banks, finance companies and captive finance subsidiaries of
non-financial corporations and other real estate investors. Credit risk is an important issue in CMBS
Securities because of significant credit risk inherent in the underlying collateral. The loans that form the pool
of collateral for the CMBS Securities may have varying contractual maturities and may or may not represent
a heterogeneous pool of borrowers. Credit risk arises from losses due to defaults by the borrowers in the
underlying collateral and the issuer’s or servicer’s failure to perform. Market risk arises from the cash-flow
characteristics of the security, which can be unpredictable. Furthermore, a bank, other issuer or other third
parties (such as a special servicer) may play more than one role in the securitization process. Accordingly,
CMBS Securities generally include one or more credit enhancements, which are designed to raise the overall
credit quality of the security above that of the underlying collateral. See “Risk Factors—Nature of the
Collateral Assets; Credit and Liquidity Risks.”
ABS Securities
ABS Securities are, generally, securities (other than RMBS Securities or CMBS Securities) backed by
consumer receivables, commercial receivables or securities and include, without limitation, Automobile
Loan Securities, Automobile Lease Securities, Credit Card Securities and ABS Equipment Leasing
Securities. The structure of an ABS Security and the terms of the investors’ interest in the collateral can vary
widely depending on the type of collateral, the desires of investors and the use of credit enhancements.
Although the basic elements of all ABS Securities are similar, individual transactions can differ markedly in
both structure and execution. Important determinants of the risk associated with holding ABS Securities
include the relative seniority or subordination of the class of ABS Securities, the relative allocation of
principal and interest payments in the priorities by which such payments are made under the governing
documents, how credit losses affect the issuing vehicle and the return to investors, whether collateral
represents a fixed set of specific assets or accounts, whether the underlying collateral assets are revolving or
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closed-end, under what terms (including maturity of the asset-backed instrument) any remaining balance in
the accounts may revert to the issuing company and the extent to which the company that is the actual source
of the collateral assets is obligated to provide support to the issuing vehicle or to the investors. In addition,
certain ABS Securities (particularly subordinated ABS Securities) provide that the non-payment of interest
in Cash on such securities will not constitute an event of default in certain circumstances and the holders of
such securities will not have available to them any associated default remedies. Interest not paid in Cash will
often be capitalized and added to the outstanding principal balance of the related security. Any such deferral
will reduce the yield on such ABS Securities. See “Risk Factors—Nature of the Collateral Assets; Credit and
Liquidity Risks.”
ABS Securities may also include CDO Securities. CDO Securities are limited recourse obligations of
the issuer thereof payable solely from the underlying securities and loans owned by the issuer or proceeds
thereof. Consequently, holders of CDO Securities must rely solely on distributions on the collateral
underlying such CDO Securities or the proceeds thereof for payment. Such assets may consist of investment
grade debt securities, high yield debt securities, loans, structured finance securities, synthetic securities and
other debt instruments and bank trust preferred securities. Investments in assets through the purchase of
synthetic securities present risks in addition to those resulting from direct purchases of those assets because
the buyer of such synthetic security usually will have a contractual relationship only with the synthetic
security counterparty and not the obligor on the reference obligation of such synthetic security. The buyer of
a synthetic security will not benefit from any collateral supporting the reference obligation of such synthetic
security, will not have any remedies that would normally be available to the holder of such reference
obligation and will be subject to the credit risk of the synthetic security counterparty as well as the obligor
on such reference obligation. High yield debt securities are generally unsecured (and loans may be
unsecured) and may be subordinated to certain other obligations of the related obligor. The lower rating of
high yield securities and below-investment grade loans reflects a greater possibility that adverse changes in
the financial condition of an issuer or in general economic conditions or both may impair the ability of the
issuer to make payments of principal or interest. Such investments may be speculative. Over the last several
years, there has been a significant increase in the default rates of and rating downgrades reported on
corporate debt securities and loans. As a result of increases in the default rates, there has been a decrease in
the amount of credit support available for CDO Securities backed by such corporate debt securities and loans
since the issue date thereof. See “Risk Factors—Default Rates of Collateral Assets.” Diminished credit
support as a result of increases in the default rates of and rating downgrades reported on corporate debt
securities or loans could increase the likelihood that payments may not be made to holders of CDO
Securities that are secured by corporate debt securities and loans. See “Risk Factors—Nature of the
Collateral Assets; Credit and Liquidity Risks.”
REIT Debt Securities
REIT Debt Securities include REIT Debt Securities-Health Care, REIT Debt Securities-Hotel, REIT
Debt Securities-Industrial, REIT Debt Securities-Mortgage, REIT Debt Securities-Multi-Family, REIT Debt
Securities-Office, REIT Debt Securities-Residential, REIT Debt Securities-Retail, and REIT Debt
Securities-Storage. REIT Debt Securities are, generally, unsecured debt obligations issued by publicly held
real estate investment trusts. All discussions herein concerning real estate investment trusts are generally
applicable to subsidiaries of real estate investment trusts. Investments in REIT Debt Securities involve
special risks. In particular, real estate investment trusts generally are permitted to invest solely in real estate
or real estate-related assets and are subject to the inherent risks associated with such investments.
Consequently, the financial condition of any REIT Debt Security may be affected by the risks described
herein with respect to commercial mortgage loans and commercial real estate related securities and similar
risks, including (i) risks of delinquency and foreclosure on real properties, the cash flow on which is used to
support payments on such REIT Debt Security, and risks of loss in the event thereof, (ii) risks of change in
management strategy and the execution thereof, (iii) dependence upon the successful operation of and net
income from real property, (iv) risks that may be presented by the type and use of a particular commercial
property, (v) the difficulty of converting certain property to an alternative use and (vi) concentration of
property types or geographical concentration. See “Risk Factors—Nature of the Collateral Assets; Credit and
Liquidity Risks.”
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Synthetic Assets
The Collateral Assets are expected to consist predominantly of Synthetic Assets that are either Credit
Linked Securities or CDS Assets. To satisfy its obligations under the CDS Assets, the Issuer will use
Collateral Principal Collections and Collateral Interest Collections, funds in the Class I Reserve Account,
funds in the CDS Reserve Account, funds drawn under the Supersenior Swap, in each case in accordance
with the CDS Payment Priority. The Issuer will have no obligation to make any payment in respect of a
Credit Linked Security after the initial purchase of such Credit Linked Security. Investments in CDS Assets
involve special risks. See “Risk Factors—Certain Additional Risks with respect to CDS Assets.”
For purposes of the Eligibility Criteria (except as set forth in clauses (ii), (iv), (xviii)(C), (D), (E) and
(F) and (xxi)), the Coverage Tests and the Collateral Quality Tests (other than the S&P CDO Monitor Test
and the Asset Correlation Test), a Synthetic Asset will be included as a Collateral Asset having the
characteristics of the Synthetic Asset; provided that a Form-Approved CDS Asset will be included as a
Collateral Asset having the characteristics of the related Reference Obligation in determining the rating and
the Applicable Recovery Rate of such CDS Asset without any action by the Rating Agencies unless the
Investment Adviser, acting on behalf of the Issuer, requests that a rating and/or Applicable Recovery Rate be
assigned to the Form-Approved CDS Asset by either Rating Agency. In addition, investment earnings on
CDS Reserve Investments, Initial CDS Counterparty CSA Eligible Credit Support and Eligible CDS
Collateral will be included in the Interest Coverage Tests. However, interest earned on collateral posted by a
swap counterparty to secure its obligations to the Issuer would likely be payable to the swap counterparty
under the terms of the applicable swap, in which case it would not be included when calculating the Interest
Coverage Ratios. The Reference Obligation in respect of a Form-Approved CDS Asset may not include an
Interest Only Security, any NIM Security, any Specified Type of guaranteed security, any index security or
the equivalent or any Reference Obligation for which the reference obligor is a non-U.S. entity.
For purposes of the S&P CDO Monitor Test and Asset Correlation Test, any Synthetic Asset will be
included as a Collateral Asset having the characteristics of the related Reference Obligation with respect to
the industry classification group and otherwise as having the characteristics of such Synthetic Asset.
For purposes of the Moody’s Rating Factor of a Synthetic Asset, the Synthetic Asset will have a
Moody’s Rating Factor equal to the Moody’s Rating of the related Reference Obligation, or, if such
Reference Obligation is not rated, the rating which must be assigned thereto by Moody’s upon the
acquisition thereof unless Moody’s Rating Notching may be applicable in the manner described in Schedule
D.
For purposes of the Portfolio Percentage Limitations, a Synthetic Asset will be included as a Collateral
Asset having the characteristics of the related Reference Obligation, except with respect to the Portfolio
Percentage Limitations that address Synthetic Assets specifically or that address the interest rate, payment
frequency and maturity of a Collateral Asset, for which purposes a Synthetic Asset will be included as a
Collateral Asset having the characteristics of such Synthetic Asset.
CDS Assets
The Issuer will enter into CDS Assets with one or more CDS Counterparties. As of the Closing Date,
the Issuer expects to have entered into CDS Assets having an aggregate Principal Balance of at least
U.S.$325,000,000 all of which will be entered into with the Initial CDS Counterparty. During the Ramp-Up
Period, the Issuer may enter into additional CDS Assets, subject to certain restrictions set forth in the
Indenture, so that the aggregate of the Principal Balances of all CDS Assets (“CDS Asset Balance”) is
expected to be approximately U.S.$325,000,000 on the Effective Date. In addition, during the Reinvestment
Period and, to the extent provided in the Indenture, the first Due Period thereafter, the Issuer may reinvest
Synthetic Notional Proceeds in substitute CDS Assets if (i) the CDS Asset Balance would not exceed the
CDS Asset Ceiling after giving effect to the entry into such reinvestment and (ii) the Reinvestment Criteria
are satisfied or, if immediately prior to giving effect to such reinvestment any of the Reinvestment Criteria
were not satisfied, no such Reinvestment Criteria that was unsatisfied will be further from being satisfied
after giving effect to such reinvestment and no such Reinvestment Criteria that was satisfied will be
unsatisfied after giving effect to such reinvestment; provided that Synthetic Notional Proceeds resulting from
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the sale or termination of a Defaulted Security during the Reinvestment Period may be so reinvested only if
the Coverage Tests were satisfied before the sale or termination of such Defaulted Security and will be
satisfied after giving effect to such proposed reinvestment. To the extent described under “—Substitute
Collateral Assets and Reinvestment Criteria,” the Issuer also may terminate, assign, hedge or amend existing
CDS Assets in order to (i) designate new Reference Obligations or remove existing Reference Obligations or
(ii) reduce or increase the notional amount for any Reference Obligation. Up to 100 percent of the Collateral
Assets may consist of CDS Assets and Credit Linked Securities in the aggregate but the CDS Asset Balance
may not exceed the CDS Asset Ceiling.
“CDS Asset Ceiling” is, as of any date of determination, an amount equal to the Available Supersenior
Swap Amount plus the Class I Reserve Balance plus the CDS Reserve Account Balance.
If on any Business Day the Issuer is required to make (i) a CDS Interest Payment, (ii) a CDS Loss
Payment or (iii) a CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment) pursuant to a CDS Asset, the Trustee will make such payments in the manner described under
“Description of the Notes—The Supersenior Swap—Class I Reserve Account.”
Any Sale Proceeds, including Deliverable Obligation Sale Proceeds, CDS Principal Reimbursements
and CDS Counterparty Termination Payments (except any Designated Accrued Premium component
thereof), in each case in respect of CDS Assets, will be remitted to the Trustee for deposit into the Collection
Account as Collateral Principal Collections. Any Premium Amounts (including any Designated Accrued
Premium in respect of a CDS Counterparty Termination Payment) and any CDS Interest Reimbursements, in
each case in respect of CDS Assets, will be remitted to the Trustee for deposit into the Collection Account as
Collateral Interest Collections.
In connection with (or after) the acquisition of a CDS Asset, the related CDS Counterparty may be
required to grant to the Issuer a first priority security interest in the assets (and the proceeds
thereof) deposited by the related CDS Counterparty in the related sub-account of the CDS Issuer Account to
secure the CDS Counterparty’s obligations to the Issuer. Such assets deposited in the related sub-account of
the CDS Issuer Account (and the proceeds thereof) will be invested and reinvested by the Trustee by Issuer
Order or as directed by the applicable CDS Counterparty in Eligible CDS Collateral (or, in the case of Initial
CDS Counterparty, the Initial CDS Counterparty CSA Eligible Credit Support) in accordance with the terms
of such CDS Asset, and the amounts in such account may be applied to make periodic payments to the Issuer
under such CDS Asset. See “—CDS Counterparty Rating Requirements; CDS Issuer Account.”
Netting of Payments; Reallocation
With respect to payments under CDS Assets or the Supersenior Swap, on any date that Interest-Related
Amounts and/or Principal-Related Amounts are owed by the Issuer and a CDS Counterparty or the
Supersenior Swap Counterparty to each other, such amounts shall be netted such that only a single payment
of an Interest-Related Amount and/or a single payment of a Principal-Related Amount will be made by one
party to the other on that date; provided, however, that to the extent that a Draw is netted against a payment
owed by the Issuer to a CDS Counterparty, no funds will be wired and the Draw will be deemed to have
been funded in the amount so netted. However, payments in respect of Interest-Related Amounts will not be
netted on any such date against payments in respect of any Principal-Related Amounts that may be owing by
either party to the other, or vice versa. The Issuer expects that, outside the early termination context, there
will not be any circumstances where each party would owe the other a Principal-Related Amount on the
same date. The treatment of CDS Issuer Termination Payments and CDS Counterparty Termination
Payments will be different, however, and will vary with the context in which the termination occurred.
In either such case, the amount constituting the CDS Issuer Termination Payment or CDS Counterparty
Termination Payment will be determined on the basis of a market quotation process likely to take into
account a positive or negative mark-to-market component, as well as accrued and unpaid amounts owing by
one party to the other at the time of such valuation, or expected to be due and payable on the next payment
date under the relevant CDS Asset, thereby effectively netting amounts that if payable to or by the Issuer on
a payment date under a CDS Asset, and not in connection with an early termination date, the Issuer would
treat as discrete Interest-Related Amounts or Principal-Related Amounts. However, except as described
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below in connection with negotiated terminations, the Issuer will treat termination payments in respect of
CDS Assets as amounts that, if payable to the Issuer, will be treated entirely as Collateral Principal
Collections, and if payable by the Issuer will be payable entirely from the same sources as CDS Loss
Payments (subject to the limitations described herein of available sources in the case of a CDS Subordinated
Issuer Termination Payment). Thus, in connection with any Auction Call Redemption, Optional Redemption
or Tax Redemption, or the liquidation of the Collateral following an Event of Default under the Indenture,
and in connection with the early termination of CDS Assets in connection with an event of default or
termination event under the relevant Master Agreement, the Issuer will treat both CDS Issuer Termination
Payments and CDS Counterparty Termination Payments as consisting entirely of Principal-Related
Amounts.
However, in the case of negotiated terminations of CDS Assets, such as would occur in connection with
permitted sales, or full or partial reductions of the notional amount of such Collateral Assets (and not in the
contexts referred to in the preceding paragraph), the Investment Adviser may designate a portion of the
relevant CDS Issuer Termination Payment or CDS Counterparty Termination Payment, as applicable, as
constituting an accrued Premium Amount (“Designated Accrued Premium”), which Designated Accrued
Premium shall not exceed, with respect to any CDS Asset, the Premium Amount that would have been
accrued and unpaid as of the relevant early termination date had such date not been an early termination
date, calculated on the assumption that it accrued evenly throughout the period in question. In such cases, the
termination payment will comprise an Interest-Related Amount and a Principal-Related Amount, and in
order that the treatment of amounts payable to or by the Issuer in connection with elective dispositions of
CDS Assets be consistent, to the extent practicable, with the treatment of such amounts arising from elective
dispositions in connection with Cash Assets, as Collateral Interest Collections or Collateral Principal
Collections, the following procedures will apply.
A CDS Issuer Termination Payment in connection with any such negotiated termination (that is,
negotiated terminations that do not involve liquidation of substantially all of the Collateral or early
terminations where there is a defaulting or an affected party) will be paid from the same sources that would
be used to pay a CDS Loss Payment. However, if there is Designated Accrued Premium in connection with
such CDS Issuer Termination Payment (which, for the avoidance of doubt, excludes any CDS Subordinated
Issuer Termination Payments), an amount equal to the amount of such Designated Accrued Premium (an
“Issuer Payment Reallocation Amount”) will be reallocated from Collateral Principal Collections to
Collateral Interest Collections, because the Issuer will have effectively reduced a Principal-Related Amount
payable by it through netting an Interest-Related Amount payable to it.
In respect of CDS Counterparty Termination Payments in connection with any such transaction (which
exclude, for the avoidance of doubt, CDS Counterparty Termination Payments payable in connection with
liquidation of all or substantially all of the Collateral or an early termination where there is a defaulting or an
affected party), if there is no Designated Accrued Premium, the CDS Counterparty Termination Payment
will be deposited to the Collection Account as Collateral Principal Collections. If the CDS Counterparty
Termination Payment consists of Designated Accrued Premium and a Principal-Related Amount in the
Issuer’s favor (that is, a positive amount that would have been payable to the Issuer without regard to having
been netted with Designated Accrued Premium), the Designated Accrued Premium will be deposited to the
Collection Account as Collateral Interest Collections and the Principal-Related Amount will be deposited to
the Collection Account as Collateral Principal Collections. However, if the CDS Counterparty Termination
Payment consists of Designated Accrued Premium and a Principal-Related Amount that, but for having been
netted against the Designated Accrued Premium, would have been an amount payable by the Issuer, then the
Designated Accrued Premium will be deposited to the Collection Account as Collateral Interest Collections
and an amount equal to such Principal-Related Amount (a “Counterparty Payment Reallocation
Amount”) will be reallocated from Collateral Principal Collections to Collateral Interest Collections,
because the amount payable to the Issuer as Collateral Interest Collections will have been effectively
reduced by being netted with an amount otherwise payable by the Issuer from Collateral Principal
Collections.
Pursuant to the CDS Payment Priority, the Used Supersenior Swap Amount Repayment Priority and the
Priority of Payments, amounts in the CDS Reserve Account and/or the Class I Reserve Account may be used
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for the purpose of covering Issuer Payment Reallocation Amounts and Counterparty Payment Reallocation
Amounts only if available in Cash or securities that are permitted pursuant to the Indenture to be sold upon
release from the CDS Reserve Account and/or the Class I Reserve Account, in either case excluding
investment earnings thereon. To the extent that the Issuer does not have sufficient Collateral Principal
Collections or amounts from the CDS Reserve Account and/or the Class I Reserve Account to reallocate the
full amount of any Issuer Payment Reallocation Amount or Counterparty Payment Reallocation Amount
within the Due Period in which such reallocation arose, any remaining portion will not be reallocated, nor
will any reallocations be made on the Payment Date for such Due Period.
To the extent the CDS Counterparty and the Supersenior Swap Counterparty are the same entities,
payments owed by the Supersenior Swap Counterparty in respect of payments to be made to the CDS
Counterparty may be netted against each other, to the extent permitted under the Master Agreement
governing such CDS Asset and Supersenior Swap. Any payments required to be made by the Supersenior
Swap Counterparty under the Supersenior Swap that were so netted shall be deemed to have been made (and
the Used Supersenior Swap Amount shall be increased accordingly) and any payments required to be made
by the Issuer under the CDS Assets that were so netted shall be deemed to have been made.
“Interest-Related Amount” means, with respect to any CDS Asset or the Supersenior Swap, any
Premium Amount or CDS Interest Reimbursement payable by a CDS Counterparty to the Issuer, any CDS
Interest Payment payable by the Issuer to a CDS Counterparty, any amount payable by the Supersenior Swap
Counterparty under the Supersenior Swap to pay a CDS Interest Payment and any payment payable by the
Issuer under the Supersenior Swap (other than a Supersenior Swap Commitment Fee or a Supersenior Swap
Drawing Fee) with respect to a payment (or portion thereof) made by the Supersenior Swap Counterparty
that was used to pay a CDS Interest payment.
“Principal-Related Amount” means, with respect to any CDS Asset, any CDS Principal
Reimbursement payable by a CDS Counterparty to the Issuer, and any CDS Principal Payment or Physical
Settlement Payment payable by the Issuer to a CDS Counterparty.
Additional Requirements; Settlements and Reimbursements
All CDS Assets will be required to be entered into pursuant to an ISDA Master Agreement that may be
in the form of a 1992 ISDA Master Agreement (Multicurrency-Cross Border) or an ISDA 2002 Master
Agreement or any successor form published by the International Swap and Derivatives Association, Inc.
(“ISDA” and each such Agreement, a “Master Agreement”) together with the schedule and credit support
annex thereto and one or more confirmations thereunder (each, a “Confirmation”). If the Issuer enters into
one or more Hedge Agreements and/or CDS Assets with the same counterparty, the Hedge Agreements will
be required to be documented under a separate Master Agreement from the CDS Assets; provided that all
Confirmations between the Issuer and a particular counterparty relating to Hedge Agreements or CDS
Assets, respectively, shall be under a single Master Agreement.
Under the CDS Assets, the Issuer will have exposure to certain Reference Entities and Reference
Obligations. The Issuer will be required to enter into CDS Assets only with CDS Counterparties who are
derivative dealers (and not trusts or similar special purpose entities). CDS Assets may provide for physical
settlement (or the obligation to physically settle) by delivery of obligations that may include the related
Reference Obligation.
Following the occurrence of any CDS Shortfall Event, the Issuer will be required to make a CDS
Shortfall Payment to the relevant CDS Counterparty; however, in the case of a CDS Interest Payment, the
amount required to be paid by the Issuer generally will be a net amount not greater than the amount by which
the CDS Interest Payment exceeds the Premium Amount payable to the Issuer on the same date, and, when
“fixed cap” is applicable under a CDS Asset, the amount owed by the Issuer will be capped by the Premium
Amount payable on the same date. Following the occurrence of a Credit Event, if the CDS Counterparty
elects to physically settle, the Issuer will be obligated to make a Physical Settlement Payment to the CDS
Counterparty. A CDS Counterparty will not be required to own any Reference Obligation or otherwise to
have any credit exposure to the Reference Entity and, if it does, it will have the right to sell such Reference
Obligation at any time without affecting the terms of the relevant CDS Asset. The Issuer’s obligation to pay
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a CDS Counterparty will exist irrespective of whether the CDS Counterparty suffers a loss or is exposed to
the risk of loss upon the occurrence of a CDS Shortfall Event or a Credit Event.
The CDS Shortfall Events in connection with which the Issuer may be required to make payments to
CDS Counterparties from time to time are CDS Interest Shortfalls and CDS Principal Shortfalls, defined as
follows:
“CDS Interest Shortfall” means, with respect to any CDS Asset, a determination by the respective
CDS Counterparty that an “Interest Shortfall” (as defined in the Pay-As-You-Go Confirmation or in any
other form-approved CDS Asset) or similar event specified in the relevant Confirmation with respect to the
non-payment of a scheduled interest payment, in whole or in part, has occurred under the Reference
Obligation.
“CDS Principal Shortfall” means, with respect to any CDS Asset, a determination by the respective
CDS Counterparty that a “Principal Shortfall Amount” exists or a “Writedown” has occurred (each as
defined in the Pay-As-You-Go Confirmation or in any other form-approved CDS Asset), or similar event
specified in the relevant Confirmation with respect to the non-payment or forgiveness of principal, or a
writedown or applied loss, has occurred under the Reference Obligation.
The CDS Counterparty under a CDS Asset may receive a reimbursement under the relevant Reference
Obligation of a CDS Interest Shortfall or CDS Principal Shortfall previously incurred (any such
reimbursement in respect of interest, a “CDS Interest Reimbursement;” any such reimbursement in respect
of principal, a “CDS Principal Reimbursement” and collectively, “CDS Reimbursement Amounts”). To
the extent of any CDS Principal Reimbursement, the notional amount of the related CDS Asset will be
reinstated other than with respect to a payment by or on behalf of the Reference Entity of an amount in
respect of the Reference Obligation in reduction of any prior Writedowns. Each CDS Counterparty will be
obligated to make payments to the Issuer to the extent of CDS Principal Reimbursements received by such
CDS Counterparty and in respect of CDS Interest Reimbursements received by such CDS Counterparty, in
either case, not exceeding the amount previously paid by the Issuer to such CDS Counterparty in connection
with the applicable shortfall event. However, in the case of CDS Interest Reimbursements, to the extent the
Issuer’s obligations to pay CDS Interest Payments were capped under the relevant CDS Asset, the CDS
Counterparty generally will be entitled to receive recovery of amounts for which it was not compensated by
the Issuer before it makes any related CDS Interest Reimbursement.
The Initial CDS Counterparty will, and any additional CDS Counterparty may, be required to deposit
Initial CDS Counterparty CSA Eligible Credit Support, in the case of the Initial CDS Counterparty, or
Eligible CDS Collateral, in the case of any other CDS Counterparty, to the CDS Issuer Account to secure its
obligation to pay CDS Principal Reimbursement amounts and CDS Interest Reimbursement amounts that
may become payable to the Issuer without regard to whether or not it satisfies the applicable rating
requirements set forth in the related Master Agreement.
When physical settlement is elected, the Physical Settlement Payment generally will be in the amount
of the notional amount of the relevant CDS Asset, or the appropriate proportionate share thereof if physical
settlement is elected only in part, in exchange for delivery of the Reference Obligation, or the appropriate
proportionate share thereof, as the Deliverable Obligation. Certain events constitute both a CDS Shortfall
Event and a Credit Event, in which case it is at the option of the CDS Counterparty whether to elect physical
settlement (and, if so, whether such physical settlement will be in part or in whole). CDS Shortfall Payments
will continue to be made from time to time with respect to the portion of the notional amount not physically
settled. In addition, following the occurrence of a Credit Event, a CDS Counterparty may elect partial
physical settlement on more than one occasion.
Credit Events
“Credit Event” means, with respect to any CDS Asset, a determination by the respective CDS
Counterparty that any of the events specified in the relevant Confirmation as a Credit Event has occurred.
The Credit Events are expected to include some or all of “Distressed Ratings Downgrade Event,” “Failure to
Pay Principal” and “Writedown,” each as defined in the Pay-As-You-Go Confirmation, and PIK
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Continuation Event, as defined below, as well as any additional, substitute or modified Credit Events that the
Issuer in the future elects to include in the CDS Assets as to which Rating Agency Confirmation has been
received and to which the relevant CDS Counterparties have consented.
“PIK Continuation Event” means, with respect to any Reference Obligation, the occurrence at any
time on or after the effective date of the related CDS Asset, of a positive CDS Interest Shortfall attributable
to the deferral, capitalization or “payment-in-kind” of interest on the relevant payment date determined in
respect of the Reference Obligation for (i) if payment dates for the Reference Obligation occur monthly, 24
consecutive such payments dates, (ii) if payment dates for the Reference Obligation occur quarterly, eight
consecutive such payment dates and (iii) if payment dates for the Reference Obligation occur semi-annually,
four consecutive such payment dates.
If an occurrence would otherwise constitute a Credit Event, such occurrence will constitute a Credit
Event whether or not such occurrence arises directly or indirectly from (w) any lack or alleged lack of
authority or capacity of a Reference Entity to enter into any Reference Obligation, (x) any actual or alleged
unenforceability, illegality, impossibility or invalidity with respect to any Reference Obligation, however
described, (y) any applicable law, order, regulation, decree or notice, however described, or the
promulgation of, or any change in, the interpretation by any court, tribunal, regulatory authority or similar
administrative or judicial body with competent or apparent jurisdiction of any applicable law, order,
regulation, decree or notice, however described, or (z) the imposition of, or any change in, any exchange
controls, capital restrictions or any other similar restrictions imposed by any monetary or other authority,
however described.
Premium Amount Payments
In the case of CDS Assets, each CDS Counterparty will pay to the Issuer a periodic premium under
each CDS Asset between such CDS Counterparty and the Issuer, determined on the basis of the relevant
premium rate specified in such CDS Asset and the notional amount, from time to time, of the CDS Asset
(the “Premium Amount”). The Premium Amount will be payable at the time and accrue at the rate and until
the date specified in the applicable CDS Asset.
Payments of Premium Amounts (including any Designated Accrued Premium in respect of a CDS
Counterparty Termination Payment) will be deposited into the Collection Account as Collateral Interest
Collections and distributed in accordance with the Priority of Payments.
Early Termination of CDS Assets
Termination by the Issuer
Under the terms that the Issuer has obtained under the Initial CDS Agreement, and that the Issuer may
obtain under other Master Agreements, if any, relating to the CDS Assets, the CDS Assets will be subject to
early termination by the Issuer if an “event of default” or “termination event” as specified in the applicable
Master Agreement occurs with respect to which the CDS Counterparty is the defaulting or affected party.
The events of default or termination events in the Initial CDS Agreement include (in each case, as defined in
the ISDA 1992 Master Agreement): (a) Failure to Pay or Deliver, (b) Credit Support Default, (c) Merger
Without Assumption, (d) Bankruptcy and (e) Illegality and other Master Agreements, if any, relating to CDS
Assets also are expected to include such events and may include other standard ISDA or modified events of
default or termination events. The events listed in (a) through (d) are events of default under the ISDA 1992
Master Agreement, and the event listed in (e) is a termination event under the ISDA 1992 Master
Agreement. The “Credit Support Default” pursuant to which such CDS Assets may be terminated by the
Issuer will include a failure by the CDS Counterparty to deliver the required amount of collateral to the
Issuer.
If an event of default occurs with respect to a CDS Counterparty, and the Issuer, as the non-defaulting
party, elects to cause early termination, it will use the valuation method known as “Market Quotation” (using
quotes on the Issuer’s side of the market) and it will use “Second Method” to value the terminated CDS
Assets with netting between transactions pursuant to which a payment will be made on a net basis by one
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party to the other. If the Issuer elects to cause early termination, the Issuer must designate an Early
Termination Date (as defined in the Master Agreement) with respect to all CDS Assets, with netting between
transactions, such that the amount payable by the CDS Counterparty to the Issuer would be the net amount,
if any, determined to be payable to the Issuer in respect of all transactions, and termination payments
determined to be payable by the Issuer to a CDS Counterparty as to which such CDS Counterparty is the
defaulting party will be payable on a subordinated basis in accordance with the Priority of Payments.
If a termination event occurs as to which the CDS Counterparty is an affected party and the Issuer, as
the non-affected party, designates an Early Termination Date, it will use “Market Quotation” (using quotes
on the Issuer’s side of the market) and “Second Method” as set forth in the ISDA 1992 Master Agreement to
value the affected CDS Assets with netting between transactions pursuant to which a payment will be made
on a net basis by one party to the other. In this circumstance, if the Issuer causes early termination, the Issuer
will be required to terminate all of the affected CDS Assets under the Master Agreement collectively with
netting between such terminated CDS Assets. Under this valuation method, either party under the relevant
Master Agreement may be required to make a payment to the other, such that the non-affected party may be
required to make a payment to the affected party, or one affected party may be required to pay the other.
Termination payments determined to be payable by the Issuer to the Initial CDS Counterparty will be
payable on a subordinated basis under the Priority of Payments and the Initial CDS Counterparty will agree
that such termination payments will be payable on a subordinated basis pursuant to the Priority of Payments.
If the Issuer does not elect to terminate such CDS Assets within 30 days from the date of such Early
Termination Event, the CDS Counterparty will have a right to (by telephonic notice to the Issuer, promptly
confirmed in writing) to receive from the Issuer CDS Reserve Investments with the Principal Balance equal
to the payment amount required to be paid by the Issuer to the CDS Counterparty to which such Failure to
Pay or Deliver relates. Upon the CDS Counterparty’s receipt of all such CDS Reserve Investments, as the
case may be, such Event of Default shall be deemed cured and no longer existing and the Issuer’s payment
obligation to which such Failure to Pay or Deliver relates shall be deemed satisfied. Whether or not the
Issuer elects to terminate such CDS Assets and whether or not such Event of Default is deemed cured, the
Issuer, if requested by the CDS Counterparty, shall pursue remedies at law or in equity to require the
Supersenior Swap Counterparty to perform its obligations under the Supersenior Swap or to compensate any
damages incurred by the CDS Counterparty and to compensate the Issuer and the CDS Counterparty for the
reasonable costs and expenses (including reasonable attorneys’ fees and expenses) incurred by or on behalf
of the Issuer and the CDS Counterparty as a result of such default by the Supersenior Swap Counterparty;
provided, that the Issuer shall not enter into any settlement agreement with the Supersenior Swap
Counterparty without the prior written consent of the CDS Counterparty (which consent may be withheld or
delayed in its sole discretion). Any delinquent amount payable by the Issuer to a CDS Counterparty under a
CDS Asset will accrue interest for each day at a rate equal to the Supersenior Swap Drawing Fee Rate.
In addition, in connection with (a) the liquidation of the Collateral, following the occurrence of an
Event of Default and the acceleration of the Notes under the Indenture, or (b) an Optional Redemption, a Tax
Redemption or an Auction Call Redemption of the Rated Notes in whole but not in part, the Issuer will cause
early termination of all CDS Assets under each Master Agreement. In either case, “Market Quotation” (using
quotes on the CDS Counterparty’s side of the market) and “Second Method” with netting between
transactions will apply pursuant to which a payment will be made on a net basis by one party to the other.
These amounts, if payable to a CDS Counterparty, will not be subordinated, but rather will be paid prior to
the payment of interest and principal on any of the Notes. However, if an “event of default” in respect of the
CDS Counterparty has occurred and is continuing at the time of the event described in clause (a) above, the
parties’ respective rights when the CDS Counterparty is the defaulting party as described above will govern
the valuation and payments required to be made in connection with the termination of such CDS Assets. For
the purposes of this section (“Early Termination of CDS Assets”), so long as the Supersenior Swap
Counterparty and the CDS Counterparty are the same, “transactions” means CDS Assets and the Supersenior
Swap; however, if the CDS Counterparty and the Supersenior Swap Counterparty are different,
“transactions” means only CDS Assets.
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Termination by the CDS Counterparty
Under the terms that the Issuer has obtained under the Initial CDS Agreement, and that the Issuer
currently expects to obtain under other Master Agreements, if any, relating to the CDS Assets, the CDS
Assets will be subject to early termination by the respective CDS Counterparties if an “event of default” or
termination event as specified in the applicable Master Agreement occurs with respect to which the Issuer is
the defaulting party or an affected party. In the case of the Initial CDS Agreement, such events of default and
termination events consist of (in the case of clauses (a) through (e), as defined in the ISDA 1992 Master
Agreement): (a) Failure to Pay or Deliver, (b) Credit Support Default, (c) Merger Without Assumption,
(d) Bankruptcy, (e) Illegality and (f) the Indenture being amended or modified or any provision thereof being
waived without the prior written consent of the applicable CDS Counterparty, and other Master Agreements,
if any, in respect of CDS Assets may include other then-standard ISDA or modified events of default or
termination events. The events described in clauses (a) through (d) are events of default under the ISDA
1992 Master Agreement the occurrence of which will give the CDS Counterparty the right, as the nondefaulting party, to cause early termination after the Issuer’s failure to cure such default after notice is given.
If an event of default occurs with respect to the Issuer, if the CDS Counterparty elects to terminate, it will be
required to do so with respect to all CDS Assets under the relevant Master Agreement, with netting between
such terminated CDS Assets. The events described in clauses (e) and (f) are termination events under the
CDS Asset the occurrence of which will give the CDS Counterparty the right, as the non-affected party, to
designate an Early Termination Date. However, under the terms that the Issuer has obtained under the Initial
CDS Agreement, and currently expects to obtain under other Master Agreements, if any, in respect of CDS
Assets, if the CDS Counterparty elects to designate an Early Termination Date, it must do so with respect to
all CDS Assets under the applicable Master Agreement (whether or not all such CDS Assets are “Affected
Transactions”, as defined in the ISDA 1992 Master Agreement), with netting between such terminated CDS
Assets. In all such events, “Market Quotation” (using quotes on the CDS Counterparty’s side of the
market) and “Second Method” will apply to determine the net amount payable by either party in connection
with the early termination. Any such amounts owing to a CDS Counterparty (unless such amounts constitute
a CDS Subordinated Issuer Termination Payment) will not be subordinated under the Priority of Payments.
Moreover, under the terms the Issuer has obtained under the Initial CDS Agreement, and that the Issuer
currently expects to obtain under any other Master Agreements applicable to CDS Assets, a CDS
Counterparty will be able to cause the termination of CDS Assets in connection with a termination event
only if such CDS Counterparty is not an affected party.
On the other hand, if the CDS Counterparty elects not to terminate the related CDS Assets, the CDS
Counterparty may elect (by telephonic notice to the Issuer, promptly confirmed in writing) to receive from
the Issuer CDS Reserve Investments with the Principal Balance equal to the payment amount required to be
paid by the Issuer to the CDS Counterparty to which a Failure to Pay or Deliver relates (in which case, the
Issuer shall deliver those CDS Reserve Investments with the shortest maturities in the CDS Reserve
Account, to the CDS Counterparty (which delivery shall be made by the Trustee at the direction of the
Investment Adviser acting on behalf of the Issuer, within two Business Days of the CDS Counterparty’s
notice)). Upon the CDS Counterparty’s receipt of all such CDS Reserve Investments, as the case may be,
such event of default shall be deemed cured and no longer existing and the Issuer’s payment obligation to
which such Failure to Pay or Deliver relates shall be deemed satisfied. Whether or not any affected CDS
Counterparty elects to terminate the related CDS Asset, the Issuer, if requested by such CDS Counterparty,
shall pursue remedies at law or in equity to require the Supersenior Swap Counterparty to perform its
obligation under the Supersenior Swap or to compensate any damages incurred by such CDS Counterparty
and to compensate the Issuer and such CDS Counterparty for the reasonable costs and expenses (including
reasonable attorneys’ fees and expenses) incurred by or on behalf of the Issuer and such CDS Counterparty
as a result of such default by the Supersenior Swap Counterparty; provided that the Issuer shall not enter into
any settlement agreement with the Supersenior Swap Counterparty without the prior written consent of such
CDS Counterparty (which consent may be withheld or delayed in its sole discretion). Any delinquent amount
payable by the Issuer to a CDS Counterparty under a CDS Asset will accrue interest for each day at a rate
equal to the Supersenior Swap Drawing Fee Rate.
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Subject to receipt of Rating Agency Confirmation and the consent of the Supersenior Swap
Counterparty, the Issuer may enter into CDS Assets with different events of default and/or termination
events, or (subject to the prior written consent of the Initial CDS Counterparty if it may be adversely affected
thereby or if the proposed terms of such CDS Assets are, in its sole judgment, more favorable to the new
CDS Counterparty than the terms afforded to the Initial CDS Counterparty under the Initial CDS
Agreement) different valuations and elections between “First Method” and “Second Method” and “Market
Quotation” or “Loss” than those described above.
CDS Reserve Account
The Trustee will, on or prior to the Closing Date, establish and maintain a segregated non-interest
bearing trust account designated as the “CDS Reserve Account,” which will be held in trust in the name of
the Trustee for the benefit and on behalf of the Secured Parties. On the Closing Date, the Issuer is expected
to acquire the CDS Reserve Investments with a Principal Balance equal to U.S.$0 and make a deposit to the
CDS Reserve Account in an amount equal to U.S.$0 and use such funds to acquire the CDS Reserve
Investments during the Reinvestment Period. On any Business Day (other than a Payment Date), the Trustee
will, from time to time, as directed by the Investment Adviser, (x) deposit to the CDS Reserve Account any
Collateral Principal Collections designated by the Investment Adviser as “Designated CDS Principal
Proceeds” and (y) deliver, as directed by the Investment Adviser, any CDS Reserve Investments (at a price
of par or above) to be sold, the sale proceeds of which will be, as certified by the Investment Adviser,
designated as “Designated CDS Reserve Account Proceeds” by the Investment Adviser; provided, that any
such delivery, sale and designation will occur concurrently. Any such proceeds will be treated as “Collateral
Principal Collections” and shall be deposited to the Collection Account as directed by the Investment
Adviser. All funds on deposit in, or otherwise credited to, the CDS Reserve Account shall be held by the
Trustee as part of the Collateral and shall be applied for the purposes herein provided. By Issuer Order, the
Issuer will at all times direct the Trustee to, and, upon receipt of such Issuer Order, the Trustee will, invest
all funds on deposit in, or otherwise credited to the CDS Reserve Account in CDS Reserve Investments
selected by the Investment Adviser. Interest on funds on deposit in, or otherwise credited to, the CDS
Reserve Account will constitute Collateral Interest Collections and will be withdrawn from the CDS Reserve
Account from time to time and, in any event, with respect to each Calculation Date, on or before the related
Payment Date, for deposit to the Collection Account for application as Collateral Interest Collections. Any
loss on the investment of funds on deposit in, or otherwise credited to, the CDS Reserve Account shall be
debited to the CDS Reserve Account. The CDS Reserve Account shall remain at all times with the principal
corporate trust office of the Trustee or an Eligible Financial Institution.
On any Business Day, if the Issuer is required to make (i) a CDS Interest Payment, (ii) a CDS Loss
Payment, or (iii) a CDS Issuer Termination Payment (other than a CDS Subordinated Issuer Termination
Payment) pursuant to a CDS Asset, the Trustee will, to the extent required in accordance with the CDS
Payment Priority, apply Cash on deposit in the CDS Reserve Account and the sale proceeds from the sale of
any CDS Reserve Investments up to the full amount payable to the CDS Counterparty (by first selling CDS
Reserve Investments that can be sold for an amount at least equal to their respective par amounts); provided
that, to the extent such amounts of Cash and sale proceeds are insufficient to pay in full the amounts referred
to in clauses (i) through (iii) above on such Business Day, such amounts will be applied in the order of
priority set forth in the CDS Payment Priority. If two or more CDS Counterparties are due a payment
pursuant to the same clause set forth in clauses (i) through (iii) above on the same Business Day, the Trustee
will apply such amounts of Cash and sale proceeds pro rata among the CDS Counterparties regardless of the
order in which they notified the Trustee that such amounts were due to them. Upon release of any Cash or
CDS Reserve Investments from the CDS Reserve Account, the CDS Reserve Account Balance will be
reduced permanently by such released amount and will not be subsequently reinstated or replenished.
CDS Reserve Investments on deposit in the CDS Reserve Account will not be available to make
payments on the Notes except in limited circumstances as described in the Indenture (i.e., in connection with
an Optional Redemption, Tax Redemption or Auction Call Redemption or the occurrence of an Event of
Default that results in acceleration of the Notes) and in accordance with the Priority of Payments.
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On or before the Business Day immediately preceding each Payment Date, the Trustee will, as directed
by the Issuer (which direction may be in the form of standing instructions), withdraw Cash from the CDS
Reserve Account and sell CDS Reserve Investments such that the amount of cash and sale proceeds equals
the Excess CDS Reserve Amount, if any, as of the related Calculation Date, and such amount will be
deposited to the Collection Account and treated as Collateral Principal Collections.
CDS Counterparty Rating Requirements; CDS Issuer Account
Any CDS Counterparty (or a guarantor that irrevocably and unconditionally guarantees its obligations
under the related Master Agreement) will be required to have (A)(i) a short-term rating of at least “P-1” by
Moody’s (which, if rated “P-1” by Moody’s, is not on negative credit watch for downgrade) and a long-term
senior unsecured debt rating of at least “A1” by Moody’s (which, if rated “A1” by Moody’s, is not on
negative credit watch for downgrade) or (ii) a long-term senior unsecured debt rating of at least “Aa3” by
Moody’s (which, if rated “Aa3” by Moody’s, is not on negative credit watch for downgrade) and (B) a shortterm rating of at least “A-1” by S&P, in each case as of the date of purchase or entry into the CDS Asset by
the Issuer.
If any CDS Counterparty (or the related guarantor, if any) no longer satisfies the CDS Counterparty
Non-Posting Rating Requirements at any time thereafter, it will be required to deposit or transfer Eligible
CDS Collateral (or, in the case of the Initial CDS Counterparty, Initial CDS Counterparty CSA Eligible
Credit Support) to a sub-account of the CDS Issuer Account to support its obligations to the Issuer.
Alternatively, the CDS Counterparty may obtain a guarantee, letter of credit or surety bond from an entity
that satisfies the applicable rating requirements or assign its rights and obligations under the CDS Asset to a
substitute CDS Counterparty that satisfies the CDS Counterparty Non-Posting Rating Requirements (or
whose guarantor that irrevocably and unconditionally guarantees its obligations thereunder satisfies such
requirements). In connection therewith, the Trustee, on behalf of the Issuer, will make a prompt demand
upon (a) any CDS Counterparty or its guarantor, if any, in the event that the CDS Counterparty or its
guarantor fails to make any payment under such CDS Asset when due and (b) any CDS Counterparty or its
guarantor, if any, in the event credit support is required to be posted by the CDS Counterparty or its
guarantor. Each CDS Counterparty or its guarantor, if any, will be required to deliver prompt written notice
to the Trustee in the event that it no longer satisfies the required ratings.
If a CDS Counterparty (or its guarantor) that initially satisfies the CDS Counterparty Non-Posting
Rating Requirements by both Rating Agencies set forth in the related Master Agreement is downgraded and
does not, within thirty days thereafter, post credit support as described above, or obtain a guarantee, letter of
credit or surety bond from an entity that satisfies the CDS Counterparty Non-Posting Rating Requirements,
the CDS Counterparty will be required to assign the affected CDS Assets to a qualified dealer that has or
enters into a Master Agreement with the Issuer and assumes the obligations of the CDS Counterparty under
the affected CDS Assets. The failure of any CDS Counterparty that is required to collateralize its obligations
and fails to do so in accordance with the terms of the relevant CDS Asset is expected to constitute an event
of default (as defined in the relevant CDS Asset) as to which the CDS Counterparty will be the defaulting
party.
MSCS will be the CDS Counterparty (the “Initial CDS Counterparty”) under all of the CDS Assets
on the Closing Date (with a Principal Balance of U.S.$325,000,000) pursuant to a Master Agreement
including any schedules thereto and confirmations thereunder (the “Initial CDS Agreement”) entered into
with the Issuer on or prior to the Closing Date; provided, that any references to the rights of the Initial CDS
Counterparty and any requirement for notice or consent of the Initial CDS Counterparty will be inapplicable
following the termination of all CDS Assets with the Initial CDS Counterparty and payment of all amounts
due thereunder. If and for so long as the Initial CDS Counterparty does not satisfy the CDS Counterparty
Non-Posting Rating Requirements set forth in the Initial CDS Agreement, the Initial CDS Counterparty will
be required to transfer credit support permitted under the Initial CDS Agreement to be transferred to the
Issuer (such credit support, the “Initial CDS Counterparty CSA Eligible Credit Support”). The Initial
CDS Counterparty will not satisfy the CDS Counterparty Non-Posting Rating Requirements upon entering
into the Initial CDS Agreement and therefore the Initial CDS Counterparty will be required to transfer Initial
CDS Counterparty CSA Eligible Credit Support in the manner provided in the Initial CDS Agreement.
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The “CDS Counterparty Non-Posting Rating Requirements” means, as of any date of
determination, a long-term senior unsecured debt rating by each of Moody’s and S&P that is at least equal to
such Rating Agency’s current rating of the most senior Class of Rated Notes that is Outstanding as of such
date; provided that if the CDS Counterparty is listed for possible downgrade or upgrade by Moody’s on
Moody’s then-current credit rating watch list, then its long-term senior unsecured debt rating from Moody’s
for purposes of this definition will be deemed to be one subcategory below or one subcategory above,
respectively, the rating then assigned to it by Moody’s. The CDS Counterparty under any additional CDS
Assets may be required to satisfy the CDS Counterparty Non-Posting Rating Requirements pursuant to the
related Master Agreement.
In addition to the foregoing, the Initial CDS Counterparty will transfer the Initial CDS Counterparty
CSA Eligible Credit Support, and any additional CDS Counterparties may, be required to deposit Eligible
CDS Collateral to the CDS Issuer Account to secure its obligation to pay CDS Principal Reimbursement
amounts and CDS Interest Reimbursement amounts that may become payable to the Issuer without regard to
whether or not it satisfies the applicable rating requirements set forth in the related Master Agreement. See
“—CDS Counterparty Collateralization Requirements.”
The Trustee will establish a trust account held in the name of the Issuer (the “CDS Issuer Account”). If
and to the extent that any CDS Counterparty does not satisfy the applicable rating requirements and is
required to collateralize its obligations pursuant to the related CDS Asset, the CDS Counterparty will deposit
collateral in the required amount to a sub-account of the CDS Issuer Account identified with the CDS
Counterparty. A CDS Counterparty will not have any legal, equitable or beneficial interest in the related subaccount of the CDS Issuer Account other than in accordance with the Indenture, the relevant CDS Asset and
applicable law.
By Issuer Order or as directed by the applicable CDS Counterparty in writing and in accordance with
the terms of the applicable CDS Asset, amounts on deposit in each sub-account of the CDS Issuer Account
for the benefit of the Issuer shall be invested in Eligible CDS Collateral (or, in the case of the Initial CDS
Counterparty, Initial CDS Counterparty CSA Eligible Credit Support). Income received on amounts on
deposit in each sub-account of the CDS Issuer Account shall be withdrawn from such sub-account and
(i) paid to the related CDS Counterparty if and to the extent required by the related Master Agreement or
(ii) if an Event of Default or Termination Event has occurred with respect to a CDS Counterparty, deposited
to the Collection Account as Collateral Interest Collections and shall be withdrawn from the CDS Issuer
Account from time to time and, in any event, with respect to each Calculation Date, on or before the related
Payment Date, for deposit to the Collection Account for application as Collateral Interest Collections.
Eligible CDS Collateral (or, in the case of the Initial CDS Counterparty, Initial CDS Counterparty CSA
Eligible Credit Support) on deposit in the CDS Issuer Account will not be available to make payments on the
Notes other than as a result of an event of default or termination event under the related CDS Asset or as
otherwise provided by the related CDS Asset. The only permitted withdrawal from or application of funds
on deposit in, or otherwise standing to the credit of, any sub-account of the CDS Issuer Account will be
(i) for application to obligations of the related CDS Counterparty that are not paid when due (whether when
scheduled or upon early termination) to the extent of collateral provided by such CDS Counterparty or (ii) to
return collateral to the related CDS Counterparty when and as required by the terms of the relevant CDS
Assets. Amounts contained in the CDS Issuer Account will not be considered to be an asset of the Issuer for
purposes of any of the Collateral Quality Tests, the Portfolio Percentage Limitations or the Coverage Tests.
CDS Counterparty Collateralization Requirements
For so long as the Initial CDS Counterparty does not satisfy the CDS Counterparty Non-Posting Rating
Requirements, the collateral requirements will apply with respect to its obligations to pay Premium Amounts
and potential CDS Interest Reimbursements and CDS Principal Reimbursements. The same requirements
will apply to one or more of the CDS Counterparties under the CDS Assets entered into by the Issuer
following the Closing Date.
If the Initial CDS Counterparty or any other CDS Counterparty does not satisfy the CDS Counterparty
Non-Posting Rating Requirements, but has a short-term unsecured debt rating or counterparty rating (or its
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equivalent) at or above “A-1” by S&P and “P-1” by Moody’s, it will be required to post Eligible CDS
Collateral (or, in the case of the Initial CDS Counterparty, Initial CDS Counterparty CSA Eligible Credit
Support) at all times equal to the Premium Amount for one payment period under the relevant CDS Assets
(determined as of any valuation date as the Premium Amount payable on the next occurring scheduled date
for the payment of Premium Amounts under the relevant CDS Asset).
