OFFERING MEMORANDUM
STRATA 2007-1, LIMITED
$40,000,000 Floating Rate Notes Due September 21, 2014
STRATA 2007-1, Limited (the "Issuer") will issue $40,000,000 principal amount (the "Issued Principal Amount") of Floating Rate
Notes (the "Notes"). The Notes will be issued pursuant to an indenture, dated as of February 20, 2007 (the "Indenture"), between the Issuer, Bank
of America, N.A., as swap counterparty, and LaSalle Bank National Association, as trustee (the "Trustee").
The Notes will bear interest on the outstanding principal amount at a per annum rate equal to LIBOR plus 0.83 % per annum (the "Note
Interest Rate "), provided that, in the case of the first Interest Accrual Period, t he Note Interest Rate shall be 6.14875%. Interest on the Notes will
be paid quarterly in arrears, on the twentieth day of each of March, June, September or December, commencing on March 20, 2007 (but excluding
September 20, 2014), and on the Scheduled Maturity Date, or if any such day is not a Business Day, the first Business Day thereafter (each, an
"Interest Payment Date "). The Notes will be scheduled to mature on (and the final Int erest Payment Date will be) September 21, 2014 (the
"Scheduled Maturity Date").
The assets of the Issuer will be comprised of (i) the Collateral Assets held by the Issuer from time to time, (ii) the rights of the Issuer
under a credit default swap agreement (the "Credit Default Swap") with Bank of America, N.A. (the "Swap Counterparty "), (iii) the rights of the
Issuer under an interest rate swap agreement (the "Interest Rate Swap") with Bank of America, N.A. (the "Interest Rate Swap Counterparty"),
(iv) the rights of the Issuer under a portfolio management agreement (the "Portfolio Management Agreement")entered into by Vanderbilt Capital
Advisors, LLC (the "Portfolio Manager"), U.S. Bank National Association (the "Verification Agent"), the Issuer, the Swap Counterparty and the
Trustee; (v) funds on deposit in certain accounts created under the Indenture, and (vi) certain payments or distributions received in respect of the
Collateral Assets, the Credit Default Swap and the Interest Rate Swap. The Issuer's assets will be used to pay the obligations of the Issuer,
including the obligation of the Issuer to pay Cash Settlement Amounts, if any, to the Swap Counterparty.
Under the Credit Default Swap, the Issuer will initially provide to the Swap Counterparty credit protect ion on a portfolio of Reference
Entities (the "Long Portfolio"), in return for quarterly payments by the Swap Counterparty to the Issuer. The Long Portfolio will consist of 120
corporate and sovereign entities. In certain circumstan ces the Swap Counterparty may also provide to the Issuer credit protection on a separate
portfolio of Reference Entities (the "Short Portfolio" and, together with the Long Portfolio, the "Portfolios" or the "Reference Portfolios"). The
Credit Default Swap will consist of each of the transactions referencing the Reference Entities in the Long Portfolio (the "Long Transactions") and
each of the transactions referencing Reference Entities in the Short Portfolio (the "Short Transactions" and, together with the Long Transactions,
the " Transactions").
Pursuant to the terms of the Portfolio Management Agreement, the Portfolio Manager (a) will select the initial Long Portfolio; (b) may
remove, add or replace Reference Entities in the Portfolios (each a "Portfolio Change "), (c) will monitor the Portfolio s and (d) will provide the
Issuer with cert ain information with respect to the performance of the Portfolio s and the Reference Entities. The Portfolio Manager may (a) be
removed for cause or (b) resign, and in each case the Issuer may appoint a successor portfolio manager provided that certain con ditions listed in the
Portfolio Management Agreement are met. Under the Credit Default Swap, the Issuer may be obligated to pay Cash Settlement Amounts in
connection with the occurrence of Credit Events with respect to the Long Transactions. In certain circumstances, the Swap Counterparty may be
obligated to pay Cash Settlement Amounts in connection with the occurrence of Credit Events with respect to the Short Transactions. The amount
of any Cash Settlement Amount paid by the Issuer will reduce the Outstanding Principal Amount of the Notes (without any payment being made to
the Noteholders) and the amount of any Cash Settlement Amount paid to the Issuer will increase the Outstanding Principal Amount of the Notes.
It is a condition to the issuance of the Notes that the Notes be rated "AA-" by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") and "Aa3" by Moody's Investors Service, Inc. ("Moody's").
Application has been made to the Irish Financial Services Regulatory Authority, as competent authority under Directive 2003/71/EC, for
the prospectus to be approved. This Offering Memorandum comprises a prospectus ("Prospectus") for the purposes of Directive 2003/71/EC (the
"Prospectus Directive ").
Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List of the Irish Stock Exchange (the
"Official List") and trading on its regulated market.
Investing in the Notes involves risks. See " Risk Factors" beginning on page 9.