Any CDS Counterparty will be required to deposit or transfer Eligible CDS Collateral (or, in the case of
the Initial CDS Counterparty, Initial CDS Counterparty CSA Eligible Credit Support) to the appropriate
sub-account of the CDS Issuer Account to secure or as credit support for its obligation to pay CDS Principal
Reimbursement Amounts and CDS Interest Reimbursement Amounts that may become payable to the Issuer
with respect to any CDS Principal Payments or CDS Interest Payments made by the Issuer to such CDS
Counterparty, in each instance in the amount of the relevant CDS Principal Payment or CDS Interest
Payment, as applicable. In each case, such obligation to post or transfer Eligible CDS Collateral (or, in the
case of the Initial CDS Counterparty, Initial CDS Counterparty CSA Eligible Credit Support) will survive
for so long as the obligation to pay CDS Reimbursement Amounts survives under the terms of the respective
CDS Asset, except to the extent that Rating Agency Confirmation is received with respect to the earlier
release.
CDS Counterparties as Secured Parties
The obligations of the Issuer to the CDS Counterparties under the CDS Assets will be secured by the
Issuer’s rights and interest in the Collateral. If the Issuer is required to make a CDS Interest Payment, a CDS
Loss Payment, or a CDS Issuer Termination Payment (other than on CDS Issuer Subordinated Termination
Payment), the Issuer will fund the required payment from Collateral Interest Collections, Collateral Principal
Collections, the Class I Reserve Account, the CDS Reserve Account and the Supersenior Swap, in
accordance with the CDS Payment Priority all as further described herein.
Governing Law
The Initial CDS Agreement will provide that it will be governed by, and construed in accordance with,
the laws of the State of New York, and each other CDS Asset may provide that it will be governed by, and
construed in accordance with, the laws of the State of New York. Each of the Issuer and each CDS
Counterparty is expected to submit to the jurisdiction of the courts of the State of New York and the United
States District Court located in the Borough of Manhattan in New York City in connection with the CDS
Assets.
Collateral Quality Tests
Satisfaction of the Collateral Quality Tests is one of the Reinvestment Criteria for purchasing Collateral
Assets. See “—Substitute Collateral Assets and Reinvestment Criteria.” The “Collateral Quality Tests” are
(i) the Maximum Moody’s Rating Factor Test, (ii) the Minimum Coupon Test, (iii) the Asset Correlation
Test, (iv) the Weighted Average Life Test, (v) the Moody’s Recovery Test, (vi) the S&P CDO Monitor Test,
and (vii) the S&P Minimum Average Recovery Rate Test. The Issuer’s failure to satisfy the Collateral
Quality Tests and/or the Portfolio Percentage Limitations will not be a default or an Event of Default under
the Indenture.
The Investment Adviser expects that the Issuer will satisfy the Collateral Quality Tests (other than the
S&P CDO Monitor Test and the Asset Correlation Test) on the Closing Date. The Collateral Quality Tests
will be calculated on each Measurement Date and, with respect to any purchase of or entry into Collateral
Assets on and after the Effective Date will be required to be satisfied after giving effect to such transaction
or if immediately prior to the proposed transaction, one or more of such Collateral Quality Tests was not
satisfied, no Collateral Quality Test that was unsatisfied shall be further from being satisfied and no
Collateral Quality Test that was satisfied shall be unsatisfied after giving effect to such transaction.
Any Collateral Asset that the Issuer has committed to purchase or enter into but which has not yet
settled will be included as a Collateral Asset for purposes of the Coverage Tests, the Collateral Quality Tests
and the Portfolio Percentage Limitations (and, as applicable, (x) in the case of a Cash Asset or a Credit
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Linked Security, Eligible Investments and Collateral Principal Collections in an amount equal to the
purchase price or Principal Balance, as applicable, of such Collateral Asset shall be excluded from all
calculations or (y) in the case of a CDS Asset, (i) Eligible Investments and Collateral Principal Collections in
an amount equal to any up-front payment made by the Issuer to the CDS Counterparty shall be excluded
from all calculations and (ii) an amount equal to the Principal Balance thereof shall be deemed added to the
CDS Asset Balance); provided that if such Collateral Asset has not settled by the 45th Business Day after the
day the Issuer committed to purchase or enter into such Collateral Asset, such Collateral Asset will no longer
be treated as a Collateral Asset for any purpose and such Eligible Investments will then be included in all
calculations or such Principal Balance shall be deducted from the CDS Asset Balance, as applicable.
For purposes of calculating the Par Value Coverage Tests, the Collateral Quality Tests (other than the
Minimum Coupon Test) and the Eligibility Criteria (other than clauses (ii), (iv), (xviii)(C), (D), (E) and
(F) and (xxi) thereof), the characteristics of any Reference Obligations that are subject to any Synthetic
Assets will be used and all references to “Collateral Asset” with respect to calculating such tests will be
deemed to refer to the Reference Obligations of such Synthetic Assets.
In order to determine whether each of the Collateral Quality Tests (other than the S&P CDO Monitor
Test) was complied with as a result of the sale or termination of a Credit Risk Security and reinvestment of
the Sale Proceeds thereof, the effect of any reinvestment in Substitute Collateral Assets on such Collateral
Quality Tests shall be measured by comparing such Collateral Quality Test as calculated before the sale or
termination of the Credit Risk Security and after the purchase of or entry into such Substitute Collateral
Asset. Compliance with the S&P CDO Monitor Test is not required in connection with the sale or
termination of a Credit Risk Security and the reinvestment of the Sale Proceeds thereof. See “—Substitute
Collateral Assets and Reinvestment Criteria— Reinvestment Criteria.”
Maximum Moody’s Rating Factor Test
“Maximum Moody’s Rating Factor Test” means a test that will be satisfied if on any Measurement
Date the Weighted Average Moody’s Rating Factor for all the Collateral Assets does not exceed 550;
provided that in connection with any sale or termination of Collateral Assets and reinvestment in Substitute
Collateral Assets, if immediately prior to the sale or termination of such Collateral Asset giving rise to such
reinvestment the Maximum Moody’s Rating Factor Test was not satisfied, then the weighted average of the
Moody’s Rating Factors of such Substitute Collateral Assets to be purchased or entered into with such sale
or termination proceeds or in connection with a Trading Plan cannot be higher than the weighted average of
the Moody’s Rating Factors of such Collateral Assets at the time they were sold or terminated.
The “Weighted Average Moody’s Rating Factor” is determined on any Measurement Date by
summing the products obtained by multiplying the Principal Balance of each Collateral Asset (excluding
Defaulted Securities and Equity Securities) by its Moody’s Rating Factor (as set forth in the glossary
attached hereto), dividing such sum by the aggregate Principal Balance of all such Collateral Assets that are
not Defaulted Securities or Equity Securities and rounding the result up to the nearest whole number.
Minimum Coupon Test
“Minimum Coupon Test” is a test that will be satisfied on any Measurement Date if (i) the Weighted
Average Fixed Rate Coupon as of such date equals or exceeds the Minimum Weighted Average Fixed Rate
Coupon and (ii) the Weighted Average Spread as of such date equals or exceeds the Minimum Weighted
Average Spread.
Asset Correlation Test
“Asset Correlation Test” means a test that will be satisfied on any Measurement Date if the Asset
Correlation Factor is no greater than 18.5 percent.
“Asset Correlation Factor” means a single number determined in accordance with the asset
correlation methodology provided to the Investment Adviser by Moody’s (after consultation with Moody’s
to the extent the Investment Adviser determines necessary from time to time). The sectors used in the asset
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correlation methodology are set forth in Schedule G. For purposes of determining the Asset Correlation
Factor in accordance with Moody’s correlation methodology, it is assumed that 85 is the number of assets
included in the Collateral.
Weighted Average Life Test
“Weighted Average Life Test” means a test that will be satisfied as of any Measurement Date during
any period set forth below if the Weighted Average Life as of such Measurement Date is less than or equal
to the number of years set forth in the table below:
As of any Calculation Date with Respect to the
Payment Date Occurring in
Weighted
Average Life (in years)
November 2006
7.0
February 2007
6.75
May 2007
6.50
August 2007
6.25
November 2007
6.0
February 2008
5.75
May 2008
5.5
August 2008
5.25
November 2008
5.0
February 2009
4.75
May 2009
4.5
August 2009
4.25
November 2009
4.0
February 2010
3.75
May 2010
3.5
August 2010
3.25
Thereafter
3.0
August 2046 – Stated Maturity Date
provided, however, that as of any Measurement Date between any two consecutive Payment Dates, the
Weighted Average Life Test shall be satisfied if the Weighted Average Life of all Collateral Assets as of
such Measurement Date is less than or equal to the number of years determined by interpolation on a
straight-line basis using the Weighted Average Life figures for the immediately preceding Payment Date and
the immediately succeeding Payment Date.
Moody’s Recovery Test
“Moody’s Recovery Test” means a test that will be satisfied as of any Measurement Date if the
Moody’s Weighted Average Recovery Rate is greater than or equal to 21.50 percent.
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The “Moody’s Weighted Average Recovery Rate” means as of any Measurement Date the percentage
obtained by summing the products obtained by multiplying the Principal Balance of each Collateral Asset
(other than a Defaulted Security) by its Moody’s Recovery Rate, dividing such sum by the aggregate
Principal Balance of all such Collateral Assets (other than Defaulted Securities), and rounding up to the first
decimal place.
S&P CDO Monitor Test
“S&P CDO Monitor Test” means the test that is satisfied as of any Measurement Date occurring on or
after the Effective Date if, after giving effect to the sale of a Collateral Asset or the purchase of an Eligible
Investment (or both), as the case may be, on such Measurement Date, each of the Class II Note Loss Rate
Differential, the Class III Note Loss Rate Differential, the Class IV Note Loss Rate Differential, the Class V
Note Loss Rate Differential, the Class VI Note Loss Rate Differential and the Class VII Note Loss Rate
Differential of the Proposed Portfolio is positive or, if the Class II Note Loss Rate Differential, Class III
Note Loss Rate Differential, Class IV Note Loss Rate Differential, Class V Note Loss Rate Differential,
Class VI Note Loss Rate Differential or Class VII Note Loss Rate Differential of the Proposed Portfolio is
negative prior to giving effect to such sale or purchase, the extent of compliance with the S&P CDO Monitor
Test is improved after giving effect to such sale or purchase. The S&P CDO Monitor Test will be considered
to be improved if the Class II Note Loss Rate Differential of the Proposed Portfolio is greater than the
Class II Note Loss Rate Differential of the Current Portfolio, the Class III Note Loss Rate Differential of the
Proposed Portfolio is greater than the Class III Note Loss Rate Differential of the Current Portfolio, the
Class IV Note Loss Rate Differential of the Proposed Portfolio is greater than the Class IV Note Loss Rate
Differential of the Current Portfolio, the Class V Note Loss Rate Differential of the Proposed Portfolio is
greater than the Class V Note Loss Rate Differential of the Current Portfolio, the Class VI Note Loss Rate
Differential of the Proposed Portfolio is greater than the Class VI Note Loss Rate Differential of the Current
Portfolio and the Class VII Note Loss Rate Differential of the Proposed Portfolio is greater than the Class
VII Note Loss Rate Differential of the Current Portfolio.
S&P Minimum Average Recovery Rate Test
“S&P Minimum Average Recovery Rate Test” means a test that will be satisfied as of any
Measurement Date if the S&P Minimum Average Recovery Rate is greater than or equal to 27.00 percent if
the Class II Notes are Outstanding, 27.00 percent if the Class III Notes are Outstanding, 31.75 percent if the
Class IV Notes are Outstanding, 36.50 percent if the Class V Notes are Outstanding, 42.00 percent if the
Class VI Notes are Outstanding and 47.25 percent if the Class VII Notes are Outstanding.
“S&P Minimum Average Recovery Rate” means, as of any Measurement Date, a rate expressed as a
percentage equal to the number obtained by (i) summing the products obtained by multiplying the Principal
Balance of each Collateral Asset by its S&P Recovery Rate (set forth in Schedule B hereto), (ii) dividing
such sum by the sum of the Principal Balances of all Collateral Assets and (iii) rounding up to the first
decimal place.
Portfolio Percentage Limitations
Satisfaction of the Portfolio Percentage Limitations is one of the Reinvestment Criteria for purchasing
Collateral Assets. See “—Substitute Collateral Assets and Reinvestment Criteria.” On the Effective Date, the
portfolio of Collateral Assets is expected to satisfy all of the Portfolio Percentage Limitations. The Portfolio
Percentage Limitations will be calculated on each Measurement Date and, with respect to any purchase of or
entry into Collateral Assets on and after the Effective Date will be required to be satisfied after giving effect
thereto or if immediately prior to the proposed purchase of or entry into such additional Collateral Assets,
one or more of such limitations was not satisfied, no limitation that was unsatisfied shall be further from
being satisfied after giving effect thereto and no limitation that was satisfied shall be unsatisfied after giving
effect thereto. The “Portfolio Percentage Limitations” require that:
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(1) if such Collateral Asset is not publicly rated or has not received a credit estimate by Moody’s, then
the aggregate Principal Balance of all such Collateral Assets does not exceed the greater of (x) 20
percent of the Collateral Principal Balance and (y) U.S.$100,000,000;
(2) if such Collateral Asset is a Fixed Rate Collateral Asset, the aggregate Principal Balance of all
such Collateral Assets does not exceed the greater of (x) 5percent of the Collateral Principal
Balance and (y) U.S.$25,000,000;
(3) if such Collateral Asset consists of PIK Bonds, then the aggregate Principal Balance of all such
Collateral Assets does not exceed the greater of (x) 7.5 percent of the Collateral Principal Balance
and (y) U.S.$37,500,000;
(4) if such security is a CDO Security, then the aggregate Principal Balance of all such Collateral
Assets does not exceed the greater of (x) 7.5 percent of the Collateral Principal Balance and
(y) U.S.$37,500,000;
(5) with respect to the particular issue of a Collateral Asset with a Moody’s Rating of “Baa3” or
above and an S&P Rating of “BBB-” or above at the time of being acquired, the aggregate
Principal Balance of all Collateral Assets part of the same issue does not exceed the greater of
(x) 1.5 percent of the Collateral Principal Balance and (y) U.S.$7,500,000 provided that with
respect to up to 3 such issues, the aggregate Principal Balance of all Collateral Assets part of the
same issue does not exceed the greater of (x) 2.0 percent of the Collateral Principal Balance and
(y) U.S.$10,000,000;
(6) with respect to the particular issue of a Collateral Asset with a Moody’s Rating of “Ba1” or an
S&P Rating of “BB+” or below by Moody’s or S&P at the time of being acquired, the aggregate
Principal Balance of all Collateral Assets part of the same issue does not exceed the greater of
(x) 1 percent of the Collateral Principal Balance and (y) U.S.$5,000,000, except in the case of a
single Collateral Asset, which does not exceed the greater of (x) 1.3 percent of the Collateral
Principal Balance and (y) U.S.$6,500,000;
(7) if such security is a CMBS Security, then the aggregate Principal Balance of all such Collateral
Assets does not exceed the greater of (x) 30 percent of the Collateral Principal Balance and
(y) U.S.$150,000,000;
(8) if any such Collateral Asset is other than a Residential A Mortgage Security, Residential B/C
Mortgage Security, Home Equity Loan Security, CMBS Security, CDO Security, Automobile
Lease Security, Automobile Loan Security, Credit Card Security, ABS Equipment Leasing
Security, REIT Debt Security, Small Business Loan Security or Student Loan Security, such
securities in the aggregate may not exceed the greater of (x) 5.0 percent of the Collateral Principal
Balance and (y) U.S.$25,000,000;
(9) with respect to the servicer of the Collateral Asset being so acquired or designated, if such servicer
or an affiliate, if such affiliate is required to perform the obligations of the servicer, (i) is rated
(A) “Aa3” or higher or “SQ1” or higher by Moody’s and (B) “AA-” or higher or “Strong” by
S&P, the aggregate Principal Balance of all Collateral Assets serviced by such servicer does not
exceed the greater of (x) 20 percent of the Collateral Principal Balance, and (y) U.S.
$100,000,000; provided, that with respect to Designated Servicers, the aggregate Principal
Balance of all Collateral Assets serviced by such servicer does not exceed the greater of (x) 25.0
percent of the Collateral Principal Balance and (y) U.S.$125,000,000, (ii) (A) is rated (x) “A3” or
higher or “SQ2” or higher by Moody’s and (y) “A-” or higher or “Average” or “higher” by S&P
and (B) does not meet the ratings criteria of clause (i), the aggregate Principal Balance of all
Collateral Assets serviced by such servicer in the Collateral Principal Balance does not exceed the
greater of (x) 12.5 percent of the Collateral Principal Balance and (y) U.S.$62,500,000, (iii) is
New Century Mortgage Corporation, the aggregate Principal Balance of all Collateral Assets
serviced by such servicer in the Collateral Principal Balance does not exceed the greater of (x)
12.5 percent of the Collateral Principal Balance and (y) U.S.$62,500,000, or (iv) does not meet the
ratings criteria for either clause (i), (ii) or (iii), the aggregate Principal Balance of all Collateral
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Assets serviced by such servicer does not exceed the greater of (x) 7.5 percent of the Collateral
Principal Balance and (y) U.S.$37,500,000;
(10) if such Collateral Asset is not (i) issued pursuant to an effective registration statement under the
Securities Act or (ii) privately placed and eligible for resale under Rule 144A or Regulation S
under the Securities Act, then the aggregate Principal Balance of all such Collateral Assets does
not exceed the greater of (x) 10 percent of the Collateral Principal Balance and
(y) U.S.$50,000,000;
(11) if such security is a Cash Asset, then the aggregate Principal Balance of all Cash Assets does not
exceed the greater of (x) 35 percent of the Collateral Principal Balance and (y) U.S.$175,000,000;
(12) if such security is an Interest Only Security, the Aggregate Amortized Cost of all such Collateral
Assets does not exceed the greater of (x) 5.0 percent of the Collateral Principal Balance and
(y) U.S.$25,000,000; provided that Rating Agency Confirmation is required in connection with
any purchase of an Interest Only Security after the Closing Date; provided further, that all Interest
Only Securities must be acquired in accordance with the Interest Only Security Stipulations;
(13) if such security is a Principal Only Security, then the aggregate Principal Balance of all such
Collateral Assets does not exceed the greater of (x) 5.0 percent of the Collateral Principal Balance
and (y) U.S.$25,000,000; provided, that the Rating Agency Confirmation is required in connection
with any purchase of a Principal Only Security after the Closing Date;
(14) (i) if such security is a Step-Down Bond, then the aggregate Principal Balance of all such
Collateral Assets does not exceed the greater of (x) 5.0 percent of the Collateral Principal Balance
and (y) U.S.$25,000,000 and (ii) if such security is a Step-Up Bond, the aggregate Principal
Balance of all such Collateral Assets does not exceed the greater of (x) 5.0 percent of the
Collateral Principal Balance and (y) U.S.$25,000,000;
(15) not more than the greater of (i) 20 percent of the Collateral Principal Balance and
(ii) U.S.$100,000,000 in Collateral Principal Balance may consist of securities from obligors or
issuers that are incorporated or organized in a jurisdiction outside the United States of America or
an Eligible SPV Jurisdiction, of which (a) the aggregate Principal Balance of Collateral Assets
from obligors or issuers that are incorporated in the United Kingdom does not exceed the greater
of (x) 12.5 percent of the Collateral Principal Balance and (y) U.S.$62,500,000; (b) the aggregate
Principal Balance of Collateral Assets from obligors or issuers that are incorporated or organized
in Canada does not exceed the greater of (x) 12.5 percent of the Collateral Principal Balance and
(y) U.S.$62,500,000; and (c) the aggregate Principal Balance of Collateral Assets from obligors or
issuers that are incorporated or organized in any jurisdiction other than the United Kingdom,
Canada, the United States of America or an Eligible SPV Jurisdiction does not for such
jurisdiction exceed the greater of (x) 3 percent of the Collateral Principal Balance and
(y) U.S.$15,000,000; provided that with respect to this clause (c), such issuers or obligors are
Qualifying Foreign Obligors;
(16) if the stated maturity of such security occurs later than the Stated Maturity Date of the Notes, the
aggregate Principal Balance of all such securities does not exceed the greater of (i) 10 percent of
the Collateral Principal Balance and (ii) U.S.$50,000,000; provided that if such security is a
CMBS Security, the stated maturity of such CMBS Security shall be deemed to be the earlier of
(x) the stated maturity of such CMBS Security as specified in the related Underlying Instruments
and (y) the date which is five years after the later of (A) the latest occurring balloon date with
respect to any balloon loan securing such CMBS Security and (B) the last scheduled amortization
date with respect to any other loans securing such CMBS Security;
(17) if such security matures (i) after, but no more than 5 years after, the Stated Maturity Date, then the
aggregate Principal Balance of all such Collateral Assets does not exceed the greater of (x) 10
percent of the Collateral Principal Balance and (y) U.S.$50,000,000; or (ii) more than 5 years after
but not more than 10 years after the Stated Maturity Date, then the aggregate Principal Balance of
all such Collateral Assets does not exceed the greater of (x) 5 percent of the Collateral Principal
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Balance and (y) U.S.$25,000,000; provided that, in each case, the Investment Adviser has an
expectation of receiving final payment on such Collateral Asset prior to the Stated Maturity Date;
provided that if such security is a CMBS Security, the stated maturity of such CMBS Security
shall be deemed to be the earlier of (i) the stated maturity of such CMBS Security as specified in
the related Underlying Instruments and (ii) the date which is five years after the later of (A) the
latest occurring balloon date with respect to any balloon loan securing such CMBS Security and
(B) the last scheduled amortization date with respect to any other loans securing such CMBS
Security;
(18) the Aggregate Attributable Amount of all Collateral Assets related to obligors with respect to
obligations securing Collateral Assets that are incorporated or organized in a country, other than
an Eligible SPV Jurisdiction (if the underlying collateral of such Collateral Assets consists
primarily of obligations of obligors located in the United States and Qualifying Foreign Obligors),
that has a U.S. Dollar sovereign debt rating lower than “Aa2” by Moody’s and “AA” by S&P does
not exceed the greater of (x) 5 percent of the Collateral Principal Balance and
(y) U.S.$25,000,000;
(19) if such Collateral Asset provides for periodic payments of interest in cash less frequently than
quarterly, then the aggregate Principal Balance of all such Collateral Assets does not exceed the
greater of (x) 5 percent of the Collateral Principal Balance and (y) U.S.$25,000,000;
(20) if such Collateral Asset consists of NIM Securities, then (i) the aggregate Principal Balance of all
such Collateral Assets does not exceed the greater of (x) 2.5 percent of the Collateral Principal
Balance and (y) U.S.$12,500,000 and (ii) for each purchase of NIM Securities, the Investment
Adviser has obtained Rating Agency Confirmation and been assigned a recovery rate by S&P for
each such NIM Security;
(21) if such security has a Moody’s Rating of “Ba1” or lower or an S&P Rating of “BB+” or lower,
then the aggregate Principal Balance of all such Collateral Assets does not exceed the greater of
(x) 5 percent of the Collateral Principal Balance and (y) U.S.$25,000,000;
(22) if such security is a REIT Debt Security, then the aggregate Principal Balance of all such securities
does not exceed the greater of (x) 5 percent of the Collateral Principal Balance and
(y) U.S.$25,000,000;
(23) if such security is a CDS Asset referencing a fixed-rate Reference Obligation, then the aggregate
Principal Balance of all such securities does not exceed the greater of (x) 10 percent of the
Collateral Principal Balance and (y) U.S.$50,000,000; and
(24) in no event will the sum of (i) the Aggregate Amortized Cost of all Collateral Assets that are
Interest Only Securities; (ii) the aggregate Principal Balance of all Collateral Assets that are
Principal Only Securities; (iii) the aggregate Principal Balance of all Collateral Assets that are
Step-Down Bonds; (iv) the aggregate Principal Balance of all Collateral Assets that are Step-Up
Bonds; and (v) the aggregate Principal Balance of all Collateral Assets that are NIM Securities,
exceed the greater of (x) 7.5 percent of the Collateral Principal Balance and (y) U.S.$37,500,000.
For purposes of determining compliance with the Portfolio Percentage Limitations, each calculation
made to determine compliance with the Portfolio Percentage Limitations will be made with the assumption
that the Collateral Principal Balance or, until the Effective Date, the aggregate Principal Balance of the
Collateral Assets, will remain unchanged by the sale or termination, entry into or purchase of the applicable
Collateral Asset and Substitute Collateral Asset.
The Coverage Tests
Satisfaction of the Coverage Tests are one of the Reinvestment Criteria for purchasing Collateral
Assets. See “—Substitute Collateral Assets and Reinvestment Criteria.” On the Closing Date, the portfolio
of Collateral Assets and Eligible Investments are expected to satisfy the Coverage Tests. The Coverage Tests
will be calculated on each Measurement Date on and after the Effective Date and will be required to be
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satisfied or if not satisfied immediately prior to such investment, then the applicable ratios will be
maintained or improved with respect to any purchase of or entering into Collateral Assets.
In addition, the Coverage Tests will be used on each Calculation Date while any Rated Notes are
Outstanding to determine whether Principal Prepayments will be required to be made in accordance with the
Priority of Payments on the related Payment Date. See “Description of the Notes—Priority of Payments.”
The Interest Coverage Test for the Class II Notes, the Class III Notes and the Class IV Notes (treated as
a single Class), the Class V Notes and the Class VI Notes is satisfied as of any date of determination when
the Interest Coverage Ratio for such Class is equal to or exceeds the required level set forth below:
Interest Coverage Test
Required Interest Coverage Ratio
Senior Interest Coverage Test
115.0 percent
Class V Interest Coverage Test
109.0 percent
Class VI Interest Coverage Test
105.0 percent
The respective Interest Coverage Ratio is equal to the percentage based on the ratio of (x) to (y), where
(x) is equal to the Interest Coverage Amount and where (y) is an amount equal to (i) in the case of the Senior
Interest Coverage Ratio, the sum of the Periodic Interest for the Class II Notes, the Class III Notes and the
Class IV Notes plus the Supersenior Swap Commitment Fee for the Payment Date immediately following
such date of determination plus the Supersenior Swap Drawing Fee for the Payment Date immediately
following such date of determination, (ii) in the case of the Class V Interest Coverage Ratio, the sum of the
Periodic Interest for the Class II Notes, the Class III Notes, the Class IV Notes and the Class V Notes plus
the Supersenior Swap Commitment Fee for the Payment Date immediately following such date of
determination plus the Supersenior Swap Drawing Fee for the Payment Date immediately following such
date of determination, and (iii) in the case of the Class VI Interest Coverage Ratio, the sum of the Periodic
Interest for the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes and the Class VI
Notes plus the Supersenior Swap Drawing Fee for the Payment Date immediately following such date of
determination plus the Supersenior Swap Commitment Fee for the Payment Date immediately following
such date of determination.
The Par Value Coverage Test for the Class II Notes, the Class III Notes and the Class IV Notes (treated
as a single Class), the Class V Notes or the Class VI Notes is satisfied as of any date of determination when
the Par Value Coverage Ratio, or in the case of the Class VII Interest Diversion Test, the Class VII Interest
Diversion Coverage Ratio, for such Class is equal to or exceeds the required level set forth below:
Par Value Coverage Test and Class VII Interest
Diversion Test
Required Par Value Coverage Ratio
Senior Par Value Coverage Test
108.50%
Class V Par Value Coverage Test
106.90%
Class VI Par Value Coverage Test
102.50%
Class VII Interest Diversion Test
101.80%
Substitute Collateral Assets and Reinvestment Criteria
Sale or termination of Collateral Assets
The Collateral Assets may be retired prior to their respective final maturities due to, among other
things, the existence and frequency of exercise of any optional redemption or principal prepayment features
of Cash Assets or Reference Obligations, as applicable or, in the case of CDS Assets, due to early
terminations or settlements in accordance with their respective terms. In addition, pursuant to the Indenture,
the Investment Adviser may direct the Trustee to sell any:
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(a) Defaulted Security;
(b) Equity Security;
(c) Credit Risk Security; and
(d) Credit Improved Security.
A Credit Improved Security may be sold or terminated during the Reinvestment Period only if in the
Investment Adviser’s judgment (A) such security constitutes a Credit Improved Security and (B) (x) with
respect to Cash Assets and Credit Linked Securities, the resulting Sale Proceeds will be reinvested within 10
Business Days after the sale of such Credit Improved Security in one or more Substitute Collateral Assets
having an aggregate Principal Balance at least equal to 100 percent of the Principal Balance of the Credit
Improved Security and (y) with respect to CDS Assets, the amount of the Principal Balance thereof that has
been sold or terminated will be reinvested within 10 Business Days after the sale or termination of such
Credit Improved Security in one or more Substitute Collateral Assets having an aggregate Principal Balance
at least equal to 100 percent of the Principal Balance of the Credit Improved Security and no amounts will be
payable by the Issuer in connection with such sale or termination (unless an up-front payment will be made
to the Issuer in connection with such reinvestment in one or more Substitute Collateral Assets in an
aggregate amount equal to or greater than any such amounts payable by the Issuer) and, in either case,
resulting in compliance with the Reinvestment Criteria described below and any other criteria specified in
the Indenture.
A Credit Improved Security may be sold or terminated after the Reinvestment Period only if the
Investment Adviser certifies to the Trustee in writing that (i) the Investment Adviser believes that such
security constitutes a Credit Improved Security and (ii) on the date of such sale or termination, in the
Investment Adviser’s judgment, (A) in respect of any Cash Assets or Credit Linked Securities, the Sale
Proceeds from the sale or termination of such Credit Improved Security will be equal to or greater than the
Principal Balance of the Credit Improved Security being sold and (B) with respect to any CDS Assets, no
amounts will be payable by the Issuer in connection with such sale or termination (unless an up-front
payment is made to the Issuer in connection with the reinvestment in one or more Substitute Collateral
Assets in an aggregate amount equal to or greater than any such amounts payable by the Issuer).
A Credit Risk Security may be sold or terminated at any time. During the Reinvestment Period,
following the sale or termination of a Credit Risk Security, the Investment Adviser on behalf of the Issuer
will seek to, no later than 30 Business Days after the sale or termination of such Credit Risk Security,
purchase or enter into one or more Substitute Collateral Assets (i) if the Credit Risk Security was a Cash
Asset or Credit Linked Security, with an aggregate Principal Balance no less than the Sale Proceeds resulting
from such sale and (ii) if the Credit Risk Security was a CDS Asset, with a Principal Balance no less than the
Principal Balance of such CDS Asset (less any CDS Issuer Termination Payments payable in connection
with such sale or termination), in either case, in compliance with the Reinvestment Criteria described below.
A Defaulted Security or an Equity Security may be sold or terminated at any time. During the
Reinvestment Period, if the Coverage Tests were satisfied prior to any such sale or termination, the
Investment Adviser on behalf of the Issuer will seek to, purchase or enter into, prior to the end of the Due
Period in which such Defaulted Security is sold or terminated or within 90 Business Days after the date of
sale or termination, whichever is greater, one or more Substitute Collateral Assets (x) in the case of a Cash
Asset or Credit Linked Security, that are Substitute Collateral Assets with an aggregate Principal Balance at
least equal to the Sale Proceeds resulting from such sale and (y) in the case of a CDS Asset, that are
Substitute Collateral Assets with an aggregate Principal Balance at least equal to the amount of the Principal
Balance thereof that has been sold or terminated (less any CDS Issuer Termination Payments payable in
connection with such sale or termination), in either case in compliance with the Reinvestment Criteria;
provided, however, that Sale Proceeds resulting from the sale or termination of a Defaulted Security may be
reinvested only if the Coverage Tests are satisfied before such sale and after giving effect to such proposed
transaction and provided further, that after the first Due Period following the Reinvestment Period, neither
the Issuer nor the Investment Adviser acting on behalf of the Issuer will direct the Trustee to apply the Sale
Proceeds of a Defaulted Security or an Equity Security to purchase or enter into any Substitute Collateral
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Assets (except to the extent of any such Sale Proceeds remaining at the end of the Reinvestment Period that
may be applied in the following Due Period). The Issuer may hold a Defaulted Security for up to three years
after such security becomes a Defaulted Security so long as the total amount of Defaulted Securities held for
greater than one year does not exceed the greater of 5 percent of the Collateral Principal Balance or
$25,000,000. The Investment Adviser, on behalf of the Issuer, shall seek to sell or terminate Defaulted
Securities within three years of becoming Defaulted Securities and to sell or terminate Defaulted Securities
held for greater than one year that are in excess of 5 percent of the Collateral Principal Balance. The
Principal Balance of each Defaulted Security that has not been sold or terminated within three years after
becoming a Defaulted Security shall be zero and the Principal Balance of Defaulted Securities held for more
than one year in excess of 5 percent of the Collateral Principal Balance shall be conclusively deemed to be
zero.
Any Equity Security must be sold within one year after receipt and any Equity Security that constitutes
Margin Stock must be sold within 45 days after the later of receipt or of its becoming Margin Stock.
Notwithstanding the foregoing, Equity Securities that are received upon the exercise of convertible bonds
must be sold within five Business Days after receipt (or within five Business Days after such later date as
such Equity Security may first be sold in accordance with its terms and applicable law).
Provided that no Event of Default has occurred and is continuing, the Investment Adviser, on behalf of
the Issuer, may, during the Reinvestment Period, direct the Trustee to sell or terminate, and the Trustee will
sell or terminate, Collateral Assets that are not Defaulted Securities, Equity Securities, Credit Risk Securities
or Credit Improved Securities (each such sale, a “Discretionary Sale”) but only so long as (i) the aggregate
Principal Balance of all such Collateral Assets sold in a given annual period (with the first such annual
period beginning on the Closing Date) does not exceed the greater of (A) 15 percent of the Collateral
Principal Balance at the beginning of that annual period or in the case of the calendar year in which the
Closing Date occurs, as of the Closing Date and (B) U.S.$75,000,000, (such limit, the “Discretionary Sale
Limit”), (ii) the rating of the Class II Notes has not been reduced by one or more rating subcategories from
that in effect on the Closing Date or withdrawn by Moody’s (unless it has been reinstated to the rating
assigned on the Closing Date), the rating of the Class III Notes has not been reduced by two or more rating
subcategories from that in effect on the Closing Date or withdrawn by Moody’s (unless it has been reinstated
to the rating assigned on the Closing Date), the rating of the Class IV Notes has not been reduced by two or
more rating subcategories from that in effect on the Closing Date or withdrawn by Moody’s (unless it has
been reinstated to the rating assigned on the Closing Date), the rating of the Class V Notes has not been
reduced by two or more rating subcategories from that in effect on the Closing Date or withdrawn by
Moody’s (unless it has been reinstated to the rating assigned on the Closing Date), the rating of the Class VI
Notes has not been reduced by two or more rating subcategories from that in effect on the Closing Date or
withdrawn by Moody’s (unless it has been reinstated to the rating assigned on the Closing Date) or the rating
of the Class VII Notes has not been reduced by two or more rating subcategories from that in effect on the
Closing Date or withdrawn by Moody’s (unless it has been reinstated to the rating assigned on the Closing
Date); provided, however that this subclause (ii) may be disregarded if the Holders of a majority of the
Controlling Class have consented to such Discretionary Sale or Moody’s notifies the Investment Adviser that
this condition (specified in subclause (ii) above) need not be satisfied for all future sales, subject to any
further rating category reductions (without the reinstatement to the applicable level or levels as provided
above with respect to the Class or Classes of Notes to which such reductions apply), in which event a new
notice must be delivered, and (iii) (x) with respect to Cash Assets and Credit Linked Securities, the Sale
Proceeds resulting from such sale will be reinvested in one or more Substitute Collateral Assets in
compliance with the Reinvestment Criteria within 10 Business Days of the sale of such Collateral Assets and
the Principal Balance of the Substitute Collateral Assets purchased with such Sale Proceeds will be equal to
or greater than 100 percent of the Principal Balance of the Collateral Asset sold and (y) with respect to CDS
Assets, the amount of the Principal Balance thereof that has been sold or terminated will be reinvested in one
or more Substitute Collateral Assets in compliance with the Reinvestment Criteria within 10 Business Days
of the sale or termination of such CDS Asset and the Principal Balance of the Substitute Collateral Assets
entered into will be equal to or greater than 100 percent of the Principal Balance of the CDS Asset sold or
terminated, and no amounts are payable by the Issuer in connection with such sale or termination (unless an
up-front payment will be made to the Issuer in connection with the reinvestment in one or more Substitute
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Collateral Assets in an aggregate amount equal to or greater than any such amounts payable by the Issuer).
There will be no Discretionary Sales after the Reinvestment Period.
With respect to a Sale of a CDS Asset to which the Initial CDS Counterparty is the counterparty, the
Issuer may sell such CDS Asset by novation to one of the dealers set out in a pre-agreed list between the
Issuer and the Initial CDS Counterparty or, subject to certain requirements set out in the Master Agreement
between the Issuer and the Initial CDS Counterparty, to any other dealer in the credit default swap markets
referencing residential mortgage-backed securities, unless the Initial CDS Counterparty is unable to trade
with such dealer at the time of such proposed novation for credit, litigation or internal policy reasons relating
to such dealer (or any Affiliate of such dealer) or the type of transaction subject to transfer (and not
predominantly to the related CDS Asset thereof or any hedge thereof).
In the event of a Redemption or Auction Call Redemption of the Notes or liquidation of the Collateral
after an Event of Default and acceleration of the Notes, the Collateral Assets may be sold or terminated
without regard to the foregoing limitations; provided that the procedures for such sales and redemption are
followed. See “Description of the Notes—Redemption Procedures.”
Notwithstanding the foregoing provisions, (A) if an Event of Default shall have occurred and be
continuing, no Collateral Asset may be acquired unless it was the subject of a commitment entered into by
the Issuer prior to the occurrence of such Event of Default and (B) from and after the first date on which the
Discretionary Sale Limit is 0 percent, no Collateral Asset may be acquired using proceeds from
Discretionary Sales unless it was the subject of a commitment entered into by the Issuer prior to the first date
on which the Discretionary Sale Limit became 0 percent.
The Investment Adviser will no later than the Calculation Date immediately preceding the Payment
Date coinciding with the Stated Maturity Date of the Notes, on behalf of the Issuer, instruct the Trustee to,
and the Trustee will, sell for settlement in immediately available funds no later than two Business Days
before the Stated Maturity Date any Collateral Assets scheduled to mature after the Stated Maturity Date of
the Notes.
Reinvestment Criteria
During the Reinvestment Period (and, as provided in the Priority of Payments, the first Due Period
thereafter), Collateral Principal Collections (including Sale Proceeds and Designated CDS Reserve Account
Proceeds) and Synthetic Notional Proceeds may be reinvested in substitute Collateral Assets if, after such
reinvestment (which shall be deemed to be the date on which the Issuer enters into commitments to purchase
or enter into such Substitute Collateral Assets):
(i)
in the case of reinvestment in CDS Assets, the CDS Asset Balance would not exceed the CDS
Asset Ceiling after giving effect to the entry into such reinvestment, and
(ii)
the Collateral Quality Tests, the Portfolio Percentage Limitations and the Coverage Tests
(collectively the “Reinvestment Criteria”) are satisfied, or if immediately prior to giving effect to
such reinvestment, any of the Reinvestment Criteria were not satisfied, no such Reinvestment
Criteria that was unsatisfied shall be further from being satisfied after giving effect to such
proposed reinvestment and no such Reinvestment Criteria that was satisfied shall be unsatisfied
after giving effect to such reinvestment; provided, however, that Sale Proceeds or Synthetic
Notional Proceeds resulting from the sale or termination of a Defaulted Security may be reinvested
only if the Coverage Tests are satisfied before and after giving effect to such proposed
reinvestment.
In the case where the Investment Adviser sells or terminates a Credit Risk Security and temporarily
invests the Sale Proceeds thereof in Eligible Investments pending purchase of or entry into one or more
Substitute Collateral Assets, compliance with each of the Collateral Quality Tests (other than the S&P CDO
Monitor Test) shall in all cases be measured by comparing such Collateral Quality Test as calculated before
the sale or termination of the Credit Risk Security and after the purchase of or entry into such Substitute
Collateral Asset. Compliance with the S&P CDO Monitor Test is not required in connection with the sale or
termination of a Credit Risk Security and the reinvestment of the Sale Proceeds thereof.
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No purchase of or entry into Collateral Assets may be made unless certain procedures relating to the
perfection of the Trustee’s security interest in the Substitute Collateral Assets have taken place, there are no
Used Supersenior Swap Amounts and no Event of Default shall have occurred and be continuing.
Measurement of the degree of compliance with the Reinvestment Criteria will be required (i) on the
Effective Date, (ii) after the Effective Date, on each day the Issuer commits to purchase or enter into a
Collateral Asset, (iii) on the last Business Day of each month with respect to which a Monthly Report is
required to be delivered, (iv) any day on which a Collateral Asset becomes a Defaulted Security and (v) each
Calculation Date (any such date, a “Measurement Date”).
During the Reinvestment Period, the Investment Adviser will reinvest Collateral Principal Collections,
to the extent permitted or required as described above, in Substitute Collateral Assets promptly following
such sale or termination. If, however, at the time of sale or termination of the applicable Collateral Assets,
the Investment Adviser is not required to or has not identified Substitute Collateral Assets, Collateral
Principal Collections may be reinvested in Eligible Investments in the Collection Account on a temporary
basis, pending reinvestment in Substitute Collateral Assets. Such Eligible Investments will not constitute
Collateral Principal Collections that must be applied in accordance with the Priority of Payments if such sale
or termination has occurred (i) within 10 Business Days prior to the Calculation Date for a Credit Improved
Security, (ii) within 30 Business Days prior to the Calculation Date for a Credit Risk Security, (iii) within 90
Business Days prior to the Calculation Date for a Defaulted Security so long as the Coverage Tests were
satisfied immediately prior to the sale or termination of such Defaulted Security and (iv) within five
Business Days prior to the Calculation Date for a Collateral Asset sold or terminated pursuant to a
Discretionary Sale.
Notwithstanding the foregoing provisions, but subject to the immediately following paragraph, if any
Reinvestment Criteria would not be satisfied upon the proposed purchase of or entry into a single Collateral
Asset but such Reinvestment Criteria would be satisfied upon the proposed purchase of or entry into a
number of Collateral Assets (including such single Collateral Asset), testing the Reinvestment Criteria as
described below in subclause (b), then such Reinvestment Criteria will be deemed to be satisfied for all such
Collateral Assets if the following conditions are met: (a) such Collateral Assets have been acquired or
entered into or will be acquired or entered into by the Issuer in accordance with a Trading Plan; (b) as
evidenced by an officer’s certificate of the Investment Adviser delivered to the Trustee on or prior to the
earliest event specified in such Trading Plan, such Reinvestment Criteria are expected to be satisfied as of
the trade date relating to the last Collateral Asset that will be purchased or entered into pursuant to such
Trading Plan or, if not expected to be satisfied as of such trade date, are expected to be maintained or
improved as of such trade date; and (c) the ratings by Moody’s on the Class II Notes are not one or more
rating subcategories, and the ratings by Moody’s on the Class III Notes, the Class IV Notes, the Class V
Notes, the Class VI Notes and the Class VII Notes are not two or more rating subcategories, below the
applicable ratings in effect on the Closing Date nor, in any such case, withdrawn by Moody’s.
If a Trading Plan that was implemented results in the deterioration in the Issuer’s level of compliance
with any of the Reinvestment Criteria or is unable to achieve the results expected, other than due to (x) a
failure of a counterparty or issuer to comply with any of its payment or delivery obligations to the Issuer or
any other default by such counterparty or issuer for reasons beyond the control of the Issuer or any other
terms that were agreed with the Issuer at or prior to the commencement of such Trading Plan, (y) an error or
omission of an administrative or operational nature made by any bank, broker-dealer, clearing corporation or
other similar financial intermediary holding funds, securities or other property directly or indirectly for the
account of the Issuer or (z) changes to the ratings, payments of principal and reset interest rates on the
Collateral Assets following the implementation of the Trading Plan, the Issuer will be required to give
prompt written notice to the Rating Agencies and will be prohibited from entering into any additional
Trading Plan; provided that if the Issuer, or the Investment Adviser on its behalf, can show that it acted in
good faith in its entry into such Trading Plan, the Issuer will be able to enter into future Trading Plans for so
long as the aggregate Principal Balance of the Collateral Assets expected to be acquired or entered into
under such future Trading Plan does not exceed 5 percent of the Collateral Principal Balance; provided,
further, that if the Issuer fails to satisfy the Reinvestment Criteria twice upon the implementation of a
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Trading Plan, the Issuer will be prohibited from entering into any further Trading Plans notwithstanding that
each such plan was entered into in good faith.
“Trading Plan” means any trading plan (a) pursuant to which the Investment Adviser determines that
all trades contemplated thereby will be entered into within 10 Business Days, (b) specifying certain
(i) amounts received or expected to be received as Collateral Principal Collections in connection with such
trading plan and the Collateral Assets producing such Collateral Principal Collections and (ii) Collateral
Assets acquired or intended to be acquired as a result of such trading plan, (c) that the Investment Adviser
determines can be executed according to its terms and (d) as to which the aggregate Principal Balance of the
Collateral Assets expected to be acquired or entered into thereunder constitute no more than 10 percent of
the Collateral Principal Balance. The time period for such trading plan shall be measured from the earliest
trade date to the latest trade date of any such Collateral Assets.
If the Issuer has previously entered into a commitment to acquire a Substitute Collateral Asset for
inclusion in the Collateral, then the Issuer need not comply with any of the Reinvestment Criteria on the date
of such acquisition if the Issuer complied with each of the Reinvestment Criteria on the date on which the
Issuer entered into such commitment.
The Collection Account
On or prior to the Closing Date, the Trustee will establish a trust account in the United States that will
be designated as the collection account (the “Collection Account”) in the name of the Trustee for the benefit
and on behalf of the Secured Parties and over which the Trustee will have exclusive control and the sole
right of withdrawal and into which the Trustee will from time to time make deposits in accordance with the
Indenture.
All distributions on the Collateral Assets and any proceeds received from the disposition of any
Collateral Assets (unless simultaneously reinvested as described herein) will be remitted to the Collection
Account and will be available, together with reinvestment earnings thereon, for application to the payment of
the amounts set forth under “Description of the Notes—Priority of Payments” and for the acquisition of
Substitute Collateral Assets under the circumstances and pursuant to the requirements described herein and
set forth in the Indenture. In addition, it is anticipated as of the date hereof that approximately
U.S.$16,300,000 of the net proceeds of the issuance of the Notes will be deposited in the Collection Account
on the Closing Date and invested in Eligible Investments pending the purchase of or entering into additional
Collateral Assets during the Ramp-Up Period and any proceeds remaining after the Effective Date will be
applied as Collateral Principal Collections.
Amounts received in the Collection Account during a Due Period, and amounts received in prior Due
Periods and retained in the Collection Account, will be invested in Eligible Investments maturing no later
than the Business Day immediately preceding the next Payment Date, unless otherwise permitted under the
Indenture. All proceeds from the Eligible Investments will be retained in the Collection Account until
applied in accordance with the Priority of Payments unless used to purchase Substitute Collateral Assets in
accordance with the Reinvestment Criteria, or used as otherwise permitted under the Indenture. See “—
Substitute Collateral Assets and Reinvestment Criteria” and “Description of the Notes—Priority of
Payments.”
The Issuer will not have any legal, equitable or beneficial interest in the Collection Account other than
in accordance with the Priority of Payments. The Collection Account will remain at all times with an
Eligible Financial Institution.
The Closing Date Expense Account
On or prior to the Closing Date, the Trustee will establish and maintain a segregated non-interest
bearing trust account which will be designated as the Closing Date Expense Account. Any amount deposited
in the Closing Date Expense Account will be used for the payment of fees and expenses accrued as of the
Closing Date at any time or transferred to the Collection Account at the direction of the Investment Adviser
at any time on or prior to the first Calculation Date after the Closing Date.
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On the first Calculation Date, the Trustee will transfer all funds remaining in the Closing Date Expense
Account into the Collection Account, and such deposited funds will be deemed to be Collateral Principal
Collections.
The Issuer will direct the Trustee to invest all funds on deposit in the Closing Date Expense Account in
Eligible Investments and any investment earnings on such Eligible Investments will be credited to (and any
losses will be debited to) the Closing Date Expense Account.
Interest Reserve Account
On or prior to the Closing Date, the Trustee will establish a trust account in the United States which
will be designated as the interest reserve account (the “Interest Reserve Account”) in the name of the
Trustee for the benefit and on behalf of the Secured Parties and over which the Trustee will have exclusive
control and the sole right of withdrawal. The Issuer will, by Issuer Order, direct the Trustee to deposit
Collateral Interest Collections received on Collateral Assets (other than any PIK Bonds) that pay interest less
frequently than quarterly (“Non-Quarterly Collateral Assets”) in the following manner during such Due
Period:
(a) with respect to any such Non-Quarterly Collateral Asset that pays interest semi-annually, (i) 50
percent of any scheduled distribution of interest received during such Due Period will remain on
deposit in the Collection Account for application as Collateral Interest Collections in accordance
with the Priority of Payments on the immediately following Payment Date and (ii) the remaining
50 percent 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 Collection Account for application as Collateral Interest Collections in accordance with the
Priority of Payments on the related Payment Date; and
(b) with respect to any such Non-Quarterly Collateral Asset that pays interest annually, (i) 25 percent
of any scheduled distribution of interest received during such Due Period will remain on deposit in
the Collection Account for application as Collateral Interest Collections in accordance with the
Priority of Payments on the immediately following Payment Date and (ii) the remaining 75
percent of such scheduled distribution of interest will be deposited to the Interest Reserve Account
and will be withdrawn from such account in three equal installments on the last day of the three
following Due Periods for deposit to the Collection Account for application as Collateral Interest
Collections in accordance with the Priority of Payments on the related Payment Date.
Amounts deposited to the Interest Reserve Account will be invested by the Trustee as so directed by the
Issuer (or the Investment Adviser on behalf of the Issuer) in Eligible Investments maturing no later than the
first Business Day immediately preceding the next Calculation Date, unless otherwise permitted under the
Indenture.
The Issuer will not have any legal, equitable or beneficial interest in the Interest Reserve Account other
than in accordance with the Priority of Payments. The Interest Reserve Account will remain at all times with
an Eligible Financial Institution.
Expense Reserve Account
On or prior to the Closing Date, the Trustee will establish a trust account in the United States that will
be designated as the expense reserve account (the “Expense Reserve Account”) in the name of the Trustee
for the benefit and on behalf of the Secured Parties and over which the Trustee will have exclusive control
and the sole right of withdrawal. On the Closing Date, the Trustee will deposit, from amounts provided by or
on behalf of the Issuer, an amount equal to U.S.$30,000 in the Expense Reserve Account. On each Payment
Date (other than the Stated Maturity Date), pursuant to the Priority of Payments, the Trustee will deposit in
the Expense Reserve Account, from available amounts in the Collection Account, the amount needed to
bring the amount on deposit therein equal to U.S.$30,000 (unless the Investment Adviser in its sole
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discretion directs that a lesser amount be deposited into the Expense Reserve Account). See “Description of
the Notes—Priority of Payments.”
Amounts received in the Expense Reserve Account during a Due Period, and amounts received in prior
Due Periods and retained in the Expense Reserve Account, will be invested by the Trustee as so directed by
the Issuer (or the Investment Adviser on behalf of the Issuer) in Eligible Investments, unless otherwise
permitted under the Indenture. The Expense Reserve Account will remain at all times with an Eligible
Financial Institution. The Issuer will not have any legal, equitable or beneficial interest in the Expense
Reserve Account other than in accordance with the Priority of Payments.