PAYMENTS RECEIVED BY THE ISSUER IN RESPECT OF THE COLLATERAL ASSETS, THE CREDIT DEFAULT SWAP AND
THE INTEREST RATE SWAP WILL BE THE SOLE SOURCE S OF PAYMENT IN RESPECT OF THE NOTES. THE NOTES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATIONS OF, AND WILL NOT BE INSURED OR GUARANTEED BY THE TRUSTEE, THE
PORTFOLIO MANAGER, THE SWAP COUNTERPARTY, THE INTEREST RATE SWAP COUNTERPARTY, THE PLACEMENT AGENT
OR ANY OF THEIR RESPECTIVE AFFILIATES. THE NOTES WILL NOT BE DEPOSITS OF BANK OF AMERICA, N.A. OR ANY
OTHER INSURED INSTITUTION AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY OR INSTRUMENTALITY.
THE NOTES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND THE ISSUER WILL BE RELYING UPON
THE EXEMPTION FROM REGISTRATION AS AN "INVESTMENT COMPANY" UNDER SECTION 3(c)(7) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT COMPANY ACT"). THE NOTES OR ANY INTEREST THEREIN MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT TO (A) "QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) WHICH ARE ALSO "QUALIFIED PURCHASERS" FOR PURPOSES OF SECTION 3(c)(7)
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OF THE INVESTMENT COMPANY ACT OR (B) IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF, AND IN
ACCORDANCE WITH, REGULATION S UNDER THE SECURITIES ACT ("REGULATION S") TO A PERSON THAT IS NOT A "U.S.
PERSON" AS DEFINED IN REGULATION S (A "U.S. PERSON"), IN COMPLIANCE WITH ANY OTHER CERTIFICATION AND OTHER
REQUIREMENTS SPECIFIED IN THE INDENTURE. PROSPECTIVE INVESTORS ARE HEREBY NOTIFIED THAT THE SELLERS OF
ANY NOTES MAY BE RELYING ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY SECTION 4(2) OR RULE 144A SEE "PURCHASE AND TRANSFER RESTRICTIONS ."
The Notes will be a new issue of securities and, accordingly, there will be no secondary market for the Notes prior to the offering hereof.
There can be no assurance that a secondary market for the Notes will develop or, if it does develop, that it will continue or provide investors with
liquidity.
T he Notes will be issued initially only in book-entry form, and will be evidenced by one or more permanent global notes, each registered
in the name of the nominee of The Depository Trust Company. Definitive notes will be available only under limited circumstances.
The Notes will be offered when, as and if delivered, and will be subject to the right of Banc of America Securities Limited (the
"Placement Agent") to reject orders in whole or in part. It is expected that the Notes will be delivered on or about February 20, 2007 , against
payment in immediately available funds.
BANC OF AMERICA SECURITIES LIMITED
The date of this Offering Memorandum is June 26, 2007.
NOTICES TO PURCHASERS
The Notes have not been and will not be registered under the Securities Act, the securities laws of any state
of the United States or the securities laws of any other relevant jurisdiction and may not be offered, sold or
otherwise transferred unless an exemption from registration under the Securities Act and applicable state securities
laws and the laws of any other relevant jurisdiction is available. Each purchaser of the Notes will be required to
make the appropriate purchaser representations as described under "Purchase and Transfer Restrictions." In
addition, the Notes will bear restrictive legends and will be subject to restrictions on transfer as described herein,
including the requirement that certain transferors of such Notes furnish a representation letter in the form prescribed
by the Indenture. Any resale or other transfer, or attempted resale or other attempted transfer, of Notes that is not
made in compliance with the applicable transfer restrictions will be deemed null and void ab initio. See "Purchase
and Transfer Restrictions."
The Notes do not represent an interest in or obligations of, and are not insured or guaranteed by the Trustee,
the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap Counterparty, the Placement Agent or any of
their respective Affiliates.
An investment in the Notes is not suitable for all investors and will be appropriate only for financially
sophisticated investors capable of (i) analyzing and assessing the risks associated with synthetic collateralized debt
obligations where the investor is taking the credit risk with respect to a portfolio of reference entities and (ii) bearing
such risks and the financial consequences thereof as they relate to an investment in the Notes. An investor in the
Notes should have no need for liquidity with respect to its investment in the Notes and no need to dispose of its
Notes or any portion thereof to satisfy any existing or contemplated indebtedness, obligation or for any other
purpose.
To ensure compliance with U.S. Treasury Department Circular 230, investors in the Notes are hereby
notified that: (a) any discussion herein of U.S. federal tax issues is not intended to be relied upon, and cannot be
relied upon by investors in the Notes, for the purpose of avoiding penalties that may be imposed on investors under
the United States Internal Revenue Code; (b) such discussion is written in connection with the promotion or
marketing of the Notes by the Issuer and the Placement Agent; and (c) investors in the Notes should seek advice
based on their particular circumstances from their own independent tax advisors.
Notwithstanding anything to the contrary herein or in any of the transaction documents, all persons may
disclose to any and all persons, without limitation of any kind, the U.S. federal, state and local tax treatment of the
Notes and the Issuer, any fact relevant to understanding the U.S. federal, state and local tax treatment of the Notes
and the Issuer, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. federal,
state and local tax treatment other than the names of the parties or any other person named herein, or information
that would permit identification of the parties or such other persons, and any pricing terms or other non-public
business or financial information that is unrelated to the U.S. federal, state or local tax treatment of the Notes and the
Issuer to the taxpayer and is not relevant to understanding the U.S. federal, state or local tax treatment of the Notes
and the Issuer to the taxpayer.
The Issuer accepts responsibility for the information contained in this Offering Memorandum (other than
information provided in the sections "Description of the Portfolio Manager", "The Swap Counterparty, the Interest
Rate Swap Counterparty and the Calculation Agent" and "Plan of Offering"). To the best of the knowledge and
belief of the Issuer the information contained in this document is in accordance with the facts and does not omit
anything likely to affect the import of such information.
None of the Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap Counterparty,
the Placement Agent or any of their respective Affiliates has separately verified the information contained in this
Offering Memorandum, except (i) the Portfolio Manager accepts responsibility for the information contained under
"Description of the Portfolio Manager"; to the best of the knowledge and belief of the Portfolio Manager the
information contained in "Description of the Portfolio Manager" is in accordance with the facts and does not omit
anything likely to affect the import of such information; (ii) the Swap Counterparty, the Interest Rate Swap
Counterparty and the Calculation Agent accept responsibility for the information contained under "The Swap
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Counterparty, the Interest Rate Swap Counterparty and the Calculation Agent"; to the best of the knowledge and
belief of the Swap Counterparty, the Interest Rate Swap Counterparty and the Calculation Agent the information
contained in "The Swap Counterparty, the Interest Rate Swap Counterparty and the Calculation Agent" is in
accordance with the facts and does not omit anything likely to affect the import of such information; and (iii) the
Placement Agent accepts responsibility for the information contained under "Plan of Offering"; to the best of the
knowledge and belief of the Placement Agent the information contained in "Plan of Offering" is in accordance with
the facts and does not omit anything likely to affect the import of such information. Accordingly, no representation,
warranty, or undertaking, express or implied, is made, and no responsibility or liability is accepted, by the Issuer, the
Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap Counterparty, the Placement Agent
or any of their respective Affiliates as to the accuracy or completeness of the information contained in this Offering
Memorandum, except as provided above. Each person receiving this Offering Memorandum acknowledges that
such person has not relied on the Issuer, the Trustee, the Portfolio Manager the Swap Counterparty, the Interest Rate
Swap Counterparty, the Placement Agent or any of their respective Affiliates in connection with the accuracy of
such information or its investment decision, except as provided above.
The information relating to the Replacement Collateral Assets has been accurately reproduced from
information published by the issuer of the Replacement Collateral Assets, as set out below. So far as the Issuer is
aware and is able to ascertain from such sources, no facts have been omitted from such sources which would render
the reproduced information misleading.
The Notes are being offered only to a limited number of institutional investors that are willing and able to
conduct an independent analysis of the characteristics of the Notes and risks of ownership of the Notes. It is
expected that prospective purchasers interested in participating in this offering are willing and able to conduct an
independent investigation of the risks posed by an investment in the Notes. Representatives of the Placement Agent
will be available to answer questions concerning the Issuer, the Notes, the Swap Agreements and the Collateral
Assets and will, upon request, make available such other information as prospective purchasers may reasonably
request.
This Offering Memorandum is not intended to furnish legal, regulatory, tax, accounting, investment or
other advice to any prospective purchaser of the Notes. This Offering Memorandum should be reviewed by each
prospective purchaser and its legal, regulatory, tax, accounting, investment and other advisors. Prospective
purchasers whose investment authority is subject to legal restrictions should consult their legal advisors to determine
whether and to what extent the Notes constitute legal investments for them.
No person is authorized in connection with any offering made hereby to give any information or make any
representation other than as contained in this Offering Memorandum and, if given or made, such information or
representation must not be relied upon as having been authorized by the Issuer, the Trustee, the Portfolio Manager,
the Swap Counterparty, the Interest Rate Swap Counterparty or the Placement Agent. The delivery of this Offering
Memorandum at any time does not imply that the information contained herein is correct at any time subsequent to
its date.
No action is being taken or is contemplated by the Issuer, the Trustee or the Placement Agent that would
permit a public offering of the Notes or possession or distribution of this Offering Memorandum or any amendment
thereof, or supplement thereto or any other offering material relating to the Issuer or the Notes in any jurisdiction
where, or in any other circumstances in which, action for those purposes is required. The distribution of this
Offering Memorandum and the offering of the Notes may also be restricted by law in certain jurisdictions.