The Trustee may, from time to time and at any time, withdraw amounts from the Expense Reserve
Account to pay accrued and unpaid administrative expenses of the Co-Issuers. On the Business Day prior to
the Initial Payment Date, all amounts in excess of U.S.$30,000 remaining on deposit in the Expense Reserve
Account will be deposited by the Trustee into the Collection Account as Collateral Principal Collections for
application in accordance with the Priority of Payments on the Initial Payment Date. All amounts remaining
on deposit in the Expense Reserve Account at the time when substantially all of the Issuer’s assets have been
sold or otherwise disposed of will be deposited by the Trustee into the Collection Account as Collateral
Interest Collections for application in accordance with the Priority of Payments on the immediately
succeeding Payment Date. See “Description of the Notes—Priority of Payments.”
The Trustee, for the benefit of the Holders of the Class P Notes, will establish or will cause to be
established, a segregated non-interest bearing trust account (the “Class P Treasury Strip Component
Account”), bearing a designation clearly indicating that the funds deposited therein and any securities or
investments credited thereto are the property of the Trust held for the benefit of the Class P Noteholders. The
Class P Treasury Strip Component Account will be under the sole dominion and control of the Trustee for
the benefit of the applicable Class P Noteholders. The Class P Treasury Strip Component Account and all
funds credited thereto are owned by the Issuer for the benefit of the Class P Noteholders. All amounts paid
on any Payment Date with respect to the Class P Subordinated Note Component will be deposited into the
Class P Treasury Strip Component Account on behalf of, and for the benefit of, the Holder of the Class P
Notes. Funds standing to the credit of the Class P Treasury Strip Component Account that constitute Class P
Treasury Strip Collateral will be available for application to the amounts due to the Holders of the Class P
Notes as described in the Indenture. Funds standing to the credit of the Class P Treasury Strip Component
Account that constitute amounts paid with respect to the Class P Subordinated Note Component will be
available for distribution to the Class P Notes on the Payment Date on which such funds were credited to the
Class P Treasury Strip Component Account in accordance with the terms of the Indenture.
Hedge Agreements
After the Closing Date, subject to certain conditions specified in the Indenture, the Issuer may from
time to time enter into interest rate swap agreements and/or interest rate cap agreements and/or Deemed
Floating Asset Hedges (together with the related ISDA Master Agreement, schedules, confirmations and
related credit support documents, each, a “Hedge Agreement”) with one or more counterparties (each, a
“Hedge Counterparty”) for the primary purpose of managing the Issuer’s interest rate risk exposure
relating to the variable rate of interest applicable to the Rated Notes, increase the notional amount of an
existing Hedge Agreement, sell all or a portion of any Hedge Agreement, terminate such Hedge Agreement
or reduce the notional amount of any Hedge Agreement; provided that Rating Agency Confirmation has
been received. Depending on prevailing interest rates at the time of any such termination or notional amount
reduction, the Issuer could be required to make substantial payments to Hedge Counterparties. Any Hedge
Agreement entered into by the Issuer following the Closing Date will be required to be entered into on
customary market terms as determined by the Investment Adviser, acting on behalf of the Issuer, subject to
the specific requirements of the Indenture and may not provide for up-front payments, non-periodic
payments (except upon a default or termination event), unequal periodic payments (except as a result of a
floating rate index risk or LIBOR), or unequal notional amounts or differing termination dates for the two
parties thereunder; provided that the Issuer will be permitted to pay an up-front payment to a Hedge
Counterparty in an amount not to exceed the termination payment, if any, payable to the Issuer pursuant to
the related terminated Hedge Agreement. Any up-front payment in excess of the termination payment, if
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any, payable to the Issuer pursuant to the related terminated Hedge Agreement will require the consent of the
Supersenior Swap Counterparty, which consent will not be unreasonably withheld or delayed.
The amounts payable to the Hedge Counterparties will be paid in accordance with the Priority of
Payments and will be limited to the amounts payable under the Priority of Payments. The claims of each
Hedge Counterparty (if there is more than one) will rank equally and pari passu with the claims of other
Hedge Counterparties entitled to receive payments at the same level of priority within the Priority of
Payments. Any Hedge Agreement may provide for termination in whole or in part following payment in full
of the Rated Notes to the extent of funds available in accordance with the Priority of Payments on each
Payment Date.
If the ratings of a Hedge Counterparty (or the related guarantor, if any) are reduced to below the
minimum required level under the Hedge Agreement, the Hedge Counterparty (or the guarantor, if any) will
be required to post credit support in order to collateralize its obligations to the Issuer unless it designates a
guarantor with the required ratings or assigns the Hedge Agreement to an eligible assignee. If a Hedge
Counterparty’s ratings are withdrawn or are reduced further, the Hedge Counterparty is expected to be
required to either designate a guarantor with the required ratings or to assign the Hedge Agreement to an
eligible assignee.
Each Hedge Agreement will be required to provide for termination, and the Issuer may terminate a
Hedge Agreement, whether or not the Notes have been paid in full prior to such termination, if any of the
following, among other things, occurs: (i) certain events of bankruptcy, insolvency, conservatorship,
receivership or reorganization of the Issuer or the applicable Hedge Counterparty, (ii) failure on the part of
the Hedge Counterparty or the Issuer to make any payment or delivery under such Hedge Agreement when
due subject to any applicable grace period, (iii) a change in law making it illegal for either the Issuer or the
Hedge Counterparty to be party to, or perform an obligation under, such Hedge Agreement and (iv) the
failure of the Hedge Counterparty to take any of the required actions within the required time frame upon a
downgrade of its ratings to below the required ratings. Each Hedge Agreement may be terminated pursuant
to its terms upon an optional redemption of the Notes or liquidation of the Collateral following an
acceleration of maturity of the Notes after an Event of Default. Notwithstanding the foregoing, the Hedge
Agreement will not be permitted to be terminated as the result of an Event of Default or any occurrence that,
with notice or the lapse of time or both, would become an Event of Default unless any acceleration of
maturity of the Notes resulting from the Event of Default is no longer permitted to be rescinded pursuant to
the Indenture.
Each Hedge Agreement will provide that upon occurrence of a termination event, the Issuer and the
Hedge Counterparty will settle their payment obligations as provided in the Hedge Agreement and a
termination payment may be payable by the Issuer to the Hedge Counterparty or by the Hedge Counterparty
to the Issuer. All payments by the Issuer will be paid on a Payment Date in accordance with the Priority of
Payments and, if the Hedge Counterparty is the defaulting party, or sole affected party, will be paid on a
subordinated basis. Any termination payment payable by the Hedge Counterparty to the Issuer may be
applied by the Issuer to enter into a substitute hedge agreement, but such payment may not be sufficient to
enable the Issuer to do so. The Investment Adviser may cause the Issuer to enter into a substitute hedge
agreement on similar terms to the extent that the Issuer is able to enter into such an agreement. However, an
Event of Default under the Indenture will not occur if a Hedge Agreement is terminated. If the Issuer is
unable to obtain a substitute hedge agreement, interest due on the Notes will be paid from amounts received
on the Collateral Assets without the benefits of a Hedge Agreement or a substitute hedge agreement.
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USE OF PROCEEDS
General
The proceeds from the issuance of the Notes will be used by the Issuer on the Closing Date to
(i) purchase or otherwise acquire or commit to purchase on the Closing Date of a portfolio of Collateral
Assets that will, as of the Closing Date, satisfy the Eligibility Criteria described herein and have a Principal
Balance of approximately U.S.$450,000,000 (ii) make a deposit to the Expense Reserve Account in an
amount of approximately U.S.$30,000, (iii) acquire the CDS Reserve Investments with a Principal Balance
equal to U.S.$0 and make a deposit to the CDS Reserve Account in an amount equal to U.S.$0 and will use
such funds to acquire the CDS Reserve Investments during the Reinvestment Period, (iv) pay certain fees
and expenses payable in connection with the offering of the Notes, including fees to the Managers and the
Placement Agents and the up-front payment to the Supersenior Swap Counterparty, (v) undertake certain
related activities and (vi) to the extent not already repaid, pay any amounts due to the Warehouse Provider
under the warehousing documents. The remaining net proceeds of approximately U.S.$16,300,000 will be
deposited in the Collection Account on the Closing Date and invested in Eligible Investments pending the
purchase of or entering into additional Collateral Assets during the Ramp-Up Period. The Investment
Adviser expects that, by the Closing Date, the Issuer will have purchased or entered into, or will have
entered into binding agreements to purchase or enter into, a portfolio of Collateral Assets selected by the
Investment Adviser representing at least 90 percent (by aggregate Principal Balance) of the Expected
Effective Date Balance. See “Security for the Notes—Collateral Assets.” The remaining portion of the
Expected Effective Date Balance is expected to be purchased during the Ramp-Up Period.
Ramp-Up Period; Acquisition of Additional Collateral Assets
The Issuer will purchase or enter into, or to enter into binding agreements to purchase or enter into, at
the direction of the Investment Adviser, Collateral Assets satisfying the Eligibility Criteria such that the
aggregate Principal Balance of all Collateral Assets owned by the Issuer at the end of the Ramp-Up Period is
at least equal to the Expected Effective Date Balance and, as of the Effective Date, will satisfy the Coverage
Tests, the Collateral Quality Tests and the Portfolio Percentage Limitations.
Within eight Business Days following the Effective Date, the Issuer will request each Rating Agency
rating the Rated Notes to confirm that it has not reduced or withdrawn the rating it assigned to such Class of
Rated Notes on the Closing Date (a “Rating Confirmation”). In connection with obtaining the Rating
Confirmation from each Rating Agency, the Investment Adviser, on behalf of the Issuer, may propose a
reasonable plan to the Rating Agencies (a “Proposed Plan”) to receive such Rating Confirmation. If the
Issuer does not obtain such Rating Confirmation within 30 days following the Effective Date or such later
date that such Rating Agencies may determine (a “Rating Confirmation Failure”), on each Payment Date
thereafter, in accordance with the Priority of Payments, the Issuer is required to (a) pay the Used Supersenior
Swap Amount, then deposit funds to the Class I Reserve Account to the extent necessary to reduce the
Available Supersenior Swap Amount to zero, and then pay principal of the Class II Notes, the Class III
Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and the Class VII Notes, sequentially in
order of seniority and/or (b) apply Synthetic Notional Proceeds to reduce the Available Supersenior Swap
Amount to the extent of the Available Synthetic Notional Proceeds Amount, in accordance with the
Synthetic Applications Sequence, in the amounts necessary for each of S&P and Moody’s to confirm their
respective ratings of such Rated Notes assigned on the Closing Date or, if earlier, until the outstanding
principal balance of each Class of Rated Notes and the Available Supersenior Swap Amount is reduced to
zero. See “Description of the Notes—Mandatory Redemption of the Rated Notes Upon Rating Confirmation
Failure.”
Within 15 Business Days after the Effective Date, the Issuer will be required to obtain and deliver to
the Trustee and each Rating Agency an accountants’ certificate from the Independent Accountants
(a) confirming the information with respect to each Collateral Asset as of the end of the Ramp-Up Period
and the information provided by the Issuer with respect to every other asset included in the Collateral, by
reference to such sources as will be specified therein; (b) certifying as of the end of the Ramp-Up Period the
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procedures applied and the associated findings with respect to (1) the Coverage Tests, (2) the Portfolio
Percentage Limitations and (3) the Collateral Quality Tests (other than the Asset Correlation Test and the
S&P CDO Monitor Test); and (c) specifying the procedures undertaken by them to review data and
computations relating to the foregoing statement.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The Stated Maturity Date of the Class II Notes, Class III Notes, the Class IV Notes, the Class V Notes,
the Class VI Notes, the Class VII Notes and the Subordinated Notes is the Payment Date occurring in
August of 2046. The actual maturities of the Notes are generally expected to occur prior to the Stated
Maturity Date.
Prepayment. The mortgage loans underlying the RMBS Securities and the CMBS Securities may be
subject to prepayment. Prepayments on mortgage loans are affected by a number of factors. If prevailing
rates for similar mortgage loans fall below the interest rates on such mortgage loans, prepayment rates would
generally be expected to increase. Conversely, if prevailing rates for similar mortgage loans rise above the
interest rates on such mortgage loans, prepayment rates would generally be expected to decrease. Certain of
the commercial mortgage loans underlying the CMBS Securities may have lockout periods and/or
defeasance periods during which prepayment is prohibited or require prepayment penalties or premiums or
defeasance features to be paid upon a prepayment. However, certain of such mortgage loans permit
prepayment after such lockout periods or the periods for such prepayment penalties or premiums have
expired. Prepayments on a mortgage loan are also affected by the value of the related mortgaged property,
the borrower’s equity in the mortgaged property, the financial circumstances of the borrower, fluctuations in
the business operated by the borrower on the mortgaged property, competition, general economic conditions
and other factors. However, there can be no assurance that CMBS Securities or RMBS Securities will prepay
at any particular rate.
Some or all of the loans, bonds or other financial assets underlying Structured Finance Securities may
be prepaid at any time. Prepayments on loans, bonds or other financial assets are affected by a number of
factors, including interest rate movements, general economic conditions and other factors. Defaults on and
liquidations of the loans, bonds or financial assets underlying certain of the Collateral Assets may also lead
to early repayment thereof. The Investment Adviser will have the right to direct the sale or termination of
Collateral Assets that become Defaulted Securities or Credit Risk Securities. In addition, the REIT Debt
Securities included in the Collateral may provide for redemption at the option of the issuer that could result
in the early repayment thereof. The existence and frequency of such prepayments, optional redemptions,
defaults and liquidations will affect the average lives of, and credit support for, the Notes.
Weighted Average Life. Weighted 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 weighted average life of the Notes of each Class will be determined by the amount and
frequency of principal payments, which are dependent upon, among other things, the sale or termination of
Collateral Assets and the amount of payments received at or in advance of the scheduled maturity of the
Collateral Assets and, in the case of the RMBS Securities, the CMBS Securities or the ABS Securities, their
underlying mortgage loans, loans, bonds or other financial assets (in each case, whether through sale,
maturity, redemption, prepayment, default or other liquidation or disposition). The actual weighted average
lives and actual maturities of the Notes will be affected by the financial condition of the Reference Entities,
the CDS Counterparties and the obligors under or the issuers of the Cash Assets and will be affected by the
terms of the CDS Assets and by the characteristics of the Cash Assets and the Reference Obligations,
including the existence and frequency of exercise of any prepayment, optional redemption or amortization
features, the redemption price, the actual default rate and the actual level of recoveries on any Defaulted
Securities, the frequency of tender or exchange offers for the Cash Assets and Reference Obligations and
any sales and terminations of and reinvestment in Collateral Assets. Any disposition or termination of a
Collateral Asset and/or purchase of or entering into a Substitute Collateral Asset may change the
composition and characteristics of the Collateral Assets and the rates of payment thereon, and, accordingly,
may affect the actual weighted average lives of the Notes. The rate of future defaults and the amount and
timing of any cash realization from Defaulted Securities and Credit Risk Securities also will affect the
maturity and weighted average lives of the Notes. The weighted average life of the Notes of each Class may
also vary depending on whether or not the Notes are redeemed in a Redemption or an Auction Call
Redemption or in connection with a Special Amortization or failure to satisfy any Coverage Test. The
weighted average lives of the Notes are expected to be shorter, and may be substantially shorter, than the
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Stated Maturity Date of the Notes. The amount of Collateral Assets purchased or entered into on or prior to
the Closing Date, the amount and timing of the purchase of or entering into additional Collateral Assets
during the Ramp-Up Period and the Reinvestment Period and the ability of the Investment Adviser to sell or
terminate Collateral Assets and reinvest Collateral Principal Collections in the manner described under
“Security for the Notes—Substitute Collateral Assets and Reinvestment Criteria” will also affect the
weighted average lives of the Notes. The portfolio of Collateral Assets will change from time to time as a
result of sales and terminations of Collateral Assets and reinvestment of Collateral Principal Collections and
Synthetic Notional Proceeds as described herein.
Yield. The yield to maturity of the Notes of each Class will be affected by the timing of purchases of
and entering into Collateral Assets during the Ramp-Up Period and the Reinvestment Period and by the rates
of repayment of the Collateral Assets and the timing of reinvestment in Substitute Collateral Assets and the
rates available at the time of reinvestment as well as by the amounts outstanding from time to time under the
Supersenior Swap, the timing of any Special Amortization or any redemption of the Notes in a Redemption
or an Auction Call Redemption. The yield to maturity of the Notes of each Class also may be affected by the
rates of delinquencies and defaults on the Collateral Assets or of Reference Obligations, sales and
terminations of Collateral Assets and purchases of and entering into Substitute Collateral Assets having
different scheduled payments and payment characteristics and by the effects of the Coverage Tests on
payments of principal of the Rated Notes pursuant to the Priority of Payments. The yield to investors in the
Notes of any Class may be adversely affected to the extent that the Co-Issuers incur any significant
unexpected expenses not absorbed by Notes of another, more subordinated Class.
Although a variety of factors may be expected to cause an early repayment of the Notes in whole or in
part, in the absence of such factors the Issuer is not contractually obligated to repay the Notes on any date
prior to the Stated Maturity Date. The receipt of principal payments on the Notes at rates slower than the
rates that were anticipated by investors purchasing Notes at a discount will result in an actual yield on such
Notes that is lower than anticipated by such investors.
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THE INVESTMENT ADVISER
The information appearing in this section has been prepared by the Investment Adviser and has not
been independently verified by the Co-Issuers or the Trustee. Accordingly, notwithstanding anything to the
contrary herein, none of the Co-Issuers, the Managers, the Placement Agents or the Trustee assumes any
responsibility for the accuracy, completeness or applicability of such information. The Issuer takes
responsibility for accurately reproducing the information provided by the Investment Adviser.
General
TCW Asset Management Company will act as Investment Adviser to the Issuer (in such capacity,
together with any successor, the “Investment Adviser”) and in such capacity will be responsible for certain
administrative and investment advisory functions relating to the Collateral Assets, the Hedge Agreements
and other assets included in the Collateral. The Investment Adviser is a registered investment adviser
regulated by the U.S. Securities and Exchange Commission.
TCW Asset Management Company is a California corporation with its principal offices at 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017. TCW Asset Management Company was
organized in 1971 and is a wholly owned subsidiary of The TCW Group, Inc., whose subsidiaries, including
Trust Company of the West, provide a variety of trust, investment management and investment advisory
services. TCW Asset Management Company and its affiliated companies (collectively, “TCW”) manage
assets of more than 1,450 institutional and private clients. Assets under management or committed to
management by TCW totaled approximately $130 billion as of March 31, 2006.
As of March 31, 2006, TCW employed over 610 individuals, including nearly 390 investment and
administrative professionals. TCW operates out of offices in Los Angeles, New York and Houston.
In July 2001, The TCW Group, Inc. sold a majority of its interests to Société Générale Asset
Management, S.A. (“SG Asset Management”), a subsidiary of Société Générale, S.A. (“Soc Gen”), one of
the world’s leading financial service companies. SG Asset Management is a leading asset manager serving
private and corporate clients worldwide.
Pursuant to the terms of the Investment Advisory Agreement, the Investment Adviser will determine
the specific Collateral Assets to be purchased or sold, or entered into or terminated, by the Issuer and the
terms of such purchases and sales or executions and terminations, monitor the Collateral Assets included in
the Collateral from time to time and provide the Issuer with certain information with respect to the
composition and characteristics of such Collateral Assets, any dispositions or tenders of such Collateral
Assets and the reinvestment of the proceeds of any such dispositions in Substitute Collateral Assets.
Accounts for which the Investment Adviser acts as investment adviser may at times own a portion of the
Notes. See “Risk Factors—Potential Conflicts of Interest Involving the Investment Adviser; Dependence on
Investment Adviser and Key Personnel; Removal of Investment Adviser.”
In accordance with the Reinvestment Criteria and other requirements set forth in the Investment
Advisory Agreement and the Indenture, the Investment Adviser will instruct the Trustee in writing with
respect to any disposition or tender, or execution or termination, of a Collateral Asset included in the
Collateral and investment in Substitute Collateral Assets.
Key Personnel
Set forth below is the information regarding the backgrounds and experience of certain persons who are
currently employed by the Investment Adviser and who are expected to be responsible for substantially all of
the investment activities of the Issuer. There can be no assurance that such persons will continue to be
employed by TCW.
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Portfolio Management
Jeffrey E. Gundlach
Chief Investment Officer – TCW Group
Group Managing Director – Mortgage-Backed Securities,
Mr. Gundlach is a member of the Board of Directors of the TCW Group, Inc., and oversees fixed income
investments as Chairman of the TCW Multi-Strategy Fixed Income Committee. He joined TCW in 1985.
He worked in the Finance Department as Senior Loss Reserve Analyst, responsible for investment discount
and funding strategies. He is a graduate of Dartmouth College summa cum laude holding BA in
Mathematics and Philosophy. He attended Yale University as a Ph.D. candidate in Mathematics.
Louis C. Lucido, Group Managing Director – Credit Mortgage Group
Prior to joining TCW in 2001, Mr. Lucido was the Chief Investment Officer for Delphi Financial Group
(DFG) responsible for the asset/liability management of the firm, oversight and management of the firm’s
$2.3 billion investment portfolio. Before DFG, Mr. Lucido was the Chief Operating Officer, Managing
Director & Corporate Secretary for Hyperion Capital Management, an MBS, CMBS & ABS investment
management company, and was responsible for managing the daily operation of the firm, which had $5.5
billion of assets under management. While at Hyperion, Mr. Lucido was also a member of the Resolution
Trust Advisory Committee, responsible for the conservatorship and ultimate liquidation of the Franklin
Savings Association. Mr. Lucido is Chairman, American Securitization Forum CDO Collateral Managers
Subforum and Guest lecturer at Yale University School of Management. Mr. Lucido has an MBA in
Management and Finance from New York University.
Philip A. Barach, Group Managing Director – Mortgage-Backed Securities
Mr. Barach is the Co-Founder of the MBS Group and joined TCW in 1987 after being associated with Sun
Life Insurance Company, where he was Senior Vice President and Chief of Investments. Previously, he
served as head of Fixed Income Investments for the State of California Retirement System where he issued
the first private label CMO. Mr. Barach attended the Hebrew University of Jerusalem, where he received a
BA in International Relations and an MBA in Finance.
Eric Arentsen, Managing Director – Mortgage-Backed Securities
Prior to joining TCW in 1991, Mr. Arentsen was with William Simon Group where he was head of
mortgage-backed securities analysis for their Fixed Income Group. Before that, Mr. Arentsen was with
Kidder, Peabody & Co. designing computer simulations to analyze fixed income returns and identify trading
opportunities. Mr. Arentsen also worked with Aerojet ElectroSystems where he designed missile tracking
systems for the Strategic Defense Initiative. He holds a BS in Mathematics from the University of California
at Riverside.
Joel A. Damiani, CFA, Managing Director – Mortgage-Backed Securities
Prior to joining TCW in 1999, Mr. Damiani was a Senior Vice President and head of mortgage investments
at Back Bay Advisors. Before that, he was an Assistant Vice President and Portfolio Manager for The
Putnam Companies. Mr. Damiani holds both a BS in Molecular Biology and an MS in Finance from the
University of Wisconsin. He is a CFA charterholder.
Claude B. Erb, CFA, Managing Director – Multi-Strategy Fixed Income
Prior to joining TCW in 2001, Mr. Erb was in charge of equity portfolio management, international
subsidiary portfolio management, and enterprise risk management for Liberty Mutual Insurance Company.
Previously, he managed international equity and fixed income funds, as well as balanced and asset allocation
funds, and served as Director of Equity and Fixed Income Research for First Chicago. Before joining First
Chicago, he served as Deputy Chief Investment Officer for Trust Services of America. Earlier in his career,
he was an Equity Research Analyst with Weiss, Peck and Greer and Trust Company of the West. Mr. Erb
received his BA in Economics from the University of California at Berkeley and his MBA from the
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Anderson Graduate School of Management at the University of California at Los Angeles. He is a CFA
charterholder.
Vincent A. Fiorillo, Managing Director – Credit Mortgage Group
Prior to joining TCW, Mr. Fiorillo was an Executive Director with Morgan Stanley. He brings 28 years of
mortgage, asset-backed and commercial mortgage experience to the TCW team. Responsibilities at Morgan
Stanley included developing mortgage origination providers into the MSAC Conduit and expanding the
firm’s activity in both the asset-backed and commercial mortgage backed securities markets. Prior to joining
Morgan Stanley, Mr. Fiorillo was the Co-Head, Managing Director of the Mortgage Backed Securities
Group at Smith Barney. Before being recruited to Smith Barney he was the head of marketing and sales of
the Mortgaged Backed Securities Group at Merrill Lynch. Mr. Fiorillo attended the City University of New
York and Marist College.
Joseph J. Galligan, CFA, Managing Director – Mortgage-Backed Securities
Prior to joining TCW in 1991, Mr. Galligan was a Vice President at Smith Barney in the Mortgage-Backed
Specialist Group. Prior to that, he spent five years at First Boston as Vice President in the same area. In
addition, Mr. Galligan spent over three years at Scudder Stevens & Clark as a Portfolio Manager/Trader. Mr.
Galligan holds a BS in Economics with a concentration in Finance from the Wharton School of Business at
the University of Pennsylvania. He is a CFA charterholder.
Roland K.W. Ho, CFA, Managing Director – Credit Mortgage Group
Prior to joining TCW in 2001, Mr. Ho was the Director and Head of Research at Hyperion Capital
Management where he was responsible for the research, design, development and implementation of
Hyperion’s analytical system for fixed income securities. These included MBS prepayment modeling,
CMBS cash flow modeling, and term structure modeling. Mr. Ho holds a BA and an MBA in electrical
science from Cambridge University in England. He also studied for his doctorate in Mathematics at the
Imperial College, University of London. He is a CFA charterholder.
Jennifer A. Jacob, CFA, CIC, Managing Director – Mortgage-Backed Securities
Prior to joining TCW in 1993, Ms. Jacob was a Senior Portfolio Manager with CMB Investment Counselor
where she was responsible for over $1 billion in fixed income assets. Prior to CMB, she was a Portfolio
Manager with Transamerica and SunAmerica Life Insurance Companies and was responsible for the
management of multi-billion dollar fixed income portfolios invested in mortgage-backed securities and high
grade corporate bonds. She is a Phi Beta Kappa graduate from the University of California at Los Angeles,
where she received a BA in Anthropology magna cum laude. She also holds an MBA in Finance from the
University of Southern California. Ms. Jacob is a CFA charterholder and a Chartered Investment Counselor.
Samuel M. Garza, Senior Vice President – Credit Mortgage Group
Mr. Garza joined TCW in 2000 as a Mortgage-Backed Securities Analyst. Prior to joining TCW in 2000,
Mr. Garza worked at Union Bank of California in the Commercial Banking Group where he was involved
with corporate loan underwriting. Mr. Garza joined the Credit-Mortgage Backed Securities Group in 2001.
Mr. Garza holds a BA in Business Economics from the University of California at Santa Barbara.
George P. Kappas, Ph.D., Senior Vice President – Credit Mortgage Group
Mr. Kappas joined TCW in 2003 after working for 2 years at Countrywide on residential MBS structuring
where he specialized in S&P, Moody’s stress models and NIM structuring. Previously he worked as an
analyst/trader for Delphi Financial Group, Eagle Capital Management and Cargill Financial. Mr. Kappas
holds an MS and DES in Engineering and Applied Science from Columbia University in New York.
David J. Kennedy, CFA, Senior Vice President – Fixed Income/Credit Mortgage Group
Mr. Kennedy joined TCW in 1989 as an Account Manager. In 1990, he joined the Investment Grade Fixed
Income Group. In 1994, he assumed the management responsibilities for the Galileo Money Market Fund.
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He joined the Credit Mortgage Group in 2006. Mr. Kennedy holds a BS in Business Administration from
Colorado State University and an MBA from California University at Long Beach. He is a CFA
charterholder.
Sonia C. Mangelsdorf, Senior Vice President – Structured Products
Ms. Mangelsdorf joined TCW in 1999. Previously, she worked at Bankers Trust New York in Sales and
Trading of Australian and New Zealand fixed income securities and currencies. Prior to that, she worked at
Bankers Trust Australia Ltd. in Sydney, as an Assistant Portfolio Manager, responsible for the BTAL Cash
Management Trusts and the Short-term Managed Funds. Ms. Mangelsdorf holds a BS in Economics from
The University of Sydney, Australia.
Jonathan R. Marcus, Senior Vice President – Credit Mortgage Group - Systems
Mr. Marcus joined TCW in 2000 as a Systems Analyst in the Information Services department. He served as
a team lead in the enterprise upgrade to the Windows 2000 operating system, as well as providing technical
assistance for the Mortgage-Backed Securities group. He joined the Credit Mortgage-Backed Securities
group in 2001 and was promoted to Senior Vice President in 2006. Mr. Marcus has his BS in Mathematics
from the University of California at Santa Barbara.
Sajjad H. Naqvi, Senior Vice President – Credit Mortgage Group
Prior to joining TCW in 2002, Mr. Naqvi was responsible for credit analysis at Hyperion Capital
Management, which included ABS, CMBS and corporate securities, where he held the title of Assistant Vice
President. Prior to Hyperion, Mr. Naqvi was an Associate at Smith Barney where he performed equity
research with an Institutional Investor ranked analyst. Mr. Naqvi holds two undergraduate degrees: a BA in
Political Science from the University of Winnipeg, and a BS in Finance from St. John’s University in New
York. He also holds an M.BA from the Lubin School of Business at Pace University in New York.
Susan Nichols, Senior Vice President – Credit Mortgage Group
Prior to joining TCW, Susan held a position as the Investment Tax and Accounting Manager at Reliance
Standard Life Insurance for 13 years. In that capacity, Susan interfaced with numerous departments and was
involved in the development of a bank loan participation program with Bank United in Texas, was
responsible for maintaining the NAIC relationship and coordinated risk based capital requirements with the
investment portfolio strategy to maintain agency ratings. Susan has extensive experience in insurance,
investment and regulatory accounting. Susan is a Phi Beta Kappa, magna cum laude graduate of Lehigh
University, with a BS degree in Accounting. She is also a Certified Public Accountant and Fellow of the Life
Management Institute.
Cris Santa Ana III, Senior Vice President – Mortgage-Backed Securities
Mr. Santa Ana joined TCW as a supervisor in the operations department in 1994. Mr. Santa Ana was
promoted to Assistant Vice President in 1995, overseeing operations for TCW’s Mortgage-Backed Securities
Group which included accounting, reporting, compliance, trading support and system development. In 1997
Mr. Santa Ana was promoted to Vice President while overseeing operations for TCW’s Domestic Fixed
Income products. In 2000 Mr. Santa Ana joined the MBS team assuming responsibility for managing the
MBS analysts, structured product modeling and system development. Mr. Santa Ana was promoted to Senior
Vice President in 2001. He received his Bachelor of Arts in Economics from the University of California at
Los Angeles.
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Gregory A. Uythoven, CFA, Senior Vice President – Multi-Strategy Fixed Income
Mr. Uythoven joined TCW in 1989 as an Account Manager. He subsequently joined the Mortgage-Backed
Securities Group in 1993. In 1997, he assumed full responsibility of portfolio analytics for TCW’s MultiStrategy Fixed Income product. Mr. Uythoven holds a BA in Quantitative Economics from the University of
California at San Diego and an MBA from the Anderson School of Management at the University of
California at Los Angeles. He is a CFA charterholder.
Shirley Zheng, CFA, Senior Vice President – Credit Mortgage Group
Ms. Zheng joined TCW’s Investment Grade Fixed Income in 2000. Later she joined the Credit MortgageBacked Securities group in 2004. Prior to TCW, Ms. Zheng was with Merrill Lynch, where she worked as a
Senior Credit Analyst specializing in the credit analysis of basic industrial companies. Previously, she was
employed as a Credit Analyst with ING Barings conducting credit analysis on energy and mining companies.
Ms. Zheng received her BA from Nankai University in China, her MA in American History from the
University of Cincinnati and her Master of International Affairs (concentration in International Banking and
Finance) from Columbia University. She is a CFA charterholder.
Vince Chan, CFA, Vice President – Credit Mortgage Group
Ms. Chan joined TCW in 2006 after working at Standard & Poor’s over the last two-and-a-half years. Based
in Hong Kong, she was a senior credit analyst responsible for credit analysis and surveillance in relation to
ABS, RMBS, CMBS and CDO transactions originated in the Greater China region, Southeast Asia and
South Korea. Prior to that, Ms. Chan had spent several years in Hong Kong and the U.S., engaging in
various positions at Deloitte & Touche, PricewaterhouseCoopers and the Hong Kong Monetary Authority. In
those positions, she has gained experience in auditing, banking operations, central banking and structured
finance. Ms. Chan has graduated with High Distinction from the University of Toronto with a Bachelor’s
degree of Commerce (B.Comm.) in accounting and economics. She also holds an MBA degree in finance
and strategy from the School of Management of Yale University. She is a Certified Public Accountant and a
CFA charterholder.
Stephanie Y. M. Cheung, Vice President – Credit-Mortgage Group
Prior to joining TCW in 2005, Ms. Cheung was a Finance Associate for Robertson Properties Group (an
affiliate of Pacific Theatres Corporation), where she focused on land acquisitions and retail development
analysis. Prior to that, she worked at CB Richard Ellis Investors, as a Senior Financial Analyst, responsible
for due diligence and acquisitions of commercial real estate on behalf of public pension funds. Prior to CB
Richard Ellis Investors, Ms. Cheung worked at Jones Lang LaSalle as a Financial Analyst in the Capital
Markets Group. Ms. Cheung is a Phi Kappa Phi, Magna Cum Laude graduate from the University of
Southern California, holding a BS degree in Business Administration with a concentration in Finance and
Real Estate. Ms. Cheung also holds an MBA in Finance from Yale University and is presently a Level III
candidate in the CFA Program.
Beth Clarke, Vice President – Mortgage-Backed Securities – Structured Products
Prior to joining TCW in 2006, Ms. Clarke worked as an associate attorney in the area of securitization and
structured finance at McKee Nelson LLP. Ms. Clarke was counsel to issuers, underwriters and asset
managers in CDO transactions, focusing primarily on synthetic CDOs referencing ABS securities and cash
CLOs. Prior to that, she worked as an associate attorney in the structured finance group at Fried, Frank,
Harris, Shriver & Jacobson. Ms. Clarke holds a BA in political science from Boston College and a JD from
The George Washington University Law School.
Emily B. Davidson, Vice President – Mortgage-Backed Securities
Prior to joining TCW in 1993, Ms. Davidson was the assistant to the Director of Marketing for The Pilgrim
Group for three years where she was involved in the launching of over a dozen mutual funds. Prior to that,
she worked in the Syndicated Department at Drexel Burnham Lambert where she was responsible for
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closing private placements. Previously, she worked for Hellman and Friedman in San Francisco. Ms.
Davidson holds a BA from The University of California at Santa Barbara.
Kerry A. Eschwie, Vice President – Mortgage-Backed Securities – Structured Products
Prior to joining TCW, Ms. Eschwie worked as an asset-backed securities credit analyst in the Capital
Markets Group at Nord/LB. Previously, she worked for Princeton Advisory Group as a consultant on the
collateral manager’s ABS CDO. Prior to consulting, Ms. Eschwie spent nearly eight years as an analyst in
the CDO group at Moody’s Investors Service. Ms. Eschwie holds a BS in Finance from Fordham University
in New York, as well as an MBA in Finance from New York University.
Qun Ju, Vice President – Credit Mortgage Group
Prior to joining TCW in 2005, Ms. Ju worked at Hyperion Capital Management for seven years as a Senior
Quantitative Strategist. Her responsibilities focused on security analysis and portfolio strategy development
in the product areas including mortgage-backed securities, subprime mortgage-backed securities, assetbacked securities, commercial mortgage-backed securities, and collateralized debt obligations. Ms. Ju holds
a BA in Computer Science and an MS in Applied Mathematics from Peking University. In addition, Ms. Ju
holds an MA in Mathematics from the Johns Hopkins University and a PhD in Computer Science from
Brandeis University.
Daniel J. Kale, Vice President – Credit Mortgage Group
Mr. Kale joined TCW in 1994 as a Systems Analyst. He later joined the Credit Mortgage Group in 2006. Mr.
Kale holds a BS in Management Information Systems from Ambassador University and an MBA in Finance
from the University of Southern California.
Jeffrey M. Mayberry, CFA, Vice President – Mortgage-Backed Securities
Mr. Mayberry joined TCW in 2000 as an analyst in the Mortgage-Backed Securities Department specializing
in systems monitoring and development. He was later promoted to Assistant Vice President in 2002 while
developing proprietary “real-time” asset and liability valuations for TCWs’ MBS portfolio and fund
monitoring systems. In 2004, Mr. Mayberry was promoted to Vice President serving as the Senior MBS
Analyst responsible for day-to-day operations of MBS database system and analytics. Mr. Mayberry holds a
BS in Engineering from Harvey Mudd College and an MS in Financial Engineering from the Peter F.
Drucker Graduate School of Management at Claremont Graduate University. He is a CFA charterholder.
Jeffrey J. Sherman, CFA, Vice President – Multi-Strategy Fixed Income
Mr. Sherman joined TCW in 2001 as a Performance Attribution Analyst. He later joined the Multi-Strategy
Fixed Income group in 2005. He previously was a statistics and mathematics instructor at both the
University of the Pacific and Florida State University. Mr. Sherman holds a BS in Applied Mathematics
from the University of the Pacific and an MS in Financial Engineering from the Claremont Graduate
University. He is a CFA charterholder.
Dolores Talamantes, Vice President – Mortgage-Backed Securities
Ms. Talamantes joined TCW in 1989, bringing with her ten years of experience in the mortgage-backed
securities field. She served as head of West Coast Operations with Salomon Brothers for six years, where
she was involved in establishing settlement and clearing conventions for the first mortgage-backed securities
created. Subsequent to Salomon Brothers, she was the Mortgage-Backed Securities Specialist at Coast
Federal Savings Bank, where she was head of the Treasury Services Department responsible for over $1
billion in assets.
Barbara R. VanEvery, Vice President – Mortgage-Backed Securities
Ms. VanEvery joined TCW in 1993. She was promoted to Assistant Vice President in 1997 and to her
current position in 2002. Previously, she worked with Provident Life and Accident Insurance, where she
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specialized in client relations and account analysis. Ms. VanEvery holds a BA in Political Science from
California State University at San Diego.
Sriram Balasubramanian, Assistant Vice President – Credit Mortgage Group - Systems
Prior to joining TCW in 2004, Mr. Balasubramanian was a lead web engineer at Goyogi.com where he
developed specialized search engines, and backend database applications. Mr. Balasubramanian holds a BS
in Computer Science from San Jose State University, where he was awarded the 2001 Physics Award for
outstanding performance in physics coursework.
Helen Chen, Assistant Vice President – Credit Mortgage Group
Ms. Chen joined TCW in 2003 as an analyst in the multi-strategy fixed income group. She was later
promoted to her current position as Assistant Vice President. Ms. Chen joined the CMBS group in 2005.
Prior to that, Ms. Chen was working for Houlihan Lokey Howard and Zukin as a Financial Analyst, where
she specialized in financial restructuring. Ms. Chen is a Magna Cum Laude graduate from the University of
California at Los Angeles with a BA in Business Economics and a minor in Accounting.
Morris Chen, Assistant Vice President – Credit Mortgage Group
Mr. Chen joined TCW in 2003. He was later promoted to Assistant Vice President in 2006. Mr. Chen
graduated from the University of California, Riverside with a BS in Business Administration and a
concentration in Business Development and Finance.
Loren D. Fleckenstein, Assistant Vice President – Credit Mortgage Group
Mr. Fleckenstein joined TCW as an Assistant Vice President in Corporate Communications in 2003. He later
joined the Credit Mortgage Group as a Research Analyst in 2005. Prior to TCW, he served as Editorial
Manager at Houlihan Lokey Howard & Zukin, an international investment bank. He previously worked as a
financial journalist, including at Investor’s Business Daily. Mr. Fleckenstein earned a BA degree in
Journalism and French from Indiana University in 1984 and studied at the Institut d’Etudes Politiques in
Paris (Certificat d’études politiques, 1982).
Andrew Hsu, Assistant Vice President – Credit Mortgage Group
Mr. Hsu joined TCW in 2002 as an analyst in the mortgage-backed securities group. He was later promoted
to his current position as Assistant Vice President. Mr. Hsu joined the CMBS group in 2005. Prior to joining
TCW, Mr. Hsu was working with InteCap as a Strategic/Economic Consultant. Mr. Hsu obtained his BS in
Finance from the University of Southern California and is presently a Level III candidate in the CFA
Program.
Eric Huynh, Assistant Vice President – Credit Mortgage Group
Prior to joining TCW in 2004, Mr. Huynh was a software engineer for Logic Links, Inc., where he designed
and built a national hotel reservation and billing system. Mr. Huynh holds a BS in Computer Science &
Engineering from the University of California at Los Angeles and a BS in Computer Information Systems
from the University of Saigon.
George T. Jikovski, Assistant Vice President – Mortgage-Backed Securities
Prior to joining TCW in 2003, Mr. Jikovski was a Financial Analyst at Houlihan Lokey Howard & Zukin’s
Financial Restructuring Group, where he focused on corporate finance and M&A transactions for both
public and private companies. Previously, Mr. Jikovski was an Investment Banking Analyst for Bear,
Stearns & Co. Inc. Mr. Jikovski is a Phi Beta Kappa and Summa Cum Laude graduate from the University
of California, Los Angeles with a BA in Business-Economics and a minor in Accounting.
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Vitaliy Liberman, CFA, Assistant Vice President – Mortgage-Backed Securities
Prior to joining TCW in 2003, Mr. Liberman worked for ABN AMRO/LaSalle Bank as a CDO Analyst in
the trust department where he specialized in reverse engineering of CDO transactions. Mr. Liberman
graduated from California State University at Northridge and is a CFA charterholder.
Ken K. Shinoda, Assistant Vice President – Credit Mortgage Group
Mr. Shinoda joined TCW in 2003 as an intern for the CMBS group, where he was later hired to his current
position in 2005. Mr. Shinoda graduated from the University of Southern California with a BS in Finance
and an emphasis in International Relations.
Karen Tsang, Assistant Vice President – Mortgage-Backed Securities Trading
Prior to joining TCW in 2003, Ms. Tsang worked for UBS International, Inc. as an assistant to the Financial
Advisors in the International division, where she specialized in client service. Ms. Tsang graduated from
California State University at Los Angeles with a BS in Finance and a minor in Economics.
Nanlan Ye, Assistant Vice President – Mortgage-Backed Securities Trading
Ms. Ye joined TCW in 2003. She was promoted to her current position as Assistant Vice President in 2006.
Ms. Ye is a Summa Cum Laude graduate from California State University, Los Angeles with a BS in
Computer Information Systems and a Minor in Finance. Ms. Ye also holds an MA degree in Economics
from California State University, Los Angeles.
Katherine Ali, Senior Analyst – Credit Mortgage Group
Ms. Ali joined TCW in 2004 as a Client Relations Coordinator in the Marketing Department. She later
joined the Credit-Mortgage Backed Securities group in 2005 as an analyst. Ms. Ali holds a BS in Economics
with a concentration in Management from the Wharton School at the University of Pennsylvania.
Kate Hua, Senior Analyst – Credit Mortgage Group
Ms. Hua joined TCW in 2005 as an intern for the CDO Equity Fund in the New York office and later
transferred to her current position in Los Angeles. Ms. Hua earned a BE in Polymer Science and Engineering
at Dalian University of Technology in China, an MS in Chemistry at Rensselaer Polytechnic Institute in New
York, and a second MS in Operations Research with a concentration in Financial Engineering at Columbia
University in New York. She passed Level III of the CFA program in June 2005.
Erik Karas, Senior Systems Analyst – Credit Mortgage Group - Systems
Mr. Karas joined TCW in 2004 as intern for the CMBS group, where he was later hired into his current
position as a Systems and Securities Analyst. Mr. Karas holds a BS in Computer Science from the
University of Colorado at Boulder. Mr. Karas holds an MS degree in Economics with an emphasis in
Financial Economics from California State Polytechnic University at Pomona.
Minet Mucka, Analyst – Mortgage-Backed Securities
Ms. Mucka joined TCW in 2005. She earned her BA in International Business from Monterrey Institute of
Technology and Superior Studies (ITESM) and her MS in Finance at the Graduate School of Business and
Leadership of Monterrey Tech (EGADE) in Monterrey, Mexico. Ms. Mucka previously worked at ITESM in
accounting and at EGADE in financial research for almost two years. She also holds an MS in Financial
Engineering from the Peter F. Drucker Graduate School of Management at Claremont Graduate University.
Shelby Pollard, Analyst – Credit Mortgage Group
Ms. Pollard joined TCW in 2005 as an intern for the Credit Mortgage Group, where she was later hired to
her current position in 2006. Ms. Pollard holds a BS in Finance and an emphasis in Entrepreneurship from
the University of Southern California’s Marshall School of Business.
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Allyson Pfeifer, Senior Analyst – Credit Mortgage Group
Ms. Pfeifer joined TCW in 2005. Previously, Ms. Pfeifer was an Undergraduate Peer Advisor in the
Economics Department at the University of California, Santa Barbara, as well as a Teaching Assistant in the
Dance Department. Ms. Pfeifer holds a BA in Economics and Math from the University of California, Santa
Barbara along with a minor in Professional Writing.
Guillermo Serrano, Mortgage Analyst – Mortgage-Backed Securities
Mr. Serrano joined TCW in 2004 as an intern for the MBS group. He was later hired to his current position
in 2005. Mr. Serrano graduated from California State Polytechnic University at Pomona and is currently a
Level II candidate in the CFA program.
Marie Thomasson, Analyst – Multi-Strategy Fixed Income
Ms. Thomasson joined TCW in 2005 as an intern for the MBS group. She was later hired into the Multi
Strategy group as an analyst. Ms. Thomasson graduated from the University of California, Los Angeles with
a BS in Applied Mathematics.
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THE INVESTMENT ADVISORY AGREEMENT
Certain advisory, administrative, and monitoring functions relating to the Collateral will be performed
by the Investment Adviser under the Investment Advisory Agreement. Pursuant to the terms of the
Investment Advisory Agreement and, as applicable, the Indenture, the Investment Adviser will, on behalf of
the Issuer, select the portfolio of Collateral and Eligible Investments, and will, on behalf of the Issuer,
instruct the Trustee with respect to any disposition of Collateral. The Investment Adviser will also provide
the Issuer and the Trustee with certain information on a regular basis, with respect to the composition and
characteristics of the Collateral, any disposition or tender of Collateral, the reinvestment of the proceeds of
any such disposition in Eligible Investments and the retention of the proceeds of any such disposition or the
application thereof toward the purchase of Substitute Collateral Assets. In addition, pursuant to the terms of
a collateral administration agreement dated as of the Closing Date (the “Collateral Administration
Agreement”), among the Issuer, Investors Bank & Trust Company, as collateral administrator (in such
capacity, the “Collateral Administrator”), and the Investment Adviser, the Issuer will retain the Collateral
Administrator to prepare certain reports and information with respect to the Collateral.
The Indenture and the Investment Advisory Agreement place significant restrictions on the Investment
Adviser’s ability to advise the Issuer to buy and sell securities, and execute or terminate Synthetic Assets, for
inclusion in the Collateral, and the Investment Adviser is subject to compliance with such restrictions.
Accordingly, during certain periods or in certain specified circumstances, the Issuer may be unable to buy or
sell securities, or enter into or terminate a Synthetic Asset or to take other actions that the Investment
Adviser might consider in the best interests of the Issuer and the Noteholders.
The Investment Adviser and any of its Affiliates may engage in other businesses and may furnish
investment management and advisory services to related entities whose investment policies may differ from
or be similar to those followed by the Investment Adviser on behalf of the Issuer, as required by the
Indenture. The Investment Adviser and its Affiliates will be free, in their sole discretion, to make
recommendations to others, or effect transactions on behalf of themselves or others which may be the same
as or different from those effected with respect to the Collateral securing the Notes or the Reference
Obligations. In addition, the Investment Adviser and its Affiliates may, from time to time, cause, direct or
recommend that their clients buy or sell securities or enter into or terminate a credit default swap of the same
or different kind or class of the same issuer or with the same counterparty as securities or assets that are part
of the Collateral or used as Reference Obligations subject to the CDS Assets, and that the Investment
Adviser directs to be purchased, entered into, sold or terminated on behalf of the Issuer. See “Risk Factors—
Potential Conflicts of Interest Involving the Investment Adviser; Dependence on Investment Adviser and
Key Personnel; Removal of Investment Adviser.”
The Investment Adviser will be deemed to have satisfied certain requirements in clause (ii) of the
proviso in the definition of Eligibility Criteria if the Investment Adviser acquires Collateral Assets in
compliance with Annex A of the Investment Advisory Agreement.
The Investment Adviser will cause any acquisition or sale or execution or termination by the Issuer of
Collateral to be conducted on an arm’s length basis and, if effected with the Investment Adviser or a person
affiliated with the Investment Adviser, or any fund or account for which the Investment Adviser or an
affiliate thereof acts as investment adviser, on terms no less favorable to the Issuer than would be the case if
such person were not so affiliated; provided that the Investment Adviser shall be permitted to acquire an
obligation or enter into a CDS Asset (which obligation or CDS Asset must satisfy the Eligibility Criteria) on
behalf of the Issuer to be included in the Collateral from the Investment Adviser’s Permitted SG Affiliates as
principal or as agent or from funds or accounts for which any Permitted SG Affiliate acts as investment
adviser or to sell an obligation to the Investment Adviser’s Permitted SG Affiliates as principal or agent or to
funds or accounts for which any Permitted SG Affiliate acts as investment adviser; provided, further, that the
Investment Adviser may acquire or enter into an obligation (which obligation must satisfy the Eligibility
Criteria) on behalf of the Issuer to be included in the Collateral from itself or from any of its non-Permitted
SG Affiliates as principal or as agent, or from funds or accounts for which the Investment Adviser or any of
the Investment Adviser’s non-Permitted SG Affiliates acts as investment adviser or sell an obligation on
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behalf of the Issuer to itself, or to any of its non-Permitted SG Affiliates as principal or as agent or to funds
or accounts for which the Investment Adviser or any of the Investment Adviser’s non-Permitted SG
Affiliates acts as an investment adviser, provided that any such acquisition or disposition must be ratified or
approved by the Issuer’s Board of Directors.