Consequently, nothing contained herein shall constitute an offer to sell, or a solicitation of an offer to buy, (i) any
securities other than the Notes or (ii) any Notes in any jurisdiction in which it is unlawful for such Person to make
such an offer or solicitation. Persons into whose possession this Offering Memorandum comes are required by the
Issuer, the Trustee and the Placement Agent to inform themselves about, and to observe, any such restrictions.
The Placement Agent will not assume any responsibility for the performance of any obligations of the
Issuer or any other Person described in this Offering Memorandum or for the due execution, validity or
enforceability of the Notes, the instruments or documents delivered in connection with the Notes or for the value or
validity of any collateral or security interests pledged in connection therewith.
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NO INVITATION, WHETHER DIRECTLY OR INDIRECTLY MAY BE MADE TO THE PUBLIC IN
THE CAYMAN ISLANDS TO SUBSCRIBE FOR THE NOTES.
NOTICE TO RESIDENTS OF NEW HAMPSHIRE
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM SECURITIES
ACT, AS AMENDED, WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B OF THE NEW HAMPSHIRE UNIFORM SECURITIES ACT 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.
NOTICE TO RESIDENTS OF FLORIDA
IN THE EVENT SALES ARE MADE TO FIVE (5) OR MORE PERSONS RESIDENT IN THE STATE
OF FLORIDA PURSUANT TO AN OFFERING EXEMPTED UNDER SECTION 517.061(11)(A) OF THE
FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, SUCH SALES ARE VOIDABLE BY THE
PURCHASER IN SUCH SALE EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER, OR
AN ESCROW AGENT, OR WITHIN THREE (3) DAYS AFTER THE AVAILA BILITY OF THAT PRIVILEGE
IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER.
NOTICE TO RESIDENTS OF PENNSYLVANIA
UNDER PROVISIONS OF SECTION 207(M) OF THE PENNSYLVANIA SECURITIES ACT OF 1972,
EACH INDIVIDUAL WHO IS A PENNSYLVANIA RESIDENT HAS THE RIGHT TO WITHDRAW HIS OR
HER ACCEPTANCE WITHOUT INCURRING ANY LIABILITY TO THE SELLER, UNDERWRITER (IF
ANY) OR ANY OTHER PERSON, WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE
COMPANY OF HIS OR HER WRITTEN BINDING CONTRACT OF PURCHASE OR, IN THE CASE OF A
TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF PURCHASE, WITHIN
TWO BUSINESS DAYS AFTER HE OR SHE MAKES THE INITIAL PAYMENT FOR THE NOTES BEING
OFFERED. TO ACCOMPLISH THIS WITHDRAWAL A PURCHASER NEED ONLY SEND A LETTER TO
THE ISSUER AT THE ADDRESS SET FORTH IN THE TEXT OF THIS OFFERING MEMORANDUM,
INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER SHOULD BE SENT AND
POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED SECOND BUSINESS DAY. IT IS
PRUDENT TO SEND SUCH LETTER BY CERTIFIED MAIL RETURN RECEIPT REQUESTED, TO ENSURE
THAT IT IS RECEIVED AND TO EVIDENCE THE TIME WHEN IT WAS MAILED. IF THE REQUEST IS
MADE ORALLY IN PERSON OR BY TELEPHONE TO THE ISSUER AT THE NUMBER LISTED IN THE
TEXT OF THIS OFFERING MEMORANDUM A WRITTEN CONFIRMATION THAT THE REQUEST HAS
BEEN RECEIVED SHOULD BE REQUESTED.
PENNSYLVANIA SUBSCRIBERS MAY NOT SELL THEIR INTERESTS FOR ONE YEAR FROM
THE DATE OF PURCHASE IF SUCH SALE WOULD VIOLATE SECTION 203(D) OF THE PENNSYLVANIA
SECURITIES ACT.
NOTICE TO GEORGIA RESIDENTS
THE NOTES WILL BE ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE
SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR
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TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT
TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
FORWARD LOOKING STATEMENTS
Any projections, forecasts and estimates contained herein are forward looking statements and are based
upon certain assumptions that the Issuer considers reasonable. 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, among others, changes in interest rates, market, financial or legal uncertainties,
differences in the actual allocation of the Reference Entities among categories from those assumed, the timing and
the number of Credit Events occurring under the Credit Default Swap, and differences in the levels of the market
value of Reference Obligations assumed for purposes of settling Credit Events. Consequently, the inclusion of
projections herein should not be regarded as a representation by the Issuer, the Trustee, the Portfolio Manager, the
Swap Counterparty, the Interest Rate Swap Counterparty, the Placement Agent or any of their respective Affiliates
or any other Person or entity of the results that will actually be achieved by the Issuer.
None of the Issuer, the Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap
Counterparty, the Placement Agent 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.
CERTAIN LEGAL INVESTMENT CONSIDERATIONS
Institutions whose investment activities are subject to investment laws and regulations or to review
by certain regulatory authorities may be subject to restrictions on investments in the Notes. Any such
institution should consult its legal advisers in determining whether and to what extent there may be
restrictions on its ability to invest in the Notes. Without limiting the foregoing, any financial institution that
is subject to the jurisdiction of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration, any state insurance commission, or any other federal or state agencies with
similar authority should review any applicable rules, guidelines and regulations prior to purchasing the
Notes. Depository institutions should review and consider the applicability of the Federal Financial
Institutions Examination Council Supervisory Policy Statement on Securities Activities, which has been
adopted by the respective federal regulators.
None of the Issuer, the Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate
Swap Counterparty, the Placement Agent or any of their respective Affiliates makes any representation as to
the proper characterization of the Notes for investment or other purposes under applicable law or regulatory
guidelines, or as to the ability of particular purchasers to purchase the Notes under applicable investment
restrictions. The uncertainties described above (and any unfavorable future determinations concerning
investment or applicable legal and regulatory characteristics of the Notes) may affect the liquidity of the
Notes. Accordingly, all institutions whose activities are subject to investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should consult their own legal advisers in
determining whether and to what extent the Notes are subject to investment, capital or other restrictions.
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TABLE OF CONTENTS
Page
SUMMARY...................................................................................................................................................................................... 1
RISK FACTORS ............................................................................................................................................................................. 8
Limited Assets to Make Payments on the Notes................................................................................................................ 8
Effect of Credit Events............................................................................................................................................................ 9
Deferral of Payments on the Notes....................................................................................................................................... 9
Limited Ability to Substitute Reference Entities.............................................................................................................. 10
Portfolio Manager to manage the Portfolios in respect of multiple series of obligations......................................... 10
Effect of Leverage ................................................................................................................................................................. 10
Subordination ......................................................................................................................................................................... 11
No Legal or Beneficial Interest in Obligations of Reference Entities .......................................................................... 11
Limited Information about Reference Entities ................................................................................................................. 11
Non-Investment Grade Reference Entities ........................................................................................................................ 12
Early Termination of the Swap Agreements..................................................................................................................... 12
Conflicts of Interest............................................................................................................................................................... 13
Certain Conflicts Relating to the Portfolio Manager....................................................................................................... 14
Swap Counterparty Not a Fiduciary ................................................................................................................................... 17
Creditworthiness of Bank of America................................................................................................................................ 17
Creditworthiness of the Obligor on the Collateral Assets and any Eligible Investments.......................................... 17
Credit Ratings......................................................................................................................................................................... 18
Suitability of Investment ...................................................................................................................................................... 18
Limited Liquidity and Transfer Restrictions..................................................................................................................... 18
No Registration under the Securities Act .......................................................................................................................... 19
Book-Entry Registration....................................................................................................................................................... 19
Investment Company Act..................................................................................................................................................... 19
ERISA Considerations.......................................................................................................................................................... 20
Legislation and Regulations in Connection with Prevention of Money Laundering ................................................. 20
U.S. Federal Income Tax Considerations.......................................................................................................................... 21
Accounting Considerations.................................................................................................................................................. 22
THE ISSUER.................................................................................................................................................................................. 23
DESCRIPTION OF THE NOTES.............................................................................................................................................. 25
General..................................................................................................................................................................................... 25
Payments on the Notes.......................................................................................................................................................... 25
Interest Payments......................................................................................................................................................... 25
Principal Payments; Redemption; Reduction and Increase of Principal........................................................... 26
Priority of Payments.............................................................................................................................................................. 27
Form and Denominations..................................................................................................................................................... 29
Book-Entry Registration....................................................................................................................................................... 29
Definitive Notes ..................................................................................................................................................................... 31
PURCHASE AND TRANSFER RESTRICTIONS ................................................................................................................ 32
Legend ..................................................................................................................................................................................... 32
Investor Representations....................................................................................................................................................... 33
Section 3(c)(7) Procedures................................................................................................................................................... 38
Available Information........................................................................................................................................................... 38
Issuer Covenants and Undertakings.......................................................................................................................... 38
Selling Restrictions................................................................................................................................................................ 40
European Economic Area........................................................................................................................................... 40
United Kingdom........................................................................................................................................................... 40
CLEARING AND SETTLEMENT............................................................................................................................................ 41
Initial Settlement of Global Notes ...................................................................................................................................... 41
Secondary Market Trading of Interests in Global Notes ................................................................................................ 42
Trading between DTC Participants..................................................................................................................................... 42
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Trading between Clearstream and/or Euroclear Participants......................................................................................... 42
Trading between DTC seller and Euroclear/Clearstream purchaser............................................................................. 42
Trading between Euroclear/Clearstream seller and DTC purchaser............................................................................. 42
DESCRIPTION OF THE COLLATERAL ASSETS.............................................................................................................. 43