Compensation, Indemnification and Expenses
As compensation for the performance of its obligations under the Investment Advisory Agreement, the
Investment Adviser will receive an investment advisory fee (the “Investment Advisory Fee”), payable in
arrears on each Payment Date or, to the extent there are not sufficient funds available therefor on such
Payment Date, on a subsequent Payment Date, in each case in accordance with the Priority of Payments. The
Investment Advisory Fee comprises (x) a senior fee (the “Senior Investment Advisory Fee”), for any
Payment Date during the period commencing on the Closing Date and thereafter, in an amount equal to 0.20
percent per annum of the Fee Basis Amount for such Payment Date, (y) a subordinated fee (the
“Subordinate Investment Advisory Fee”) with respect to any Payment Date, in an amount equal to 0.20
percent per annum of the Fee Basis Amount for such Payment Date and (z) an incentive fee (the “Incentive
Investment Advisory Fee”) with respect to any Payment Date, in an amount equal to (i) 25% of Collateral
Interest Collections (if any) remaining after the payment of all amounts payable through the first clause of
(xxiii), of the section entitled "Description of the Notes—Priority of Payments—Collateral Interest
Collections" and (ii) 25% of the Collateral Principal Collections (if any) remaining after the payment of all
amounts payable through the first clause of (xvii)) of the section entitled "Description of the Notes—Priority
of Payments—Collateral Principal Collections"; provided, that, in the case of the Incentive Investment
Advisory Fee, no amount will be due or payable on any Payment Date (including any date on which the
Subordinated Notes are redeemed) until the Noteholders of the Subordinated Notes have received an Internal
Rate of Return of at least 18% per annum for the period from the Closing Date up to and including such
Payment Date (and after taking into account any payments made or to be made in respect of the
Subordinated Notes on such Payment Date and all prior Payment Dates in accordance with the Priority of
Payments, but only to the extent of funds available for such purpose in accordance with the Priority of
Payments). The Senior Investment Advisory Fee will be payable prior to any payments to Noteholders of
any Class on each Payment Date. The Subordinate Investment Advisory Fee will be payable prior to
payments with respect to the Subordinated Notes. Pursuant to the Investment Advisory Agreement, the
Investment Adviser may rebate a portion of its Investment Advisory Fee to any account which owns a Note
and for which the Investment Adviser acts as investment adviser.
All fees will be payable to the Investment Adviser only to the extent that funds are available for such
purpose in accordance with the Priority of Payments. The Senior Investment Advisory Fee and Subordinated
Investment Advisory Fee will be calculated based on the Fee Basis Amount. The Senior Investment
Advisory Fee will be payable from Collateral Interest Collections prior to any payments on the Notes and, if
such amounts are insufficient, from Collateral Principal Collections prior to any payments on the Notes. The
Subordinate Investment Advisory Fee will be payable from Collateral Interest Collections and, if such
amounts are insufficient, from Collateral Principal Collections, after (i) all payments required to be made on
the Notes, to the Supersenior Swap Counterparty, to the CDS Counterparties, and to the Hedge
Counterparties have been paid and (ii) the payment of the expenses of the Trustee and other expenses of the
Issuer from such Collateral Interest Collections or Collateral Principal Collections, as applicable, have been
made in accordance with the Priority of Payments. To the extent not paid on any Payment Date when due,
any accrued Senior Investment Advisory Fee or accrued Subordinate Investment Advisory Fee will be
deferred and will be payable on subsequent Payment Dates. Any unpaid Senior Investment Advisory Fee
that is deferred due to the operation of the Priority of Payments will accrue interest at Three-Month LIBOR,
computed on an actual/three hundred and sixty day year basis.
In the event that the Investment Adviser resigns or is terminated and a replacement adviser is
appointed, the Investment Adviser nonetheless will be entitled to receive payment of all unpaid Investment
Advisory Fees accrued through the effective date of the termination or resignation, to the extent that funds
are available for that purpose in accordance with the Priority of Payments, and such payments will rank pari
passu with the Investment Advisory Fees due to the replacement adviser.
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The Investment Adviser will be responsible for its own expenses incurred in the course of performing
its obligations under the Investment Advisory Agreement; provided, however, that the Investment Adviser
will not be liable, among other things, for the following reasonable expenses and reasonable costs: (a) legal
advisers, accountants, auditors, recordkeepers, consultants and other professionals retained by the Issuer (or
by the Investment Adviser on the Issuer’s behalf), in connection with the services provided by the
Investment Adviser pursuant to the Investment Advisory Agreement or pursuant to the other Transaction
Documents including, without limitation, fees and expenses of Rating Agencies incurred in connection with
obtaining ratings for Collateral; (b) legal advisers, consultants and other professionals retained by the Issuer
(or by the Investment Adviser on the Issuer’s behalf) for the restructuring of, or enforcement of rights under,
the Collateral; (c) the preparation of Investment Adviser reports to the Holders of the Notes; (d) reasonable
travel expenses (airfare, meals, lodging and other transportation) undertaken in connection with the
performance by the Investment Adviser of its duties pursuant to the Investment Advisory Agreement, the
Indenture or the other Transaction Documents; (e) amounts payable to the Collateral Administrator pursuant
to the Collateral Administration Agreement; (f) any fees for bookkeeping, accounting or recordkeeping
services obtained or maintained with respect to the Issuer (including those services rendered at the
Investment Adviser’s behest); or (g) fees and expenses of auditors incurred in connection with any
consolidation review with respect to the Investment Adviser. Such expenses will be reimbursed to the
Investment Adviser by the Issuer in accordance with the Priority of Payments.
The Investment Adviser or its Affiliates and their respective members, managers, directors, officers and
employees will not be liable to the Co-Issuers, the Trustee, the Collateral Administrator, the Noteholders, the
Supersenior Swap Counterparty, any CDS Counterparties, any Hedge Counterparties, the Managers, the
Placement Agents, any Secured Party or any of their respective Affiliates, partners, shareholders, officers,
directors, employees, agents, accountants and attorneys for any losses incurred as a result of the actions
taken or recommended by the Investment Adviser under the Investment Advisory Agreement or the other
Transaction Documents or for any other act or omission by the Investment Adviser in the performance of its
obligations under the Investment Advisory Agreement or under the other Transaction Documents or
otherwise for any mistake of judgment or otherwise in any event whatsoever, except for losses resulting
from the Investment Adviser’s bad faith, willful misconduct or gross negligence in the performance of its
duties. The Investment Adviser and its Affiliates and each of their respective shareholders, officers,
directors, members, managers, employees, agents, accountants and attorneys (each, an “Investment Adviser
Indemnified Party”) will be entitled to indemnification by the Issuer for all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever (including reasonable attorneys’ fees and
expenses) for which an Investment Adviser Indemnified Party may become liable or which may be incurred
by or asserted against an Investment Adviser Indemnified Party (i) in respect of, or arising from, the issuance
of the Notes, the transactions described in this Final Offering Memorandum, the Indenture, the Investment
Advisory Agreement or the other Transaction Agreements, or any action or failure to act by the Investment
Adviser, or (ii) in respect of, or arising from, any untrue statement or alleged untrue statement of a material
fact contained in this Final Offering Memorandum, or any omission or alleged omission to state a material
fact necessary to make the statements in the Preliminary Offering Memorandum, in light of the
circumstances under which they were made, not misleading, except as may result from (i) the Investment
Adviser’s willful misconduct, bad faith, or gross negligence in the performance of the Investment Adviser’s
obligations or (ii) the information in the section entitled “The Investment Adviser” herein where such
information 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. Such indemnification will be payable pursuant to the Priority of Payments.
Termination of the Investment Advisory Agreement
Subject to the following provisions regarding removal of the Investment Adviser, the Investment
Advisory Agreement will be entered into on the Closing Date for a term of one year and will be
automatically renewed for an additional year on each date of its expiration unless the Holders of more than
66⅔ percent of the aggregate principal amount of each Class of Notes Outstanding, voting as a separate
class, object to such renewal by giving notice to the Issuer, the Supersenior Swap Counterparty and the
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Investment Adviser. The Investment Advisory Agreement will terminate automatically in the event the
Notes are redeemed or cancelled in their entirety.
Resignation
The Investment Advisory Agreement may be terminated at any time by the Investment Adviser,
without the payment of any penalty, on 90 days’ written notice to the Issuer, the Trustee, the Supersenior
Swap Counterparty and the Rating Agencies or on such shorter notice as is acceptable to the Issuer, the
Supersenior Swap Counterparty, the Trustee and the Rating Agencies.
Termination Without Cause
The Investment Adviser may be removed without Cause upon at least 90 days’ prior written notice by
Holders of at least 66⅔ percent of the aggregate principal amount of each Class of Notes Outstanding,
voting as separate Classes.
Termination For Cause
The Investment Adviser may be removed for Cause, upon 15 Business Days’ prior written notice by the
Holders of at least 66⅔ percent in principal amount of the Controlling Class, provided that notice of such
removal will have been given to the Holders of each Class of the Notes Outstanding. For purposes of the
Investment Advisory Agreement, “Cause” will mean: (a) willful violation in bad faith or willful breach in
bad faith by the Investment Adviser of any provision of the Investment Advisory Agreement or the Indenture
applicable to the Investment Adviser; (b) violation by the Investment Adviser of any provision of the
Investment Advisory Agreement or the Indenture applicable to it (other than as covered by the preceding
clause (a)) (it being understood that the failure of any Coverage Test or Collateral Quality Test, or the failure
to satisfy a Portfolio Percentage Limitation which is not caused by a breach described in clause (a) of this
definition of “Cause”, is not such a violation) which violation (1) has a material adverse effect on the
Holders of any Class of Notes, and (2) if capable of being cured, is not cured within 30 days of the
Investment Adviser becoming aware of, or receiving notice from the Issuer or Trustee of, such violation;
(c) the occurrence of any Event of Default which results from any breach by the Investment Adviser of its
duties under the Investment Advisory Agreement or under the Indenture; (d) the failure for any
representation or warranty set forth in Section (a) in Annex B of the Investment Advisory Agreement, or any
certification or written statement specifically required to be made or delivered by the Investment Adviser in
or pursuant to the Investment Advisory Agreement to be correct in any respect and (i) such failure has a
material adverse effect on the Holders of any Class of the Notes Outstanding or any of their rights under the
Indenture or the Investment Advisory Agreement and (ii) no correction is made for a period of 30 days after
the Investment Adviser becomes aware of or receives notice from the Trustee of such violation, in each case
in connection with the performance of the Investment Adviser’s obligations under the Investment Advisory
Agreement or the conviction of the Investment Adviser for a felony materially related to the Investment
Adviser’s asset management business; (e) Investment Adviser consolidates or amalgamates with, or merges
with or into, or transfers all or substantially all of its assets to, another Person and either at the time of such
consolidation, amalgamation, merger or transfer, the resulting, surviving or transferee person fails to assume
all of the Investment Adviser’s obligations under the Investment Advisory Agreement by operation of law or
pursuant to an agreement reasonably satisfactory to the Issuer; (f) the dissolution, bankruptcy, insolvency,
liquidation or reorganization of the Investment Adviser; (g) the occurrence of an act constituting fraud or a
criminal felony offense in respect of investment activity by the Investment Adviser in the performance of its
obligations under the Investment Advisory Agreement; or (h) the indictment of any of the Investment
Adviser’s managing directors who has direct supervisory responsibility for the Issuer’s investment activities,
and who continues to have direct supervisory responsibility for the Investment Adviser’s performance under
the Investment Advisory Agreement for a period of 30 days after such indictment, for a criminal felony
offense materially related to the Investment Adviser’s advisory services relating to mortgage-backed
securities, asset-backed securities or collateralized debt obligations.
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Replacement of Investment Adviser
Upon any removal or resignation of the Investment Adviser while any of the Notes are Outstanding, the
Holders of at least a majority of the Subordinated Notes may appoint an institution as replacement
investment adviser which is not affiliated with the Investment Adviser (however, in the case of any
resignation, a replacement investment adviser affiliated with the Investment Adviser may be appointed)
provided that the Holders of at least a majority of the Notes of the Controlling Class Outstanding do not
disapprove such institution within 30 days of notice of such appointment and Rating Agency Confirmation is
obtained. If, however, the Holders of at least a majority of the Notes of the Controlling Class Outstanding do
not disapprove such replacement investment adviser within such 30 days and a replacement investment
adviser mutually acceptable to the Holders of at least a majority of the Subordinated Notes and the Holders
of at least a majority of the Notes of the Controlling Class Outstanding cannot be appointed (or with respect
to which Rating Agency Confirmation cannot be obtained) within 30 days, then commencing on such 30th
day (the “Static Pool Commencement Date”), no Collateral Assets may be sold or terminated by the Issuer
and no Substitute Collateral Assets may be acquired or entered into by the Issuer until a replacement
investment adviser mutually acceptable to the Holders of at least a majority of the Subordinated Notes and
the Holders of at least a majority of the Notes of the Controlling Class Outstanding is appointed and Rating
Agency Confirmation is obtained.
In the event the Investment Adviser shall have been terminated or resigns, if a successor investment
adviser is not selected in accordance with the Investment Advisory Agreement within 60 days after the
Investment Adviser receives notice of termination or gives notice of resignation, then the Investment
Adviser may petition any court of competent jurisdiction for the appointment of a successor investment
adviser without the approval of any of the Issuer, the Holders of the Notes or the Rating Agencies.
The successor investment adviser will be an established institution that (x) has demonstrated an ability
to professionally and competently perform duties similar to those imposed upon the Investment Adviser
under the Investment Advisory Agreement, (y) is legally qualified and has the capacity to act as Investment
Adviser under the Investment Advisory Agreement, as successor to the Investment Adviser and will agree to
assume in writing all of the Investment Adviser’s duties and obligations pursuant to the Investment Advisory
Agreement, and (z) has prior experience serving as an investment adviser in structured finance transactions
involving collateral similar to the Collateral.
No resignation or termination of the Investment Adviser and no objection to renewal of the Investment
Advisory Agreement will be effective until such time as a successor investment adviser has been appointed
and has assumed in writing all of the Investment Adviser’s duties and obligations pursuant to the Investment
Advisory Agreement.
All Notes, if any, beneficially owned by the Investment Adviser or any Affiliate thereof (other than the
Supersenior Swap Counterparty or the Initial CDS Counterparty, but only to the extent the Supersenior Swap
Counterparty or the Initial CDS Counterparty ever become Affiliates of the Investment Adviser), or by an
account or fund for which the Investment Adviser or such Affiliate acts as the investment adviser (and for
which the Investment Adviser or such Affiliate has discretionary voting authority (the “Investment Adviser
Notes”)) will be disregarded and deemed not to be Outstanding with respect to (i) any vote or consent of the
Holders on any termination of the Investment Adviser for Cause pursuant to the Investment Advisory
Agreement and (ii) any and all votes or consents with respect to a successor investment adviser following
any such termination for Cause; provided, however, that the Investment Adviser will notify the Trustee of
any Investment Adviser Notes. Neither the Investment Adviser nor any of its Affiliates are under any
obligation to purchase any of the Notes for its own account or for any account for which it serves as
investment adviser.
Amendment or Modification of the Investment Advisory Agreement
The Investment Advisory Agreement may not be supplemented, amended or modified in any manner
except by a written agreement executed by all the parties to the Investment Advisory Agreement and only if
the Rating Agency Confirmation is obtained and the Supersenior Swap Counterparty has consented thereto;
provided, however, that the consent of the Supersenior Swap Counterparty shall only be required if any
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proposed amendment and/or modification to the Investment Advisory Agreement pertains to one or more of
the following and such proposed amendment or modification could reasonably be expected to have a
material adverse effect on the rights or interests of Supersenior Swap Counterparty: (1) provisions pertaining
to the fees of the Investment Adviser; (2) provisions pertaining to the termination, resignation, and/or
replacement of the Investment Adviser; and (3) provisions pertaining to the Investment Adviser’s standard of
care. For as long as any of the Notes are listed on the Irish Stock Exchange, the Issuer will cause a copy of
any supplement, amendment or modification of the Investment Advisory Agreement to be sent to the Irish
Stock Exchange.
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THE ISSUER AND THE CO-ISSUER
The Issuer
STACK 2006-1 Ltd., an exempted company incorporated in the Cayman Islands with limited liability,
was incorporated on April 7, 2006 under the Companies Law (2004 Revision) of the Cayman Islands with
the registered number 165598 and has an indefinite existence. The registered office of the Issuer is at the
offices of Maples Finance Limited, P.O. Box 1093 GT, Queensgate House, South Church Street, George
Town, Grand Cayman, Cayman Islands. The telephone number of the Issuer at such address is: (345) 9457099.
The Issuer has no employees, prior operating history or prior business other than in connection with the
purchase of or entering into Collateral Assets prior to the Closing Date. Clause 3 of the Issuer’s
Memorandum of Association sets out the objectives of the Issuer, which are unrestricted and which include
the business to be carried out by the Issuer in connection with the issuance of the Notes. The Issuer has been
established as a special purpose vehicle for the purpose of the issuance of the Notes. The activities of the
Issuer will be limited to (i) issuance of the Ordinary Shares, (ii) issuance of the Notes, which will be secured
by the Collateral Assets and certain other assets pledged by the Issuer under the Indenture, and (iii) entering
into the Indenture and the other Transaction Documents to which the Issuer is a party and engaging in other
activities incidental to the foregoing and permitted by the Indenture including the purchase of the Class P
Treasury Strip. Cash flow derived from the Collateral securing the Notes will be the Issuer’s only source of
Cash. The Issuer has no indebtedness for borrowed money other than indebtedness incurred pursuant to the
Indenture and the other Transaction Documents as described herein. The Issuer may incur debt in the future
only in compliance with and pursuant to the terms of the Indenture.
In connection with the Issuer’s acquisition and management of Collateral Assets, it is the Issuer’s
intention not to acquire any Collateral Asset on terms such that the Issuer receives a fee for underwriting
services, syndication services, placement services for marketing or placement of such Collateral Asset
(which shall not include any discount or fee for the use of or time value of money or the commitment to
make funds available). The Issuer intends to buy, sell and hold securities only for its own account and not to
buy, sell or hold securities for or on behalf of, or as nominee for any other person. The Issuer intends to buy
and hold its securities solely for investment with the expectation of realizing a profit from income earned on
the securities and/or any rise in their value during the interval of time between purchase and sale. The Issuer
does not intend to register as or become subject to regulatory supervision or other legal requirements under
the laws of any country or political subdivision thereof as a bank, insurance company or finance company or
be treated as a bank, insurance company or finance company for purposes of (i) any tax, securities law or
other filing or submission made to any governmental authority, (ii) any application made to a rating agency
or (iii) qualification for any exemption from tax, securities law or any other legal requirements. The Issuer
does not intend to hold itself out to the public as a bank, insurance company or finance company.
The authorized share capital of the Issuer is U.S.$50,000 divided into 50,000 ordinary shares of
U.S.$1.00 each, 250 of which have been issued. All of the issued shares (the “Ordinary Shares”) are fullypaid and are held by Maples Finance Limited as share trustee (in such capacity, the “Share Trustee”) under
the terms of a declaration of trust (the “Declaration of Trust”) under which the Share Trustee holds the
Ordinary Shares in trust until the Termination Date (as defined in the Declaration of Trust) and may only
dispose of or otherwise deal with the Ordinary Shares with the approval of the Trustee for so long as there
are Notes Outstanding. Prior to the Termination Date, the trust is an accumulation trust, but the Share
Trustee has power with the consent of the Trustee, to benefit the Noteholders or Qualified Charities (as
defined in the Declaration of Trust). It is not anticipated that any distribution will be made while any Note is
Outstanding. Following the Termination Date, the Share Trustee will wind up the trust and make a final
distribution to charity. 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 Ordinary Shares.
The Issuer’s Articles provide that the board of directors of the Issuer will consist of at least one
director. The directors (the “Directors”) of the Issuer are as follows:
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Name
Address
Occupation
Steven O’Connor
P.O. Box 1093 GT, George Town,
Grand Cayman, Cayman Islands
Vice President,
Maples Finance Limited
Chris Marett
P.O. Box 1093 GT, George Town
Grand Cayman, Cayman Islands
Vice President,
Maples Finance Limited
The Co-Issuer
STACK 2006-1 Corp. (the “Co-Issuer”) was incorporated on April 25, 2006 under the laws of the
State of Delaware with the Registration No. 4148263 and its registered office is c/o The Corporation Trust
Company, Corporate Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The telephone
number of the Co-Issuer at such address is: (302) 738-7210. The Co-Issuer will not have any substantial
assets and will not pledge any assets to secure the Notes. Article 3 of the Co-Issuer’s Certificate of
Incorporation sets out the objectives of the Co-Issuer, which include the business to be carried out by the CoIssuer in connection with the issuance of the Rated Notes (other than the Class VII Notes). The Co-Issuer
has been established as a special purpose vehicle for the purpose of the issuance of the Rated Notes (other
than the Class VII Notes).
The Co-Issuer has no prior operating history, prior business or employees. The activities of the CoIssuer will be limited to (i) issuance of its common stock, (ii) co-issuance of the Rated Notes (other than the
Class VII Notes), and (iii) other activities incidental to the foregoing and permitted by the Indenture.
The sole director of the Co-Issuer is Donald J. Puglisi. Mr. Puglisi is also the President, Secretary and
Treasurer of the Co-Issuer. Mr. Puglisi may be contacted at the address of the Co-Issuer.
Capitalization of the Issuer
The Issuer’s expected initial capitalization and indebtedness on the Closing Date, after giving effect to
the issuance of the Notes and the Ordinary Shares (before deducting issuance expenses paid by the Issuer on
the Closing Date) is set forth below:
Type
Amount (U.S.)
Class II Notes.................................................................................................... $
Class III Notes .................................................................................................. $
55,000,000
Class IV Notes .................................................................................................. $
Class V Notes ................................................................................................... $
11,000,000
Class VI Notes .................................................................................................. $
Class VII Notes................................................................................................. $
24,000,000
Subordinated Notes........................................................................................... $
Total Debt ......................................................................................................... $
19,000,000
49,500,000
11,500,000
5,000,000
175,000,000
Ordinary Shares ................................................................................................ $
Total Equity ...................................................................................................... $
250
Total Capitalization........................................................................................... $
175,000,250
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250
Capitalization of the Co-Issuer
The Co-Issuer will be capitalized only to the extent of its common equity of U.S.$100 which will be
legally owned and held in charitable trust by Maples Finance Limited, as the Share Trustee, together with the
Issuer’s Ordinary Shares under the terms of the declaration of trust described above. The Co-Issuer will have
no assets other than its equity capital and will have no debt other than as co-issuer of the Rated Notes (other
than the Class VII Notes). The Class VII Notes and the Subordinated Notes will not be obligations of the
Co-Issuer. The Co-Issuer has no indebtedness for borrowed money other than indebtedness incurred
pursuant to the Indenture and described herein. The Co-Issuer may incur debt in the future only in
compliance with and pursuant to the terms of the Indenture. The Co-Issuer will have no claim against the
Issuer in respect of the Collateral Assets or otherwise.
The Administrator
Certain administrative functions in the Cayman Islands will be performed on behalf of the Issuer by
Maples Finance Limited, a licensed trust company incorporated in the Cayman Islands (in such capacity,
together with any successor appointed by the Issuer, the “Administrator”). The office of the Administrator
will serve as the general registered office of the Issuer. Through this office and pursuant to the terms of an
agreement by and between the Administrator and the Issuer (the “Administration Agreement”), the
Administrator will perform various management functions on behalf of the Issuer, including
communications with the holders of the Ordinary Shares and the general public and other services. The
Administrator provides similar services to various other Cayman Islands entities. In consideration of the
foregoing, the Administrator will receive various fees and other charges payable by the Issuer at rates agreed
upon from time to time plus expenses. The Administrator’s address is P.O. Box 1093 GT, Queensgate
House, South Church Street, George Town, Grand Cayman, Cayman Islands.
The activities of the Administrator under the Administration Agreement will be subject to the overview
of the Issuer’s board of directors. The Administrator may resign or be terminated upon three months prior
written notice by the Administrator to the Issuer, in the case of resignation, or by the Issuer to the
Administrator, in the case of termination. Upon the occurrence of either such event, the Issuer will promptly
appoint a successor Administrator.
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THE SUPERSENIOR SWAP COUNTERPARTY AND INITIAL CDS COUNTERPARTY
The information in this section related to the Supersenior Swap Counterparty and the Initial CDS
Counterparty has been obtained from the Supersenior Swap Counterparty and the Initial CDS Counterparty
for use in this Final Offering Memorandum. The information concerning the Supersenior Swap
Counterparty and the Initial CDS Counterparty contained herein is furnished solely to provide limited
introductory information regarding the Supersenior Swap Counterparty and the Initial CDS Counterparty
and does not purport to be comprehensive. The provision of such information does not create any
implication that there has been no change in the affairs of the Supersenior Swap Counterparty and the
Initial CDS Counterparty since the date hereof, or that the information contained or referenced in this
section is correct as of any time subsequent to its date. No representation is made by the Issuer, the CoIssuer, the Managers, the Placement Agents, the Investment Adviser or the Trustee as to the accuracy or
completeness of the information in this section.
Morgan Stanley Capital Services Inc.
Morgan Stanley Capital Services Inc. is a wholly owned, special purpose unregulated subsidiary of
Morgan Stanley, a Delaware corporation (“Morgan Stanley”). Morgan Stanley Capital Services Inc. was
incorporated in Delaware in 1985. Morgan Stanley Capital Services Inc. conducts an over-the-counter
derivatives business writing a variety of derivative instruments, including interest rate swaps, currency
swaps, credit default swaps and interest rate options with institutional clients. The principal executive
offices of Morgan Stanley Capital Services Inc. are located at 1585 Broadway, 3rd Floor, New York, New
York 10036.
Morgan Stanley Capital Services Inc. will be the Supersenior Swap Counterparty and the Initial
CDS Counterparty under the CDS Assets with a Principal Balance of approximately U.S.$325,000,000 as of
the Closing Date, which will comprise all of the CDS Assets entered into or otherwise acquired as of the
Closing Date. The payment obligations of Morgan Stanley Capital Services Inc. as the Supersenior Swap
Counterparty under the Supersenior Swap and under the CDS Assets with respect to which it is the Initial
CDS Counterparty are guaranteed by Morgan Stanley. As of October 11, 2005 Morgan Stanley currently
has long-term debt ratings of “Aa3” by Moody’s, “AA-” by Fitch and “A+” by S&P and a short-term rating
of “P-1” by Moody’s, “A-1” by S&P and “F1+” by Fitch. Morgan Stanley is listed on the New York Stock
Exchange.
Morgan Stanley files annual reports, proxy statements and other information with the SEC. The
public may read and copy any document Morgan Stanley files at the Securities and Exchange Commission’s
public reference room at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at its Regional
Office located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0300 for further information on the public reference rooms. In addition, the SEC
maintains a Website that contains reports, proxy statements and other information that Morgan Stanley and
its consolidated subsidiaries electronically file. The address of the SEC’s Website is http://www.sec.gov.
(The SEC’s Website does not form part of this Final Offering Memorandum).
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INCOME TAX CONSIDERATIONS
TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230,
POTENTIAL PURCHASERS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF
FEDERAL TAX ISSUES IN THIS FINAL OFFERING MEMORANDUM IS NOT INTENDED OR
WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY POTENTIAL
PURCHASERS FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON
NOTEHOLDERS UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS BEING
USED IN CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE
MEANING OF CIRCULAR 230) BY THE ISSUER OF THE NOTES; AND (C) POTENTIAL
PURCHASERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES
FROM AN INDEPENDENT TAX ADVISOR.
General
The following summary describes the principal U.S. federal income tax and Cayman Islands tax
consequences of the purchase, ownership and disposition of the Notes to investors that acquire the Notes at
original issuance and for an amount equal to the “Issue Price” of the relevant Class of Notes. For purposes
of this section, with respect to each Class of Notes, the first price at which a substantial amount of Notes of
such Class are sold to investors is referred to herein as the “Issue Price.” This summary does not purport to
be a comprehensive description of all the tax considerations that may be relevant to a particular investor’s
decision to purchase the Notes. In particular, special tax considerations that may apply to certain types of
taxpayers, including entities treated as partnerships for U.S. federal income tax purposes, dealers in
securities or currencies, traders in securities that elect to mark-to-market, banks and other financial
institutions, insurance companies, tax-exempt investors, U.S. Holder (as defined below) whose functional
currency is not the U.S. dollar, persons subject to the alternative minimum tax and subsequent purchasers of
the Notes, are not addressed. In addition, this summary does not describe any tax consequences arising under
the laws of any state, locality or taxing jurisdiction other than the United States federal income tax laws and
Cayman Islands tax laws. In general, the summary assumes that a Noteholder holds a Note as a capital asset
and not as part of a hedge, straddle, or conversion transaction, within the meaning of Section 1258 of the
Code or as part of a synthetic security or other integrated financial transaction.
This summary is based on the U.S. and Cayman Islands tax laws, regulations (final, temporary and
proposed), administrative rulings and practice and judicial decisions in effect or available on the date of this
Final Offering Memorandum as well as the expected Cayman Islands undertaking described in “—Cayman
Islands Tax Considerations.” All of the foregoing are subject to change or differing interpretation at any
time, which change or interpretation may apply retroactively and could affect the continued validity of this
summary.
This summary is included herein for general information only, and there can be no assurance that the
U.S. Internal Revenue Service (the “IRS”) will take a similar view of the U.S. federal income tax
consequences of an investment in the Notes as described herein. Accordingly, prospective purchasers of the
Notes should consult their tax advisors as to U.S. federal income tax and Cayman Islands tax consequences
of the purchase, ownership and disposition of the Notes, and the possible application of state, local, foreign
or other tax laws.
U.S. Federal Income Tax Considerations
As used in this section, the term “U.S. Holder” includes a beneficial owner of a Note who is, as
determined for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States of
America, (ii) a corporation created or organized in or under the laws of the United States of America, any
state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source or (iv) a trust if (a) in general, a court within the
United States of America is able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all substantial decisions of such trust, or (b) if it has a valid
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election in effect under applicable Treasury Regulations to be treated as a “United States person.” If an entity
treated as a partnership for U.S. federal income tax purposes holds Notes, the U.S. federal income tax
treatment of a partner therein will generally depend on the status of the partner and upon the activities of the
partnership. Partners in partnerships purchasing Notes should consult their tax advisors as to the U.S. federal
income tax consequences of acquiring, holding and disposing of the Notes.
For U.S. federal income tax purposes, the Issuer, and not the Co-Issuer, will be treated as the issuer of
the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes and the
Class VII Notes.
United States Federal Income Tax Treatment of the Issuer.
In general, a non-U.S. corporation is subject to U.S. federal income tax on a net income basis (and
may also be subject to a branch profits tax of 30%) in respect of earnings of the corporation that are
effectively connected with its conduct of a trade or business within the United States. Under a specific
exemption provided by the Code, and the Treasury regulations promulgated thereunder, a non-U.S.
corporation will not be considered to be engaged in a U.S. trade or business if its activities within the United
States are limited to trading in stocks or securities for its own account (and activities closely related thereto),
and it is not a dealer in stocks or securities whether such trading (or such other activity) is conducted by the
corporation or its employees or through a resident broker, commission agent, custodian or other agent. (the
"Trading Exemption"). However, other activities that are undertaken by a non-U.S. corporation within the
United States, including acting as a lender, can result in the establishment of a U.S. trade or business.
The Issuer intends to rely on the Trading Exemption and does not intend to operate so as to be subject
to U.S. federal income taxes on its net income. In this regard, on the Closing Date, the Issuer will receive an
opinion from Linklaters, special U.S. income tax counsel to the Issuer and the Co-Issuer (“Special U.S.
Income Tax Counsel”) to the effect that, although there is no direct authority, and no activity closely
comparable to that contemplated by the Issuer has been the subject of any Treasury Regulation, revenue
ruling or judicial decision, under current law and assuming compliance with the Transaction Documents
(including, without limitation, the Indenture, the Investment Advisory Agreement and other related
documents) by all parties thereto, the Issuer’s contemplated activities will not cause it to be engaged in a
trade or business in the United States under the Code (except to the extent that the Issuer may acquire Equity
Securities or Exchanged Equity Securities as a result of the exercise or conversion of Collateral Assets or in
exchange for Defaulted Securities or may receive certain Defaulted Securities the holding of which, in either
circumstance, could cause the Issuer to be engaged in a U.S. trade or business for the period from the
acquisition until such security is sold), and accordingly, the Issuer’s profits will not be subject to U.S. federal
income tax on a net income basis (or to the branch profits tax referred to above). In interpreting and
complying with the Transaction Documents, the Issuer and the Investment Adviser are entitled to rely upon
the advice and/or opinions of their counsel. The aforementioned opinion of Special U.S. Income Tax
Counsel will assume that any such advice and/or opinions (other than such opinion of Special U.S. Income
Tax Counsel) are correct and complete. The opinion of Special U.S. Income Tax Counsel will be based on
the Code, the Treasury Regulations thereunder, the existing authorities, and Special U.S. Income Tax
Counsel’s interpretation thereof, and on certain representations made by the Issuer, its agents or advisors, as
well as certain assumptions regarding the Issuer, the intended activities of and on behalf of the Issuer, and
this Offering (including assumptions that there will be full compliance with each provision in the
Transaction Documents, and that the information contained in this Final Offering Memorandum is true,
correct and complete in all material respects). The Issuer intends to conduct its affairs in accordance with
such assumptions and representations, and the remainder of this summary assumes such result.
However, the opinion of Special U.S. Income Tax Counsel is not binding on the IRS and due to the
lack of governing authority and the highly factual nature of the analysis, there can be no assurance that
positions contrary to those stated in such opinion may not be asserted successfully by the IRS. In addition,
under current U.S. federal income tax law the treatment of CDS Assets in the form of credit default swaps is
not settled. Certain possible tax characterizations of a credit default swap if adopted by the IRS and if
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applied to CDS Assets to which the Issuer is a party, could result in the Issuer being treated as engaged in a
trade or business in the United States.
Notwithstanding the foregoing opinion of Special U.S. Income Tax Counsel, if it were determined that
the Issuer were engaged in a trade or business in the United States (as defined in the Code), and the Issuer
had taxable income that was effectively connected with such U.S. trade or business, the Issuer would be
subject under the Code to the regular U.S. corporate income tax on such effectively connected taxable
income (and possibly to the 30 percent branch profits tax as well). The imposition of such taxes would
materially affect the Issuer’s financial ability to make payments with respect to the Notes and could
materially affect the yield of the Notes. In addition, the interest income on the Notes would be treated as
United States source income potentially subject to U.S. withholding tax.
With respect to Cayman Islands taxation, see the discussion below in “—Cayman Islands Tax
Considerations.”
Withholding Taxes. Although, based on the foregoing, the Issuer is not expected to be subject to U.S.
federal income tax on a net income basis, income derived by the Issuer may be subject to withholding taxes
imposed by the United States or other countries. In this regard, the Issuer is permitted to acquire or enter into
a particular Collateral Asset only if the payments thereon are exempt from U.S. withholding taxes at the time
of acquisition or the obligor or the issuer thereof is required to make “gross-up” payments to offset fully any
such tax on any such payments. In addition, the Issuer does not intend to derive material amounts of any
other items of income that would be subject to U.S. withholding taxes. Accordingly, assuming compliance
with the foregoing restrictions and subject to the foregoing, income derived by the Issuer will be free of or
fully “grossed up” for any material amount of U.S. withholding tax. It is also anticipated that the Issuer will
acquire Collateral Assets that consist of obligations of non-U.S. issuers. In this regard, the Issuer may
acquire a particular Collateral Asset only if either the payments thereon are not subject to foreign
withholding tax or the issuer of the Collateral Asset is required to make “gross-up” payments. In addition,
the treatment of CDS Assets in the form of credit default swaps is not settled and certain possible tax
characterizations of a credit default swap if adopted by the IRS and if applied to CDS Assets to which the
Issuer is a party, could subject payments received by the Issuer under such CDS Assets to United States
withholding or excise tax and the Issuer may not be entitled to a full gross-up on such taxes under the terms
of the CDS Assets.
Payments with respect to Equity Securities, however, will be subject to withholding taxes imposed by
the United States if paid from sources therein and, if paid from sources in other countries, will likely be
subject to withholding taxes imposed by such other countries. In the event that the amount of withholding
tax applied results in the occurrence of a Tax Event, the Holders of at least a majority of the Subordinated
Notes Outstanding will have the right to require the Issuer to effect a redemption in whole, but not in part, of
the Rated Notes.
Tax Treatment of U.S. Holders of the Rated Notes
Status of the Rated Notes. The Issuer will receive an opinion from Special U.S. Income Tax Counsel to
the effect that, although there is no authority addressing the U.S. federal income tax characterization of
financial instruments having substantially similar terms under substantially similar circumstances, under
current U.S. federal income tax law, the Class II Notes, the Class III Notes, the Class IV Notes, the Class V
Notes and the Class VI Notes will, and, although the issue is not free from doubt, the Class VII Notes
should, be treated as debt for U.S. federal income tax purposes, and each Holder of a Rated Note, by
acceptance of such Rated Note, will agree to treat the Rated Notes as indebtedness of the issues for such
purposes.
In rendering such opinion, Special U.S. Tax Counsel will rely on certain representations made by the
Issuer, its agents or advisors, as well as on certain assumptions regarding the Issuer and activities of and on
behalf of the Issuer and this Offering (including assumptions that there will be full compliance with each
provision in the Transaction Documents (including, without limitation, the Indenture, the Investment
Advisory Agreement and other related documents), and that the information contained in this Final Offering
Memorandum is true, correct and complete in all material respects). The conclusions expressed in such
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opinion of counsel will take into account many factors that traditionally have been considered by the IRS
and the courts in determining the appropriate characterization of financial instruments for U.S. federal
income tax purposes, including, among other things, the form and terms of the Rated Notes (e.g., their fixed
maturity dates), the level of over-collateralization provided by the Issuer, the likelihood of repayment (as
evidenced by the ratings assigned by the rating agencies) and the intent of the Issuer and purchasers of such
Notes (who will agree, by their purchase, to treat the Rated Notes as indebtedness for all U.S. income tax
purposes).
The opinion of Special U.S. Income Tax Counsel and positions taken by the Issuer and Holders of the
Rated Notes are not binding on the IRS, 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 Rated Notes. Accordingly, in the absence of
published authority directly on point, there can be no assurance that the IRS will not contend, and that a
court will not ultimately hold, that any of the Rated Notes are equity in the Issuer. If any Class of Rated
Notes were treated as equity in, rather than debt of, the Issuer for U.S. federal income tax purposes, the U.S.
Holders thereof would be subject to the treatment described below for U.S. Holders of Subordinated Notes
without the making of a QEF election, as discussed under "—U.S. Federal Income Taxation of U.S. Holders
of the Subordinated Notes”. The remainder of this discussion assumes that the Rated Notes are treated as
debt for U.S. federal income tax purposes.
Interest and Discount on the Rated Notes. Subject to the discussion below, U.S. Holders of the Rated
Notes generally will include in gross income payments of stated interest received on the Rated Notes, in
accordance with their usual method of tax accounting, as ordinary interest income from sources outside the
United States.
However, if the Issue Price of a Rated Note is less than such Note’s “stated redemption price at
maturity” by more than a de minimis amount, a U.S. Holder will be considered to have purchased such Rated
Note with original issue discount (“OID”). The stated redemption price at maturity of a Rated Note will be
the sum of all payments to be received on such Rated Note, other than payments of “qualified stated interest”
(i.e., generally, stated interest which is unconditionally payable in money at least annually).
If a U.S. Holder acquires Rated Notes with OID, then regardless of such Holder’s method of
accounting, the Holder will be required to accrue OID on a constant yield basis and include such accruals in
gross income. If a U.S. Holder acquires a Rated Note issued with de minimis OID, such U.S. Holder must
include such OID in income, on a pro rata basis, as principal payments are received on such Rated Note. It
is not anticipated that any Class of Rated Notes will be issued with any OID, subject, with respect to the
Class V Notes, the Class VI Notes and the Class VII Notes, to the discussion below.
Prospective U.S. Holders of the Class V Notes, the Class VI Notes and the Class VII Notes should note,
however, that because payments on each Payment Date of stated interest on the Class V Notes, the Class VI
Notes and the Class VII Notes are contingent on available funds and subject to deferral, although the matter
is not free from doubt, the Issuer will not treat the stated interest payable with respect to the Class V Notes,
the Class VI Notes and the Class VII Notes as “qualified stated interest.” Accordingly, the Issuer will treat
the Class V Notes, the Class VI Notes and the Class VII Notes as having been issued with OID for U.S.
federal income tax purposes. The total amount of such OID with respect to a Class V Note, a Class VI Note
or a Class VII Note will equal the sum of all payments to be received under such Class V Note, Class VI
Note or Class VII Note less their respective Issue Price. A U.S. Holder of Class V Notes, Class VI Notes or
Class VII Notes will be required to include OID in its income as it accrues. The amount of OID accruing in
any interest period will generally equal the stated interest accruing in that period (whether or not currently
due) plus any additional amount representing the accrual under a constant yield method of any additional
OID represented by the excess of the principal amount of the Class V Notes, the Class VI Notes or the Class
VII Notes over their respective Issue Price. Although Treasury Regulations governing the accrual of OID do
not clearly address instruments precisely comparable to the Class V Notes, the Class VI Notes or the Class
VII Notes, the Issuer intends to base accruals of any such additional OID on the projected weighted average
life of the Class V Notes, the Class VI Notes and the Class VII Notes rather than their stated maturity,
adjusted for any difference between the timing of actual principal repayments on such Notes and the
projected weighted average life. Accruals of OID will be calculated by assuming that interest will be paid
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over the life of such Class V Note, Class VI Note or the Class VII Note based on the value of LIBOR used in
setting interest for the first interest period, and then adjusting the income for each subsequent interest period
for any difference between the value of LIBOR used in setting interest for that subsequent interest period
and the assumed rate. As a result of the complexity (and uncertainty of application in various circumstances)
of the OID rules, however, each U.S. Holder of a Class V Note, a Class VI Note, or a Class VII Note should
consult its tax advisor regarding the potential impact of the OID rules on its investment in such Class V
Note, Class VI Note or the Class VII Note, as the case may be.
Under section 1272(a)(6) of the Code, special provisions apply to debt instruments on which payments
may be accelerated by reason of prepayments on other debt obligations securing such debt instruments. In
general, under Code section 1272(a)(6), the accrual of OID on such debt instruments would be determined
based upon prepayment assumptions made in accordance with Treasury regulations (with adjustments over
time to reflect differences between the actual prepayment rate and the prepayment assumptions).
Additionally, the IRS could assert that stated interest on such debt instruments is not unconditionally payable
and, thus, does not constitute qualified stated interest. No Treasury regulations have been issued under Code
section 1272(a)(6), and the manner in which the provisions of Code section 1272(a)(6) could apply to debt
instruments such as the Rated Notes is not clear. Prospective investors in the Rated Notes should consult
their own tax advisors regarding possible differences in the U.S. federal income tax accounting for such
Notes if Code section 1272(a)(6) were to apply.
Sale, Exchange and Retirement of the Rated Notes. In general, a U.S. Holder of a Rated Note will have a
basis in such Rated Note equal to the cost of such Rated Note to such Holder, increased by any amount
includible in income by such Holder as OID and reduced by any payments other than payments of qualified
stated interest on such Rated Note. Upon a sale, exchange or retirement of a Rated Note, a U.S. Holder will
generally recognize gain or loss equal to the difference between the amount realized on the sale, exchange or
retirement (less any accrued interest, which would be taxable as such) and the Holder’s tax basis in such
Rated Note. Such gain or loss generally will be long-term capital gain or loss if the U.S. Holder held the
Rated 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.
Gain recognized by a U.S. Holder on the sale, exchange or retirement of a Rated Note generally will be
treated as from sources within the United States and loss so recognized generally will offset income from
sources in the United States.
Tax Treatment of U.S. Holders of Subordinated Notes
Status of Subordinated Notes. For purposes of Cayman Islands law, the Subordinated Notes will be
characterized as debt of the Issuer. Under U.S. federal income tax principles, however, a strong likelihood
exists that the Subordinated Notes would be treated as equity of the Issuer for U.S. federal income tax
purposes. Each Holder of the Subordinated Notes, by acquiring an interest in a Subordinated Note, will agree
to treat the Subordinated Notes as equity of the Issuer for U.S. federal income tax purposes and agrees to
report all income (or loss) from the Subordinated Notes in accordance with such characterization. In
addition, the Issuer will treat the Subordinated Notes as equity for U.S. federal income tax purposes. Except
as otherwise indicated, this summary assumes such treatment. No assurance can be given, however, that the
IRS will respect this position in light of the Subordinated Notes’ status as debt for purposes of Cayman
Islands law.
Investment in a Passive Foreign Investment Company. The Issuer will constitute a “passive foreign
investment company” (“PFIC”) for federal income tax purposes. Except as provided below, U.S. Holders of
Subordinated Notes will be considered U.S. shareholders in a PFIC. In general, a U.S. Holder of a PFIC may
desire to make an election to treat the Issuer as a “qualified electing fund” (“QEF”) with respect to such U.S.
Holder. Generally, 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 held Subordinated Notes.
If a timely QEF election is made for the Issuer, an electing U.S. Holder will be required in each taxable
year to include in gross income (i) as ordinary income, such Holder’s pro rata share of the Issuer’s ordinary
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earnings and (ii) as a long-term capital gain, such Holder’s pro rata share of the Issuer’s net capital gain,
whether or not distributed, assuming that the Issuer does not constitute a “controlled foreign corporation” as
discussed further below. A U.S. Holder will not be eligible for the dividends received deduction in respect of
such income or gain, nor will distributions paid with respect to the Subordinated Notes to a U.S. Holder who
is an individual be eligible to be taxed at the recently reduced rates generally applicable to dividends paid by
certain U.S. corporations and “qualified foreign corporations” on or after January 1, 2003. In addition, any
losses of the Issuer in a taxable year will not be available to such U.S. Holder and may not be carried back or
forward in computing the Issuer’s ordinary earnings and net capital gain in other taxable years. If applicable
to a U.S. Holder of Subordinated Notes, the rules pertaining to a “controlled foreign corporation,” discussed
below, generally override those pertaining to a PFIC with respect to which a QEF election is in effect.
In certain cases in which a QEF does not distribute all of its earnings in a taxable year, U.S. Holders
may also be permitted to elect to defer payment of some or all of the taxes on the QEF’s income subject to
an interest charge on the deferred amount. In this respect, prospective purchasers of Subordinated Notes
should be aware that it is possible that the 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 Substitute Collateral Assets or to pay
Used Supersenior Swap Amounts. As a result, the Issuer may have ordinary earnings from such instruments,
but the receipt of Cash attributable to such earnings may be deferred, perhaps for a substantial period of
time. In addition, if any portion of a Class of Rated Notes is not paid upon maturity, the Issuer in some
circumstances may recognize cancellation of indebtedness income without any corresponding offsetting
losses (due to tax character differences or otherwise). Thus, absent an election to defer payment of taxes,
U.S. Holders of the Issuer that make a QEF election may owe tax on significant “phantom” income.
The Issuer will provide to a U.S. Holder, upon request, all information and documentation that such
U.S. Holder of Subordinated Notes making a QEF election is required to obtain for U.S. federal income tax
purposes (e.g., the U.S. Holder’s pro rata share of ordinary income and net capital gain), including a “PFIC
Annual Information Statement,” as described in Treasury Regulation Section 1.1295-1(g) (or in any
successor IRS release or Treasury Regulation), all representations and statements required by such
regulation, and will make reasonable efforts to take any other reasonable steps to facilitate such election.
The Issuer may invest in Collateral Assets that may be treated as equity of other PFICs (if, for example,
the Issuer invests in a Collateral Asset that is issued by a PFIC and such security is not the subject of a debt
for tax opinion for U.S. federal income tax purposes). In such event, a U.S. shareholder must make a
separate QEF election with respect to any such other PFIC, and the Issuer will make reasonable efforts to
provide, to the extent the Issuer receives such information, the information needed for U.S. shareholders to
make such a QEF election. Such investments may have adverse U.S. federal income tax consequences for
U.S. Holders.
If a U.S. shareholder does not make a timely QEF election for the year in which it acquires its
Subordinated Notes, and the PFIC rules are otherwise applicable, it will be subject to a special tax on socalled “excess distributions,” including both certain distributions from the Issuer and gain on the sale of
Subordinated Notes. A U.S. Holder will have an excess distribution if distributions on the Subordinated
Notes during any tax year exceed 125 percent of the average amount received during the three preceding tax
years (or, if shorter, the U.S. Holder’s holding period for Subordinated Notes). To compute the tax on an
excess distribution, (i) the excess distribution is allocated ratably over the U.S. Holder’s holding period for
Subordinated Notes, (ii) the amount allocated to the current tax year is taxed as ordinary income, and (iii) the
amount allocated to each previous tax year is taxed at the highest applicable marginal rate in effect for that
year and an interest charge is imposed to recover the deemed benefit from the deferred payment of the tax.
In many cases, application of the tax on gain on disposition and receipt of excess distributions will be
substantially more onerous than the treatment applicable if a timely QEF election is made. Classification as a
PFIC may also have other adverse tax consequences including, in the case of individuals, the denial of a
“step up” in the basis of the Subordinated Notes at death. ACCORDINGLY, U.S. HOLDERS OF
SUBORDINATED NOTES SHOULD CONSIDER CAREFULLY WHETHER TO MAKE A QEF
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ELECTION WITH RESPECT TO THE SUBORDINATED NOTES AND THE CONSEQUENCES OF
NOT MAKING SUCH AN ELECTION.
Investment in a Controlled Foreign Corporation. The Issuer may be classified as a controlled foreign
corporation (“CFC”). In general, a foreign corporation will be classified as a CFC if more than 50 percent of
the shares of the corporation, measured by reference to combined voting power or value, is owned (directly,
indirectly or by attribution) by U.S. Shareholders. A “U.S. Shareholder,” for this purpose, is any U.S.
person that possesses (actually or constructively) 10 percent or more of all interests treated for U.S. federal
income tax purposes as voting equity of the Issuer. It is possible that the IRS would assert that the
Subordinated Notes are de facto voting securities and that U.S. Holders each possessing (actually or
constructively) 10 percent or more of the aggregate outstanding amount of the Subordinated Notes are U.S.
Shareholders. If this argument were successful and more than 50 percent of the aggregate outstanding
amount or value of the Subordinated Notes are owned (actually or constructively) by such U.S.
Shareholders, the Issuer would be treated as a CFC.
If the Issuer were treated as a CFC, a U.S. Shareholder of the Issuer would be treated, subject to certain
exceptions, as receiving a deemed dividend (taxable as ordinary income) at the end of the taxable year of the
Issuer in an amount equal to that person’s pro rata share of the “subpart F income” of the Issuer for the tax
year. Among other items, and subject to certain exceptions, “subpart F income” includes dividends, interest,
annuities, gains from the sale of shares and securities, certain gains from commodities transactions, certain
types of insurance income and income from certain transactions with related parties. The Issuer believes that
predominately all of its income would be subpart F income. If more than 70% of the Issuer's earnings
constitute subpart F income, then 100% of its earnings would be so treated. As a consequence, certain U.S.
investors holding equity in the Issuer may have taxable income in excess of cash distributions as a result of
their investment. In addition, in the event any portion of a given Class of Notes is not ultimately paid upon
maturity, the Issuer may recognize cancellation of indebtedness income without any corresponding offsetting
losses (due to tax character differences or otherwise), in which case such U.S. investors also may have
additional "phantom income."
If the Issuer were treated as a CFC, a U.S. Shareholder of the Issuer which made a QEF election with
respect to the Issuer would be taxable on the income of the Issuer under rules described in the preceding
paragraph and not under the PFIC rules previously described. As a result, to the extent income of the Issuer
includes net capital gains, such gains will be treated as ordinary income of the U.S. Shareholder under the
CFC rules, notwithstanding the fact that the character of such gains generally would otherwise be preserved
under the PFIC rules if a QEF election were made. Also, the PFIC rule permitting the deferral of tax on
undistributed earnings would not apply.