General..................................................................................................................................................................................... 43
Application of Payments ...................................................................................................................................................... 45
DESCRIPTION OF THE CREDIT DEFAULT SWAP......................................................................................................... 45
General..................................................................................................................................................................................... 45
Payments Under the Credit Default Swap......................................................................................................................... 46
Payments by the Swap Counterparty........................................................................................................................ 46
Payments by the Issuer................................................................................................................................................ 47
Settlement Upon Credit Event............................................................................................................................................. 47
Credit Events ................................................................................................................................................................ 47
Conditions to Settlement ............................................................................................................................................ 49
Designation of Reference Obligations ..................................................................................................................... 50
Determination and Payment of Cash Settlement Amount.................................................................................... 51
Procedure for Determining Final Price .................................................................................................................... 53
Termination of Credit Default Swap .................................................................................................................................. 53
Termination Date ......................................................................................................................................................... 53
Early Termination of Credit Default Swap ............................................................................................................. 54
Miscellaneous Provisions..................................................................................................................................................... 55
DESCRIPTION OF THE INTEREST RATE SWAP............................................................................................................. 55
General..................................................................................................................................................................................... 56
Payments Under the Interest Rate Swap............................................................................................................................ 56
Early Termination of Interest Rate Swap .......................................................................................................................... 56
THE SWAP COUNTERPARTY, THE INTEREST RATE SWAP COUNTERPARTY AND THE CALCULATION
AGENT............................................................................................................................................................................ 57
Consequences of a Rating Downgrade............................................................................................................................... 58
DESCRIPTION OF THE PORTFOLIO MANAGEMENT AGREEMENT ...................................................................... 59
Duties of the Portfolio Manager.......................................................................................................................................... 59
Standard of Care ..................................................................................................................................................................... 60
Modification of the Portfolios ............................................................................................................................................. 60
Substitution Rules .................................................................................................................................................................. 64
Conflicts of Interest; Affiliated Transactions.................................................................................................................... 65
Resignation and Removal of Portfolio Manager.............................................................................................................. 66
Assignment; Delegation........................................................................................................................................................ 66
Portfolio Management Fees ................................................................................................................................................. 67
Governing Law....................................................................................................................................................................... 67
Certain Additional Definitions in respect of the Portfolio Management Agreement................................................. 67
DESCRIPTION OF THE PORTFOLIO MANAGER............................................................................................................ 70
THE TRUSTEE AND AGENTS ................................................................................................................................................ 74
Trustee..................................................................................................................................................................................... 74
Paying Agent, Transfer Agent, Agent Bank and Registrar............................................................................................. 74
Capacities of LaSalle ............................................................................................................................................................. 75
THE INDENTURE ....................................................................................................................................................................... 75
The Collateral Accounts ....................................................................................................................................................... 75
The Principal Collateral Account........................................................................................................................................ 75
The Interest Collateral Account .......................................................................................................................................... 76
Duties of Trustee.................................................................................................................................................................... 76
Reports and Notices............................................................................................................................................................... 77
Replacement of Trustee........................................................................................................................................................ 79
Performance of Obligations................................................................................................................................................. 79
Agreements Supplemental to the Indenture ...................................................................................................................... 80
Governing Law....................................................................................................................................................................... 81
THE PLACEMENT AGENT ...................................................................................................................................................... 81
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES ........................................................................................ 81
CAYMAN ISLANDS TAXATION ........................................................................................................................................... 87
ERISA CONSIDERATIONS ...................................................................................................................................................... 88
AVAILABLE INFORMATION................................................................................................................................................. 91
LEGAL MATTERS ...................................................................................................................................................................... 91
PLAN OF OFFERING ................................................................................................................................................................. 91
GENERAL INFORMATion........................................................................................................................................................ 91
GLOSSARY OF DEFINITIONS................................................................................................................................................ 93
APPENDIX A — REFERENCE ENTITY INFORMATION
APPENDIX B — TRANSACTION TYPE INFORMATION
APPENDIX C — FORM OF INVESTMENT LETTER
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SUMMARY
The following summary does not purport to be complete and is qualified in its entirety by reference to
(i) the detailed information appearing elsewhere in this Offering Memorandum and (ii) the terms and provisions of
the related documents referred to herein. Certain capitalized terms used but not defined in the following summary
are defined elsewhere in this Offering Memorandum. See, also, the "Glossary of Definitions" and the "Index of
Defined Terms."
Transaction Overview
On the Closing Date, the Issuer will issue the Notes. The Notes will pay interest
at the rates and dates, and the principal amount thereof will be payable on the
dates, described under "— Payments on the Notes."
On the Closing Date, the Issuer deposited the $40,000,000 proceeds realized
from the initial sale of the Notes in the LaSalle Enhanced Liquidity Management
deposit account (the "Initial Collateral Assets"). On March 13, 2007, the
Issuer, upon receiving instruction from the Swap Counterparty, liquidated the
Initial Collateral Assets and purchased the Replacement Collateral Assets.