In addition, if the Issuer were to constitute a CFC, the Issuer generally would not be treated as a PFIC at
all with respect to any Subordinated Notes owned by a Holder that qualifies as a U.S. Shareholder. If such
U.S. Holder subsequently ceases to be a U.S. Shareholder, such Holder will be treated as owning an interest
in a PFIC as of the day following such cessation and could make a QEF election in accordance with the rules
discussed above.
Distributions on Subordinated Notes. The treatment of actual distributions of cash on the Subordinated
Notes, in very general terms, will vary depending on whether a U.S. Holder has made a timely QEF election
as described above. See “—Investment in a Passive Foreign Investment Company.” If a timely QEF election
has been made, distributions should be allocated first to amounts previously taxed pursuant to the QEF
election (or pursuant to the CFC rules, if applicable) and to this extent will not be taxable to U.S. Holders.
Distributions in excess of such previously taxed amounts will be taxable to U.S. Holders as ordinary income
upon receipt, to the extent of any remaining amounts of untaxed current and/or accumulated earnings and
profits of the Issuer. Distributions in excess of previously taxed amounts and any remaining current and/or
accumulated earnings and profits of the Issuer will be treated first as a nontaxable reduction to the U.S.
Holder’s tax basis for the Subordinated Notes to the extent thereof and then as capital gain.
In the event that a U.S. Holder does not make a timely QEF election, then except to the extent that
distributions may be attributable to amounts previously taxed pursuant to the CFC rules, some or all of any
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distributions with respect to the Subordinated Notes may constitute “excess distributions,” taxable as
previously described. See “—Investment in a Passive Foreign Investment Company.”
Disposition of the Subordinated Notes. In general, a U.S. Holder of a U.S. Holder of a Subordinated
Note will recognize gain or loss upon the sale, exchange, redemption or other taxable disposition of a
Subordinated Note equal to the difference between the amount realized and such Holder’s adjusted tax basis
in the Subordinated Note. A U.S. Holder may realize gain on Subordinated Notes not only through a sale or
other disposition, but also by pledging the Subordinated Notes as security for a loan or entering into certain
constructive disposition transactions. Except as discussed below, such gain or loss will be long-term capital
gain or loss if the U.S. Holder held the Subordinated Note for more than one year at the time of the
disposition. In certain circumstances, U.S. Holders who are individuals (or whose income is taxable to U.S.
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.
Initially, a U.S. Holder’s tax basis for a Subordinated Note will equal the amount paid for the
Subordinated Note. Such basis will be increased by amounts taxable to such U.S. Holder by virtue of a QEF
election, or by virtue of the CFC rules, as applicable, and decreased by actual dividends from the Issuer that
are deemed to consist of such previously taxed amounts or are treated as a nontaxable reduction to the U.S.
Holder’s tax basis for the Subordinated Note (as described above).
If a U.S. Holder does not make a timely QEF election as described above and the PFIC rules are
otherwise applicable, any gain realized on the sale, exchange, redemption or other taxable disposition of a
Subordinated Note (or any gain deemed to accrue prior to the time a non-timely QEF election is made) will
be treated as an excess distribution and taxed as ordinary income and subject to an additional tax reflecting a
deemed interest charge under the special tax rules described above. See “—Investment in a Passive Foreign
Investment Company.”
If the Issuer were treated as a CFC and a U.S. Holder were treated as a U.S. Shareholder therein, then
any gain realized by such U.S. Holder upon the disposition of a Subordinated Note, other than gain
constituting an excess distribution under the PFIC rules, if applicable, would be treated as ordinary income
to the extent of the U.S. Holder’s share of the current and/or accumulated earnings and profits of the Issuer.
In this regard, earnings and profits would not include any amounts previously taxed pursuant to a timely
QEF election or pursuant to the CFC rules.
Indirect Interests in PFICs and CFCs. If the Issuer holds a Collateral Asset of a non-U.S. corporation
that is treated as equity for U.S. federal income tax purposes, U.S. holders of Subordinated Notes could be
treated as holding an indirect investment in a PFIC or a CFC. U.S. Holders should consult their tax advisors
regarding the issues relating to such investments.
Tax Shelter Regulations. In certain circumstances, a U.S. Holder of Subordinated Notes who disposes
of such securities in a transaction resulting in the recognition by such holder of losses in excess of certain
significant threshold amounts may be obligated to disclose its participation in such transaction in accordance
with recently issued regulations governing tax shelters and other potentially tax-motivated transactions (the
“Tax Shelter Regulations”). A significant penalty will be imposed on taxpayers who participate in a
“reportable transaction” (as defined in the Code) and fail to make the required disclosure in tax returns and
statements that are due after October 22, 2004. The penalty generally is $10,000 for natural persons and
$50,000 for other persons (increased to $100,000 and $200,000, respectively, if the reportable transaction is
a “listed transaction” (as defined in the Code)). Potential purchasers of Subordinated Notes should consult
their tax advisors concerning any possible disclosure obligation under the Tax Shelter Regulations with
respect to the disposition of their Subordinated Notes.
U.S. Federal Income Tax Treatment of the Class P Notes
The Issuer will agree and, by their purchase of the Class P Notes, Holders and beneficial owners of the
Class P Notes will be deemed to have agreed, that the Class P Notes will be treated as evidencing ownership
of a pro rata interest in the applicable Class P Treasury Strip Component and the Class P Subordinated Note
Component for U.S. federal (and state and local) income tax purposes. Accordingly, U.S. Holders of Class P
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Notes will be required to report for U.S. federal income tax purposes the pro rata share of income derived
from the Class P Treasury Strip Collateral and the Subordinated Notes relating to their Class P Notes.
In accordance with such treatment of the Class P Notes, a U.S. Holder would need to allocate the
purchase price paid for a Class P Note between the Components of such Class P Note in proportion to their
relative fair market values at the time of acquisition. The U.S. Holder’s initial tax basis in each Component
will equal the portion of the purchase price of the Class P Note allocable to the Component. Also, in
accordance with such treatment of the Class P Notes, the exchange by a U.S. Holder of Class P Notes for the
separate Components of such Class P Notes should not be a taxable event for U.S. federal income tax
purposes. The remainder of this discussion assumes that a U.S. Holder of Class P Notes is treated for U.S.
federal income tax purposes as directly owning the separate Components of such Class P Notes. Prospective
investors in Class P Notes should review the applicable discussion above with respect to the U.S. federal
income tax consequences of the purchase, ownership and disposition of the Subordinated Notes.
In this regard, the Class P Treasury Strip Collateral will be treated as having been issued with OID for
U.S. federal income tax purposes and a U.S. Holder will be required to include annually in its gross income
as interest such amounts of OID that accrue on the Class P Treasury Strip Collateral. The accrual of OID
will apply regardless of the U.S. Holder’s regular method of tax accounting, and without regard to the timing
of actual payments on such Class P Treasury Strip Collateral. Under these rules, a U.S. Holder will be
required to include OID in gross income in advance of the receipt of the cash payments attributable to such
income. This income will be ordinary income from sources within the United States. A U.S. Holder
generally will recognize gain or loss on the sale, redemption or other taxable disposition of its interest in
Class P Treasury Strip Collateral equal to the difference between the amount realized and the U.S. Holder’s
adjusted tax basis in the Class P Treasury Strip Collateral. The adjusted basis of the Class P Treasury Strip
Collateral generally will equal the portion of the U.S. Holder’s purchase price paid for the Class P Note
allocable to the Class P Treasury Strip Collateral (determined in the manner described above) increased by
any OID previously included in the U.S. Holder’s gross income, and reduced by payments previously
received in respect of the Class P Treasury Strip Collateral. Gain or loss recognized on the sale, redemption
or other taxable distribution of Class P Treasury Strip Collateral generally will be capital gain or loss from
sources within the United States.
Notwithstanding the foregoing intended treatment, it is possible that the Class P Notes may be
characterized as either debt of the Issuer or as contingent debt of the Issuer, subject to the special OID rules
for contingent payment of debt instruments, or as an equity interest in the Issuer, in which case the U.S.
federal income tax consequences of an investment in the Class P Notes would be different and possibly
adverse to a U.S. Holder.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PROPER CHARACTERIZATION OF THE CLASS P NOTES AND THE
CONSEQUENCES OF SUCH ALTERNATIVE CHARACTERIZATIONS.
Tax Treatment of Tax-Exempt U.S. Holders
Special considerations apply to pension plans and other investors in the Notes (“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 Notes generally will not be treated as resulting in UBTI
regardless of whether they are treated as equity or debt for U.S. federal income tax purposes, so long as such
investor’s acquisition of Notes is not debt-financed. A tax-exempt Holder that owns more than 50 percent
of the aggregate outstanding principal balance of the Subordinated Notes and also owns Rated Notes should
consider the possible application of the special UBTI rules for amounts received from controlled entities.
Tax-Exempt Investors should consult their own tax advisors regarding an investment in the Notes.
Transfer Reporting Requirements
Under Section 6038B of the Code (relating to reporting requirements incident to the transfer of property
(including cash) to a foreign corporation by U.S. persons or entities), in general, any U.S. person or entity
(including any Tax-Exempt Investors) who acquires Subordinated Notes is required to file a Form 926 or a
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similar form with the IRS if (1) such person owns (directly or by attribution) immediately after the transfer at
least 10 percent of the equity of the Issuer (by vote or value) or (2) the transfer, when aggregated with all
related transfers within the preceding 12-month period under applicable regulations, exceeds U.S.$100,000.
In the event that a U.S. Holder that is required to file such form fails to do so, the U.S. Holder could be
subject to a penalty of up to U.S.$100,000 (computed as 10 percent of the fair market value of such
Subordinated Notes acquired). U.S. Holders of Subordinated Notes are urged to consult with their advisors
regarding these reporting requirements and any other reporting requirements, such as an IRS Form 5471,
which may apply to such holders.
Tax Treatment of Non-U.S. Holders of Notes
In general, payments on the Notes to a Holder that is neither, for U.S. federal income tax purposes, an
entity treated as a partnership nor a U.S. Holder (a “non-U.S. Holder”) and gain realized on the sale,
exchange or retirement of the Notes by a non-U.S. Holder will not be subject to U.S. federal income or
withholding tax, unless (i) such income is effectively connected with a trade or business conducted by such
non-U.S. Holder in the United States, or (ii) in the case of gain, such non-U.S. Holder is a nonresident alien
individual who holds the Notes as a capital asset and is present in the United States for 183 days or more in
the taxable year of the sale and certain other conditions are satisfied. Notes held by an individual who at the
time of death is not a U.S. person and which are not held in connection with a trade or business conducted in
the United States will generally not be subject to United States estate tax.
Certain prospective Holders of Notes that are not U.S. persons, such as banks not protected by an
applicable income tax treaty with the United States, could possibly be subject to withholding on payments to
such non-U.S. Holders under certain Treasury Regulations regarding “conduit financing arrangements,” if
such Notes are considered to have been issued or acquired pursuant to a “tax avoidance plan.” Non-U.S.
Holders are required, as a condition of their purchase of Notes, to make certain representations and
warranties negating the existence of any such plan, and consequently the Issuer expects that the IRS
ultimately should not prevail if it were to attempt to establish such a plan and attempt to apply these
regulations to the Issuer.
Information Reporting and Backup Withholding
Information reporting to the IRS generally will be required with respect to payments of principal and
interest (including accrual of any OID) on the Rated Notes, distributions on the Subordinated Notes and
proceeds of the sale of the Notes to Holders other than corporations and other exempt recipients. A “backup”
withholding tax will apply to those payments if such Holder fails to provide certain identifying information
(such as such Holder’s taxpayer identification number) to the Trustee. Non-U.S. Holders may be required to
comply with applicable certification procedures to establish that they are not U.S. persons in order to avoid
the application of such information reporting requirements and backup withholding tax.
Prospective investors should consult with their tax advisors concerning the potential effect of such
certification procedures on their ownership of Notes.
State and Local Taxes
In addition to the federal income tax consequences described above, prospective investors should
consider potential state and local tax consequences of an investment in the Issuer. State and local laws often
differ from federal income tax laws with respect to the treatment of specific items of income, gain, loss,
deduction and credit, and the state and local tax implications of an investment in the Issuer are beyond the
scope of this summary. Each investor should consult its tax advisor concerning the state and local tax
implications of an investment in the Issuer, the impact of the recent changes to the Code on these state and
local tax implications, and the extent, if any, to which an investment in the Issuer could cause such investor
to be subject to taxation in states in which it would not otherwise be subject to tax.
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Cayman Islands Tax Considerations
The following discussion of certain Cayman Islands income tax consequences of an investment in the
Notes is based on the advice of Maples and Calder as to Cayman Islands law. The discussion is a general
summary of present Cayman Islands law, which is subject to prospective and retroactive change. It assumes
that the Issuer will conduct its affairs in accordance with the assumptions made by, and representations made
to, counsel. 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 principal and interest in respect of, or distributions on, the Notes will not be subject
to taxation in the Cayman Islands and no withholding will be required on such payments to any
Holder of a Note and gains derived from the sale of Notes will not 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; and
(ii)
certificates evidencing the Notes, in registered form, to which title is not transferable by
delivery, will not attract Cayman Islands stamp duty. However, an instrument transferring title
to a Note, if brought to or executed in the Cayman Islands, would be subject to Cayman Islands
stamp duty.
The Issuer has been incorporated under the laws of the Cayman Islands as an exempted company and,
as such, has obtained an undertaking from the Governor in Cabinet of the Cayman Islands substantially in
the following form:
“THE TAX CONCESSIONS LAW
(1999 REVISION)
UNDERTAKING AS TO TAX CONCESSIONS
In accordance with Section 6 of the Tax Concessions Law (1999 Revision), the Governor in Cabinet
undertakes with:
STACK 2006-1 Ltd. (the “Company”)
(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 Company 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 Company; or
(ii)
by way of the withholding in whole or in part of any relevant payment as defined in Section
6(3) of the Tax Concessions Law (1999 Revision).
These concessions shall be for a period of 20 years from the 25th day of April, 2006.
GOVERNOR IN CABINET”
The Cayman Islands do not have an income tax treaty arrangement with the United States or any other
country.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY OF CERTAIN OF THE TAX
IMPLICATIONS OF AN INVESTMENT IN NOTES. PROSPECTIVE INVESTORS ARE URGED
TO CONSULT WITH THEIR TAX ADVISORS PRIOR TO INVESTING TO DETERMINE THE
TAX IMPLICATIONS OF SUCH INVESTMENT IN LIGHT OF EACH SUCH INVESTOR’S
PARTICULAR CIRCUMSTANCES.
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ERISA CONSIDERATIONS
The United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the
Code impose certain restrictions on (a) employee benefit plans (as defined in Section 3(3) of ERISA) that are
subject to Title I of ERISA, (b) plans (as defined in Section 4975(e)(1) of the Code) that are subject to
Section 4975 of the Code, including individual retirement accounts or Keogh plans, (c) any other entities,
including without limitation, as applicable, an insurance company general account, whose underlying assets
include plan assets by reason of a plan’s investment in such entities (each of (a), (b) and (c), a “Plan”) and
(d) persons who have certain specified relationships to such Plans (“Parties in Interest” under ERISA and
“Disqualified Persons” under the Code). Moreover, based on the reasoning of the United States Supreme
Court in John Hancock Mutual Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an insurance
company’s general account may be deemed to include assets of the Plans investing in the general account
(e.g., through the purchase of an annuity contract), and the insurance company might be treated as a Party in
Interest with respect to a Plan by virtue of such investment. ERISA also imposes certain duties on persons
who are fiduciaries of Plans subject to ERISA, and ERISA and Section 4975 of the Code prohibit certain
transactions between a Plan and Parties in Interest or Disqualified Persons with respect to such Plan.
Violations of these rules may result in the imposition of excise taxes and other penalties and liabilities under
ERISA and the Code.
A Party in Interest or Disqualified Person who engages in a non-exempt prohibited transaction may be
subject to non-deductible excise taxes and other penalties and liabilities under ERISA and the Code. Each of
the Issuer, the Co-Issuer, the Managers, the Placement Agents and the Investment Adviser, as a result of
their own activities or because of the activities of an affiliate, may be considered a Party in Interest or a
Disqualified Person with respect to certain Plans. Accordingly, direct or indirect prohibited transactions
within the meaning of Section 406 of ERISA and Section 4975 of the Code may arise if Notes are acquired
by a Plan with respect to which any of the Issuer, the Co-Issuer, the Managers, the Placement Agents, the
Investment Adviser, the obligors on the Collateral Assets or any of their respective affiliates is a Party in
Interest or Disqualified Person. In addition, if a Party in Interest or Disqualified Person with respect to a Plan
owns or acquires a beneficial interest in the Issuer or the Co-Issuer, the acquisition or holding of Notes by or
on behalf of the Plan could be considered to constitute an indirect prohibited transaction. Moreover, the
acquisition or holding of Notes or other indebtedness issued by the Issuer or the Co-Issuer by or on behalf of
a Party in Interest or Disqualified Person with respect to a Plan that owns or acquires a beneficial interest in
the Issuer or the Co-Issuer, as the case may be, also could give rise to an indirect prohibited transaction.
Certain exemptions from the prohibited transaction rules could be applicable, however, depending in part
upon the type of Plan fiduciary making the decision to acquire a Note or other interest and the circumstances
under which such decision is made. Included among these exemptions are PTE 90-1, regarding investments
by insurance company pooled separate accounts; PTE 91-38, regarding investments by bank collective
investment funds; PTE 84-14, regarding transactions effected by a “qualified professional asset manager;”
PTE 96-23, regarding investments by certain in-house asset managers; and PTE 95-60, regarding
investments by insurance company general accounts. Even if the conditions specified in one or more of these
exemptions are met, the scope of the relief provided by these exemptions might or might not cover all acts
which might be construed as prohibited transactions. If a purchase of a Note or other indebtedness were to be
a non-exempt prohibited transaction, the purchase might have to be rescinded.
Government plans, certain church plans and foreign 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 local, state, federal or other laws that are similar to the foregoing provisions of ERISA and the
Code. Fiduciaries of any such plans should consult with their counsel before purchasing any Notes.
The United States Department of Labor, the government agency primarily responsible for administering
the ERISA fiduciary rules and the prohibited transaction rules under ERISA and Section 4975 of the Code,
has issued a regulation (the “Plan Asset Regulation”) that, under specified circumstances, requires plan
fiduciaries, and entities with certain specified relationships to a Plan, to “look through” investment vehicles
(such as the Issuer and the Co-Issuer) and treat as an “asset” of the Plan each underlying investment made by
such investment vehicle. The Plan Asset Regulation provides, however, that if equity participation in any
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entity by Benefit Plan Investors is not significant, then the “look-through” rule will not apply to such entity.
Equity participation by Benefit Plan Investors in an entity is significant if, immediately after the most recent
acquisition of any equity interest in the entity, 25 percent or more of the value of any Class of equity
interests in the entity (excluding the value of any interests held by certain persons, other than Benefit Plan
Investors, exercising control over the assets of the entity or providing investment advice to the entity for a
fee (such as the Investment Adviser) or any affiliates (as defined in the Plan Asset Regulation) of such
persons (each such person or affiliate, a “Controlling Person”)) is held by Benefit Plan Investors (the “25
percent Threshold”).
Although there is little pertinent authority issued by the United States Department of Labor, it is
anticipated that the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes and the Class
VI Notes will not constitute “equity interests” in the Co-Issuers. However, it is likely that the Class VII
Notes, the Subordinated Notes and the Class P Notes will constitute a Class of “equity interests” in the Issuer
for purposes of the Plan Asset Regulation.
Accordingly, the Issuer intends to prohibit Plans from acquiring or holding any ERISA Restricted
Note or any interest therein. However, there can be no assurance that at any time no Plan will hold an
interest in a ERISA Restricted Note.
Therefore, except as expressly permitted by the Issuer, each initial investor in the ERISA Restricted
Notes in the form of a Physical Note or Global Note and each subsequent transferee of ERISA Restricted
Notes in the form of a Physical Note will represent and warrant (either in an investor representation letter or
a transfer certificate to be delivered to the Trustee, as transfer agent) and each subsequent transferee in the
ERISA Restricted Notes in the form of a Global Note will be deemed to represent and warrant that, during
the period it holds any interest in a ERISA Restricted Note, it is not and is not acting on behalf of a Plan.
Except as expressly permitted by the Issuer, none of the Trustee, as Note Registrar and transfer agent, or the
Issuer will recognize any purchase or transfer of such ERISA Restricted Note to a purchaser or transferee
that is or is using the assets of a Plan to acquire or hold such ERISA Restricted Notes. If at any time a
purchaser or transferee of a ERISA Restricted Note becomes or uses the assets of a Plan to acquire or hold a
ERISA Restricted Note, such purchaser or transferee will promptly notify each of the Issuer and the Trustee,
as transfer agent, and the Indenture will entitle the Issuer to require such purchaser or transferee to dispose of
such ERISA Restricted Note as soon as practicable following such notification.
There can be no assurance, however, that Plans will not own ERISA Restricted Notes such that the
assets of the Issuer are deemed to be plan assets of a Plan subject to ERISA or Section 4975 of the Code
because one or more Plans is an owner of an ERISA Restricted Note. If for any reason the assets of the
Issuer are deemed to be plan assets of a Plan subject to ERISA or Section 4975 of the Code because one or
more Plans is an owner of an ERISA Restricted Note, 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. In
addition, the payment of certain of the fees payable to the Investment Adviser might be considered to be a
non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code, and other
provisions of ERISA could be implicated as well. It is also not clear whether Section 404(b) of ERISA,
which generally provides that no fiduciary may maintain the indicia of ownership of any assets of a plan
outside the jurisdiction of the district courts of the United States, would be satisfied or any of the exceptions
to this requirement set forth in 29 C.F.R. Section 2550.404b-1 would be available.
Each purchaser or transferee of Notes will be deemed or required, as applicable, to represent and
warrant that either (A) it is not, and is not acting on behalf of, a Benefit Plan Investor subject to ERISA or
Section 4975 of the Code or a governmental or church plan that is subject to any federal, state, local or
foreign law that is similar to the Prohibited Transaction Provision of Section 406 of ERISA or Section 4975
of the Code or (B) its purchase and ownership of Notes will not 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 or
church plan, a violation of any similar federal, state or local law).
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Any purchaser of Notes that is an insurance company using the assets of an insurance company general
account should note that pursuant to Section 401(c) of ERISA, the United States Department of Labor issued
final regulations that provide that assets of an insurance company general account will not be treated as
“plan assets” for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
to the extent such assets relate to contracts issued to employee benefit plans on or before December 31, 1998
and the insurer satisfies various conditions. The plan asset status of insurance company separate accounts is
unaffected by Section 401(c) of ERISA, and separate account assets are treated as the plan assets of any such
plan invested in a separate account.
The sale of any Notes to a Plan is in no respect a representation by the Issuer, the Investment Adviser,
the Managers, the Placement Agents or any of their respective affiliates that such an investment meets all
relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that
such an investment is appropriate for Plans generally or any particular Plan.
ANY PLAN FIDUCIARY THAT PROPOSES TO CAUSE A PLAN TO PURCHASE NOTES
SHOULD CONSULT WITH ITS OWN LEGAL AND TAX ADVISORS WITH RESPECT TO THE
POTENTIAL APPLICABILITY OF ERISA AND THE CODE TO SUCH INVESTMENTS, THE
CONSEQUENCES OF SUCH AN INVESTMENT UNDER ERISA AND THE CODE AND THE
ABILITY TO MAKE THE REPRESENTATIONS DESCRIBED ABOVE. MOREOVER, EACH PLAN
FIDUCIARY SHOULD DETERMINE WHETHER, UNDER THE GENERAL FIDUCIARY
STANDARDS OF ERISA, AN INVESTMENT IN THE NOTES IS APPROPRIATE FOR THE PLAN,
TAKING INTO ACCOUNT THE OVERALL INVESTMENT POLICY OF THE PLAN AND THE
COMPOSITION OF THE PLAN’S INVESTMENT PORTFOLIO.
The discussion of ERISA and Section 4975 of the Code contained in this Final Offering Memorandum,
is, of necessity, general, and does not purport to be complete. Moreover, the provisions of ERISA and
Section 4975 of the Code are subject to extensive and continuing administrative and judicial interpretation
and review. Therefore, the matters discussed above may be affected by future regulations, rulings and court
decisions, some of which may have retroactive application and effect.
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SUBSCRIPTION AND SALE; PRIVATE PLACEMENT
Morgan Stanley & Co. Incorporated (“MS”) and Morgan Stanley & Co. International Limited (“MSI”
and, together with MS, “Morgan Stanley” and in connection with the Rated Notes (other than the Class VII
Notes) the “Managers” or in connection with the Class VII Notes or the Subordinated Notes, the
“Placement Agents”) will, pursuant to a Subscription and Private Placement Agency Agreement, dated on
or prior to the Closing Date (the “Subscription and Private Placement Agency Agreement”), agree with
the Co-Issuers to purchase the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes and
the Class VI Notes subject to the satisfaction of certain conditions set forth in the agreement. MS will resell
such Notes in the United States pursuant to Rule 144A of the Securities Act and MSI will resell such Notes
outside the United States pursuant to Regulation S under the Securities Act. Pursuant to the Subscription and
Private Placement Agency Agreement, MS will agree to sell, on behalf of the Issuer, the Class VII Notes, the
Class P Notes and the Subordinated Notes in the United States pursuant to Rule 144A (in the case of the
Class VII Notes) or Section 4(2) (in the case of the Subordinated Notes) of the Securities Act and MSI will
agree to sell, on behalf of the Issuer, the Class VII Notes, the Class P Notes and the Subordinated Notes
outside the United States pursuant to Regulation S under the Securities Act, each subject to the satisfaction
of certain conditions set forth in the agreement. The Managers and the Placement Agents will be under no
obligation to hold any Notes so acquired.
Pursuant to the Subscription and Private Placement Agency Agreement, the Managers, the Placement
Agents will receive certain fees including, any fees paid on the Closing Date and the Structuring Fee.
Purchasers of Notes may receive certain fees in connection with their purchase of Notes from the Managers
or through the Placement Agents.
Each Class of Rated Notes (other than the Class VII Notes) offered hereby is expected to be
underwritten or privately placed by the Managers and in the case of the Class VII Notes, the Class P Notes
and the Subordinated Notes, privately placed by the Placement Agents, in each case, in individually
negotiated transactions.
Each initial investor in a Class VII Note, Class P Note or Subordinated Note will be required to execute
and deliver to the Placement Agents a representation letter and will in any event be deemed to have made the
representations substantially to the effect set forth in the section entitled “Transfer Restrictions.”
In order to facilitate the Offering, the Managers, and the Placement Agents may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes. Specifically, the Managers and the
Placement Agents may over-allot in connection with the Offering, creating a short position in the Notes for
their own account. In addition, to cover overallotments or to stabilize the price of the Notes, each of the
Managers and the Placement Agents may bid for, and purchase, the Notes in the open market. Any of these
activities may stabilize or maintain the market price of the Notes above independent market levels. The
Managers and the Placement Agents are not required to engage in these activities, and may end any of these
activities at any time.
The Co-Issuers have been advised by the Managers and the Placement Agents that the Managers
propose to resell the Rated Notes (other than the Class VII Notes) and the Placement Agents propose to sell
the Class VII Notes, the Class P Notes and the Subordinated Notes to (i) Non-U.S. Persons in offshore
transactions in reliance on Regulation S under the Securities Act and (ii) U.S. Persons that are both QIBs in
reliance on Rule 144A under the Securities Act and Qualified Purchasers or, with respect to Subordinated
Notes only, both Accredited Investors in reliance on Section 4(2) of the Securities Act and Qualified
Purchasers. Any offer or sale of Notes made in reliance on Rule 144A will be made by the Managers or the
Placement Agents, as applicable, or other broker dealers, including certain Affiliates of the Managers and the
Placement Agents, who are registered as broker dealers under the Exchange Act. The Managers and the
Placement Agents may allow a concession, not in excess of the selling concession, to certain brokers or
dealers.
The Notes have not been and will not be registered under the Securities Act and may not be offered,
sold or delivered within the United States or to, or for the account or benefit of, a U.S. Person except to a
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QIB in reliance on Rule 144A under the Securities Act who is also a Qualified Purchaser or, with respect to
Subordinated Notes only, an Accredited Investor who is also a Qualified Purchaser. In addition, each
purchaser of the Notes taking delivery in the form of an interest in a Rule 144A Global Note will be deemed
to represent and warrant that it and each of the accounts, if any, for which it is purchasing an interest in such
Rule 144A Global Note is both a QIB and a Qualified Purchaser and is not (x) a dealer of the type described
in paragraph (a)(1)(ii) of Rule 144A unless it owns and invests on a discretionary basis not less than
$25,000,000 in securities of issuers that are not affiliated to it, (y) 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 a 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 the plan are made solely by the fiduciary, trustee or sponsor of such
plan, or (z) formed for the purpose of investing in the Issuer or the Co-Issuer (except where each beneficial
owner of the purchaser is a Qualified Purchaser).
Each of the Managers and the Placement Agents will also represent and agree in the Subscription and
Private Placement Agency Agreement that it is both a QIB and a Qualified Purchaser and will represent and
agree in the Subscription and Private Placement Agency Agreement that it will not offer, sell or deliver any
Notes within the United States or to, or for the account or benefit of, U.S. Persons except, in either case, in
accordance with Rule 144A or, in the case of the Subordinated Notes only, Section 4(2) of the Securities
Act, to persons purchasing for their own account or for the accounts of one or more QIBs or, with respect to
the Subordinated Notes only, Accredited Investors, for which the purchaser is acting as fiduciary or agent
and that it will send to each other dealer to which it sells Notes, as applicable, during the restricted period
(unless the sale is made in accordance with Rule 144A) a confirmation or other notice setting forth the
restrictions on offers and sales of Notes within the United States or to, or for the account or benefit of, U.S.
Persons. In addition, with respect to the Notes initially sold pursuant to Regulation S, until the expiration of
40 days after the commencement of the distribution of the offering of the Notes by the Managers and the
Placement Agents an offer or sale of Notes, within the United States by a dealer (whether or not participating
in the Offering) may violate the registration requirements of the Securities Act if the offer or sale is made
otherwise than pursuant to Rule 144A or, in the case of the Subordinated Notes, Section 4(2) of the
Securities Act. Resales of the Notes offered in reliance on Rule 144A or Section 4(2) of the Securities Act,
as the case may be, 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 Notes
offered outside the United States in reliance on Regulation S may be effected only to persons that are both
QIBs and Qualified Purchasers or, with respect the Subordinated Notes only, Accredited Investors and
Qualified Purchasers, in accordance with the transfer restrictions described herein under “Transfer
Restrictions.” As used in this paragraph, the terms “United States” and “U.S.” have the meanings given to
them by Regulation S.
In addition, the Co-Issuers will represent in the Subscription and Private Placement Agency Agreement
that, based on discussions with the Managers and Placement Agents and other factors that the Co-Issuers or
their counsel may deem necessary and appropriate, each of the Co-Issuers, or with respect to the Class VII
Notes, the Issuer, has a reasonable belief that initial sales and subsequent transfers of the Rated Notes to U.S.
Persons will be limited to persons that are both QIBs and Qualified Purchasers.
Each of the Managers and the Placement Agents agrees and represents that 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 meaning of section 21 of the Financial Services and
Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of any Notes in
circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and it has complied and will
comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any
Notes in, from or otherwise involving the United Kingdom.
Each of the Managers and the Placement Agents has agreed that it has not made and will not make any
invitation to the public in the Cayman Islands to subscribe for the Notes. The Issuer has not made and will
not make any invitation to the public in the Cayman Islands to subscribe for the Notes.
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No action has been or will be taken in any jurisdiction that would permit a public offering of the Notes
or the possession, circulation or distribution of this Final Offering Memorandum or any other material
relating to the Co-Issuers (or, with respect to the Class VII Notes, the Class P Notes and the Subordinated
Notes, the Issuer) or any of the Notes in any country or jurisdiction where action for that purpose is required.
Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this Final Offering
Memorandum nor any other offering material or advertisements in connection with the Notes 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.
Purchasers of the Notes 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 Investment Adviser and the Co-Issuers (or, in the case of the Class VII Notes and the Subordinated
Notes, the Issuer) extend to each prospective investor the opportunity, prior to the consummation of the sale
of the Notes, to ask questions of, and receive answers from, the Investment Adviser and the Co-Issuers
concerning the Notes and the terms and conditions of this 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 Co-Issuers, the Issuer or the Investment
Adviser possess the same. Requests for such additional information can be directed to Morgan Stanley & Co.
International Limited on behalf of the Managers and Placement Agents at its principal office at 25 Cabot
Square, Canary Wharf, London E14 4QA England, Attention: Managing Director, Fixed Income Structured
Credit Products Transactions, or Morgan Stanley & Co. Incorporated on behalf of the Managers and
Placement Agents at its principal office at 1585 Broadway, New York, New York 10036, Attention:
Managing Director, Securitized Products Group.
No action is being taken or is contemplated by the Co-Issuers that would permit a public offering of the
Notes or possession or distribution of any Offering Memorandum (in preliminary or final form) or any
amendment thereof, any supplement thereto or any other offering material relating to the Notes in any
jurisdiction where, or in any other circumstances in which, action for those purposes is required. The
Managers and the Placement Agents understand and agrees that it is solely responsible for its own
compliance with all laws applicable in each jurisdiction in which they offer and sell Notes, or distribute any
Offering Memorandum (in preliminary or final form) or any amendments thereof or supplements thereto or
any other material and they agree to comply with all such law.
The Co-Issuers have agreed to indemnify the Managers and the Placement Agents and their Affiliates,
the Investment Adviser and its Affiliates, the Administrator and the Trustee against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments they may be required to make in
respect thereof.
Application will be made to designate the Class VII Notes and the Subordinated Notes for trading
through the National Association of Securities Dealers, Inc.’s PORTAL system.
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 Managers or the Placement
Agents or their Affiliates, or may be underwritten or placed by one or more of the Managers or the
Placement Agents or their Affiliates. In addition, one or more of the Managers or the Placement Agents or
their Affiliates may have in the past and may in the future perform investment banking services for issuers of
the Collateral Assets.
MSCS will be the Supersenior Swap Counterparty and the Initial CDS Counterparty under the CDS
Assets with a Principal Balance of $325,000,000 as of the Closing Date, which will comprise all of the CDS
Assets entered into or otherwise acquired as of the Closing Date. One or more of the Managers or the
Placement Agents or their respective Affiliates may also be the Hedge Counterparty under any Hedge
Agreement. In addition, Affiliates of the Managers and the Placement Agents have acted as the Warehouse
Provider prior to the Closing Date. The Managers and the Placement Agents or their respective Affiliates
may from time to time as a principal or through one or more investment funds that it manages, make
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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.
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SETTLEMENT AND CLEARING
Upon the issuance of a Global Note or Class P Regulation S Global Note, DTC or its custodian will
credit, on its internal system, the respective stated initial principal balance of the individual beneficial
interests represented by the Global Notes or Class P Regulation S Global Note to the accounts of persons
who have accounts with DTC. The accounts initially will be designated by or on behalf of the Managers and
Placement Agents. Ownership of beneficial interests in Global Notes or Class P Regulation S Global Note
will be limited to persons who have accounts with DTC (“participants”) or persons who hold interests
through participants. Ownership of beneficial interests in a Global Note or Class P Regulation S Global Note
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). See “Description of the Notes—Form, Denomination and
Registration of the Notes.”
Certificated Notes, Subordinated Notes, Class P Rule 144A Certificated Notes and Class P Regulation
S Certificated Notes
The Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes, the Class VI Notes, the
Class VII Notes, the Subordinated Notes, (other than the Physical Notes) in definitive registered form, the
Class P Rule 144A Certificated Notes and the Class P Regulation S Certificated Notes, as applicable, (the
“Certificated Notes”) will only be issued in exchange for beneficial interests in a Global Note under the
limited circumstances described under “Description of the Notes—Form, Denomination and Registration of
the Notes—Book-Entry Registration of the Global Notes” or, in the case of the Class P Notes, “Description
of the Class P Notes—Form, Denomination and Registration of the Class P Notes.” Certificated Notes
issued in exchange for the Global Notes will bear the legends referred to under “Transfer Restrictions” and
will be subject to the transfer restrictions referred to in such legends. Payments on the Certificated Notes will
be made by wire transfer in immediately available funds to a U.S. Dollar account maintained by the
Noteholder or its nominee or, if wire transfer cannot be effected, by a U.S. Dollar check delivered to the
Noteholder or its nominee. Final payments of such Certificated Notes will be made only against surrender of
such Certificated Notes at the office of any Note Paying Agent under the Indenture.
Any money deposited with the Trustee or any Note Paying Agent in trust for the payment of the
principal of or interest on any such Certificated Note or Physical Note and remaining unclaimed for two
years after such principal or interest has become due and payable shall be paid to the Co-Issuers (or, with
respect to the Class VII Notes and the Subordinated Notes, the Issuer) at the request of the Co-Issuers (or,
with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the Issuer), and the
Holder of such Certificated Note or Physical Note shall thereafter look only to the Co-Issuers (or, with
respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the Issuer) as an unsecured
general creditor for payment of such amounts and all liability of the Trustee or such Note Paying Agent with
respect to such money (but only to the extent of the amounts so paid to the Co-Issuers or the Issuer, as the
case may be) shall thereupon cease. The Holder of such Certificated Note or Physical Note may transfer or
exchange such Certificated Note or Physical Note, as applicable, by surrendering it at the office of any Note
Paying Agent. Upon the transfer, exchange or replacement of Notes bearing the legend, or upon specific
request for removal of the legend on such Certificated Note or Physical Note, the Co-Issuers (or, with
respect to the Class VII Notes, the Subordinated Notes, and the Class P Notes, the Issuer) will deliver,
through the Trustee, any Note Paying Agent or the Note Transfer Agent, to the Holder and the transferee, as
applicable, one or more Certificated Notes or Physical Notes corresponding to the outstanding principal
balance of Certificated Notes or Physical Notes surrendered for transfer, exchange, or replacement that bear
the legend, or will refuse to remove the legend, as the case may be, unless there is delivered to the CoIssuers (or, with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the
Issuer) satisfactory evidence, which may include an opinion of counsel as may reasonably be required by the
Co-Issuers (or, with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the
Issuer) that neither the legend nor the restrictions on transfer set forth therein are required to ensure
compliance with the provisions of the Securities Act or the Investment Company Act.
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In case any Certificated Note or Physical Note shall become mutilated, defaced, destroyed, lost or
stolen, the Co-Issuers (or, with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes,
the Issuer) will execute and upon the request of the Co-Issuers (or, with respect to the Class VII Notes, the
Subordinated Notes and the Class P Notes, the Issuer) the Trustee will authenticate and deliver a new
Certificated Note or Physical Note 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, if applicable,
from the date to which interest has been paid on such Note in exchange and substitution for the Certificated
Note or Physical Note (upon surrender and cancellation thereof) or in lieu of and substitution for such
Certificated Note or Physical Note. In case such Certificated Note or Physical Note is destroyed, lost or
stolen, the applicant for a substituted Certificated Note or Physical Note will furnish to the Co-Issuers (or,
with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the Issuer) and the Note
Registrar (or Class P Note Registrar, as applicable) 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 Note, the applicant will also
furnish to the Co-Issuers (or, with respect to the Class VII Notes, the Subordinated Notes and the Class P
Notes, the Issuer) satisfactory evidence of the destruction, loss or theft of such Certificated Note or Physical
Note and of the ownership thereof. Upon the issuance of any such Certificated Note or Physical Note, the
Co-Issuers (or, with respect to the Class VII Notes, the Subordinated Notes and the Class P Notes, the
Issuer) may require the payment by the registered Holder thereof of a sum sufficient to cover fees and
expenses connected therewith.
Settlement
All payments in respect of the Notes shall be made in United States dollars in same-day funds.
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TRANSFER RESTRICTIONS
Because of the following restrictions, purchasers are advised to consult legal counsel prior to making
any offer, resale, pledge or other transfer of the Notes. Purchasers of Notes represented by an interest in a
Regulation S Global Note or a Class P 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 (and in the case
of the Class P Notes, the restrictions set forth in “Class P Transfer Restrictions”).
Each prospective purchaser of Notes offered in reliance on Section 4(2) of the Securities Act or Rule
144A (each, a “144A Offeree”), by accepting delivery of this Final Offering Memorandum, will be deemed
to have represented and agreed as follows:
(1) The 144A Offeree acknowledges that this Final Offering Memorandum is personal to the 144A
Offeree and does not constitute an offer to any other person or to the public generally to subscribe
for or otherwise acquire the Notes other than pursuant to Section 4(2) of the Securities Act or Rule
144A or in offshore transactions in accordance with Regulation S. Distribution of this Final
Offering Memorandum, or disclosure of any of its contents to any person other than the 144A
Offeree and those persons, if any, retained to advise the 144A Offeree with respect thereto and
other persons meeting the requirements of Rule 144A or Regulation S is unauthorized and any
disclosure of any of its contents, without the prior written consent of the Co-Issuers, is prohibited.
(2) The 144A Offeree agrees to make no photocopies of this Final Offering Memorandum or any
documents referred to herein and, if the 144A Offeree does not purchase the Notes or the Offering
is terminated, to return this Final Offering Memorandum and all documents referred to herein to
Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York 10036, Managing
Director, Securitized Products Group.
Under the Indenture, the Co-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 purchaser of Notes, and each transferee, will be required to make representations and agreements
substantially to the effect set forth below as specified in the following table. Where the manner of
representation is described as “Deemed,” by its purchase of such Notes the purchaser will be deemed to have
made such representations and agreements. Where the manner of representation is described as “Letter,” the
transferee will be required to make such representations and agreements by delivering a transferee’s letter (in
the form provided in the Indenture) to the Trustee. The Co-Issuers, the Trustee, the Administrator, the
Managers and Placement Agents and the Investment Adviser are presumed to have relied on such
representations and agreements.
Manner of
Representation**
Required Deemed
Representations and
Agreements
Class of Notes*
Form of Notes
Rated Notes (other
than Class VII Notes)
Rule 144A
(Global)
Deemed
1, 3, 4, 5, 6, 9, 10, 11, 12, 14, 16,
18, 20, 21, 22, 23, 24, 25, 26, 27,
28
Rated Notes (other
than Class VII Notes)
Regulation S
(Global)
Deemed
2, 4, 5, 6, 9, 10, 11, 12, 14, 17,
18, 20, 21, 22, 24, 25, 26, 27, 28
Class VII Notes
Rule 144A
(Physical)
Deemed and Letter
1, 3, 4, 5, 7, 9, 10, 11, 12, 13, 15,
19(a), 20, 21, 22, 23, 24, 25, 26,
27, 28
Class VII Notes
Rule 144A (Global)
Deemed and Letter
1, 3, 4, 5, 8, 10, 11, 12, 14, 15,
16, 19(a), 20, 21, 22, 23, 24, 25,
26, 27, 28
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Class VII Notes
Regulation S
(Global)
Deemed and Letter
2, 4, 5, 8, 9, 10, 11, 12, 14, 15 17,
19(a), 20, 21, 22, 24, 25, 26, 27,
28
Class VII Notes
Regulation S
(Physical)
Deemed and Letter
2, 4, 5, 7, 9, 10, 11, 12, 13, 14,
15, 19(a), 20, 21, 22, 24, 25, 26,
27, 28
Subordinated Notes
Section 4(2)
(Physical)
Deemed and Letter
1, 3, 4, 5, 7, 9, 10, 11, 12, 13, 15,
19(b), 20, 21, 22, 23, 24, 25, 26,
27, 28
Subordinated Notes
Rule 144A (Global)
Deemed and for initial
purchaser, letter
1, 3, 4, 5, 7 or 8, 9, 10, 11, 12, 15,
16, 19(b), 20, 21, 22, 23, 24, 25,
26, 27, 28
Subordinated Notes
Regulation S
(Physical)
Deemed and Letter
2, 4, 5, 7, 9, 10, 11, 12, 13, 15,
19(b), 20, 21, 22, 24, 25, 26, 27,
28
Subordinated Notes
Regulation S
(Global)
Deemed and for initial
purchaser, letter
2, 4, 5, 7 or 8, 9, 10, 11, 12, 15,
17,19(b), 20, 21, 22, 24, 25, 26,
27, 28
*
With respect to all numbered representations, references to “Applicable Notes” will be replaced with
the relevant Class of Notes, as appropriate.
** With respect to numbered representations made (or deemed to be made) with respect to a transfer,
references to “purchaser” will be replaced with “transferee,” as appropriate.
Terms used in the following representations and agreements that are defined in Rule 144A or
Regulation S under the Securities Act are used herein as defined therein.
(1) Investor Status. The purchaser is (I)(i) a qualified institutional buyer (within the meaning of Rule
144A under the Securities Act), acquiring the Applicable Notes for its own account or for one or
more accounts with respect to which the purchaser exercises sole investment discretion, each of
which is a qualified institutional buyer, and none of which is (x) a dealer of the type described in
paragraph (a)(1)(ii) of Rule 144A unless it owns and invests on a discretionary basis not less than
$25,000,000 in securities of issuers that are not affiliated to it, (y) 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 a 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 the plan are made
solely by the fiduciary, trustee or sponsor of such plan, or (z) formed for the purpose of investing
in the Issuer or the Co-Issuer (except where each beneficial owner is both a qualified institutional
buyer (within the meaning of Rule 144A under the Securities Act) and a qualified purchaser for
purposes of Section 3(c)(7) of the Investment Company Act), (ii) aware that the sale of the
Applicable Notes to it may be being made in reliance on the exemption from registration provided
by Rule 144A under the Securities Act and (iii) acquiring the Applicable Notes in a principal
amount of not less than the minimum denomination of the Applicable Notes for its own account or
such other account for which it is purchasing the Applicable Notes or (II) with respect to the
Subordinated Notes only, (i) an Accredited Investor that meets the requirements of Rule 501(a) of
Regulation D, acquiring the Subordinated Notes for its own account or for one or more accounts
with respect to which the purchaser exercises sole investment discretion, each of which is an
Accredited Investor, (ii) aware that the sale of the Applicable Notes to it may be being made in
reliance on the exemption from registration provided by Section 4(2) of the Securities Act and
(iii) acquiring the Subordinated Notes in a principal amount of not less than the minimum
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denomination of the Subordinated Notes for its own account or such other account for which it is
purchasing the Subordinated Notes.
(2) Non-U.S. Person Status. The purchaser and any account for which it is purchasing the Applicable
Notes is not a U.S. person as defined in Regulation S under the Securities Act, and its purchase of
the Applicable Notes will comply with all applicable laws in any jurisdiction in which it resides or
is located. The purchaser is aware that the sale of Applicable Notes to it is being made in reliance
on the exemption from registration provided by Regulation S and is acquiring the Applicable
Notes in a principal amount of not less than the minimum denomination of the Applicable Notes
for its own account or such other account for which it is purchasing the Applicable Notes.
(3) Qualified Purchaser Status. The purchaser and any account for which it is purchasing the
Applicable Notes (i) is a “qualified purchaser” for purposes of Section 3(c)(7) of the Investment
Company Act, (ii) was not formed solely for the purpose of investing in the Applicable Notes
(except when each beneficial owner of the purchaser or such account, as applicable, is a “qualified
purchaser” for purposes of Section 3(c)(7) of the Investment Company Act) and (iii) is not a
(A) partnership, (B) common trust fund or (C) special trust, pension fund or retirement plan in
which the partners, beneficiaries or participants, as applicable, may designate the particular
investments to be made (except when each beneficial owner of the purchaser or such account, as
applicable, is a “qualified purchaser” for purposes of Section 3(c)(7) of the Investment Company
Act).
(4) No Public Offering. The purchaser understands that the Applicable Notes are being offered only in
a transaction not involving any public offering in the United States within the meaning of the
Securities Act, the Applicable Notes have not been and will not be registered under the Securities
Act, and, if in the future the purchaser decides to offer, resell, pledge or otherwise transfer the
Applicable Notes, such Applicable Notes may be offered, resold, pledged or otherwise transferred
only in accordance with the legend on such Applicable Notes described herein. The purchaser
acknowledges that no representation is made by the Co-Issuers or the Issuer, as applicable, the
Managers or the Placement Agents as to the availability of any exemption under the Securities Act
or any state securities laws for resale of the Applicable Notes. THE PURCHASER
UNDERSTANDS THAT THE APPLICABLE NOTES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION OR ANY
OTHER GOVERNMENTAL AUTHORITY OR AGENCY OF ANY JURISDICTION, NOR
HAS THE U.S. SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER
GOVERNMENTAL AUTHORITY OR AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PRELIMINARY OFFERING MEMORANDUM OR THIS FINAL
OFFERING MEMORANDUM. The Purchaser further understands that any representation to the
contrary is a criminal offense.
(5) No Reliance. In connection with the purchase of the Applicable Notes, the purchaser
acknowledges and agrees that: (i) none of the Co-Issuers or the Issuer, as applicable, the
Managers, the Placement Agents, the Supersenior Swap Counterparty or the Investment Adviser is
acting as a fiduciary or financial or investment adviser for the purchaser; (ii) the purchaser has
carefully read the final presentation to investors, dated July, 2006 relating to the Notes and the
Final Offering Memorandum, including, without limitation, the section entitled “Risk Factors”
therein, and has based its decision to purchase the Applicable Notes upon the information
contained in this Final Offering Memorandum and is not relying (for purposes of making any
investment decision or otherwise) upon any advice, counsel or representations (whether written or
oral) of the Co-Issuers or the Issuer, as applicable, the Managers, the Placement Agents, the
Supersenior Swap Counterparty or the Investment Adviser other than in this Final Offering
Memorandum and any representations expressly set forth in a written agreement with such party;
(iii) none of the Co-Issuers or the Issuer, as applicable, the Managers, the Placement Agents, the
Supersenior Swap Counterparty or the Investment Adviser have given to the purchaser (directly or
indirectly through any other person) any assurance, guarantee, or representation whatsoever as to
the expected or projected success, profitability, return, performance, result, effect, consequence, or
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benefit (including legal, regulatory, tax, financial, accounting, or otherwise) of its purchase or the
documentation for the Applicable Notes; (iv) the purchaser has consulted with its own legal,
regulatory, tax, business, investment, financial, and accounting advisers to the extent it has
deemed necessary, and it has made its own investment decisions (including decisions regarding
the suitability of any transaction pursuant to the documentation for the Applicable Notes) based
upon its own judgment and upon any advice from such advisers as it has deemed necessary and
not upon any view expressed by the Co-Issuers or the Issuer, as applicable, the Managers, the
Placement Agents, the Supersenior Swap Counterparty or the Investment Adviser; (v) the
purchaser has determined that the rates, prices or amounts and other terms of the purchase and sale
of the Applicable Notes reflect those in the relevant market for similar transactions; (vi) the
purchaser is purchasing the Applicable Notes with a full understanding of all of the terms,
conditions and risks thereof (economic and otherwise), and it is capable of assuming and willing
to assume (financially and otherwise) those risks; (vii) the purchaser is a sophisticated investor
familiar with transactions similar to its investment in the Applicable Notes; (viii) there is no
market for the Applicable Notes and no assurance can be given as to the liquidity of any trading
market for the Applicable Notes and it is unlikely that a trading market for the Applicable Notes
will develop; and (ix) although the Managers and/or the Placement Agents, as applicable, may
from time to time make a market in the Applicable Notes, the Managers and the Placement Agents
are under no obligation to do so and, following the commencement of any market-making, may
discontinue the same at any time and, accordingly, the purchaser must be prepared to hold the
Applicable Notes for an indefinite period of time or until their maturity.