Under the Interest Rate Swap, the Issuer will pay to the Interest Rate Swap
Counterparty on each interest payment date for the Initial Collateral Assets
acquired on the Closing Date, the Replacement Collateral Assets, any additional
Collateral Assets acquired by the Issuer thereafter and any Eligible Investments
acquired by the Issuer thereafter (together, the "Collateral Assets") an amount
equal to the interest payable on the Collateral Assets on such date, in exchange
for the Interest Rate Swap Counterparty undertaking to pay to the Issuer on the
next Swap Counterparty Payment Date a floating amount calculated on the
Outstanding Principal Amount of the Notes . The Issuer will use the payments
received under the Interest Rate Swap, together with the Swap Counterparty
Payments made under the Credit Default Swap, to pay interest on the Notes on
the Interest Payment Dates and to pay fees to the Portfolio Manager under the
Portfolio Management Agreement.
The Notes will be scheduled to mature on September 21, 2014, but will be
subject to mandatory redemption prior thereto if certain events occur, including
the termination of the Swap Agreements.
All or a portion of the payments of principal on the Notes may be postponed in
connection with the occurrence of a Credit Event or Credit Events under certain
circumstances to a date later than the Scheduled Maturity Date. In addition,
certain payments in respect of interest may be postponed until the Credit Loss
Amount in respect of a Defaulted Reference Entity can be determined. See
"Description of the Notes — Payments on the Notes."
On the Closing Date, the Issuer and the Swap Counterparty will enter into the
Credit Default Swap. The Credit Default Swap will initially reference a
portfolio of entities in respect of which the Issuer will provide protection to the
Swap Counterparty (the "Long Portfolio"). The Portfolio Manager may, on
behalf of the Issuer and subject to certain conditions, select one or more entities
for which the Issuer will buy protection from the Swap Counterparty (the "Short
Portfolio" and, together with the Long Portfolio, the "Portfolios" or the
"Reference Portfolios").
Each Portfolio will comprise corporate and sovereign entities ("Reference
Entities") and will be managed by Vanderbilt Capital Advisors, LLC (the
"Portfolio Manager"). The Portfolio Manager may effect additions, removals or
substitutions of Reference Entities in the Portfolios from time to time (each a
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"Portfolio Change"), subject to certain limitations, the satisfaction of certain
requirements and verification by U.S. Bank National Association (the
"Verification Agent") that certain of those requirements have been met. Upon
any such Portfolio Change, the First Loss Amount under the Credit Default
Swap may be adjusted by a Modification Adjustment Amount. See "Description
of the Portfolio Management Agreement" and "The Portfolio Manager."
Under the Credit Default Swap, the Swap Counterparty will be required to make
periodic payments to the Issuer, as described under "— The Credit Default
Swap." In consideration for such payments by the Swap Counterparty, the
Issuer may be required to pay Cash Settlement Amounts, if any, to the Swap
Counterparty upon the satisfaction of Conditions to Settlement relating to one or
more specified Credit Events relating to any Reference Entity in the Long
Portfolio. With respect to the relevant Cash Settlement Date, the Cash
Settlement Amount payable by the Issuer will be the greater of (i) zero and (ii)
an amount equal to the least of (A) the amount by which the Net Loss Amount
with respect to that Transaction exceeds the First Loss Amount; (B) the Credit
Loss Amount in respect of the relevant Credit Event and (C) the amount by
which the Second Loss Amount exceeds the Net Loss Amount prior to giving
effect to the relevant Credit Event (see "Description of the Credit Default Swap
— Settlement Upon Credit Event — Determination and Payment of Cash
Settlement Amount").
In certain circumstances where the Issuer has been required to pay Cash
Settlement Amounts to the Swap Counterparty and Credit Events occur in
respect of Reference Entities in the Short Portfolio, the Swap Counterparty may
be required to pay Cash Settlement Amounts to the Issuer upon the satisfaction
of Conditions to Settlement in respect of such Reference Entities. With respect
to the relevant Cash Settlement Date, the Cash Settlement Amount payable by
the Swap Counterparty will be the greater of (i) zero and (ii) an amount equal to
the least of (A) the amount by which the Net Loss Amount with respect to that
Credit Event exceeds the First Loss Amount prior to giving effect to the relevant
Credit Event; (B) the Credit Loss Amount in respect of the relevant Credit Event
and (C) the amount by which the Second Loss Amount exceeds the Net Loss
Amount after giving effect to the relevant Credit Event (see "Description of the
Credit Default Swap — Settlement Upon Credit Event — Determination and
Payment of Cash Settlement Amount").
The "First Loss Amount" will initially be $213,200,000 and the "Second Loss
Amount" will initially be $253,200,000. The Swap Counterparty will bear the
risk of losses from Credit Events in respect of Reference Entities in the Long
Portfolio in an aggregate amount up to the First Loss Amount before the holders
of the Notes will suffer any loss. The difference between the First Loss Amount
and the Second Loss Amount represents the maximum exposure of the
Noteholders to Credit Events in the Long Portfolio. Upon any substitution of
Reference Entities in the Portfolios during the term of the transaction, the First
Loss Amount and the Second Loss Amount will be increased or decreased by
the Modification Adjustment Amount calculated in connection with such
substitution. If the Portfolio Manager elects to add Reference Entities to the
Short Portfolio, then the Modification Adjustment Amount will reduce the First
Loss Amounts and the Second Loss Amount to reflect the cost to the Issuer to
buying protection in respect of such Reference Entities (see "Description of the
Portfolio Management Agreement").