(6) ERISA-related Matters (for the Rated Notes (other than Class VII Notes)). On each day that the
purchaser holds Rated Notes (other than Class VII Notes), the purchaser, and any account on
behalf of which the purchaser is purchasing the Applicable Notes, is deemed to represent that
either (a) it is not a Plan or a governmental plan, foreign plan or church plan subject to any federal,
state, foreign or local law that is substantially similar to the prohibited transaction provisions of
Section 406 of ERISA or Section 4975 of the Code or (b) its purchase and holding of the
Applicable Notes 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, foreign or church
plan, a violation of any similar federal, state, foreign or local law). A “Plan” means any of (a) an
employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (b) a
plan described in Section 4975(e)(1) of the Code, including individual retirement accounts or
Keogh plans, subject to Section 4975 of the Code or (c) any other entity, including, without
limitation, an insurance company general account, whose underlying assets include plan assets by
reason of a plan’s investment in such entities.
(7) ERISA-related Matters (for ERISA Restricted Notes in the Form of a Physical Note). The
purchaser shall represent and warrant in writing that, during the period it holds any interest in an
ERISA Restricted Note, it is not and is not acting on behalf of a Plan. The purchaser
acknowledges and agrees that, except as expressly permitted by the Issuer, none of the Trustee, as
Note Registrar and transfer agent, or the Issuer will recognize any purchase or transfer of an
ERISA Restricted Note to a purchaser or transferee that is or is using the assets of a Plan to
acquire or hold an ERISA Restricted Note. The purchaser acknowledges and agrees that if at any
time a purchaser or transferee of an ERISA Restricted Note becomes or uses the assets of a Plan to
acquire or hold an ERISA Restricted Note, such purchaser or transferee will promptly notify each
of the Issuer and the Trustee, as transfer agent, and the Indenture will entitle the Issuer to require
such transferee to dispose of such ERISA Restricted Note as soon as practicable following such
notification. The purchaser shall also represent and warrant in writing that: (a) it is not a Plan or a
governmental plan, foreign plan or church plan subject to any federal, state, foreign or local law
that is substantially similar to the prohibited transaction provisions of Section 406 of ERISA or
Section 4975 of the Code or (b) its purchase and holding and disposition of the ERISA Restricted
Notes will not constitute or otherwise 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, foreign or church
plan, a violation of any similar federal, state, foreign or local law). The purchaser acknowledges
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and agrees that the representations made in this clause (7), shall be deemed made on each day
from the date hereof through and including the date on which the purchaser disposes of its
interests in the ERISA Restricted Notes, and it agrees to notify the addressees if the circumstances
change after the date hereof. The purchaser understands that any transfer effected in connection
with a representation made under this clause that was false or incomplete 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 Issuer, the Trustee or any intermediary. The
purchaser, and any fiduciary of the purchaser causing it to acquire the ERISA Restricted Notes,
agrees to indemnify and hold harmless the Co-Issuers, the Trustee, the Investment Adviser, the
Administrator, the Managers, the Placement Agents and their respective Affiliates from any cost,
damage or loss incurred by them as a result of any of the representations being made by it pursuant
to this clause being or becoming false. Any purported purchase or transfer of the ERISA
Restricted Notes by a purchaser or to a transferee that does not comply with the foregoing shall be
null and void ab initio and will not operate to transfer any rights to the purchaser, notwithstanding
any instructions to the contrary to the Issuer, the Trustee or any intermediary.
(8) ERISA-related Matters (for ERISA Restricted Notes in the form of Interests in a Global Note). The
initial investor represents and warrants in writing and each subsequent transferee is deemed to
represent and warrant that, during the period it holds any interest in an ERISA Restricted Note, it
is not and is not acting on behalf of a Plan. The purchaser acknowledges and agrees that, except
as expressly permitted by the Issuer, none of the Trustee, as Note Registrar and transfer agent, or
the Issuer will recognize any purchase or transfer of an ERISA Restricted Note to a purchaser or
transferee that is or is using the assets of a Plan to acquire or hold an ERISA Restricted Note. The
purchaser acknowledges and agrees that if at any time a purchaser or transferee of an ERISA
Restricted Note becomes or uses the assets of a Plan to acquire or hold an ERISA Restricted Note,
such purchaser or transferee will promptly notify each of the Issuer and the Trustee, as transfer
agent, and the Indenture will entitle the Issuer to require such transferee to dispose of such ERISA
Restricted Note as soon as practicable following such notification. The purchaser is deemed to
represent and warrant that: (a) it is not a Plan or a governmental plan, foreign plan or church plan
subject to any federal, state, foreign or local law that is substantially similar to the prohibited
transaction provisions of Section 406 of ERISA or Section 4975 of the Code or (b) its purchase
and holding and disposition of the ERISA Restricted Notes will not constitute or otherwise 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, foreign or church plan, a violation of any similar federal, state,
foreign or local law). The purchaser acknowledges and agrees that the representations made in
this clause (8), shall be deemed made on each day from the date hereof through and including the
date on which the purchaser disposes of its interests in the ERISA Restricted Notes, and it agrees
to notify the addressees if the circumstances change after the date hereof. The purchaser
understands that any transfer effected in connection with a representation made under this clause
that was false or incomplete 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 Issuer, the Trustee or any intermediary. The purchaser, and any fiduciary of the purchaser
causing it to acquire the ERISA Restricted Notes, agrees to indemnify and hold harmless the CoIssuers, the Trustee, the Investment Adviser, the Administrator, the Managers, the Placement
Agents and their respective Affiliates from any cost, damage or loss incurred by them as a result of
any of the representations being made by it pursuant to this clause being or becoming false. Any
purported purchase or transfer of the ERISA Restricted Notes by a purchaser or to a transferee that
does not comply with the foregoing shall be null and void ab initio and will not operate to transfer
any rights to the purchaser, notwithstanding any instructions to the contrary to the Issuer, the
Trustee or any intermediary.
(9) No General Solicitation. The purchaser will not, at any time, offer to buy or offer to sell the
Applicable Notes 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
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or similar medium or broadcast over television or radio or seminar or meeting whose attendees
have been invited by general solicitations or advertising.
(10) Investment Intent. The purchaser is not purchasing the Applicable Notes with a view to the resale,
distribution or other disposition thereof in violation of the Securities Act.
(11) Notice on Transferability. The purchaser will provide notice to each Person to whom it proposes
to transfer any interest in the Applicable Notes of the transfer restrictions and representations set
forth in the Indenture (including the exhibits referenced therein).
(12) Required Sale by Non-Permitted Holders. The purchaser understands that the Issuer has the right
under the Indenture to compel any non-permitted holder to sell its interest in the Applicable Notes
or may sell such interest in the Applicable Notes on behalf of such owner.
(13) Written Certification upon Transfer of Physical Notes. Before any interest in a Note in the form of
a Physical Note may be offered, resold, pledged or otherwise transferred, the transferee will be
required to provide the Trustee with a written certification (in the form provided in the
Indenture) as to compliance with the transfer restrictions.
(14) Risk of Investment in Rated Notes. The purchaser understands that an investment in the Applicable
Notes involves certain risks, including the risk of loss of a substantial part of its investment under
certain circumstances. The purchaser has had access to such financial and other information
concerning the Co-Issuers or the Issuer, as applicable, and the Applicable Notes as it deemed
necessary or appropriate in order to make an informed investment decision with respect to its
acquisition of the Applicable Notes, including an opportunity to ask questions of and request
information from the Co-Issuers or the Issuer, as applicable.
(15) Risk of Investment in Class VII Notes and Subordinated Notes. The Purchaser understands that an
investment in the Class VII Notes or the Subordinated Notes involves certain risks, including the
risk of loss of all or a substantial part of its investment under certain circumstances. The Purchaser
understands that the Class VII Notes and the Subordinated Notes will be highly illiquid and are
not suitable for short term trading. The Class VII Notes and the Subordinated Notes are a
leveraged investment in a portfolio of Collateral Assets (which will consist of a portfolio of assetbacked securities and securities issued by real estate investment trusts (REITs) and synthetic
securities referencing such types), which exposes the Class VII Notes and the Subordinated Notes
to disproportionately large changes in value. Payments on the Class VII Notes and the
Subordinated Notes are not guaranteed and are dependent on the performance of the portfolio of
Collateral Assets. The Purchaser understands that it is possible that, due to the structure of the
transaction and the performance of the portfolio, payments on the Class VII Notes and the
Subordinated Notes may be deferred, reduced or eliminated entirely. Furthermore, the Class VII
Notes and the Subordinated Notes will rank below the Notes that have a superior prior claim on
the portfolio. The Issuer has assets limited to the Collateral Assets for payment of all Classes of
the Notes and the Class VII Notes and the Subordinated Notes bear the first risk of loss. The
Purchaser (i) has such knowledge and experience in financial and business matters that the
Purchaser is capable of evaluating the merits and risks (including for tax, legal, regulatory,
accounting and other financial purposes) of its prospective investment in the Class VII Notes or
the Subordinated Notes, (ii) is financially able to bear such risk, (iii) in making such investment is
not relying on the advice or recommendations of Morgan Stanley, the Issuer, the Investment
Adviser or any of their respective affiliates (or any representative of any of the foregoing) and
(iv) has determined that an investment in the Class VII Notes and the Subordinated Notes is
suitable and appropriate for it. The Purchaser has received, and has had an adequate opportunity to
review the contents of the final presentation to investors, dated July, 2006, relating to the Notes
and, the Final Offering Memorandum and will review the final presentation to investors, dated
July, 2006, relating to the Notes and the Final Offering Memorandum prior to payment of the
subscription price for the Class VII Notes or the Subordinated Notes purchased by it, but shall rely
only on this Final Offering Memorandum. The Purchaser has had access to such financial and
other information concerning the Issuer and the Class VII Notes and the Subordinated Notes as it
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deemed necessary or appropriate in order to make an informed investment decision with respect to
its purchase of the Class VII Notes and the Subordinated Notes, including an opportunity to ask
questions of and request information from the Issuer.
(16) Rule 144A Global Notes. The purchaser understands that the Applicable Notes offered in reliance
on Rule 144A will bear the legend set forth herein and will be represented by one or more Rule
144A Global Notes. The Applicable Notes so represented may not at any time be held by or on
behalf of U.S. persons (as defined in Regulation S under the Securities Act) that are not qualified
institutional buyers (within the meaning of Rule 144A under the Securities Act). Before any
interest in a Rule 144A Global Note may be offered, resold, pledged or otherwise transferred to a
person who takes delivery in the form of an interest in a Regulation S Global Note or, with respect
to Class VII Notes and Subordinated Notes, Physical Notes, the transferor will be required to
provide the Trustee with a written certification (in the form provided in the Indenture) as to
compliance with the transfer restrictions and, if such transferor is an Accredited Investor, an
opinion of counsel to each of the Issuer and the Trustee in form and substance satisfactory to the
Trustee that the transfer would not require the Subordinated Notes to be registered under the
Securities Act.
(17) Regulation S Global Note. The purchaser understands that the Applicable Notes offered in reliance
on Regulation S will bear the legend set forth herein and will be represented by one or more
Regulation S Global Notes. The Applicable Notes so represented may not at any time be held by
or on behalf of U.S. persons as defined in Regulation S under the Securities Act. Before any
interest in a Regulation S Global Note may be offered, resold, pledged or otherwise transferred to
a person who takes delivery in the form of an interest in a Rule 144A Global Note or, with respect
to Class VII Notes and Subordinated Notes, Physical Notes, the transferor will be required to
provide the Trustee with a written certification (in the form provided in the Indenture) as to
compliance with the transfer restrictions.
(18) Rated Notes (other than the Class VII Notes) Legend. The Rated Notes (other than the Class VII
Notes) will bear a legend to the following effect unless the Co-Issuers determine otherwise in
compliance with applicable law:
THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN THE
INDENTURE REFERRED TO HEREIN. THIS NOTE HAS NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER RELEVANT JURISDICTION, AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT: (A) TO A TRANSFEREE
THAT IS A QUALIFIED PURCHASER (AS DEFINED IN THE INDENTURE) THAT THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, ACTING FOR ITS OWN ACCOUNT OR
THE ACCOUNT OF ONE OR MORE PERSONS WITH RESPECT TO WHICH THE
TRANSFEREE EXERCISES SOLE INVESTMENT DISCRETION, EACH OF WHICH IS A
QUALIFIED PURCHASER THAT THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER, AND NONE OF WHICH ARE (X) A DEALER OF
THE TYPE DESCRIBED IN PARAGRAPH (a)(1)(ii) OF RULE 144A UNLESS IT OWNS AND
INVESTS ON A DISCRETIONARY BASIS NOT LESS THAN $25,000,000 IN SECURITIES
OF ISSUERS THAT ARE NOT AFFILIATED TO IT, (Y) 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 A 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 THE
PLAN ARE MADE SOLELY BY THE FIDUCIARY, TRUSTEE OR SPONSOR OF SUCH
PLAN OR (Z) FORMED FOR THE PURPOSE OF INVESTING IN THE ISSUER (EXCEPT
WHERE EACH BENEFICIAL OWNER IS A QUALIFIED PURCHASER), TO WHOM
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NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON THE EXEMPTION FROM SECURITIES ACT REGISTRATION
PROVIDED BY RULE 144A, OR (B) TO A TRANSFEREE THAT IS NOT A U.S. PERSON
(AS DEFINED IN REGULATION S), IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S, ACTING FOR ITS OWN ACCOUNT OR THE
ACCOUNT OF ONE OR MORE PERSONS WITH RESPECT TO WHICH IT EXERCISES
SOLE INVESTMENT DISCRETION, EACH OF WHICH IS NOT A U.S. PERSON (AS
DEFINED IN REGULATION S), AND IN EACH CASE IN COMPLIANCE WITH THE
CERTIFICATIONS AND OTHER REQUIREMENTS SPECIFIED IN THE INDENTURE
REFERRED TO HEREIN AND ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES AND ANY OTHER RELEVANT JURISDICTION.
EACH PURCHASER OF A BENEFICIAL INTEREST IN THIS NOTE, BY ITS PURCHASE,
REPRESENTS, WARRANTS AND COVENANTS FOR THE BENEFIT OF THE ISSUER,
THE INVESTMENT ADVISER, THE MANAGERS AND THE PLACEMENT AGENTS THAT
EITHER (A) IT IS NOT, AND IS NOT ACQUIRING AND HOLDING THIS NOTE ON
BEHALF OF, A PLAN OR A GOVERNMENTAL PLAN, FOREIGN PLAN OR CHURCH
PLAN SUBJECT TO ANY FEDERAL, STATE, FOREIGN OR LOCAL LAW THAT IS
SUBSTANTIALLY SIMILAR TO THE PROHIBITED TRANSACTION PROVISIONS OF
SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE OR (B) ITS ACQUISITION
AND HOLDING OF THIS NOTE THROUGHOUT THE PERIOD THAT IT HOLDS THIS
NOTE WILL NOT 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, FOREIGN OR CHURCH PLAN, A VIOLATION OF ANY SIMILAR
FEDERAL, STATE, FOREIGN OR LOCAL LAW), BECAUSE SUCH ACQUISITION AND
HOLDING OF THIS NOTE BY THE TRANSFEREE IS COVERED BY A PROHIBITED
TRANSACTION EXEMPTION, ALL OF THE CONDITIONS OF WHICH ARE AND WILL
BE SATISFIED UPON ITS ACQUISITION OF, AND THROUGHOUT THE TERM THAT IT
HOLDS, THIS NOTE. IN ADDITION, IF THE TRANSFEREE IS, OR IS ACTING ON
BEHALF OF, A PLAN SUBJECT TO ERISA, THE FIDUCIARIES OF SUCH PLAN
REPRESENT AND WARRANT THAT THEY HAVE BEEN INFORMED OF AND
UNDERSTAND THE ISSUER’S INVESTMENT OBJECTIVES, POLICIES AND
STRATEGIES AND THAT THE DECISION TO INVEST SUCH PLAN’S ASSETS IN THIS
NOTE WAS MADE WITH APPROPRIATE CONSIDERATION OF RELEVANT
INVESTMENT FACTORS WITH REGARD TO SUCH PLAN AND IS CONSISTENT WITH
THE DUTIES AND RESPONSIBILITIES IMPOSED UPON FIDUCIARIES WITH REGARD
TO THEIR INVESTMENT DECISIONS UNDER ERISA.
THE ISSUER MAY REQUIRE ANY HOLDER OF THIS NOTE (OR A BENEFICIAL
INTEREST HEREIN) WHO IS A U.S. PERSON (AS DEFINED IN REGULATION S) WHO
WAS NOT BOTH A QUALIFIED INSTITUTIONAL BUYER AND A QUALIFIED
PURCHASER AT THE TIME OF ACQUISITION OF THIS NOTE (OR SUCH INTEREST
HEREIN) TO TRANSFER THIS NOTE (OR SUCH INTEREST) TO A TRANSFEREE THAT
IS (X) BOTH A QUALIFIED INSTITUTIONAL BUYER AND A QUALIFIED PURCHASER
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE
SECURITIES ACT, OR (Y) NOT A U.S. PERSON (AS DEFINED IN REGULATION S) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
EACH INITIAL PURCHASER AND TRANSFEREE OF AN INTEREST IN THIS NOTE WILL
BE DEEMED TO MAKE CERTAIN REPRESENTATIONS, WARRANTIES AND
COVENANTS PURSUANT TO 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 ISSUER, THE TRUSTEE OR ANY INTERMEDIARY.
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PRINCIPAL OF THIS NOTE IS PAYABLE AS SET FORTH HEREIN. ACCORDINGLY, THE
OUTSTANDING PRINCIPAL OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE
AMOUNT SHOWN ON THE FACE HEREOF. ANY PERSON ACQUIRING THIS NOTE
MAY ASCERTAIN ITS CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE NOTE
PAYING AGENT.
NO INVITATION SHALL BE MADE TO THE PUBLIC IN THE CAYMAN ISLANDS TO
SUBSCRIBE FOR THE NOTES.
The Rated Notes (other than the Class VII Notes) held pursuant to Rule 144A will bear the
following additional legends unless the Co-Issuers determine otherwise in compliance with
applicable law:
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF AN INTEREST IN A REGULATION S GLOBAL NOTE WILL BE REQUIRED TO
DELIVER A TRANSFER CERTIFICATE IN THE FORM REQUIRED BY THE INDENTURE.
The Rated Notes (other than the Class VII Notes) held pursuant to Regulation S will bear the
following additional legends unless the Co-Issuers determine otherwise in compliance with
applicable law:
AN INTEREST IN THIS NOTE MAY NOT BE HELD BY A U.S. PERSON (AS DEFINED IN
REGULATION S) AT ANY TIME. IN ADDITION, AN INTEREST IN THIS NOTE MAY
ONLY BE HELD THROUGH EUROCLEAR OR CLEARSTREAM.
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF AN INTEREST IN A RULE 144A GLOBAL NOTE WILL BE REQUIRED TO
DELIVER A TRANSFER CERTIFICATE IN THE FORM REQUIRED BY THE INDENTURE.
The Class V Notes and the Class VI Notes will bear the following additional legend unless the CoIssuers determine otherwise in compliance with applicable law:
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” (WITHIN THE
MEANING OF SECTION 1272 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED). UPON WRITTEN REQUEST, THE TRUSTEE WILL PROMPTLY MAKE
AVAILABLE TO ANY HOLDER OF THIS NOTE THE FOLLOWING INFORMATION:
(1) THE ISSUE PRICE AND DATE OF THE NOTE, (2) THE AMOUNT OF ORIGINAL ISSUE
DISCOUNT ON THE NOTE AND (3) THE YIELD TO MATURITY OF THE NOTE. SUCH
WRITTEN REQUEST SHOULD BE SENT TO: STACK 2006-1 LTD., c/o TCW ASSET
MANAGEMENT COMPANY, 865 SOUTH FIGUEROA STREET, SUITE 1800, LOS
ANGELES, CALIFORNIA 90017.
(19) (a) Class VII Notes Legend. The Class VII Notes will bear a legend to the following effect unless
the Issuer otherwise determines in compliance with applicable law:
THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN THE
INDENTURE REFERRED TO HEREIN. THIS NOTE HAS NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER RELEVANT JURISDICTION, AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT: (A) TO A TRANSFEREE
THAT IS A QUALIFIED PURCHASER (AS DEFINED IN THE INDENTURE) THAT THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, ACTING FOR ITS OWN ACCOUNT OR
THE ACCOUNT OF ONE OR MORE PERSONS WITH RESPECT TO WHICH THE
TRANSFEREE EXERCISES SOLE INVESTMENT DISCRETION, EACH OF WHICH IS A
QUALIFIED PURCHASER THAT THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER, AND NONE OF WHICH ARE (X) A DEALER OF
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THE TYPE DESCRIBED IN PARAGRAPH (a)(1)(ii) OF RULE 144A UNLESS IT OWNS AND
INVESTS ON A DISCRETIONARY BASIS NOT LESS THAN $25,000,000 IN SECURITIES
OF ISSUERS THAT ARE NOT AFFILIATED TO IT, (Y) 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 A 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 THE
PLAN ARE MADE SOLELY BY THE FIDUCIARY, TRUSTEE OR SPONSOR OF SUCH
PLAN OR (Z) FORMED FOR THE PURPOSE OF INVESTING IN THE ISSUER (EXCEPT
WHERE EACH BENEFICIAL OWNER IS A QUALIFIED PURCHASER), TO WHOM
NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON THE EXEMPTION FROM SECURITIES ACT REGISTRATION
PROVIDED BY RULE 144A, OR (B) WITH RESPECT TO THE SUBORDINATED NOTES
ONLY, TO A TRANSFEREE THAT IS AN ACCREDITED INVESTOR IN A TRANSACTION
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT WHO
IS A QUALIFIED PURCHASER OR (C) TO A TRANSFEREE THAT IS NOT A U.S. PERSON
(AS DEFINED IN REGULATION S) IN AN OFFSHORE TRANSACTION IN ACCORDANCE
WITH REGULATION S, ACTING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ONE
OR MORE PERSONS WITH RESPECT TO WHICH IT EXERCISES SOLE INVESTMENT
DISCRETION, EACH OF WHICH IS NOT A U.S. PERSON (AS DEFINED IN REGULATION
S), AND IN EACH CASE IN COMPLIANCE WITH THE CERTIFICATIONS AND OTHER
REQUIREMENTS SPECIFIED IN THE INDENTURE REFERRED TO HEREIN AND ANY
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER
RELEVANT JURISDICTION.
EACH PURCHASER OF A BENEFICIAL INTEREST IN THIS NOTE, BY ITS PURCHASE,
REPRESENTS, WARRANTS AND COVENANTS FOR THE BENEFIT OF THE ISSUER,
THE INVESTMENT ADVISER, THE MANAGERS AND THE PLACEMENT AGENTS THAT
EITHER (A) IT IS NOT, AND IS NOT ACQUIRING AND HOLDING THIS NOTE ON
BEHALF OF, A PLAN OR A GOVERNMENTAL PLAN, FOREIGN PLAN OR CHURCH
PLAN SUBJECT TO ANY FEDERAL, STATE, FOREIGN OR LOCAL LAW THAT IS
SUBSTANTIALLY SIMILAR TO THE PROHIBITED TRANSACTION PROVISIONS OF
SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE OR (B) ITS ACQUISITION
AND HOLDING OF THIS NOTE THROUGHOUT THE PERIOD THAT IT HOLDS THIS
NOTE WILL NOT 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, FOREIGN OR CHURCH PLAN, A VIOLATION OF ANY SIMILAR
FEDERAL, STATE, FOREIGN OR LOCAL LAW), BECAUSE SUCH ACQUISITION AND
HOLDING OF THIS NOTE BY THE TRANSFEREE IS COVERED BY A PROHIBITED
TRANSACTION EXEMPTION, ALL OF THE CONDITIONS OF WHICH ARE AND WILL
BE SATISFIED UPON ITS ACQUISITION OF, AND THROUGHOUT THE TERM THAT IT
HOLDS, THIS NOTE.
THE ISSUER MAY REQUIRE ANY HOLDER OF THIS NOTE (OR A BENEFICIAL
INTEREST HEREIN) WHO IS A U.S. PERSON (AS DEFINED IN REGULATION S) WHO
WAS NOT BOTH A QUALIFIED INSTITUTIONAL BUYER AND A QUALIFIED
PURCHASER AT THE TIME OF ACQUISITION OF THIS NOTE (OR SUCH INTEREST
HEREIN) TO TRANSFER THIS NOTE (OR SUCH INTEREST) TO A TRANSFEREE THAT
IS (X) BOTH A QUALIFIED INSTITUTIONAL BUYER AND A QUALIFIED PURCHASER
IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, OR (Y) NOT A U.S. PERSON (AS DEFINED IN REGULATION S) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
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
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RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE
CONTRARY TO THE ISSUER, THE TRUSTEE OR ANY INTERMEDIARY.
EACH PURCHASER OR TRANSFEREE OF THIS NOTE IS DEEMED TO REPRESENT AND
WARRANT AND, IN CERTAIN CASES, REPRESENTS AND WARRANTS IN WRITING
THAT, DURING THE PERIOD IT HOLDS ANY INTEREST IN THIS NOTE, IT IS NOT AND
IS NOT ACTING ON BEHALF OF (A) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN
SECTION 3(3) OF ERISA) THAT IS SUBJECT TO TITLE I OF ERISA, (B) A PLAN (AS
DEFINED IN SECTION 4975(E)(1) OF THE CODE) THAT IS SUBJECT TO SECTION 4975
OF THE CODE, INCLUDING INDIVIDUAL RETIREMENT ACCOUNTS OR KEOGH
PLANS, (C) ANY OTHER ENTITY, INCLUDING WITHOUT LIMITATION, AN
INSURANCE COMPANY GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS
INCLUDE ASSETS OF THE PLANS DESCRIBED IN (A) OR (B) ABOVE BY REASON OF
SUCH PLAN’S INVESTMENT IN THE ENTITIES (EACH OF (A), (B) AND (C), A “PLAN”).
THE PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY
PERMITTED BY THE ISSUER, NONE OF THE TRUSTEE, AS NOTE REGISTRAR AND
TRANSFER AGENT, OR THE ISSUER WILL RECOGNIZE ANY PURCHASE OR
TRANSFER OF THIS NOTE TO A PURCHASER OR TRANSFEREE THAT IS OR IS USING
THE ASSETS OF A PLAN TO ACQUIRE OR HOLD THIS NOTE. THE PURCHASER
ACKNOWLEDGES AND AGREES THAT IF AT ANY TIME A PURCHASER OR
TRANSFEREE OF THIS NOTE BECOMES OR USES THE ASSETS OF A PLAN TO
ACQUIRE OR HOLD THIS NOTE, SUCH PURCHASER OR TRANSFEREE WILL
PROMPTLY NOTIFY EACH OF THE ISSUER AND THE TRUSTEE, AS TRANSFER
AGENT, AND THE INDENTURE WILL ENTITLE THE ISSUER TO REQUIRE SUCH
TRANSFEREE TO DISPOSE OF THIS NOTE AS SOON AS PRACTICABLE FOLLOWING
SUCH NOTIFICATION.
The Class VII Notes will bear the following additional legend unless the Issuer determines
otherwise in compliance with applicable law:
PRINCIPAL OF THIS NOTE IS PAYABLE AS SET FORTH HEREIN. ACCORDINGLY, THE
OUTSTANDING PRINCIPAL OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE
AMOUNT SHOWN ON THE FACE HEREOF. ANY PERSON ACQUIRING THIS NOTE
MAY ASCERTAIN ITS CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE NOTE
PAYING AGENT.
NO INVITATION SHALL BE MADE TO THE PUBLIC IN THE CAYMAN ISLANDS TO
SUBSCRIBE FOR THE NOTES.
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE WILL BE DEEMED TO MAKE
CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS PURSUANT TO THE
INDENTURE.
The Class VII Notes in the form of a Rule 144A Global Note will also bear a legend to the
following effect unless the Issuer otherwise determines in compliance with applicable law:
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF A PHYSICAL NOTE OR AN INTEREST IN A REGULATION S GLOBAL NOTE
WILL BE REQUIRED TO DELIVER A TRANSFER CERTIFICATE IN THE FORM
REQUIRED BY THE INDENTURE.
The Class VII Notes in the form of a Regulation S Global Note will also bear a legend to the
following effect unless the Issuer otherwise determines in compliance with applicable law:
AN INTEREST IN THIS NOTE MAY NOT BE HELD BY A U.S. PERSON (AS DEFINED IN
REGULATION S) AT ANY TIME. IN ADDITION, AN INTEREST IN THIS NOTE MAY
ONLY BE HELD THROUGH EUROCLEAR OR CLEARSTREAM.
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204
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF A PHYSICAL NOTE OR AN INTEREST IN A RULE 144A GLOBAL NOTE WILL
BE REQUIRED TO DELIVER A TRANSFER CERTIFICATE IN THE FORM REQUIRED BY
THE INDENTURE.
The Class VII Notes will bear the following additional legend unless the Issuer determines
otherwise in compliance with applicable law:
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” (WITHIN THE
MEANING OF SECTION 1272 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED). UPON WRITTEN REQUEST, THE TRUSTEE WILL PROMPTLY MAKE
AVAILABLE TO ANY HOLDER OF THIS NOTE THE FOLLOWING INFORMATION:
(1) THE ISSUE PRICE AND DATE OF THE NOTE, (2) THE AMOUNT OF ORIGINAL ISSUE
DISCOUNT ON THE NOTE AND (3) THE YIELD TO MATURITY OF THE NOTE. SUCH
WRITTEN REQUEST SHOULD BE SENT TO: STACK 2006-1 LTD., c/o TCW ASSET
MANAGEMENT COMPANY, 865 SOUTH FIGUEROA STREET, SUITE 1800, LOS
ANGELES, CALIFORNIA 90017.
(b) Subordinated Notes Legend. Subordinated Notes will bear a legend to the following effect
unless the Issuer otherwise determines in compliance with applicable law:
THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN THE
INDENTURE REFERRED TO HEREIN. THIS NOTE HAS NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER RELEVANT JURISDICTION, AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT: (A) TO A TRANSFEREE
THAT IS A QUALIFIED PURCHASER (AS DEFINED IN THE INDENTURE) THAT THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, ACTING FOR ITS OWN ACCOUNT OR
THE ACCOUNT OF ONE OR MORE PERSONS WITH RESPECT TO WHICH THE
TRANSFEREE EXERCISES SOLE INVESTMENT DISCRETION, EACH OF WHICH IS A
QUALIFIED PURCHASER THAT THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER, AND NONE OF WHICH ARE (X) A DEALER OF
THE TYPE DESCRIBED IN PARAGRAPH (a)(1)(ii) OF RULE 144A UNLESS IT OWNS AND
INVESTS ON A DISCRETIONARY BASIS NOT LESS THAN $25,000,000 IN SECURITIES
OF ISSUERS THAT ARE NOT AFFILIATED TO IT, (Y) 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 A 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 THE
PLAN ARE MADE SOLELY BY THE FIDUCIARY, TRUSTEE OR SPONSOR OF SUCH
PLAN OR (Z) FORMED FOR THE PURPOSE OF INVESTING IN THE ISSUER (EXCEPT
WHERE EACH BENEFICIAL OWNER IS A QUALIFIED PURCHASER), TO WHOM
NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON THE EXEMPTION FROM SECURITIES ACT REGISTRATION
PROVIDED BY RULE 144A, OR (B) WITH RESPECT TO THE SUBORDINATED NOTES
ONLY, TO A TRANSFEREE THAT IS AN ACCREDITED INVESTOR IN A TRANSACTION
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT WHO
IS A QUALIFIED PURCHASER OR (C) TO A TRANSFEREE THAT IS NOT A U.S. PERSON
(AS DEFINED IN REGULATION S) IN AN OFFSHORE TRANSACTION IN ACCORDANCE
WITH REGULATION S, ACTING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ONE
OR MORE PERSONS WITH RESPECT TO WHICH IT EXERCISES SOLE INVESTMENT
DISCRETION, EACH OF WHICH IS NOT A U.S. PERSON (AS DEFINED IN REGULATION
S), AND IN EACH CASE IN COMPLIANCE WITH THE CERTIFICATIONS AND OTHER
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REQUIREMENTS SPECIFIED IN THE INDENTURE REFERRED TO HEREIN AND ANY
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER
RELEVANT JURISDICTION.
THE ISSUER MAY REQUIRE ANY HOLDER OF THIS NOTE (OR A BENEFICIAL
INTEREST HEREIN) WHO IS A U.S. PERSON (AS DEFINED IN REGULATION S) WHO
WAS NOT BOTH A QUALIFIED INSTITUTIONAL BUYER AND A QUALIFIED
PURCHASER OR WITH RESPECT TO THE SUBORDINATED NOTES ONLY, AN
ACCREDITED INVESTOR AND A QUALIFIED PURCHASER AT THE TIME OF
ACQUISITION OF THIS NOTE (OR SUCH INTEREST HEREIN) TO TRANSFER THIS
NOTE (OR SUCH INTEREST) TO A TRANSFEREE THAT IS (X) BOTH A QUALIFIED
INSTITUTIONAL BUYER AND A QUALIFIED PURCHASER OR WITH RESPECT TO THE
SUBORDINATED NOTES ONLY, AN ACCREDITED INVESTOR AND A QUALIFIED
PURCHASER IN A TRANSACTION EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, OR (Y) NOT A U.S. PERSON (AS DEFINED
IN REGULATION S) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH
REGULATION S.
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 ISSUER, THE TRUSTEE OR ANY INTERMEDIARY.
EACH PURCHASER OR TRANSFEREE OF THIS NOTE IS DEEMED TO REPRESENT AND
WARRANT AND, IN CERTAIN CASES, REPRESENTS AND WARRANTS IN WRITING
THAT, DURING THE PERIOD IT HOLDS ANY INTEREST IN THIS NOTE, IT IS NOT AND
IS NOT ACTING ON BEHALF OF (A) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN
SECTION 3(3) OF ERISA) THAT IS SUBJECT TO TITLE I OF ERISA, (B) A PLAN (AS
DEFINED IN SECTION 4975(E)(1) OF THE CODE) THAT IS SUBJECT TO SECTION 4975
OF THE CODE, INCLUDING INDIVIDUAL RETIREMENT ACCOUNTS OR KEOGH
PLANS, (C) ANY OTHER ENTITY, INCLUDING WITHOUT LIMITATION, AN
INSURANCE COMPANY GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS
INCLUDE ASSETS OF THE PLANS DESCRIBED IN (A) OR (B) ABOVE BY REASON OF
SUCH PLAN’S INVESTMENT IN THE ENTITIES (EACH OF (A), (B) AND (C), A “PLAN”).
THE PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY
PERMITTED BY THE ISSUER, NONE OF THE TRUSTEE, AS NOTE REGISTRAR AND
TRANSFER AGENT, OR THE ISSUER WILL RECOGNIZE ANY PURCHASE OR
TRANSFER OF THIS NOTE TO A PURCHASER OR TRANSFEREE THAT IS OR IS USING
THE ASSETS OF A PLAN TO ACQUIRE OR HOLD THIS NOTE. THE PURCHASER
ACKNOWLEDGES AND AGREES THAT IF AT ANY TIME A PURCHASER OR
TRANSFEREE OF THIS NOTE BECOMES OR USES THE ASSETS OF A PLAN TO
ACQUIRE OR HOLD THIS NOTE, SUCH PURCHASER OR TRANSFEREE WILL
PROMPTLY NOTIFY EACH OF THE ISSUER AND THE TRUSTEE, AS TRANSFER
AGENT, AND THE INDENTURE WILL ENTITLE THE ISSUER TO REQUIRE SUCH
TRANSFEREE TO DISPOSE OF THIS NOTE AS SOON AS PRACTICABLE FOLLOWING
SUCH NOTIFICATION.
EACH PURCHASER OR TRANSFEREE OF THIS NOTE WILL BE REQUIRED TO
REPRESENT AND WARRANT THAT EITHER (A) IT IS NOT, AND IS NOT ACTING ON
BEHALF OF, A PLAN SUBJECT TO TITLE I OF ERISA OR SECTION 4975 OF THE CODE
OR A FOREIGN, GOVERNMENTAL OR CHURCH PLAN WHICH IS SUBJECT TO ANY
FOREIGN, FEDERAL, STATE OR LOCAL LAW THAT IS MATERIALLY SIMILAR TO
THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA OR
SECTION 4975 OF THE CODE OR (B) ITS PURCHASE, HOLDING AND DISPOSITION OF
THIS NOTE WILL NOT RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION
UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF
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A FOREIGN, GOVERNMENTAL OR CHURCH PLAN, A VIOLATION OF ANY
MATERIALLY SIMILAR FOREIGN, FEDERAL, STATE OR LOCAL LAW).
PRINCIPAL OF THIS NOTE IS PAYABLE AS SET FORTH HEREIN. ACCORDINGLY, THE
OUTSTANDING PRINCIPAL OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE
AMOUNT SHOWN ON THE FACE HEREOF. ANY PERSON ACQUIRING THIS NOTE
MAY ASCERTAIN ITS CURRENT PRINCIPAL AMOUNT BY INQUIRY OF THE NOTE
PAYING AGENT.
NO INVITATION SHALL BE MADE TO THE PUBLIC IN THE CAYMAN ISLANDS TO
SUBSCRIBE FOR THE NOTES.
The Subordinated Notes in the form of a Physical Note will also bear a legend to the following
effect unless the Issuer otherwise determines in compliance with applicable law:
EACH INITIAL PURCHASER AND TRANSFEREE OF AN INTEREST IN THIS NOTE WILL
BE REQUIRED TO DELIVER AN INVESTOR REPRESENTATION LETTER OR A
TRANSFER CERTIFICATE, AS APPLICABLE, IN THE FORM REQUIRED BY THE
INDENTURE.
The Subordinated Notes in the form of a Global Note will also bear a legend to the following
effect unless the Issuer otherwise determines in compliance with applicable law:
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE WILL BE DEEMED TO MAKE
CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS PURSUANT TO THE
INDENTURE.
The Subordinated Notes in the form of a Rule 144A Global Note will also bear a legend to the
following effect unless the Issuer otherwise determines in compliance with applicable law:
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF A PHYSICAL NOTE OR AN INTEREST IN A REGULATION S GLOBAL NOTE
WILL BE REQUIRED TO DELIVER A TRANSFER CERTIFICATE IN THE FORM
REQUIRED BY THE INDENTURE.
The Subordinated Notes in the form of a Regulation S Global Note will also bear a legend to the
following effect unless the Issuer otherwise determines in compliance with applicable law:
AN INTEREST IN THIS NOTE MAY NOT BE HELD BY A U.S. PERSON (AS DEFINED IN
REGULATION S) AT ANY TIME. IN ADDITION, AN INTEREST IN THIS NOTE MAY
ONLY BE HELD THROUGH EUROCLEAR OR CLEARSTREAM.
EACH TRANSFEREE OF AN INTEREST IN THIS NOTE TAKING DELIVERY IN THE
FORM OF A PHYSICAL NOTE OR AN INTEREST IN A RULE 144A GLOBAL NOTE WILL
BE REQUIRED TO DELIVER A TRANSFER CERTIFICATE IN THE FORM REQUIRED BY
THE INDENTURE.
(20) Limitation on Resale. The purchaser agrees on its own behalf and on behalf of any account for
which it is purchasing the Applicable Notes to offer, sell or otherwise transfer such Applicable
Notes only in the required minimum denomination, and (i) in the United States, only in the form
of an interest in either (A) a Rule 144A Global Note to a qualified purchaser for purposes of
Section 3(c)(7) of the Investment Company Act that the purchaser reasonably believes is a
qualified institutional buyer (within the meaning of Rule 144A under the Securities Act),
purchasing for its own account or one or more accounts, each of which is a qualified purchaser for
purposes of Section 3(c)(7) of the Investment Company Act that the purchaser reasonably believes
is a qualified institutional buyer (within the meaning of Rule 144A under the Securities Act), in
accordance with Rule l44A, and none of which are (x) a dealer of the type described in paragraph
(a)(1)(ii) of Rule 144A unless it owns and invests on a discretionary basis not less than
$25,000,000 in securities of issuers that are not affiliated to it, (y) 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
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(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, unless investment decisions with respect to the plan are made
solely by the fiduciary, trustee or sponsor of such plan or (z) formed for the purpose of investing
in the Issuer or the Co-Issuer (except where each beneficial owner is a qualified purchaser for
purposes of Section 3(c)(7) of the Investment Company Act) or (B) solely with respect to the
Subordinated Notes, a Physical Note to a qualified purchaser for purposes of Section 3(c)(7) of the
Investment Company Act that the purchaser reasonably believes is a qualified institutional buyer
(within the meaning of Rule 144A under the Securities Act) or, with respect to the Subordinated
Notes only, an Accredited Investor (meeting the requirements of Rule 501(a) of Regulation D),
purchasing for its own account or one or more accounts, each of which is a qualified purchaser for
purposes of Section 3(c)(7) of the Investment Company Act, or (ii) outside the United States in the
form of an interest in a Regulation S Global Note to a person that is not a U.S. person as defined in
Regulation S, purchasing for its own account or the account of one or more Persons each of which
is not a U.S. person, in an offshore transaction in accordance with Regulation S under the
Securities Act. The purchaser understands and agrees that a U.S. person may not hold an interest
in the Applicable Notes in the form of a Regulation S Global Note at any time. The purchaser
agrees to provide notice of such transfer restrictions to any subsequent transferee.
(21) Cayman Islands Law. The purchaser is not a member of the public in the Cayman Islands.
(22) Due Authorization; Capability. The purchaser has the power and authority to enter into each
agreement required to be executed and delivered by or on behalf of the purchaser in connection
with its purchase of the Applicable Notes and to perform its obligations thereunder and
consummate the transactions contemplated thereby, and the person signing any such documents on
behalf of the purchaser has been duly authorized to execute and deliver such documents and each
other document required to be executed and delivered by the purchaser in connection with its
purchase of the Applicable Notes. Such execution, delivery and compliance by the purchaser does
not conflict with, or constitute a default under, any instruments governing the purchaser, any
applicable law, regulation or order, or any material agreement to which the purchaser is a party or
by which the purchaser is bound.
(23) Permanent Address. If the purchaser’s permanent address is located in the United States, the
purchaser was offered the Applicable Notes in the state of such purchaser’s permanent address and
intends that the securities law of that state govern the purchaser’s subscription for the Applicable
Notes.
(24) Treaty Exemption. The purchaser, if not a “United States person” (as defined in Section
7701(a)(30) of the Code), (i) is not a bank (within the meaning of Section 881(c)(3)(A) of the
Code) or an affiliate of a bank, (ii) 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 or (iii) is purchasing the Rated
Notes (other than the Class VII Notes) only and is not related to the Issuer or the Co-Issuer within
the meaning of Section 1.881-3 of the Treasury Regulations.
(25) Certain Tax Matters. 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. The purchaser agrees to
treat the Rated Notes as debt for U.S. tax purposes and the Subordinated Notes as equity for U.S.
tax purposes, and further agrees to take no action inconsistent with such treatment.
(26) Reliance. The purchaser understands that the information provided by the purchaser will be relied
upon by each of the Co-Issuers or the Issuer, as applicable, the Investment Adviser, the Trustee,
the Managers, the Placement Agents, their respective counsel and others for the purpose of
determining the eligibility of the purchaser to purchase the Applicable Notes. The purchaser
agrees to provide, if requested, any additional information that may reasonably be required to
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208
determine the eligibility of the purchaser to purchase the Applicable Notes. The purchaser
acknowledges that each representation, warranty or agreement of the purchaser contained herein
or in any other document provided by the purchaser to the Co-Issuers or the Issuer, as applicable,
the Investment Adviser, the Trustee, the Managers or the Placement Agents in connection with the
purchaser’s investment in the Applicable Notes is made for the benefit of the Co-Issuers or the
Issuer, as applicable, the Investment Adviser, the Trustee, the Managers, the Placement Agents
and their respective affiliates and the other Holders of the Notes issued by the Co-Issuers or the
Issuer, as applicable. If any of the acknowledgments, representations or agreements made or
deemed to be made by the purchaser hereunder in connection with its purchase of the Applicable
Notes are no longer accurate, the purchaser shall promptly notify the Co-Issuers or the Issuer, as
applicable, and any of the Managers or the Placement Agents, as applicable. Notwithstanding any
provision hereof, the purchaser does not waive any rights granted to it under any applicable
securities laws.
(27) Certain Transfers Void. The purchaser agrees that (i) any sale, pledge or other transfer of the
Applicable Notes (or any interest therein) made in violation of the transfer restrictions contained in
this Final Offering Memorandum and in the Indenture, or made based upon any false or inaccurate
representation made by the purchaser or a transferee to the Co-Issuers or the Issuer, as applicable,
will be null and void ab initio and of no force or effect and (ii) none of the Co-Issuers, the Trustee
or the Note Registrar has any obligation to recognize any sale, pledge or other transfer of the
Applicable Notes (or any interest therein) made in violation of any such transfer restriction or
made based upon any such false or inaccurate representation.
(28) Participations. If the purchaser elects to sell one or more participation interests in the Applicable
Notes or enters into any other arrangement pursuant to which any other person is entitled to a
beneficial interest in the distributions on the Notes, such other person will be required to satisfy
the representations set forth above.
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CLASS P TRANSFER RESTRICTIONS
Legend
The purchaser understands and agrees that a legend in substantially the following form will be placed
on each Class P Note:
THE CLASS P NOTES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS IN THE UNITED STATES
OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION AND THE ISSUER HAS
NOT BEEN REGISTERED UNDER THE UNITED STATES INVESTMENT COMPANY ACT
OF 1940, AS AMENDED (THE "INVESTMENT COMPANY ACT"). THE HOLDER
HEREOF, BY ITS ACCEPTANCE OF THE CLASS P NOTES REPRESENTED HEREBY,
REPRESENTS THAT IT HAS OBTAINED THESE CLASS P NOTES IN A TRANSACTION
IN COMPLIANCE WITH THE SECURITIES ACT, THE INVESTMENT COMPANY ACT
AND ALL OTHER APPLICABLE LAWS OF THE UNITED STATES OR ANY OTHER
JURISDICTION, AND THE RESTRICTIONS ON SALE AND TRANSFER SET FORTH IN
THE INDENTURE AND IN THE AMENDED AND RESTATED ARTICLES OF
ASSOCIATION AND THE AMENDED AND RESTATED MEMORANDUM OF
ASSOCIATION (TOGETHER, THE "ARTICLES") OF THE ISSUER. THE HOLDER
HEREOF, BY ITS ACCEPTANCE OF THE CLASS P NOTES REPRESENTED HEREBY,
FURTHER REPRESENTS, ACKNOWLEDGES AND AGREES THAT IT WILL NOT
REOFFER, RESELL, PLEDGE OR OTHERWISE TRANSFER THE CLASS P NOTES
REPRESENTED HEREBY (OR ANY INTEREST THEREIN) EXCEPT IN COMPLIANCE
WITH THE SECURITIES ACT, THE INVESTMENT COMPANY ACT AND ALL OTHER
APPLICABLE LAWS OF ANY JURISDICTION (SUBJECT TO THE DELIVERY OF SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE ISSUER MAY
REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT) AND IN
ACCORDANCE WITH THE CERTIFICATIONS AND OTHER REQUIREMENTS SPECIFIED
IN THE INDENTURE AND THE ARTICLES REFERRED TO HEREIN (A) TO A
TRANSFEREE (1) THAT IS A QUALIFIED PURCHASER WITHIN THE MEANING OF
SECTION 3(c)(7) OF THE INVESTMENT COMPANY ACT (A "QUALIFIED
PURCHASER") PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED PURCHASER, (2) THAT (I) WAS NOT FORMED FOR THE PURPOSE OF
INVESTING IN THE ISSUER (EXCEPT WHEN EACH BENEFICIAL OWNER OF THE
PURCHASER IS A QUALIFIED PURCHASER), (II) HAS RECEIVED THE NECESSARY
CONSENT FROM ITS BENEFICIAL OWNERS IF THE PURCHASER IS A PRIVATE
INVESTMENT COMPANY FORMED BEFORE APRIL 30, 1996, (III) IS NOT A BROKERDEALER THAT OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN
U.S.$25,000,000 IN SECURITIES OF UNAFFILIATED ISSUERS, (IV) IS NOT A PENSION,
PROFIT SHARING OR OTHER RETIREMENT TRUST FUND OR PLAN IN WHICH THE
PARTNERS, BENEFICIARIES OR PARTICIPANTS, AS APPLICABLE, MAY DESIGNATE
THE PARTICULAR INVESTMENTS TO BE MADE, AND IN A TRANSACTION THAT
MAY BE EFFECTED WITHOUT LOSS OF ANY APPLICABLE INVESTMENT COMPANY
ACT EXEMPTION AND (V) AGREES TO PROVIDE NOTICE TO ANY SUBSEQUENT
TRANSFEREE OF THE TRANSFER RESTRICTIONS PROVIDED IN THIS LEGEND AND
(3) THAT (I) IS A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE l44A UNDER THE
SECURITIES ACT (A "QUALIFIED INSTITUTIONAL BUYER") PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE l44A UNDER THE SECURITIES ACT OR (II) IS AN
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ACCREDITED INVESTOR AS DEFINED IN RULE 501(A) OF REGULATION D UNDER
THE SECURITIES ACT (AN "ACCREDITED INVESTOR"), OR (B) TO A TRANSFEREE
(1) THAT IS NOT A U.S. PERSON (AS DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) AND IS ACQUIRING THESE CLASS P NOTES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 903 OR RULE 904 OF REGULATION S
UNDER THE SECURITIES ACT AND (2) THAT IS NOT A U.S. RESIDENT WITHIN THE
MEANING OF THE INVESTMENT COMPANY ACT.
EACH PURCHASER OR
TRANSFEREE OF THE CLASS P NOTES REPRESENTED HEREBY WILL BE DEEMED TO
HAVE MADE THE REPRESENTATIONS AND AGREEMENTS SET FORTH IN THE
INDENTURE AS WELL AS HEREIN. THE CLASS P NOTES REPRESENTED HEREBY
ARE NOT TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS
DESCRIBED HEREIN. ANY SALE OR TRANSFER IN VIOLATION OF THE FOREGOING
WILL BE OF NO FORCE AND EFFECT, WILL BE ABSOLUTELY NULL AND VOID AB
INITIO, WILL VEST NO RIGHTS IN THE PURPORTED TRANSFEREE (SUCH
PURPORTED TRANSFEREE, A "DISQUALIFIED TRANSFEREE"), THE LAST
PRECEDING HOLDER OF SUCH INTEREST IN SUCH CLASS P NOTE THAT WAS NOT A
DISQUALIFIED TRANSFEREE WILL BE RESTORED TO ALL RIGHTS AS A HOLDER
THEREOF RETROACTIVELY TO THE DATE OF TRANSFER OF SUCH CLASS P NOTE
BY SUCH HOLDER, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY
TO THE CO-ISSUERS, THE TRUSTEE OR ANY INTERMEDIARY. EACH TRANSFEROR
OF THE CLASS P NOTES REPRESENTED HEREBY AGREES TO PROVIDE NOTICE OF
THE TRANSFER RESTRICTIONS SET FORTH HEREIN AND IN THE INDENTURE AND
THE ARTICLES TO THE TRANSFEREE. IN ADDITION TO THE FOREGOING, THE
ISSUER MAINTAINS THE RIGHT TO RESELL ANY INTEREST IN ANY CLASS P NOTES
REPRESENTED HEREBY PREVIOUSLY TRANSFERRED TO HOLDERS NOT ELIGIBLE
TO HOLD SUCH INTERESTS IN ACCORDANCE WITH AND SUBJECT TO THE TERMS
OF THE INDENTURE AND THE ARTICLES.
THE HOLDER OF THE CLASS P NOTES REPRESENTED HEREBY ACKNOWLEDGES
THAT NOTWITHSTANDING ANY OTHER PROVISION OF THE CLASS P NOTES OR
ANY OTHER TRANSACTION DOCUMENT, ALL DISTRIBUTIONS TO BE MADE BY THE
ISSUER IN RESPECT OF THE CLASS P NOTES OR UNDER ANY TRANSACTION
DOCUMENT WILL BE PAYABLE PURSUANT TO THE PRIORITY OF PAYMENTS AND
ONLY FROM, AND TO THE EXTENT OF, THE SUMS PAID TO, OR NET PROCEEDS
RECOVERED BY OR ON BEHALF OF, THE ISSUER IN RESPECT OF THE CLASS P
TREASURY STRIP COLLATERAL. IF THE PROCEEDS OF THE CLASS P TREASURY
STRIP COLLATERAL ARE NOT SUFFICIENT FOR THE ISSUER TO MEET ITS
OBLIGATIONS IN RESPECT OF THE CLASS P NOTES AND OTHER TRANSACTION
DOCUMENTS, NO OTHER ASSETS OF THE ISSUER WILL BE AVAILABLE TO MEET
SUCH INSUFFICIENCY.
EACH PURCHASER OR TRANSFEREE OF THIS NOTE IS DEEMED TO REPRESENT AND
WARRANT AND, IN CERTAIN CASES, REPRESENTS AND WARRANTS IN WRITING
THAT, DURING THE PERIOD IT HOLDS ANY INTEREST IN THIS NOTE, IT IS NOT AND
IS NOT ACTING ON BEHALF OF (A) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN
SECTION 3(3) OF ERISA) THAT IS SUBJECT TO TITLE I OF ERISA, (B) A PLAN (AS
DEFINED IN SECTION 4975(E)(1) OF THE CODE) THAT IS SUBJECT TO SECTION 4975
OF THE CODE, INCLUDING INDIVIDUAL RETIREMENT ACCOUNTS OR KEOGH
PLANS, (C) ANY OTHER ENTITY, INCLUDING WITHOUT LIMITATION, AN
INSURANCE COMPANY GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS
INCLUDE ASSETS OF THE PLANS DESCRIBED IN (A) OR (B) ABOVE BY REASON OF
SUCH PLAN’S INVESTMENT IN THE ENTITIES (EACH OF (A), (B) AND (C), A “PLAN”).
THE PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY
PERMITTED BY THE ISSUER, NONE OF THE TRUSTEE, AS NOTE REGISTRAR AND
TRANSFER AGENT, OR THE ISSUER WILL RECOGNIZE ANY PURCHASE OR
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TRANSFER OF THIS NOTE TO A PURCHASER OR TRANSFEREE THAT IS OR IS USING
THE ASSETS OF A PLAN TO ACQUIRE OR HOLD THIS NOTE. THE PURCHASER
ACKNOWLEDGES AND AGREES THAT IF AT ANY TIME A PURCHASER OR
TRANSFEREE OF THIS NOTE BECOMES OR USES THE ASSETS OF A PLAN TO
ACQUIRE OR HOLD THIS NOTE, SUCH PURCHASER OR TRANSFEREE WILL
PROMPTLY NOTIFY EACH OF THE ISSUER AND THE TRUSTEE, AS TRANSFER
AGENT, AND THE INDENTURE WILL ENTITLE THE ISSUER TO REQUIRE SUCH
TRANSFEREE TO DISPOSE OF THIS NOTE AS SOON AS PRACTICABLE FOLLOWING
SUCH NOTIFICATION.
DISTRIBUTIONS OF AVAILABLE FUNDS TO THE HOLDER OF THE CLASS P NOTES
REPRESENTED HEREBY ARE SUBORDINATE TO THE PAYMENT ON EACH PAYMENT
DATE OF INTEREST ON AND PRINCIPAL OF EACH CLASS OF NOTES ISSUED BY THE
ISSUER PURSUANT TO THE INDENTURE AND THE PAYMENT OF CERTAIN OTHER
AMOUNTS IN THE MANNER PROVIDED IN THE PRIORITY OF PAYMENTS SET FORTH
IN THE INDENTURE.
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” (WITHIN THE
MEANING OF SECTION 1272 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED). UPON WRITTEN REQUEST, THE TRUSTEE WILL PROMPTLY MAKE
AVAILABLE TO ANY HOLDER OF THIS CLASS P NOTE THE FOLLOWING
INFORMATION: (1) THE ISSUE PRICE AND DATE OF THIS CLASS P NOTE, (2) THE
AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THIS CLASS P NOTE AND (3) THE
YIELD TO MATURITY OF THIS CLASS P NOTE. SUCH WRITTEN REQUEST SHOULD
BE SENT TO: STACK 2006-1 LTD., c/o TCW ASSET MANAGEMENT COMPANY, 865
SOUTH FIGUEROA STREET, SUITE 1800, LOS ANGELES, CALIFORNIA 90017.
The following will be included in the case of the Class P Regulation S Global Notes and the Class P
Regulation S Certificated Notes:
THIS CLASS P NOTE MAY NOT BE HELD BY A U.S. PERSON AT ANY TIME.
Exchange and Transfer of Class P Regulation S Global Notes
Class P Notes sold to non-U.S. Persons in offshore transactions in reliance on Regulation S will be
initially represented by one or more temporary global certificates in definitive, fully registered form without
interest coupons attached (the "Class P Temporary Regulation S Global Notes") through Euroclear and
Clearstream. The Class P Temporary Regulation S Global Notes will be exchangeable for permanent global
certificates in definitive, fully registered form without interest coupons attached (the "Class P Permanent
Regulation S Global Notes" and, together with the Class P Temporary Regulation S Global Notes, the
"Class P Regulation S Global Notes") on or after the Exchange Date upon written certification that the
beneficial interests in such Class P Temporary Regulation S Global Notes are owned by persons who are not
U.S. Persons.
After the Exchange Date, interests in Class P Permanent Regulation S Global Notes may be exchanged
or transferred for interests in Class P Rule 144A Certificated Notes only in connection with transfers to U.S.
Persons that are eligible to hold such Class P Rule 144A Certificated Notes pursuant to Rule 144A under the
Securities Act and otherwise in compliance with the Securities Act upon appropriate written certification in
the manner provided in the Indenture. After the Exchange Date, interests in Class P Rule 144A Certificated
Notes may be exchanged or transferred for interests in the Class P Regulation S Global Notes only in
connection with transfers to persons who are not U.S. Persons in offshore transactions that are eligible to
hold such Class P Regulation S Global Notes in reliance on Regulation S under the Securities Act upon
appropriate written certification in the manner provided in the Indenture.
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Prospective Initial Investors in the Class P Notes Securities
Each prospective Managers and/or the Placement Agents of the Class P Notes offered in reliance on
Rule 144A or another applicable exemption from registration under the Securities Act (a "Rule 144A
Offeree") and each prospective Managers and/or the Placement Agents of the Class P Notes offered in
reliance on Regulation S under the Securities Act (together with Rule 144A Offerees, the “Initial Offerees”)
by accepting delivery of this Final Offering Memorandum, will be deemed to have represented,
acknowledged and agreed as follows:
(i) The Initial Offeree acknowledges that this Final Offering Memorandum is personal to the Initial
Offeree and does not constitute an offer to any other person or to the public generally to subscribe for or
otherwise acquire its Class P Notes other than pursuant to Rule 144A, or another exemption from
registration from the Securities Act, or in offshore transactions in accordance with Regulation S.
Distribution of this Final Offering Memorandum or disclosure of any of its contents to any person other than
the Initial Offeree and those Persons, if any, retained to advise the Initial Offeree with respect thereto and
other Persons meeting the requirements of Rule 144A or another exemption from registration under the
Securities Act or Regulation S is unauthorized and any disclosure of any of its contents, without the prior
written consent of the Issuer, is prohibited.
(ii) The Initial Offeree agrees to make no photocopies of this Final Offering Memorandum or any
documents referred to herein and, if the Initial Offeree does not purchase the Class P Notes or the offering is
terminated, to return this Final Offering Memorandum and all documents referred to herein to: Morgan
Stanley & Co. International Limited, 25 Cabot Square, Canary Wharf, London E14 4QA England, Attention:
Managing Director, Fixed Income Structured Credit Products Transactions, or Morgan Stanley & Co.
Incorporated, 1585 Broadway, New York, New York 10036, Attention: Managing Director, Securitized
Products Group.
(iii) The Initial Offeree has carefully read and understands this Final Offering Memorandum,
including, without limitation, the "Risk Factors" and the “Description of the Class P Notes—Class P Risk
Factors” sections herein, and has based its decision to purchase the Class P Notes upon the information
contained herein and not upon any other information, if any, provided to it by any of the Issuer, the CoIssuer, the Managers and/or the Placement Agents or the Investment Adviser. Additionally, the Initial
Offeree has had access to the list of the portfolio of Collateral Assets expected acquired by the Issuer on or
before the Closing Date. The Initial Offeree is not purchasing its Class P Notes with a view to the resale,
distribution or other disposition thereof in violation of the Securities Act.
Initial Investors in and Transferees of Class P Rule 144A Certificated Notes
Each initial investor in, and subsequent transferee of, the Class P Rule 144A Certificated Notes will be
required to provide to the Issuer and the Trustee in connection with any transfer of such Class P Rule 144A
Certificated Notes a written certification in substantially the form provided in the Indenture, in which such
investor or transferee will make the following representations:
(1) It (a) (1) is a Qualified Institutional Buyer or an Accredited Investor and is acquiring the Class P
Notes in reliance on the exemption from Securities Act registration provided by Rule 144A or any
other applicable exemption from registration thereunder or (2) is an Accredited Investor acquiring
the Class P Notes in reliance on the exemption from registration provided by Section 4(2) under
the Securities Act, (b) is a Qualified Purchaser and (c) understands the Class P Notes will bear the
legend set forth above. In addition, it represents and warrants that it (1) was not formed for the
purpose of investing in the Issuer (except when each beneficial owner of the purchaser is a
Qualified Purchaser), (2) has received the necessary consent from its beneficial owners if the
purchaser is a private investment company formed before April 30, 1996, (3) is not a broker-dealer
that owns and invests on a discretionary basis less than U.S.$25,000,000 in securities of
unaffiliated issuers, (4) is not a pension, profit sharing or other retirement trust fund or plan in
which the partners, beneficiaries or participants, as applicable, may designate the particular
investments to be made, (5) will provide notice to any subsequent transferee of the transfer
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restrictions provided in the legend, and (6) will provide the Issuer from time to time such
information as it may reasonably request in order to ascertain compliance with this paragraph (1).
(2) If it is not a "United States person" as defined in Section 7701(a)(30) of the Code, it is not
acquiring any Class P Notes as part of a plan to reduce, avoid or evade U.S. federal income taxes
owed, owing or potentially owed or owing.
(3) It understands that the Class P Notes have been offered only in a transaction not involving any
public offering in the United States within the meaning of the Securities Act, the Class P Notes
have not been and will not be registered under the Securities Act, and, if in the future it decides to
offer, resell, pledge or otherwise transfer the Class P Notes, such Class P Notes may be offered,
resold, pledged or otherwise transferred only in accordance with the provisions of the Articles, the
Indenture and the legend on such Class P Notes. It acknowledges that no representation is made
as to the availability of any exemption under the Securities Act or any state securities laws for
resale of the Class P Notes.
(4) In connection with the purchase of the Class P Notes: (a) neither of the Co-Issuers is acting as a
fiduciary or financial or investment adviser for it; (b) it is not relying (for purposes of making any
investment decision or otherwise) upon any advice, counsel or representations (whether written or
oral) of the Issuer or the Managers and/or the Placement Agents (in their respective capacities as
such) or any of their agents other than any statements in a current Final Offering Memorandum for
such Class P Notes and any representations expressly set forth in a written agreement with such
party; (c) it has consulted with its own legal, regulatory, tax, business, investment, financial and
accounting advisers to the extent it has deemed necessary and has made its own investment
decisions based upon its own judgment and upon any advice from such advisers as it has deemed
necessary and not upon any view expressed by the Issuer or the Managers and/or the Placement
Agents; (d) its purchase of the Class P Notes will comply with all applicable laws in any
jurisdiction in which it resides or is located; (e) it is acquiring the Class P Notes as principal solely
for its own account for investment and not with a view to the resale, distribution or other
disposition thereof in violation of the Securities Act; (f) it has made investments prior to the date
hereof and was not formed solely for the purpose of investing in the Class P Notes; (g) it is not a
(1) partnership, (2) common trust fund or (3) special trust, pension, profit sharing or other
retirement trust fund or plan in which the partners, beneficiaries or participants may designate the
particular investments to be made; (h) it may not hold any Class P Notes for the benefit of any
other person, will at all times be the sole beneficial owner thereof for purposes of the Investment
Company Act and all other purposes and will not sell participation interests in the Class P Notes or
enter into any other arrangement pursuant to which any other person will be entitled to a beneficial
interest in the distributions on the Class P Notes; (i) all Securities (together with any other
securities of the Co-Issuers) purchased and held directly or indirectly by it constitute in the
aggregate an investment of no more than 40% of its assets or capital; and (j) it is a sophisticated
investor and is purchasing the Class P Notes with a full understanding of all of the terms,
conditions and risks thereof, and it is capable of assuming and willing to assume those risks.
(5) It acknowledges that it is its intent and that it understands it is the intent of the Issuer that, for
purposes of U.S. federal income, state and local income and franchise taxes, the Issuer will be
treated as a corporation, the Rated Notes will be treated as indebtedness of the Issuer (and not of
the Co-Issuer) and the Class P Notes will be treated as consisting of beneficial interests in the
separate components of which each such Class P Note consists (and a Holder of Class P Notes will
be treated for tax purposes as directly owning the separate components of each such Class P Note);
and it agrees to such treatment and agrees to take no action inconsistent with such treatment.
(6) It understands that the Co-Issuers, Trustee, the Managers, the Placement Agents, the Investment
Adviser and their counsel will rely upon the accuracy and truth of the foregoing representations,
and it hereby consents to such reliance.
(7) It understands that the Indenture permits the Issuer to demand that any Holder of a Class P Rule
144A Certificated Note who is determined not to be either (a) a person that is both (1) either a
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Qualified Institutional Buyer or an Accredited Investor and (2) a Qualified Purchaser or (b) a
person who will take delivery of its Class P Rule 144A Certificated Notes in the form of an
interest in Class P Regulation S Global Notes or Class P Regulation S Certificated Notes and who
is not a U.S. Person in a transaction meeting the requirements of Regulation S, to sell such Class P
Notes to a person who meets all applicable transfer restrictions and, if it does not comply with
such demand within 30 days thereof, the Issuer may sell its interest in the Class P Notes.
Initial Investors and Transferees of Interests in Class P Regulation S Global Notes and Class P
Regulation S Certificated Notes
Each initial investor in, and subsequent transferee of, the Class P Notes represented by an interest in a
Class P Regulation S Global Note or a Class P Regulation S Certificated Security Note will, in the case of a
Class P Regulation S Global Note, be deemed and, in the case of a Class P Regulation S Certificated Note,
be required in a written certification to have made the representations set forth in clauses (2), (3), (4), (5), (6)
and (7) of the section above and will be deemed to have further represented and agreed as follows:
(1) It is aware that the sale of Class P Notes to it is being made in reliance on the exemption from
registration provided by Regulation S (and subject to the delivery of such certifications, legal
opinions or other information as the Issuer may reasonably require to confirm that such transfer is
being made pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act) and understands that the Class P Notes offered in reliance on
Regulation S will bear the legend set forth above and be represented by one or more Class P
Regulation S Global Notes. The Class P Notes so represented may not at any time be held by or
on behalf of U.S. Persons as defined in Regulation S under the Securities Act. It and each
beneficial owner of the Class P Notes that it holds is not, and will not be, a U.S. Person as defined
in Regulation S under the Securities Act or a U.S. Resident within the meaning of the Investment
Company Act, and its purchase of the Class P Notes will comply with all applicable laws in any
jurisdiction in which it resides or is located.
(2) It agrees to resell the Class P Notes only in accordance with the provisions of Regulation S,
pursuant to registration under the Securities Act, or pursuant to an available exemption from
registration; and further agrees in all cases not to engage in hedging transactions with regard to the
Class P Notes unless in compliance with the Securities Act.
(3) It understands that the Indenture and the Articles permit the Issuer to demand that any Holder of
Class P Notes represented by a Class P Regulation S Global Note or a Class P Regulation S
Certificated Note, who is determined to be a U.S. Person, to sell such Class P Notes (a) to a Person
who is not a U.S. Person in a transaction meeting the requirements of Regulation S or (b) to a
Person who will take delivery of the Holder's Class P Regulation S Global Notes or Class P
Regulation S Certificated Notes in the form of Class P Rule 144A Certificated Notes, and who
executes and delivers to the Issuer and the Trustee a transfer certificate, substantially in the form
provided in the Indenture, in which such person will make all representations, warranties and
acknowledgements applicable to transferees of Class P Rule 144A Certificated Notes, including,
without limitation, the representation that such Person is both (x) a Qualified Institutional Buyer or
an Accredited Investor and (y) a Qualified Purchaser, in a transaction meeting the requirements of
Rule 144A under the Securities Act or Section 4(2) thereof and, if it does not comply with such
demand within 30 days thereof, the Issuer may sell its interest in the Class P Notes.
(4) It is aware that, except as otherwise provided in the Indenture, the Class P Notes being sold to it
may be represented by one or more Class P Regulation S Global Notes and that beneficial interests
therein may be held only through Euroclear or Clearstream.
In addition, each initial investor in the Class P Notes will be required in a written certification to make
the following representations:
(i) it is not and is not acting on behalf of (a) an employee benefit plan (as defined in Section 3(3) of
ERISA) that is subject to Title I of ERISA, (b) a plan (as defined in Section 4975(e)(1) of the Code) that is
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215
subject to Section 4975 of the Code and (c) any other entity, including without limitation, an insurance
company general account, whose underlying assets include assets of the plans described in (a) or (b) above
by reason of such plan’s investment in the entity (each of (a), (b) and (c), a “Plan”). Except as expressly
permitted by the Issuer, none of the Trustee, as Note Registrar and transfer agent, or the Issuer will recognize
any purchase or transfer of such Class P Note to a purchaser or transferee that is or is using the assets of a
Plan to acquire or hold such Class P Notes. If at any time a purchaser or transferee of a Class P Note
becomes or uses the assets of a Plan to acquire or hold a Class P Note, such purchaser or transferee will
promptly notify each of the Issuer and the Trustee, as transfer agent, and the Indenture will entitle the Issuer
to require such transferee to dispose of such Class P Note as soon as practicable following such notification.
Each subsequent transferee of Class P Notes will be required in a written certification to represent and
agree as follows:
(i) It is not and is not acting on behalf of (a) an employee benefit plan (as defined in Section 3(3) of
ERISA) that is subject to Title I of ERISA, (b) a plan (as defined in Section 4975(e)(1) of the Code) that is
subject to Section 4975 of the Code and (c) any other entity, including without limitation, an insurance
company general account, whose underlying assets include assets of the plans described in (a) or (b) above
by reason of such plan’s investment in the entity (each of (a), (b) and (c), a “Plan”). Except as expressly
permitted by the Issuer, none of the Trustee, as Note Registrar and transfer agent, or the Issuer will recognize
any purchase or transfer of such Class P Note to a purchaser or transferee that is or is using the assets of a
Plan to acquire or hold such Class P Notes. If at any time a purchaser or transferee of a Class P Note
becomes or uses the assets of a Plan to acquire or hold a Class P Note, such purchaser or transferee will
promptly notify each of the Issuer and the Trustee, as transfer agent, and the Indenture will entitle the Issuer
to require such transferee to dispose of such Class P Note as soon as practicable following such notification.
In addition, each transferee of a Class P Regulation S Global Note will be required to execute and
deliver to the Trustee and the Note Registrar a letter in the form attached to the Indenture containing
representations to such effect and an agreement that, prior to any sale, pledge or transfer of such Class P
Note, it will obtain from the transferee a duly executed letter to the same effect.
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LISTING AND GENERAL INFORMATION
1. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official
List and trading on its regulated market. Upon listing on the Irish Stock Exchange being granted, a
prospectus prepared pursuant to the Prospectus Directive will be published, which can be obtained from the
Issuer. There can be no assurance that such admission will be granted or, if obtained, maintained for the
entire period that such Notes are outstanding. The total up-front fees and expenses that will be payable by
the Co-Issuers in connection with the listing of such Notes on the Irish Stock Exchange is estimated to be
approximately €26,734.45 (approximately U.S.$34,305.65 as of the date hereof).
2. If and for so long as any Class of Notes are listed on the Irish Stock Exchange, copies of the
Articles of the Issuer, the Certificate of Incorporation and By-laws of the Co-Issuer, the Transaction
Documents and a description of the Collateral will be available for inspection and will be obtainable at the
office of the Issuer and will be available for inspection in physical form at the offices of the Trustee where
copies thereof may be obtained upon request.
3. If and for so long as any Class of Notes are listed on the Irish Stock Exchange, copies of the
Articles of the Issuer, the Certificate of Incorporation and By-laws of the Co-Issuer, the resolutions of the
board of directors of the Issuer authorizing the issuance of such Notes, the Indenture and the Investment
Advisory Agreement, the resolution of the director of the Co-Issuer authorizing the issuance of the Rated
Notes (other than the Class VII Notes), the Indenture and the Investment Advisory Agreement will be
available for inspection during the term of the Notes at the office of the Trustee. The activities of the Issuer
will be limited to (i) issuance of the Ordinary Shares, (ii) issuance of the Notes, (iii) purchase of or entering
into the Initial Collateral Assets, (iv) reinvestment in Substitute Collateral Assets, Class I Reserve
Investments and Eligible Investments as permitted by the Indenture, (v) entering into the Supersenior Swap,
any Hedge Agreements, the Investment Advisory Agreement and the Collateral Administration Agreement
and (vi) engaging in other activities incidental to the foregoing and permitted by the Indenture. Cash flow
derived from the Collateral securing the Notes will be the Issuer’s only source of cash. Accordingly,
financial statements of the Issuer will be neither prepared nor made available at the office of the Irish Listing
Agent. The Co-Issuer will be capitalized only to the extent of its common equity of U.S.$100, will have no
assets other than its equity capital and will have no debt other than as co-issuer of the Class II Notes, the
Class III Notes, the Class V Notes and the Class VI Notes. Accordingly, financial statements of the CoIssuer will be neither prepared nor made available at the office of the Irish Listing Agent.
4. Each of the Co-Issuers represents that, as of the date of this Final Offering Memorandum, there has
been no material adverse change in its financial position since the date of its creation. Neither of the CoIssuers is involved, or has been involved since incorporation, in any governmental, legal or arbitration
proceedings relating to claims on amounts which may have or have had a material effect on the Co-Issuers in
the context of the issue of the Notes, nor, so far as the Issuer or the Co-Issuer is aware, is any such
governmental, legal or arbitration involving it pending or threatened.
5. The issuance of the Notes has been authorized by the board of directors of the Issuer by resolutions
passed on July 26, 2006. The issuance of the Rated Notes (other than the Class VII Notes) has been
authorized by the director of the Co-Issuer by a resolution passed on July 26, 2006. Since incorporation,
neither the Issuer nor the Co- Issuer has commenced trading, established any accounts or declared any
dividends, except for the transactions described herein relating to the issuance of the Notes.
6. The applicable CUSIP Numbers for Rule 144A Global Notes, CUSIP (CINS) Numbers, Common
Code Numbers and International Securities Identification Numbers (ISIN) for Regulation S Global Notes
and CUSIP Numbers and International Securities Identification Numbers (ISIN) for Class VII Notes and
Subordinated Notes are as set forth below:
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217
CUSIP
144A
CUSIP
Reg S
ISIN
Reg S
Common
Code
Reg S
Class II Note
85233TAA4
G8406AAA1
USG8406AAA19
025946499
Class III Note
85233TAB2
G8406AAB9
USG8406AAB91
025946537
Class IV Note
85233TAC0
G8406AAC7
USG8406AAC74
025946588
Class V Note
85233TAD8
G8406AAD5
USG8406AAD57
025946626
Class VI Note
85233TAE6
G8406AAE3
USG8406AAE31
025946677
Class VII Note
85233YAA3
G84065AA2
USG84065AA22
025946707
Class VII Note
[Accredited
Investor/QP]
N/A
N/A
US85233YAB11
N/A
Subordinated
Note
85233YAC9
G84065AB0
USG84065AB05
025946723
Subordinated
Note
[Accredited
Investor/QP]
N/A
N/A
US85233YAD76
N/A
Class P Notes
85233YAE5
G84065AC8
USG84065AC87
N/A
Note
The Issuer is not required by Cayman Islands law, and the Issuer does not intend, to publish annual
reports and accounts. The Co-Issuer is not required by Delaware state law, and the Co-Issuer does not intend,
to publish annual reports and accounts. The Indenture, however, requires the Issuer to provide the Trustee
with written confirmation, on an annual basis, that to the best of its knowledge following review of the
activities of the prior year, no Event of Default or other matter required to be brought to the Trustee’s
attention under the rules of the Irish Stock Exchange has occurred or, if one has, specifying the same.
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LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the Co-Issuers as to United
States law by Linklaters, New York, New York. Certain legal matters with respect to the Notes will be
passed upon for the Managers and the Placement Agents as to United States law by Weil Gotshal & Manges
LLP, New York, New York. Certain legal matters with respect to the Notes will be passed upon for the
Issuer as to Cayman Islands law by Maples and Calder, Cayman Islands. Certain legal matters with respect
to the Investment Adviser will be passed upon for the Investment Adviser by internal counsel to the
Investment Adviser and by Linklaters, New York, New York.
A06547768/2.0/14 Aug 2006
219
Schedule A
Moody’s Recovery Rate Matrix
“ABS Type Diversified Securities” primarily include (1) Automobile Lease Securities;
(2) Automobile Loan Securities; (3) Car Rental Receivable Securities; (4) Credit Card Securities; and
(5) Student Loan Securities.
“ABS Type Residential Securities” primarily include (1) Home Equity Loan Securities;
(2) Residential A Mortgage Securities; (3) Residential Alt-A Mortgage Securities; and (4) Residential B/C
Mortgage Securities.
“ABS Type Undiversified Securities” primarily include (1) CMBS Conduit Securities; (2) CMBS
Credit Tenant Lease Securities; (3) CMBS Large Loan Securities; and (4) those ABS sectors not included in
ABS Type Diversified Securities.
“CDOs” include (1) High-Diversity CDO Securities and (2) Low-Diversity CDO Securities.
For ABS Type Diversified Securities, the Moody’s Recovery Rate is:
Rating of a Tranche**
Tranche as % of capital structure*
Aaa
Aa
A
Baa
Ba
B
Greater than 70%
85%
80%
70%
60%
50%
40%
Less than or equal to 70% but greater than 10%
75%
70%
60%
50%
40%
30%
Less than or equal to 10%
70%
65%
55%
45%
35%
25%
For ABS Type Residential Securities, the Moody’s Recovery Rate is:
Rating of a Tranche**
Tranche as % of capital structure*
Aaa
Aa
A
Baa
Ba
B
Greater than 70%
85%
80%
65%
55%
45%
30%
Less than or equal to 70% but greater than 10%
75%
70%
55%
45%
35%
25%
Less than or equal to 10% but greater than 5%
65%
55%
45%
40%
30%
20%
Less than or equal to 5% but greater than 2%
55%
45%
40%
35%
25%
15%
Less than or equal to 2%
45%
35%
30%
25%
15%
10%
For ABS Type Undiversified Securities, the Moody’s Recovery Rate is:
Rating of a Tranche**
Tranche as % of capital structure*
Aaa
Aa
A
Baa
Ba
B
Greater than 70%
85%
80%
65%
55%
45%
30%
Less than or equal to 70% but greater than 10%
75%
70%
55%
45%
35%
25%
Less than or equal to 10% but greater than 5%
65%
55%
45%
35%
25%
15%
Less than or equal to 5% but greater than 2%
55%
45%
35%
30%
20%
10%
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220
Less than or equal to 2%
45%
35%
25%
20%
10%
5%
For High-Diversity CDO Securities, the Moody’s Recovery Rate is:
Rating of a Tranche**
Tranche as % of capital structure*
Aaa
Aa
A
Baa
Ba
B
Greater than 70%
85%
80%
65%
55%
45%
30%
Less than or equal to 70% but greater than 10%
75%
70%
60%
50%
40%
25%
Less than or equal to 10% but greater than 5%
65%
55%
50%
40%
30%
20%
Less than or equal to 5% but greater than 2%
55%
45%
40%
35%
25%
10%
Less than or equal to 2%
45%
35%
30%
25%
10%
5%
For Low-Diversity CDO Securities, the Moody’s Recovery Rate is:
Rating of a Tranche**
Tranche as % of capital structure*
Aaa
Aa
A
Baa
Ba
B
Greater than 70%
80%
75%
60%
50%
45%
30%
Less than or equal to 70% but greater than 10%
70%
60%
55%
45%
35%
25%
Less than or equal to 10% but greater than 5%
60%
50%
45%
35%
25%
15%
Less than or equal to 5% but greater than 2%
50%
40%
35%
30%
20%
10%
Less than or equal to 2%
30%
25%
20%
15%
7%
4%
*
Capital structure being equal to the aggregate principal amount of the securities outstanding on the
issuance date.
**
Based on ratings given to the securities on the issuance date.
With respect to REIT Debt Securities, the Moody’s Recovery Rate is 40 percent (other than for REIT
Debt Securities—Mortgage and REIT Debt Securities—Health Care, for which it is 10 percent).
With respect to Synthetic Assets, the Moody’s Recovery Rate will be determined in consultation with
Moody’s.
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221
Schedule B
S&P Recovery Matrix
Recovery Rates for Structured Finance Securities in repackagings of ABS Securities and CDOs*
Liability
Rating at issuance
Senior Asset Class
AAA
AA
A
BBB
BB
B
CCC
AAA
80.0%
85.0%
90.0%
90.0%
90.0%
90.0%
90.0%
AA
70.0%
75.0%
85.0%
90.0%
90.0%
90.0%
90.0%
A
60.0%
65.0%
75.0%
85.0%
90.0%
90.0%
90.0%
BBB
50.0%
55.0%
65.0%
75.0%
85.0%
85.0%
85.0%
Junior Asset Class
AAA
AA
A
BBB
BB
B
CCC
AAA
65.0%
70.0%
80.0%
85.0%
85.0%
85.0%
85.0%
AA
55.0%
65.0%
75.0%
80.0%
80.0%
80.0%
80.0%
A
40.0%
45.0%
55.0%
65.0%
80.0%
80.0%
80.0%
BBB
30.0%
35.0%
40.0%
45.0%
50.0%
60.0%
70.0%
BB
10.0%
10.0%
10.0%
25.0%
35.0%
40.0%
50.0%
B
2.5%
5.0%
5.0%
10.0%
10.0%
20.0%
25.0%
CCC
0.0%
0.0%
0.0%
0.0%
2.5%
5.0%
5.0%
* Excludes:
Project Finance Securities
ABS Future Flows Securities
Synthetic Securities with Cash Settlement Option
CDOs of CDOs
Guaranteed ABS
Market Value CDOs
NIM Securities
REITs
Interest Only Securities
Principal Only Securities
REITs will have a recovery rate of 40 percent.
Any Collateral Asset which is excluded from the S&P Recovery Matrix must be assigned an S&P
Recovery Rate by S&P.
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For structured finance securities guaranteed by (1) an insurance company that has been assigned an
Insurer Financial Enhancement Rating (“FER”) by S&P, the recovery rate will be 50 percent and (2) a
company that has not been assigned an FER by S&P, the recovery rate will be 40 percent.
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223
Schedule C
Specified Types
“ABS CDO High Grade Securities” means securities that entitle the holders thereof to receive
payments that depend (except for rights or other assets designed to assure the servicing or timely distribution
of proceeds to holders of such debt securities) on the cash flow from a portfolio of asset-backed securities or
synthetic securities or any combination of the foregoing, generally having the following characteristics:
(1) the asset-backed securities have varying contractual maturities; (2) the asset-backed securities are
obligations of obligors or issuers that represent a relatively diversified pool of obligor credit risk;
(3) repayment thereof can vary substantially from the contractual payment schedule (if any), with early
prepayment of asset-backed securities depending on numerous factors specific to the particular issuers or
obligors and on whether, in the case of asset-backed securities bearing interest at a fixed rate, such
asset-backed securities include an effective prepayment premium; (4) proceeds from such repayments can
for a limited period and subject to compliance with certain eligibility criteria be reinvested in additional
asset-backed securities; (5) the asset-backed securities are rated at least A3 by Moody’s or A- by S&P at the
time of purchase by the Issuer; and (6) the portfolio of asset-backed securities underlying the CDO has a
majority of Structured Finance Securities.
“ABS CDO Mezzanine Grade Securities” means securities that entitle the holders thereof to receive
payments that depend (except for rights or other assets designed to assure the servicing or timely distribution
of proceeds to holders of such debt securities) on the cash flow from a portfolio of asset-backed securities or
synthetic securities or any combination of the foregoing, generally having the following characteristics:
(1) the asset-backed securities have varying contractual maturities; (2) the asset-backed securities are
obligations of obligors or issuers that represent a relatively diversified pool of obligor credit risk;
(3) repayment thereof can vary substantially from the contractual payment schedule (if any), with early
prepayment of asset-backed securities depending on numerous factors specific to the particular issuers or
obligors and on whether, in the case of asset-backed securities bearing interest at a fixed rate, such
asset-backed securities include an effective prepayment premium; (4) proceeds from such repayments can
for a limited period and subject to compliance with certain eligibility criteria be reinvested in additional
asset-backed securities; (5) a significant portion of all the securities are rated below A3 by Moody’s or A- by
S&P at the time of purchase by the Issuer; and (6) the portfolio of asset-backed securities underlying the
CDO has a majority of Structured Finance Securities.
“ABS CDO Securities” means ABS CDO High Grade Securities and ABS CDO Mezzanine Grade
Securities.
“ABS Equipment Leasing Securities” means Structured Finance Securities (other than Healthcare
Securities, Small Business Loan Securities and Restaurant and Food Services Securities) that entitle the
holders thereof to receive payments that depend on the cash flow from leases and subleases of equipment
(other than automobiles) to commercial and industrial customers; provided that such dependence may in
addition be conditional upon rights or added assets designed to assure the servicing or timely distribution of
proceeds to holders of the Structured Finance Securities such as a financial guaranty insurance policy.
“Agency MBS Securities” means securities issued by the Federal National Mortgage Association or
the Government National Mortgage Association, or guaranteed by the Federal Home Loan Mortgage
Corporation that are rated “AAA” by S&P and “Aaa” by Moody’s at the time of purchase, (1) that evidence
interests in pools of residential mortgage loans or (2) that evidence interests in securities issued by the
Federal National Mortgage Association or the Government National Mortgage Association, or guaranteed by
the Federal Home Loan Mortgage Corporation that evidence interests in pools of residential mortgage loans.
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“Automobile Lease Securities” means securities that entitle the holders thereof to receive payments
that depend (except for rights or other assets designed to assure the servicing or timely distribution of
proceeds to holders of such securities) on the cash flow from leases of automobiles, sport utility vehicles,
light trucks and recreational vehicles that generally have the following characteristics: (1) the leases may
have varying contractual maturities; (2) the leases are obligations of numerous lessees and accordingly
represent a very diversified pool of obligor credit risk; (3) the lessees under the leases generally do not have
a poor credit rating; (4) the payment stream on such leases is primarily determined by a contractual payment
schedule, with early termination of such leases predominantly dependent upon the disposition of the
underlying vehicle; and (5) such leases typically provide for the right of the lessee to purchase the vehicle for
its stated residual value or to surrender the vehicle at termination, subject to payments at the end of the lease
term for excess wear and tear and excess mileage; provided that any Cash Assets or Synthetic Assets with
Reference Obligations falling within this definition will be excluded from the definition of each other
Specified Type of Collateral Asset.
“Automobile Loan Securities” means securities that entitle the holders thereof to receive payments
that depend (except for rights or other assets designed to assure the servicing or timely distribution of
proceeds to holders of such securities) on the cash flow (or proceeds of disposition of the vehicle) from
installment sale loans made to finance the acquisition of automobiles, sport utility vehicles, light trucks and
recreational vehicles that generally have the following characteristics: (1) the loans may have varying
contractual maturities; (2) the loans are obligations of numerous borrowers and accordingly represent a very
diversified pool of obligor credit risk; (3) the borrowers under the loans generally do not have a poor credit
rating; and (4) the repayment stream on such loans is primarily determined by a contractual payment
schedule, with early repayment on such loans predominantly dependent upon the disposition of the
underlying vehicle; provided that any Cash Assets or Synthetic Assets with Reference Obligations falling
within this definition will be excluded from the definition of each other Specified Type of Collateral Asset.
“Car Rental Receivable Securities” means Asset-Backed Securities that entitle the holders thereof to
receive payments that depend on the cash flow from leases and subleases of vehicles to car rental systems
(such as Hertz, Avis, National, Dollar, Budget, etc.) and their franchisees; provided that such dependence
may in addition be conditional upon rights or additional assets designed to assure the servicing or timely
distribution of proceeds to holders of the Asset-Backed Securities such as financial guaranty insurance
policy.
“CMBS Conduit Securities” means Structured Finance Securities (other than CMBS Credit Tenant
Lease Securities and CMBS Large Loan Securities) (A) issued by a single-seller or multi-seller conduit
under which the holders of such Structured Finance Securities have recourse to a specified pool of assets
(but not other assets held by the conduit which support payments on other series of securities) and (B) that
entitle the holders thereof to receive payments that depend on the cash flow from a pool of commercial
mortgage loans; provided that such dependence may in addition be conditional upon rights or added assets
designed to assure the servicing or timely distribution of proceeds to holders of the Structured Finance
Securities such as a financial guaranty insurance policy.
“CMBS Credit Tenant Lease Securities” means Structured Finance Securities (other than CMBS
Large Loan Securities and CMBS Conduit Securities) that entitle the holders thereof to receive payments
that depend on the cash flow from a pool of commercial mortgage loans made to finance the acquisition,
construction and improvement of properties leased to corporate tenants (or on the cash flow from such
leases); provided that such dependence may in addition be conditional upon rights or added assets designed
to assure the servicing or timely distribution of proceeds to holders of the Structured Finance Securities such
as a financial guaranty insurance policy.
“CMBS Large Loan Securities” means Structured Finance Securities (other than CMBS Conduit
Securities and CMBS Credit Tenant Lease Securities) that entitle the holders thereof to receive payments
that depend on the cash flow from a pool of commercial mortgage loans made to finance the acquisition,
construction and improvement of properties; provided that such dependence may in addition be conditional
upon rights or added assets designed to assure the servicing or timely distribution of proceeds to holders of
the Structured Finance Securities such as a financial guaranty insurance policy; provided, further, that to
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qualify as a “CMBS Large Loan Security”, upon original issuance of such Structured Finance Securities,
five or fewer commercial mortgage loans shall account for more than 20 percent of the aggregate principal
balance of the entire pool of commercial mortgage loans supporting payments on such securities.
“CMBS Securities” means CMBS Conduit Securities, CMBS Credit Tenant Lease Securities, CMBS
Large Loan Security and CRE CDO Securities.
“CRE CDO Securities” means securities that entitle the holders thereof to receive payments that
depend (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from a portfolio of asset-backed securities, mortgage loans,
REIT Debt Securities, synthetic securities or other real estate related securities or any combination of the
foregoing, generally having the following characteristics: (1) the asset-backed securities have varying
contractual maturities; (2) the asset-backed securities are obligations of obligors or issuers that represent a
relatively diversified pool of obligor credit risk; (3) repayment thereof can vary substantially from the
contractual payment schedule (if any), with early prepayment of asset-backed securities depending on
numerous factors specific to the particular issuers or obligors and on whether, in the case of asset-backed
securities bearing interest at a fixed rate, such asset-backed securities include an effective prepayment
premium; (4) proceeds from such repayments can for a limited period and subject to compliance with certain
eligibility criteria be reinvested in additional asset-backed securities; and (5) the portfolio of asset-backed
securities has a greater than 75 percent concentration in REIT Debt Securities, CMBS Securities,
commercial real estate and other commercial real estate mortgages; provided that Real Estate CDO
Securities shall not be considered to be CRE CDO Securities.
“Credit Card Securities” means Structured Finance Securities that entitle the holders thereof to
receive payments that depend on the cash flow from balances outstanding under revolving consumer credit
card accounts; provided that such dependence may in addition be conditional upon rights or added assets
designed to assure the servicing or timely distribution of proceeds to holders of the Structured Finance
Securities such as a financial guaranty insurance policy.
“Entertainment Securities” means securities that entitle the holders thereof to receive payments that
depend (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from entertainment receivables such as future revenues from
previously unreleased films, or royalties from the future sale of music or other forms of entertainment;
provided that any Cash Assets or Synthetic Assets with Reference Obligations falling within this definition
will be excluded from the definition of each other Specified Type of Collateral Asset.
“Healthcare Securities” means Structured Finance Securities (other than Small Business Loan
Securities) that entitle the holders thereof to receive payments that depend on the cash flow from leases,
subleases and loans of equipment to hospitals, non-hospital medical facilities, physicians and physician
groups for use in the provision of healthcare services; provided that such dependence may in addition be
conditional upon rights or added assets designed to assure the servicing or timely distribution of proceeds to
holders of the Structured Finance Securities such as a financial guaranty insurance policy.
“High-Yield CDO Securities” means securities that entitle the holders thereof to receive payments that
depend (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) primarily on the cash flow from a portfolio of bonds or loans that are primarily
rated below investment grade, generally having the following characteristics: (1) the bonds or loans have
varying contractual maturities; (2) the bonds or loans are obligations of obligors or issuers that represent a
relatively diversified pool of obligor credit risk; (3) repayment thereof can vary substantially from the
contractual payment schedule (if any), with early prepayment of individual bonds or loans depending on
numerous factors specific to the particular issuers or obligors and on whether, in the case of bonds or loans
bearing interest at a fixed rate, such bonds or loans include an effective prepayment premium; and
(4) proceeds from such repayments can for a limited period and subject to compliance with certain eligibility
criteria be reinvested in additional bonds or loans.
“Home Equity Loan Securities” means Structured Finance Securities that entitle the holders thereof to
receive payments that depend on the cash flow from balances (including revolving balances) outstanding
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under loans or lines of credit secured by (but not, upon origination, by a first priority lien on) residential real
estate (single or multi-family properties) the proceeds of which loans or lines of credit are generally not used
to purchase such real estate or to purchase or construct dwellings thereon (or to refinance indebtedness
previously so used) and generally have a weighted average score based on the credit scoring models
developed by Fair Isaac & Company with respect to the obligors on all such underlying loans or lines of
credit of at least 625; provided that such dependence may in addition be conditional upon rights or added
assets designed to assure the servicing or timely distribution of proceeds to holders of the Structured Finance
Securities such as a financial guaranty insurance policy.
“Investment-Grade CDO Securities” means securities that entitle the holders thereof to receive
payments that depend (except for rights or other assets designed to assure the servicing or timely distribution
of proceeds to holders of such securities) primarily on the cash flow from a portfolio of bonds or loans that
are primarily rated at or above investment grade, generally having the following characteristics: (1) the
bonds or loans have varying contractual maturities; (2) the bonds or loans are obligations of obligors or
issuers that represent a relatively diversified pool of obligor credit risk; (3) repayment thereof can vary
substantially from the contractual payment schedule (if any), with early prepayment of individual bonds or
loans depending on numerous factors specific to the particular issuers or obligors and on whether, in the case
of bonds or loans bearing interest at a fixed rate, such bonds or loans include an effective prepayment
premium; and (4) proceeds from such repayments can for a limited period and subject to compliance with
certain eligibility criteria be reinvested in additional bonds or loans.
“Negatively Amortizing RMBS Asset” means a RMBS Security which is backed by adjustable rate
mortgage loans that entitle the obligor thereunder to make minimum payments in an amount less than the
accrued interest thereon and, in which case, amortizes negatively.
“Real Estate CDO Securities” means securities that entitle the holders thereof to receive payments
that depend (except for rights or other assets designed to assure the servicing or timely distribution of
proceeds to holders of such securities) on the cash flow from a portfolio of asset-backed securities or
synthetic securities or any combination of the foregoing, generally having the following characteristics:
(1) the asset-backed securities have varying contractual maturities; (2) the asset-backed securities are
obligations of obligors or issuers that represent a relatively diversified pool of obligor credit risk;
(3) repayment thereof can vary substantially from the contractual payment schedule (if any), with early
prepayment of asset-backed securities depending on numerous factors specific to the particular issuers or
obligors and on whether, in the case of asset-backed securities bearing interest at a fixed rate, such assetbacked securities include an effective prepayment premium; (4) proceeds from such repayments can for a
limited period and subject to compliance with certain eligibility criteria be reinvested in additional bank
loans and/or debt securities; and (5) the portfolio of asset-backed securities has a greater than 60 percent
concentration in REIT Debt Securities, Agency MBS Securities, Residential A Mortgage Securities and/or
Residential B/C Mortgage Securities.
“REIT Debt Securities” means (1) REIT Debt Securities-Health Care; (2) REIT Debt Securities-Hotel;
(3) REIT Debt Securities-Industrial; (4) REIT Debt Securities-Mortgage; (5) REIT Debt
Securities-Multi-Family; (6) REIT Debt Securities-Office; (7) REIT Debt Securities-Residential; (8) REIT
Debt Securities-Retail; and (9) REIT Debt Securities-Storage.
“REIT Debt Securities-Health Care” means securities issued by a real estate investment trust (as
defined in Section 856 of the Code or any successor provision) whose assets consist (except for rights or
other assets designed to assure the servicing or timely distribution of proceeds to holders of such
securities) of a portfolio of properties including hospitals, clinics, sport clubs, spas and other health care
facilities and other similar real property interests used in one or more similar businesses; provided that any
Cash Assets or Synthetic Assets with Reference Obligations falling within this definition will be excluded
from the definition of each other Specified Type of Collateral Asset.
“REIT Debt Securities-Hotel” means securities issued by a real estate investment trust (as defined in
Section 856 of the Code or any successor provision) whose assets consist (except for rights or other assets
designed to assure the servicing or timely distribution of proceeds to holders of such securities) of a portfolio
of properties including hotels, motels, youth hostels, bed and breakfasts and other similar real property
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interests used in one or more similar businesses; provided that any Cash Assets or Synthetic Assets with
Reference Obligations falling within this definition will be excluded from the definition of each other
Specified Type of Collateral Asset.
“REIT Debt Securities-Industrial” means securities issued by a real estate investment trust (as
defined in Section 856 of the Code or any successor provision) whose assets consist (except for rights or
other assets designed to assure the servicing or timely distribution of proceeds to holders of such
securities) of a portfolio of properties including warehouse, industrial and distribution facilities, factories,
refinery plants, breweries and other similar real property interests used in one or more similar businesses;
provided that any Cash Assets or Synthetic Assets with Reference Obligations falling within this definition
will be excluded from the definition of each other Specified Type of Collateral Asset.
“REIT Debt Securities-Mortgage” means securities issued by a real estate investment trust (as
defined in Section 856 of the Code or any successor provision) whose assets consist (except for rights or
other assets designed to assure the servicing or timely distribution of proceeds to holders of such
securities) of mortgages, commercial mortgage-backed securities, collateralized mortgage obligations and
other similar mortgage-related securities (including securities issued by a hybrid form of such trust that
invests in both commercial real estate and commercial mortgages); provided that any Cash Assets or
Synthetic Assets with Reference Obligations falling within this definition will be excluded from the
definition of each other Specified Type of Collateral Asset.
“REIT Debt Securities-Multi-Family” means securities issued by a real estate investment trust (as
defined in Section 856 of the Code or any successor provision) whose assets consist (except for rights or
other assets designed to assure the servicing or timely distribution of proceeds to holders of such
securities) of a portfolio of properties including multi-family dwellings such as apartment blocks,
condominiums and co-operative owned buildings; provided that any Cash Assets or Synthetic Assets with
Reference Obligations falling within this definition will be excluded from the definition of each other
Specified Type of Collateral Asset.
“REIT Debt Securities-Office” means securities issued by a real estate investment trust (as defined in
Section 856 of the Code or any successor provision) whose assets consist (except for rights or other assets
designed to assure the servicing or timely distribution of proceeds to holders of such securities) of a portfolio
of properties including office buildings, conference facilities and other similar real property interests used in
the commercial real estate business; provided that any Cash Assets or Synthetic Assets with Reference
Obligations falling within this definition will be excluded from the definition of each other Specified Type of
Collateral Asset.
“REIT Debt Securities-Residential” means securities issued by a real estate investment trust (as
defined in Section 856 of the Code or any successor provision) whose assets consist (except for rights or
other assets designed to assure the servicing or timely distribution of proceeds to holders of such
securities) of residential mortgages (other than multi-family dwellings) and other similar real property
interests; provided that any Cash Assets or Synthetic Assets with Reference Obligations falling within this
definition will be excluded from the definition of each other Specified Type of Collateral Asset.
“REIT Debt Securities-Retail” means securities issued by a real estate investment trust (as defined in
Section 856 of the Code or any successor provision) whose assets consist (except for rights or other assets
designed to assure the servicing or timely distribution of proceeds to holders of such securities) of a portfolio
of properties including regional malls, neighborhood shopping centers, big box centers, retail stores,
restaurants, bookstores, clothing stores and other similar real property interests used in one or more similar
businesses; provided that any Cash Assets or Synthetic Assets with Reference Obligations falling within this
definition will be excluded from the definition of each other Specified Type of Collateral Asset.
“REIT Debt Securities-Storage” means securities issued by a real estate investment trust (as defined
in Section 856 of the Code or any successor provision) whose assets consist (except for rights or other assets
designed to assure the servicing or timely distribution of proceeds to holders of such securities) of a portfolio
of properties including storage facilities and other similar real property interests used in one or more similar
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businesses; provided that any Cash Assets or Synthetic Assets with Reference Obligations falling within this
definition will be excluded from the definition of each other Specified Type of Collateral Asset.
“Residential A Mortgage Securities” means Structured Finance Securities (other than Residential B/C
Mortgage Securities and Agency MBS Securities) that entitle the holders thereof to receive payments that
depend on the cash flow from residential mortgage loans secured (on a first priority basis, subject to
permitted liens, easements and other encumbrances) by residential real estate (single or multi-family
properties) the proceeds of which are used to purchase real estate and purchase or construct dwellings
thereon (or to refinance indebtedness previously so used) and generally underwritten to the standards of the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (without regard
to the size of the loan); provided that such dependence may in addition be conditional upon rights or added
assets designed to assure the servicing or timely distribution of proceeds to holders of the Structured Finance
Securities such as a financial guaranty insurance policy.
“Residential B/C Mortgage Securities” means Structured Finance Securities (other than Residential A
Mortgage Securities) that entitle the holders thereof to receive payments that depend on the cash flow from
subprime residential mortgage loans secured (on a first priority basis, subject to permitted liens, easements
and other encumbrances) by residential real estate (single or multi-family properties) the proceeds of which
are used to purchase real estate and purchase or construct dwellings thereon (or to refinance indebtedness
previously so used) and which generally have a weighted average credit score based on the credit scoring
models developed by Fair, Isaac & Company with respect to the obligors on all such underlying loans of less
than 625; provided that such dependence may in addition be conditional upon rights or added assets designed
to assure the servicing or timely distribution of proceeds to holders of the Structured Finance Securities such
as a financial guaranty insurance policy.
“Restaurant and Food Services Securities” means Structured Finance Securities that entitle the
holders thereof to receive payments that depend on the cash flow from (a) a pool of franchise loans made to
operators of franchises that provide goods and services relating to the restaurant and food services industries
and (b) leases or subleases of equipment to such operators for use in the provision of such goods and
services; provided that such dependence may in addition be conditional upon rights or added assets designed
to assure the servicing or timely distribution of proceeds to holders of the Structured Finance Securities such
as a financial guaranty insurance policy.
“RMBS Securities” means Residential A Mortgage Securities, Residential B/C Mortgage Securities,
Home Equity Loan Securities and Agency MBS Securities.
“Small Business Loan Securities” means Structured Finance Securities that entitle the holders thereof
to receive payments that depend on the cash flow from general purpose corporate loans made to “small
business concerns” (generally within the meaning given to such term by regulations of the United States
Small Business Administration), including those (a) made pursuant to Section 7(a) of the United States
Small Business Act, as amended, and (b) partially guaranteed by the United States Small Business
Administration; provided that such dependence may in addition be conditional upon rights or added assets
designed to assure the servicing or timely distribution of proceeds to holders of the Structured Finance
Securities such as a financial guaranty insurance policy.
“Student Loan Securities” means securities that entitle the holders thereof to receive payments that
depend (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from loans made to students (or their parents) to finance
educational needs, generally having the following characteristics: (1) the loans have standardized terms;
(2) the loans are obligations of numerous borrowers and accordingly represent a very diversified pool of
obligor credit risk; (3) the repayment stream on such loans is primarily determined by a contractual payment
schedule, with early repayment on such loans predominantly dependent upon interest rates and the income of
borrowers following the commencement of amortization; and (4) such loans are fully or partially insured or
reinsured by the United States Department of Education; provided that any Cash Assets or Synthetic Assets
with Reference Obligations falling within this definition will be excluded from the definition of each other
Specified Type of Collateral Asset.
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“Timeshare Securities” means securities that entitle the holders thereof to receive payments that
depend (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from borrowers under Timeshare Mortgage Loans. Timeshare
Mortgage Loans are generally fixed rate, fully amortizing loans that are secured by first mortgage liens on
timeshare estates. A timeshare estate consists of an interval (generally measured in weeks) in vacation
ownership of fully furnished vacation units or apartments. Usage and ownership is generally divided into 52
one-week intervals, with one or two weeks reserved for maintenance. Ownership can also be through
undivided fee simple interests (“UDIs”) in a group of units. Owners become tenants in common with other
owners of undivided interests, with “use” rights which allow more flexibility in terms of length and timing of
stay than fixed week intervals, as purchasers are not restricted to fixed fee usage.
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Schedule D
Moody’s Notching Criteria
General Notching Criteria:
-
One notch is equivalent to one rating subcategory (i.e. + or -)
-
Can only notch off public ratings that are monitored
-
No more than 10 percent can be notched off single rated assets that are Fitch Only and S&P Only
-
Ratings must address return of full principal and interest
RMBS Securities
S&P Rated
Fitch Only
AAA
1
1
AA+ to BBB-
2
2
Below BBB-
3
4
CMBS
Conduit*
S&P and Fitch
S&P and/or Fitch
Moody’s does not rate at least one class
2 (from the lower of S&P and Fitch)
Moody’s rates at least one class
1.5 (from the lower of S&P and
Fitch, if rated by both)
CTL
Use corporate guarantee notching
Use corporate guarantee notching
Large Loan
No Notching
No Notching
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* Conduit means fixed-rate, sequential pay, multi-borrower transactions having a Herfindahl score of 40 or
higher at the loan level with all collateral factored in
ABS (notching for S&P rated collateral only)
AAA to AA-
A+ to BBB-
Below BBB-
Agriculture/Equip Loans
1
2
3
Aircraft/Auto Lease
2
3
4
Arena/Stadium Financing
1
2
3
Auto Loans
1
2
3
Boat/Motorcycle/RV/Truck
1
2
3
Computer/Small Ticket Lease
1
2
3
Consumer Loan
1
3
4
Credit Card
1
2
3
Cross Border
1
2
3
Entertainment
1
2
3
Floor Plan
1
2
3
Franchise Loan
1
2
4
Future Flow
1
1
2
Healthcare
1
2
3
Manufactured Housing
1
2
3
Mutual Fund Fee
1
2
4
Small Business Loan
1
2
3
Stranded Cost
1
2
3
Structured Settlements
1
2
3
Student Loan
1
2
3
Tax Lien
1
2
3
Trade Receivables
2
3
4
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Schedule E
S&P Rating Non-Notching
The following asset classes are not eligible to be notched.
Credit estimates must be performed.
This schedule may be modified or adjusted at any time, so please verify applicability.
Asset Type
1.
Non-U.S. Structured Finance Securities
2.
Guaranteed Securities
3.
CDOs of Structured Finance and Real Estate Securities
4.
CBOs of CDOs
5.
CLOs of Distressed Debt
6.
Mutual Fund Fee Securities
7.
Catastrophic Bonds
8.
First Loss Tranches of any securitization
9.
Synthetics
10. Synthetic CBOs
11. Composite or Combination Securities
12. Re-REMICs
13. Market Value CDOs
14. Net Interest Margin Securities (NIMs)
15. Any asset class not listed on Schedule F
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Schedule F
S&P Rating Notching
Asset classes eligible for notching if they are not first loss tranches or combination securities.
If the security is rated by two agencies, notch down as shown below based on the lowest rating.
If rated only by one agency, then notch down what is shown below plus one more notch.
This schedule may be modified or adjusted at any time, so please verify applicability.
1.
Issued Prior to 8/1/01
Issued after 8/1/01
Current Rating is:
Current Rating is:
Inv. Grade
Non Inv.
Grade
Inv. Grade
Non Inv.
Grade
-1
-2
-2
-3
-1
-2
-2
-3
-1
-2
-2
-3
-1
-2
-2
-3
CONSUMER ABS
Automobile Loan Receivable Securities
Automobile Lease Receivable Securities
Car Rental Receivable Securities
Credit Card Securities
Healthcare Securities
Student Loan Securities
2.
COMMERCIAL ABS
Cargo Securities
Equipment Leasing Securities
Aircraft Leasing Securities
Small Business Loan Securities
Restaurant and Food Services Securities
Tobacco Litigation Securities
3.
Non-Re-REMIC RMBS
Manufactured Housing Loan Securities
4.
Non-Re-REMIC CMBS
CMBS - Conduit
CMBS - Credit Tenant Lease
CMBS - Large Loan
CMBS - Single Borrower
CMBS - Single Property
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Issued Prior to 8/1/01
Issued after 8/1/01
Current Rating is:
Current Rating is:
Inv. Grade
Non Inv.
Grade
Inv. Grade
Non Inv.
Grade
5.
CBO/CLO CASHFLOW SECURITIES
Cash Flow CBO - at least 80% High Yield
Corporate
Cash Flow CBO - at least 80% Investment
Grade Corporate
Cash Flow CLO - at least 80% High Yield
Corporate
Cash Flow CLO - at least 80% Investment
Grade Corporate
-1
-2
-2
-3
6.
REITS
-1
-2
-2
-3
-3
-4
-3
-4
-1
-2
-2
-3
-1
-2
-2
-3
REIT - Multifamily & Mobile Home Park
REIT-Retail
REIT - Hospitality
REIT - Office
REIT - Industrial
REIT - Healthcare
REIT - Warehouse
REIT - Self-Storage
REIT-Mixed Use
7.
SPECIALTY STRUCTURED
Stadium Financings
Project Finance
Future flows
8.
RESIDENTIAL MORTGAGES
Residential “A”
Residential “B/C”
Home equity loans
9.
REAL ESTATE OPERATING
COMPANIES
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Schedule G
Moody’s Asset Correlation Methodology
For purposes of determining the Asset Correlation Factor in accordance with Moody’s correlation
methodology, it is assumed that 85 is the number of assets included in the Collateral. The Investment
Adviser will determine the Asset Correlation Factor in respect of individual assets after consultation with
Moody’s to the extent it determines necessary from time to time and it is possible that the methodology
applied may differ from the current methodology outlined below. For any Synthetic Asset for which the
Reference Obligation is a synthetic CDO Security or any other security that synthetically references a basket
or portfolio of credit, the Asset Correlation Factor will be determined by reference to the portfolio of
securities backing such CDO Security or such other portfolio of securities.
For the purpose of categorization of Residential Mortgage-Backed Securities in accordance with
Moody’s correlation methodology:
(i)
if the weighted average FICO score ≥ 700, classify as first and second lien prime;
(ii)
if the weighted average FICO Score (A) is equal to 625 or (B) is greater than 625 but less than
700 then classify as midprime; and
(iii) if the weighted average FICO score is less than 625, classify as subprime.
The following sectors are used in Moody’s correlation methodology:
Moody’s Sector Code Sector Name
1
CORP - Corporate related - Corporate - Aerospace and Defense
2
CORP - Corporate related - Corporate - Automobile
3
CORP - Corporate related - Corporate - Banking
4
CORP - Corporate related - Corporate - Beverage, Food and Tobacco
5
CORP - Corporate related - Corporate - Buildings and Real Estate
6
CORP - Corporate related - Corporate - Chemicals, Plastics and Rubber
7
CORP - Corporate related - Corporate - Containers, Packaging and Glass
8
CORP - Corporate related - Corporate - Personal and Non Durable Consumer Products
(Manufacturing Only)
9
CORP - Corporate related - Corporate - Diversified/Conglomerate Manufacturing
10
CORP - Corporate related - Corporate - Diversified/Conglomerate Service
11
CORP - Corporate related - Corporate - Diversified Natural Resources, Precious
12
CORP - Corporate related - Corporate - Ecological
13
CORP - Corporate related - Corporate - Electronics
14
CORP - Corporate related - Corporate - Finance
15
CORP - Corporate related - Corporate - Farming and Agriculture
16
CORP - Corporate related - Corporate - Grocery
17
CORP - Corporate related - Corporate - Healthcare, Education and Childcare
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18
CORP - Corporate related - Corporate - Home and Office Furnishings, Housewares, and Durable
Consumer Products
19
CORP - Corporate related - Corporate - Hotels, Motels, Inns and Gaming
20
CORP - Corporate related - Corporate - Insurance
21
CORP - Corporate related - Corporate - Leisure, Amusement, Entertainment
22
CORP - Corporate related - Corporate - Machinery (Non-Agriculture, Non-Construction,
Non-Electronic)
23
CORP - Corporate related - Corporate - Mining, Steel, Iron and Non Precious Metals
24
CORP - Corporate related - Corporate - Oil and Gas
25
CORP - Corporate related - Corporate - Personal, Food and Miscellaneous
26
CORP - Corporate related - Corporate - Printing and Publishing
27
CORP - Corporate related - Corporate - Cargo Transport
28
CORP - Corporate related - Corporate - Retail Stores
29
CORP - Corporate related - Corporate - Telecommunications
30
CORP - Corporate related - Corporate - Textiles and Leather
31
CORP - Corporate related - Corporate - Personal Transportation
32
CORP - Corporate related - Corporate - Utilities
33
CORP - Corporate related - Corporate - Broadcasting & Entertainment
34
CORP - Corporate related - Corporate - Sovereign & Supranational
35
36
ABS - Consumer - Consumer ABS - Auto and Personal Lease
37
ABS - Consumer - Consumer ABS - Credit Card
38
ABS - Consumer - Consumer ABS - Student Loans
39
ABS - Consumer - RMBS - First and Second Lien Prime
40
ABS - Consumer - RMBS - Midprime
41
ABS - Consumer - RMBS - Subprime
42
ABS - Consumer - RMBS - Manufactured Housing
43
ABS - Consumer - ABS CDOs
44
ABS - Specific - Specific - Tax Lien
45
ABS - Specific - Specific - Mutual Fund Fees
46
ABS - Specific - Specific - Structured Settlement
47
ABS - Specific - Specific - Utility Stranded Cost
48
ABS - Specific - Specific - Big Ticket Lease
49
ABS - Specific - Specific - IP (including Entertainment Royalties)
50
ABS - Specific - Specific - Dealer’s Floor Plan
51
ABS - Specific - Specific - Tobacco Bonds
52
ABS - Commercial Real Estate - CMBS - Conduit
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53
ABS - Commercial Real Estate - CMBS - Credit Tenant Lease
54
ABS - Commercial Real Estate - CMBS - Large Loans
55
ABS - Commercial Real Estate - REITs - Hotel
56
ABS - Commercial Real Estate - REITs - Multi family
57
ABS - Commercial Real Estate - REITs - Office
58
ABS - Commercial Real Estate - REITs - Retail
59
ABS - Commercial Real Estate - REITs - Industrial
60
ABS - Commercial Real Estate - REITs - Healthcare
61
ABS - Commercial Real Estate - REITs - Self-storage
62
ABS - Commercial Real Estate - REITs - Diversified
63
ABS - Commercial Real Estate - Real Estate CDOs
64
ABS - Corporate related - CDO - CDO exposed to IG
65
ABS - Corporate related - CDO - CDO exposed to HY
66
ABS - Corporate related - CDO - CDO exposed to EM
67
ABS - Corporate related - CDO - CDO exposed to SME and SME Lease
68
ABS - Corporate related - CDO - Franchise Loans
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Schedule H
GLOSSARY OF CERTAIN DEFINED TERMS
“ABS Securities” means securities (other than RMBS Securities or CMBS Securities) backed by
consumer receivables, commercial receivables or securities and may include, without limitation, Automobile
Lease Securities, Automobile Loan Securities, CDO Securities, Credit Card Securities and Other ABS
Securities.
“Account Control Agreement” means that certain Account Control Agreement, dated as of the
Closing Date, as the same may be amended or supplemented from time to time, among the Issuer, the
Trustee and the Accountholder.
“Accountholder” means Investors Bank & Trust Company, as collateral agent, securities intermediary
and depositary bank with respect to the Collateral, under the Account Control Agreement.
“Administrative Expenses” means amounts due from or accrued for the account of the Co-Issuers with
respect to any Payment Date to, in the following order: (i) the Trustee for any due and unpaid expenses;
(ii) the Note Paying Agents and the Collateral Administrator for any due and unpaid expenses; (iii) the
Collateral Administrator pursuant to the Collateral Administration Agreement; (iv) the Rating Agencies for
fees and expenses in connection with any Class of Rated Notes rated by each such Rating Agency
(including, without limitation, expenses for credit estimates, ongoing surveillance of the ratings of the Notes
and of credit estimates); (v) the Independent Accountants, agents and counsel of the Co-Issuers for fees and
expenses (including, without limitation, tax reports); (vi) the Administrator pursuant to the Administration
Agreement; (vii) the Investment Adviser and its counsel for fees and expenses under the other Transaction
Documents and the Investment Advisory Agreement (including the amounts payable under the Investment
Advisory Agreement but excluding the Investment Advisory Fees); (viii) the Supersenior Swap Counterparty
and its counsel for fees, expenses, and any other amounts payable under the Supersenior Swap but excluding
the Supersenior Swap Commitment Fee and the Supersenior Swap Drawing Fee; (ix) any other person in
respect of any governmental fee, charge or tax (including all filing, registration and annual return fees
payable to the Cayman Islands’ government and registered office fees); and (x) any other person in respect
of any other fees or expenses permitted under this Indenture and the documents delivered pursuant to or in
connection with the Indenture, the Investment Advisory Agreement, the Supersenior Swap and the Notes,
including any technology expenses incurred by or on behalf of the Co-Issuers by any other person; provided,
however, that Administrative Expenses may not include (a) any amounts due or accrued with respect to the
actions taken on or prior to the Closing Date under pre-closing collateral accumulation agreements and
(b) any amounts due under any CDS Asset or any Hedge Agreement. For the avoidance of doubt,
Administrative Expenses shall not include any clause included in the definition of “Administrative
Indemnities.”
“Administrative Indemnities” means amounts due from or accrued for the account of the Co-Issuers
with respect to any Payment Date to, in the following order: (i) the Trustee and any Note Paying Agents in
respect of any indemnification payments (including expenses relating to indemnification obligations) due
and payable to it pursuant to the Indenture hereof; (ii) the Collateral Administrator in respect of any
indemnification payments (including expenses relating to indemnification obligations) due and payable to it
pursuant to the Collateral Administration Agreement; (iii) the Investment Adviser in respect of any
indemnification payments (including expenses relating to indemnification obligations) due and payable to it
pursuant to the Investment Advisory Agreement; (iv) the Managers and the Placement Agents in respect of
any indemnification payments (including expenses relating to indemnification obligations) due and payable
to either or both of them, as applicable, pursuant to the Subscription and Private Placement Agency
Agreement or any pre-closing collateral accumulation agreements; and (v) any other Person in respect of any
indemnification payments (including expenses relating to indemnification obligations) due and payable to it
to the extent specifically permitted under this Indenture or the other Transaction Documents. For the
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avoidance of doubt, fees and expenses of counsel with respect to indemnification obligations shall be
Administrative Indemnities.
“Administrator Fee” means an annual fee in an amount set forth in the Administration Agreement.
“Advisers Act” means the U.S. Investment Advisers Act of 1940, as amended.
“Aerospace and Defense Securities” means Structured Finance Securities that entitle the holders
thereof to receive payments that depend on the cash flow from leases and subleases of aircraft, vessels and
telecommunications equipment to businesses for use in the provision of goods or services to consumers, the
military or the government; provided, that such dependence may in addition be conditional upon rights or
added assets designed to assure the servicing or timely distribution of proceeds to holders of the Structured
Finance Securities such as a financial guaranty insurance policy.
“Affiliate” means, with respect to any specified person, any person, directly or indirectly through one
or more intermediaries, controlling, controlled by or under common control with such specified person;
provided that control of a person shall mean the power, direct or indirect, (x) to vote more than 50 percent of
the securities having ordinary voting power for the election of directors of such person or (y) to direct or
cause the direction of the management and policies of such person whether by contract or otherwise.
Notwithstanding the foregoing, with respect to the Issuer, no other entity to which the Administrator
provides directors and/or acts as share trustee shall, solely as a result thereof, be an Affiliate of the Issuer.
“Agent Members” means members of, or participants in, the Clearing Agencies.
“Aggregate Amortized Cost” means, with respect to any Interest Only Security as of any date of
determination, (a) on the date of acquisition thereof by the Issuer, the cost of purchase thereof and (b) on any
date thereafter, the present value of all remaining payments on such Interest Only Security discounted to
such date of determination as of each subsequent Payment Date at a discount rate per annum equal to the
internal rate of return on such Interest Only Security as calculated by the Investment Adviser at the time of
purchase thereof by the Issuer.
“Aggregate Attributable Amount” means, the respect to any specified Collateral Assets and issuers
incorporated or organized under the laws of any specified jurisdiction or jurisdictions, (i) the Collateral
Principal Balance of such Collateral Asset, multiplied by, (ii) the aggregate par amount of collateral securing
such Collateral Asset issued by issuers so organized, divided by (iii) the aggregate par amount of all
collateral securing such Collateral Asset.
“Aggregate Fees and Expenses” means, on any Payment Date, the sum of: (a) the Trustee Fee with
respect to such Payment Date and any unpaid Trustee Fee accrued with respect to a previous Payment Date;
(b) the Senior Investment Advisory Fee and all expenses of the Investment Adviser payable by the Issuer
pursuant to the Investment Advisory Agreement with respect to such Payment Date and any unpaid Senior
Investment Advisory Fee and unpaid expenses of the Investment Adviser accrued with respect to a previous
Payment Date; (c) any due and unpaid expenses owed to the Trustee and other expenses (including other
amounts payable to IBTC, under the Collateral Administration Agreement and the Indenture and other
Administrative Expenses and Administrative Indemnities) of the Co-Issuers (including the fees to be paid to
the Irish Stock Exchange), in each case with respect to such Payment Date, and any of the same accrued and
unpaid with respect to a previous Payment Date; (d) any due and unpaid expenses owed to the Note Paying
Agents with respect to such Payment Date and any unpaid expenses owed to the Note Paying Agents
accrued with respect to a previous Payment Date; (e) the amount, if any, scheduled to be applied on such
Payment Date to the payment to the Morgan Stanley Parties of the Structuring Fee; (f) taxes payable by the
Co-Issuers, if any; and (g) all other expenses of the Co-Issuers (including, without limitation, Administrative
Expenses and Administrative Indemnities) payable on such Payment Date pursuant to clause (i) of the
Priority of Payments for Collateral Interest Collections (to the extent not included in clauses (a) through
(f) above).
“Annualized Yield Formula” means an amount determined by taking the Excel function XIRR and
assuming the Subordinated Notes were purchased at par on the Closing Date.
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“Applicable Periodic Interest Rate” means, for any Periodic Interest Accrual Period, (i) with respect
to the Class II Notes, the Class II Note Interest Rate, (ii) with respect to the Class III Notes, the Class III
Note Interest Rate, (iii) with respect to the Class IV Notes, the Class IV Note Interest Rate, (iv) with respect
to the Class V Notes, the Class V Note Interest Rate, (v) with respect to the Class VI Notes, the Class VI
Note Interest Rate and (vi) with respect to the Class VII Notes, the Class VII Note Interest Rate.
“Applicable Recovery Rate” means, with respect to any Collateral Asset on any Measurement Date,
the lesser of (a) the applicable Moody’s Recovery Rate for such Collateral Asset on such Measurement Date
and (b) the applicable S&P Recovery Rate (specified in Schedule B hereto) for such Collateral Asset on such
Measurement Date.
“Articles” means the Amended and Restated Memorandum of Association and Amended and Restated
Articles of Association of the Issuer.
“Auction Redemption Targeted Internal Rate of Return” means an annualized internal rate of return
on the Subordinated Notes of 8 percent to May 2016 and thereafter 0% computed using the Annualized
Yield Formula.
“Authorized Officer” means with respect to the Issuer or the Co-Issuer, any officer who is authorized
to act for the Issuer or the Co-Issuer, as applicable, in matters relating to, and binding upon, the Issuer or the
Co-Issuer; with respect to the Investment Adviser, any officer or employee of the Investment Adviser who is
authorized to act for the Investment Adviser in matters relating to, and binding upon, the Investment Adviser
with respect to the subject matter of the request, certificate or order in question; and with respect to the
Trustee, a trust officer within the CDO Trust Services Group of its principal corporate trust office or with
respect to any other bank or trust company acting as a trustee of an express trust or as custodian, a trust
officer within its trust department. Each party may receive and accept a certification of the authority of any
other party as conclusive evidence of the authority of any person to act, and such certification may be
considered as in full force and effect until receipt by such other party of written notice to the contrary.
“Average Life” means, on any Measurement Date with respect to any Collateral Asset, the quotient
obtained by the Investment Adviser, on behalf of the Issuer, by dividing (i) the sum of the products of (a) the
number of years (rounded to the nearest one tenth thereof) from such Measurement Date to the respective
dates of each successive scheduled distribution of principal of such Collateral Asset and (b) the respective
amounts of principal of such scheduled distributions by (ii) the sum of all successive scheduled distributions
of principal on such Collateral Asset.
“Benefit Plan Investor” means (i) an “employee benefit plan” as defined in Section 3(3) of ERISA,
whether or not it is subject to Title I of ERISA, (ii) a “plan” described in section 4975(e)(1) of the Code
(including without limitation, an individual retirement account), whether or not it is subject to section 4975
of the Code, (iii) an entity whose underlying assets include plan assets by reason of such employee benefit
plan’s or plan’s investment in such entity, or (iv) an entity that otherwise constitutes a “benefit plan investor”
within the meaning of the Plan Asset Regulation.
“Business Day” means any day other than (i) a Saturday or Sunday or (ii) any other day on which
banking institutions are not open for business in New York City, Los Angeles, California, Boston,
Massachusetts or, if there is a successor Trustee, in the city where the corporate trust office of the successor
Trustee is located, and, for final payment of principal, in the relevant place of presentation; provided, that
solely for purposes of the definition of “Payment Date,” if and for so long as any Class of Notes is listed on
the Irish Stock Exchange, “Business Day” shall also be required to be a day on which banking institutions
are open for business in Dublin, Ireland.
“Calculation Date” means, with respect to any Payment Date, the last day of the related Due Period.
“Cash” or “cash” means such coin or currency of the United States of America as at the time shall be
legal tender for payment of all public and private debts.
“Cash-on-Cash Return” means, as of any Payment Date, the annualized rate determined on the basis
of a 360-day year and twelve 30-day months and by dividing (a) the aggregate amount of Collateral Interest
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Collections distributed on such Payment Date to the Holders of the Subordinated Notes in accordance with
the Priority of Payments by (b) original par amount of the Subordinated Notes.
“Cash Settlement Ceiling Amount” means (i) with respect to any Business Day, in the case of CDS
Payments, the Available Supersenior Swap Amount as of such date and (ii) with respect to any Payment
Date, in the case of a Senior Interest Shortfall, the lesser of (x) the Available Supersenior Swap Amount as
of such date and (y) the Available Synthetic Notional Proceeds Amount as of such date (before giving effect
to the Synthetic Applications Sequence).
“CDO Securities” means (1) High-Yield CDO Securities, (2) Investment-Grade CDO Securities,
(3) Real Estate CDO Securities, (4) ABS CDO Securities, (5) High-Diversity CDO Securities, (6) LowDiversity CDO Securities and (7) CRE CDO Securities; provided, that any Cash Assets or Synthetic Assets
with Reference Obligations falling within this definition will be excluded from the definition of each other
Specified Type of Collateral Asset.
“CDS Counterparty” means, respect to any CDS Asset, the entity (or guarantor or similar credit
support provider of such entity’s obligations pursuant to an irrevocable and unconditional guarantee or
similar credit support instrument) that is required to make payments on such CDS Asset to the Issuer to the
extent specified therein, and which is required to (x) have (A)(i) a short-term rating of at least “P-1” by
Moody’s (which, if rated “P-1” by Moody’s, is not on negative credit watch for downgrade) and a long-term
senior unsecured debt rating of at least “A1” by Moody’s (which, if rated “A1” by Moody’s, is not on
negative credit watch for downgrade) or (ii) a long-term senior unsecured debt rating of at least “Aa3” by
Moody’s (which, if rated “Aa3” by Moody’s, is not on negative credit watch for downgrade) and (B) a shortterm rating of at least “A-1” by S&P, in each case as of the date of purchase or entry into the CDS Asset by
the Issuer and (y) be a dealer in derivatives.
“CDS Counterparty Termination Payment” means, as the context may require, either (i) a payment
required to be made by a CDS Counterparty to the Issuer in connection with the early termination of a CDS
Asset or (ii) in connection with the early termination of two or more CDS Assets under a Master Agreement
in circumstances where netting between transactions under the relevant Master Agreement is applicable, any
net amount required to be paid by the CDS Counterparty to the Issuer in connection with such early
termination.
“CDS Interest Payment” means any payment required to be made by the Issuer to the related CDS
Counterparty in respect of a CDS Interest Shortfall under a CDS Asset.
“CDS Loss Payment” means, with respect to a CDS Asset, any CDS Principal Payment or Physical
Settlement Payment payable by the Issuer to the related CDS Counterparty.
“CDS Issuer Termination Payment” means, as the context may require, either (i) a payment required
to be made by the Issuer to the CDS Counterparty in connection with the early termination of a CDS Asset
or (ii) in connection with the early termination of two or more CDS Assets under a Master Agreement in
circumstances where netting between transactions under the relevant Master Agreement is applicable, any
net amount required to be paid by the Issuer to the applicable CDS Counterparty in connection with such
early termination; provided that a CDS Asset shall be required to provide that a CDS Issuer Termination
Payment may not exceed the Principal Balance of the CDS Asset.
“CDS Issuer Up-front Payment” means a payment required to be made by the Issuer to a CDS
Counterparty upon purchasing or entering into a CDS Asset.
“CDS Principal Payment” means any payment required to be made by the Issuer to the related CDS
Counterparty in respect of a CDS Principal Shortfall under a CDS Asset.
“CDS Reserve Account Balance” means, as of any date of determination, the amount equal to the sum
of the Principal Balance of the CDS Reserve Investments (excluding any investment earnings thereon) plus
(without duplication) cash on deposit in the CDS Reserve Account.
“CDS Reserve Investments” means (x) Eligible Investments (provided, that, in the case of any
Eligible Investment described in clause (b) or (d) in the definition thereof, such Eligible Investment shall
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have a maturity not more than 183 days from the date of its issuance) and (y) Structured Finance Securities
which are Credit Card Securities or Automobile Loan Securities that are not Subprime Credit Card Securities
or Subprime Automobile Securities which are rated “Aaa” and “AAA” (in each case not on negative credit
watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase and (z) unleveraged
repurchase obligations (having a maturity not more than 183 days from the date of its issuance, or, if any
such unleveraged repurchase obligation does not have a maturity, each party thereto can terminate such
unleveraged repurchase obligation upon not more than 183 days notice thereof to the other party) with
respect to any Eligible Investment described in clauses (b), (d), (e) or (f) of the definition thereof and clauses
(x) and (y) above, entered into with a depository institution or trust company (acting as principal) described
in clause (c) of the definition of Eligible Investments or entered into with a corporation (acting as
principal) whose short-term debt has a credit rating of “P-l” and “A-1+” (in each case not on negative credit
watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase in the case of any
repurchase obligation for a security having a maturity not more than 183 days from the date of its issuance or
whose long-term senior unsecured debt rating is at least “Aa2” and “AAA” (in each case not on negative
credit watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase in the case of any
repurchase obligation for a security having a maturity more than 183 days from the date of its issuance;
provided, that (i) CDS Reserve Investments must bear interest at a floating rate and may not constitute
Margin Stock; (ii) after giving effect to the purchase of Structured Finance Securities, the weighted average
life of all Structured Finance Securities then held in the CDS Reserve Account will be not more than one
year longer than the weighted average life of the CDS Assets at such time; (iii) at the time of purchase, no
Structured Finance Security then on deposit in the CDS Reserve Account shall have a maturity longer than
the longest maturity of all CDS Assets; and (iv) with respect to Eligible Investments of the types described in
clauses (c), (d), (e) and (g) that are purchased with funds in the CDS Reserve Account, together with such
types of Eligible Investments purchased with funds in the Class I Reserve Account, the aggregate principal
amount of all such investments that have the same issuer, obligor or guarantor (treating each issuer, obligor
or guarantor and its Affiliates as a single entity) may not at any time exceed the lesser of (i) $50,000,000 and
(ii) 10 percent of the Collateral Principal Balance; (v) with respect to any CDS Reserve Investment, (a) the
aggregate principal amount thereof may not at the time of purchase exceed the greater of (i) $17,500,000 and
(ii) 10% of the sum of the aggregate principal amount of (x) all of the Cash Assets, (y) the CDS Reserve
Account Balance and (z) the Class I Reserve Account Balance and (b) the aggregate principal plus the
aggregate principal amount of such other CDS Reserve Investments and Class I Reserve Investments that
have the same originator or are from the same shelf may not at any time exceed the greater of (i)
$43,750,000 and (ii) 25% of the sum of the aggregate principal amount of (x) all of the Cash Assets, (y) the
CDS Reserve Account Balance and (z) the Class I Reserve Account Balance; provided, however, that no
Class I Reserve Investment may have a legal final maturity that is later than the Stated Maturity Date.
“CDS Shortfall Events” means, collectively, CDS Interest Shortfalls and CDS Principal Shortfalls.
“CDS Subordinated Issuer Termination Payment” means a termination payment required to be
made by the Issuer to a CDS Counterparty upon the termination of the related CDS Asset pursuant to an
event of default or a termination event (other than Illegality or Tax Event) (each as defined in the related
Master Agreement) as to which the CDS Counterparty was the defaulting party or an affected party under
the related Master Agreement.
“Class” means each of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V Notes,
the Class VI Notes, the Class VII Notes, the Subordinated Notes, and the Class P Notes.
“Class I Reserve Balance” is, as of any date of determination, the amount equal to the sum of the
Principal Balance of the Class I Reserve Investments (excluding any investment earnings thereon) plus
(without duplication) Cash on deposit in the Class I Reserve Account on such date.
“Class I Reserve Investments” means (x) Eligible Investments (provided, that, in the case of any
Eligible Investment described in clause (b) or (d) in the definition thereof, such Eligible Investment shall
have a maturity not more than 183 days from the date of its issuance) and (y) Structured Finance Securities
which are Credit Card Securities, or Automobile Loan Securities (that are not Subprime Credit Card
Securities or Subprime Automobile Securities) which are rated “Aaa” and “AAA” (in each case not on
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negative credit watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase and
(z) unleveraged repurchase obligations (having a maturity not more than 183 days from the date of its
issuance, or, if any such unleveraged repurchase obligation does not have a maturity, each party thereto can
terminate such unleveraged repurchase obligation upon not more than 183 days notice thereof to the other
party) with respect to any Eligible Investment described in clauses (b), (d), (e) or (f) of the definition thereof
and clauses (x) and (y) above, entered into with a depository institution or trust company (acting as
principal) described in clause (c) of the definition of Eligible Investments or entered into with a corporation
(acting as principal) whose short-term debt has a credit rating of “P-l” and “A-1+” (in each case not on
negative credit watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase in the case
of any repurchase obligation for a security having a maturity not more than 183 days from the date of its
issuance or whose long-term senior unsecured debt rating is at least “Aa2” and “AAA” (in each case not on
negative credit watch for downgrade) by Moody’s and S&P, respectively, at the time of purchase in the case
of any repurchase obligation for a security having a maturity more than 183 days from the date of its
issuance; provided, that (i) Class I Reserve Investments must bear interest at a floating rate and may not
constitute Margin Stock; (ii) after giving effect to the purchase of Structured Finance Securities, the
weighted average life of all Structured Finance Securities then held in the Class I Reserve Account will be
not more than one year longer than the weighted average life of the CDS Assets at such time; (iii) at the time
of purchase, no Structured Finance Security then on deposit in the Class I Reserve Account shall have a
maturity longer than the longest maturity of all CDS Assets; and (iv) with respect to Eligible Investments of
the types described in clauses (c), (d), (e) and (g) that are purchased with funds in the Class I Reserve
Account, together with such types of Eligible Investments purchased with funds in the CDS Reserve
Account, the aggregate principal amount of all such investments that have the same original or are from the
same shelf may not at any time exceed the lesser of (i) $50,000,000 and (ii) 10 percent of the Collateral
Principal Balance; (v) with respect to any Class I Reserve Investment, (a) the aggregate principal amount
thereof may not at any time exceed the greater of (i) $17,500,000 and (ii) 10% of the sum of the aggregate
principal amount of (x) all of the Cash Assets, (y) the CDS Reserve Account Balance and (z) the Class I
Reserve Account Balance and (b) the aggregate principal plus the aggregate principal amount of such other
Class I Reserve Investments and CDS Reserve Investments that have the same issuer, obligor or guarantor
(treating each issuer, obligor or guarantor and its Affiliates as a single entity) may not at any time exceed the
greater of (i) $43,750,000 and (ii) 25% of the sum of the aggregate principal amount of (x) all of the Cash
Assets, (y) the CDS Reserve Account Balance and (z) the Class I Reserve Account Balance; provided,
however, that no Class I Reserve Investment may have a legal final maturity that is later than the Stated
Maturity Date.
“Class II Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class II Notes in full by the Stated
Maturity Date and the timely payment of interest on such Class II Notes.
“Class II Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 0.42 percent.
“Class II Note Loss Rate Differential” means with respect to any Measurement Date, the rate
obtained by subtracting the Class II Note Scenario Default Rate from the Class II Note Break-Even Default
Rate.
“Class II Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class II Notes
on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
“Class III Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class III Notes in full by the Stated
Maturity Date and the timely payment of interest on such Class III Notes.
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“Class III Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 0.48
percent.
“Class III Note Loss Rate Differential” means, with respect to any Measurement Date, the rate
obtained by subtracting the Class III Note Scenario Default Rate from the Class III Note Break-Even Default
Rate.
“Class III Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class III Notes
on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
“Class IV Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class IV Notes in full by the Stated
Maturity Date and the ultimate payment of interest on such Class IV Notes.
“Class IV Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 0.55
percent.
“Class IV Note Loss Rate Differential” means, with respect to any Measurement Date, the rate
obtained by subtracting the Class IV Note Scenario Default Rate from the Class IV Note Break-Even Default
Rate.
“Class IV Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class IV
Notes on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
“Class V Coverage Tests” means the Class V Interest Coverage Test and the Class V Par Value
Coverage Test.
“Class V Cumulative Applicable Periodic Interest Shortfall Amount” means, with respect to any
Payment Date, the sum of (x) the amount of unpaid interest for the applicable Periodic Interest Accrual
Period that will be added to the principal balance of the Class V Notes in the event that any Class II Notes,
Class III Notes or Class IV Notes are Outstanding and funds are not available in accordance with the Priority
of Payments on such Payment Date to pay the full amount of Periodic Interest on the Class V Notes, and
(y) the amount of all accrued and unpaid interest for any prior Periodic Interest Accrual Periods that was
added to the principal balance (to the extent remaining unpaid) of the Class V Notes in the event that any
Class II Notes, Class III Notes or Class IV Notes were Outstanding and funds were not available in
accordance with the Priority of Payments on any prior Payment Date to pay the full amount of Periodic
Interest on the Class V Notes, in each case to be paid thereafter in accordance with the Priority of Payments.
“Class V Interest Coverage Ratio” means, with respect to any date of determination, a ratio equal to
the percentage based on the ratio of (x) over (y), where (x) is equal to the Interest Coverage Amount and
where (y) is the sum of the Periodic Interest for the Class II Notes, the Class III Notes, the Class IV Notes
and the Class V Notes plus the Supersenior Swap Commitment Fee and the Supersenior Swap Drawing Fee
for the Payment Date immediately following such date of determination assuming the Average Available
Supersenior Swap Amount during the entire Periodic Interest Accrual Period ending on the day before such
Payment Date is the Available Supersenior Swap Amount on such date of determination.
“Class V Interest Coverage Test” means a test that is satisfied as of any date of determination when
the Class V Interest Coverage Ratio is equal to or exceeds 109.0 percent.
“Class V Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class V Notes in full by the Stated
Maturity Date and the ultimate payment of interest on such Class V Notes.
“Class V Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 1.20 percent.
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“Class V Note Loss Rate Differential” means, with respect to any Measurement Date, the rate
obtained by subtracting the Class V Note Scenario Default Rate from the Class V Note Break-Even Default
Rate.
“Class V Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class V Notes
on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
“Class V Par Value Coverage Ratio” means, with respect to any date of determination, a ratio equal
to the percentage based on the ratio of (x) over (y), where (x) is the Par Value Coverage Amount as of such
date and (y) is the sum of (i) the Available Supersenior Swap Amount, (ii) the aggregate outstanding amount
of the Class II Notes, the Class III Notes, the Class IV Notes and the Class V Notes (including any Class V
Cumulative Applicable Periodic Interest Shortfall Amount) and (iii) the Used Supersenior Swap Amount.
“Class V Par Value Coverage Test” means a test that is satisfied as of any date of determination when
the Class V Par Value Coverage Ratio is equal to or exceeds 106.90 percent.
“Class VI Coverage Tests” means the Class VI Interest Coverage Test and the Class VI Par Value
Coverage Test.
“Class VI Cumulative Applicable Periodic Interest Shortfall Amount” means, with respect to any
Payment Date, the sum of (x) the amount of unpaid interest for the applicable Periodic Interest Accrual
Period that will be added to the principal balance of the Class VI Notes in the event that any Class II Notes,
Class III Notes, Class IV Notes or Class V Notes are Outstanding and funds are not available in accordance
with the Priority of Payments on such Payment Date to pay the full amount of Periodic Interest on the Class
VI Notes, and (y) the amount of all accrued and unpaid interest for any prior Periodic Interest Accrual
Periods that was added to the principal balance (to the extent remaining unpaid) of the Class VI Notes in the
event that any Class II Notes, Class III Notes, Class IV Notes or Class V Notes were Outstanding and funds
were not available in accordance with the Priority of Payments on any prior Payment Date to pay the full
amount of Periodic Interest on the Class VI Notes, in each case to be paid thereafter in accordance with the
Priority of Payments.
“Class VI Interest Coverage Ratio” means, with respect to any date of determination, a ratio equal to
the percentage based on the ratio of (x) over (y), where (x) is equal to the Interest Coverage Amount and
where (y) is the sum of the Periodic Interest for the Class II Notes, the Class III Notes, the Class IV Notes,
the Class V Notes, and the Class VI Notes plus the Supersenior Swap Commitment Fee and the Supersenior
Swap Drawing Fee for the Payment Date immediately following such date of determination assuming the
Average Available Supersenior Swap Amount during the entire Periodic Interest Accrual Period ending on
the day before such Payment Date is the Available Supersenior Swap Amount on such date of determination.
“Class VI Interest Coverage Test” means a test that is satisfied as of any date of determination when
the Class VI Interest Coverage Ratio is equal to or exceeds 105.0 percent.
“Class VI Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class VI Notes in full by the Stated
Maturity Date and the ultimate payment of interest on such Class VI Notes.
“Class VI Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 3.0 percent.
“Class VI Note Loss Rate Differential” means, with respect to any Measurement Date, the rate
obtained by subtracting the Class VI Note Scenario Default Rate from the Class VI Note Break-Even Default
Rate.
“Class VI Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class VI
Notes on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
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“Class VI Par Value Coverage Ratio” means, with respect to any date of determination, a ratio equal
to the percentage based on the ratio of (x) over (y), where (x) is the Par Value Coverage Amount as of such
date and (y) is an amount equal to the sum of (i) the Available Supersenior Swap Amount, (ii) the
outstanding principal balance of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V
Notes, and the Class VI Notes (including any Class V Cumulative Applicable Periodic Interest Shortfall
Amount and any Class VI Cumulative Applicable Periodic Interest Shortfall Amount) and (iii) the Used
Supersenior Swap Amount.
“Class VI Par Value Coverage Test” means a test that is satisfied as of any date of determination
when the Class VI Par Value Coverage Ratio is equal to or exceeds 102.50 percent.
“Class VII Cumulative Applicable Periodic Interest Shortfall Amount” means, with respect to any
Payment Date, the sum of (x) the amount of unpaid interest for the applicable Periodic Interest Accrual
Period that will be added to the principal balance of the Class VII Notes in the event that any Class II Notes,
Class III Notes, Class IV Notes, Class V Notes or Class VI Notes are Outstanding and funds are not
available in accordance with the Priority of Payments on such Payment Date to pay the full amount of
Periodic Interest on the Class VII Notes, and (y) the amount of all accrued and unpaid interest for any prior
Periodic Interest Accrual Periods that was added to the principal balance (to the extent remaining unpaid) of
the Class VII Notes in the event that any Class II Notes, Class III Notes, Class IV Notes, Class V Notes or
Class VI Notes were Outstanding and funds were not available in accordance with the Priority of Payments
on any prior Payment Date to pay the full amount of Periodic Interest on the Class VII Notes, in each case to
be paid thereafter in accordance with the Priority of Payments.
“Class VII Interest Diversion Coverage Amount” means, as of any date of determination, an amount
equal to (1) the aggregate Principal Balance of all Collateral Assets (other than Defaulted Securities and
Deferred Interest PIK Bonds) included in the Collateral on such date, plus (2) the aggregate Principal
Balance of the Eligible Investments in the Collection Account on such date that represent Collateral
Principal Collections, plus (3) the Defaulted Securities Amount, plus (4) the Deferred Interest PIK Bond
Amount, plus (5) the Unused CDS Capacity, in each case as of such date minus (6) the aggregate principal
balance of all Collateral Assets that are Deep Discount obligations (other than any Defaulted Securities and
Deferred Interest PIK Bonds), plus (7) the aggregate purchase price of all Deep Discount Obligations;
provided, however, that (i) all downgraded Collateral Assets (other than Defaulted Securities and Deferred
Interest PIK Bonds) that have Moody’s Ratings of “Ba1”, “Ba2” or “Ba3” or S&P Ratings of “BB+”, “BB”
or “BB-” shall be included at 80 percent of such aggregate Principal Balance unless they are CDO Securities,
in which case they shall be included at 65 percent of such aggregate Principal Balance; (ii) any Collateral
Assets (other than Defaulted Securities and Deferred Interest PIK Bonds) that have a Moody’s Rating of
“B1”, “B2” or “B3” or an S&P Rating of “B+”, “B” or “B-” shall be included at 70 percent of their Principal
Balances unless they are CDO Securities, in which case they shall be included at 55 percent of such
aggregate Principal Balance; (iii) any Collateral Assets (other than Defaulted Securities and Deferred
Interest PIK Bonds) that have a Moody’s Rating of “Caa1” or lower or an S&P Rating of CCC+ or lower
shall be included at the lesser of (x) 50 percent of their Principal Balances and (y) their Market Values; and
(iv) (x) any Collateral Assets other than CDS Assets purchased below 75 percent of their Principal Balances
shall be included at their purchase price and (y) CDS Assets purchased below 75% of their Principal
Balances shall be included at their purchase price (which shall be calculated as the par value of the related
Reference Obligation discounted by the Premium Amount payable to the Issuer in connection with such
CDS Asset); provided that this clause (y) shall apply only if the Premium Amount payable to the Issuer on
such CDS Asset exceeds the Underlying Reference Obligation’s spread by more than 1.0%; provided that
any Structured Finance Security that trades at a market price of at least 85 percent of its Principal Balance
for 60 or more consecutive days at any time following such purchase as identified by the Investment Adviser
may be excluded from this clause (v).
“Class VII Interest Diversion Ratio” means with respect to any date of determination, a ratio equal to
the percentage based on the ratio of (x) over (y), where (x) is equal to the Class VII Interest Diversion
Coverage Amount and where (y) is the sum of (i) the Available Supersenior Swap Amount, (ii) the
outstanding principal balance of the Class II Notes, the Class III Notes, the Class IV Notes, the Class V
Notes, Class VI Notes and the Class VII Notes (including any Class V Cumulative Applicable Periodic
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Interest Shortfall Amount, Class VI Cumulative Applicable Periodic Interest Shortfall Amount and Class VII
Cumulative Applicable Periodic Interest Shortfall Amount) and (iii) the Used Supersenior Swap Amount.
“Class VII Interest Diversion Test” means a test that is satisfied as of any date of determination when
the Class VII Interest Diversion Ratio is equal to or exceeds 101.80 percent.
“Class VII Note Break-Even Default Rate” means the maximum percentage of defaults that the
Proposed Portfolio can sustain, as determined by the Trustee by application of the S&P CDO Monitor, after
giving effect to S&P’s assumptions on recoveries, defaults and timing and to the Priority of Payments such
that sufficient funds will remain for the payment of principal of the Class VII Notes in full by the Stated
Maturity Date and the ultimate payment of interest on such Class VII Notes.
“Class VII Note Interest Rate” means a rate per annum equal to Three-Month LIBOR plus 6.25
percent.
“Class VII Note Loss Rate Differential” means, with respect to any Measurement Date, the rate
obtained by subtracting the Class VII Note Scenario Default Rate from the Class VII Note Break-Even
Default Rate.
“Class VII Note Scenario Default Rate” means an estimate of the cumulative default rate for the
Current Portfolio or the Proposed Portfolio, as applicable, consistent with S&P’s rating of the Class VII
Notes on the Closing Date, determined by the Trustee by application of the S&P CDO Monitor.
“Class P Notes“ means the U.S.$5,910,000 principal amount of Class P Notes due August, 2046, rated
“Aaa” by Moody’s as to the return of principal only, which consist of the Class P Treasury Strip Component
and the Class P Subordinated Note Component.
“Class P Notes Investor Balance“ means, with respect to any Class P Notes, the initial aggregate
outstanding amount of such Class P Notes minus the aggregate amount of distributions paid to the Holders
of such Class P Notes pursuant to this Indenture on all prior Payment Dates.
“Class P Noteholder“ means the person in whose name a Class P Note is registered in the Class P Note
Register.
“Class P Subordinated Note Component“ means the component initially consisting of US $2,000,000
aggregate principal amount of Subordinated Notes allocable to, and represented by, the Class P Notes.
“Class P Treasury Strip“ means a note (CUSIP 912820KQ9) issued by the U.S. Government, on
which no payments of interest will be made and a single scheduled payment of U.S.$5,910,000 will be due at
maturity in August, 2014.
“Class P Treasury Strip Collateral“ means (i) the Class P Treasury Strip and (ii) the Class P Treasury
Strip Component Account.
“Class P Treasury Strip Component“ means the Class P Treasury Strip allocable to, and represented
by the Class P Notes.
“Class P Treasury Strip Component Account“ means the account established in the name of the
Trustee and pledged in favor of the Trustee for the benefit of the Holders of the Class P Notes.
“Class P Treasury Strip Default“ means the failure of the obligor of the Class P Treasury Strip to pay
any amount due and payable under the Class P Treasury Strip.
“Clearing Agencies” means either of Euroclear or Clearstream.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Collateral Assets” means (i) Cash Assets and Credit Linked Securities and CDS Assets with
Reference Obligations that are Structured Finance Securities or REIT Debt Securities of a Specified Type
which Cash Assets and Synthetic Assets are owned by the Issuer and, in each case, comply with the
Eligibility Criteria on the date of commitment to purchase, or the date of execution, by the Issuer and (ii) all
Deliverable Obligations when received by the Issuer.
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“Collateral Interest Collections” means with respect to any Due Period and the related Payment Date,
without duplication, the sum of (i) all cash payments of interest (including accrued interest received on a sale
of a Collateral Asset other than a Defaulted Security up to its par amount; provided that if any accrued
interest is included in the purchase price of such Collateral Asset, such accrued interest was not purchased
with Collateral Principal Collections) with respect to any Cash Assets, Credit Linked Securities, Class I
Reserve Investments, CDS Reserve Investments and Eligible Investments and Premium Amounts paid by
CDS Counterparties under any CDS Assets which are received during such Due Period (excluding (a) any
Purchased Accrued Interest, (b) any previously deferred and/or capitalized interest which is paid on a
Deferred Interest PIK Bond and (c) with respect to any Collateral Asset that pays interest less frequently
than quarterly, any portion of the cash payment of interest received on such Collateral Asset during such Due
Period that is deposited to the Interest Reserve Account), (ii) all interest payments on Eligible CDS
Collateral or Initial CDS Counterparty CSA Eligible Credit Support, in each case, deposited to the
Collection Account pursuant to the Indenture, but excluding for the avoidance of doubt, interest payments on
collateral posted by CDS Counterparties to the CDS Issuer account under any CDS Assets, to the extent such
interest payments are not payable to the Issuer under the relevant CDS Assets, (iii) all payments on Eligible
Investments in the Collection Account purchased with Collateral Interest Collections, (iv) payments received
from a Hedge Counterparty under any Hedge Agreement during such Due Period, (v) all amendment and
waiver fees, all late payment fees, all commitment fees and all other fees and commissions received during
such Due Period (other than fees and commissions received in connection with the purchase, sale,
restructuring, workout or default of Collateral Assets and Eligible Investments or in connection with
Defaulted Securities or Written Down Securities), (vi) CDS Interest Reimbursements received during such
Due Period with respect to CDS Assets, (vii) all interest payments received in respect of Written Down
Securities during such Due Period, (viii) the amount withdrawn from the Expense Reserve Account and
deposited to the Collec