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The "Net Loss Amount" on any day is the sum of all Credit Loss Amounts
determined in respect of Reference Entities in the Long Portfolio less the sum of
all Credit Loss Amounts determined in respect of Reference Entities in the Short
Portfolio.
The Outstanding Principal Amount of the Notes will be (i) reduced by each
Cash Settlement Amount paid to the Swap Counterparty by the Issuer and (ii)
increased by each Cash Settlement Amount paid by the Swap Counterparty to
the Issuer (in each case without any payment being made to the Noteholders).
The Credit Loss Amount will reflect any depreciation in value of the Reference
Obligations upon the occurrence of Credit Events (see "Description of the Credit
Default Swap — Settlement Upon Credit Event — Determination and Payment
of Cash Settlement Amount").
The credit protection afforded to the Swap Counterparty under the Credit
Default Swap will terminate on, and no Swap Counterparty Payments will be
made after, the Scheduled Termination Date.
The Issuer
STRATA 2007-1, Limited, a company incorporated with limited liability under
the laws of the Cayman Islands. The activities of the Issuer will be limited to:
(i) issuing the Notes pursuant to the terms of the Indenture, (ii) acquiring the
Initial Collateral Assets and the Replacement Collateral Assets and, if necessary,
acquiring Eligible Investments with the proceeds realized upon the maturity or
redemption of the Replacement Collateral Assets, (iii) entering into and
performing its obligations under the Credit Default Swap, (iv) entering into and
performing its obligations under the Interest Rate Swap, (v) entering into and
performing its obligations under the Portfolio Management Agreement
(vi) entering into and performing its obligations under the Placement
Agreement, and (vii) engaging in such other activities, including entering into
other agreements, that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The only assets of the Issuer will be (i) the Collateral Assets, (ii) the rights of the
Issuer under the Credit Default Swap, (iii) the rights of the Issuer under the
Interest Rate Swap, (iv) the rights of the Issuer under the Portfolio Management
Agreement (v) funds on deposit in the Principal Collateral Account and the
Interest Collateral Account from time to time, and (vi) certain payments and
distributions received in respect of the Collateral Assets, the Credit Default
Swap and the Interest Rate Swap (collectively, the "Collateral").
All amounts payable in respect of the Notes, the Portfolio Management
Agreement, the Credit Default Swap and the Interest Rate Swap will be paid
solely from and to the extent of the available proceeds from the Collateral. To
the extent there is any shortfall, the relevant obligations shall be extinguished.
The Notes
The Issuer will issue $40,000,000 Floating Rate Notes (the "Notes") pursuant to
an Indenture dated as of February 20, 2007 (the "Indenture"), between the
Issuer, Bank of America, N.A., as Swap Counterparty and Interest Rate Swap
Counterparty, and LaSalle Bank National Association, as trustee.
Use of Proceeds
The proceeds of the offering of the Notes will be used by the Issuer to purchase
the Initial Collateral Assets and the Replacement Collateral Assets .
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The Swap Counterparty will pay directly certain costs and expenses relating to
the organization of the Issuer and the issuance of the Notes, including the initial
fees of Standard & Poor's and Moody's and the fees and expenses of counsel to
the Issuer.
Rating of the Notes
It is a condition to the issuance of the Notes that the Notes be rated "AA-" by
Standard & Poor's and "Aa3" by Moody's . The rating of the Notes will
represent the estimation of the Rating Agencies of the likelihood of complete
and timely payment of the principal of the Notes and the interest payable in
respect thereof. A credit rating is not a recommendation to buy, sell or hold
securities and may be subject to revision, withdrawal or suspension by the
Rating Agencies at any time.
The Offering
The Notes are being offered and sold: (a) in the United States to U.S. Holders
that are both Qualified Institutional Buyers and Qualified Purchasers, purchasing
for their own account or one or more accounts with respect to which they
exercise sole investment discretion, each of which is both a Qualified
Institutional Buyer and a Qualified Purchaser, in accordance with Rule 144A
and Section 3(c)(7) of the Investment Company Act; and (b) to non-U.S.
Holders that are either (i) both Qualified Institutional Buyers and Qualified
Purchasers, purchasing for their own account or one or more accounts with
respect to which they exercise sole investment discretion, each of which is both
a Qualified Institutional Buyer and a Qualified Purchaser, in accordance with
Rule 144A and Section 3(c)(7) of the Investment Company Act; or (ii) non-U.S.
persons in offshore transactions in reliance and in accordance with Regulation S
under the Securities Act.
See "Certain U.S. Federal Income Tax
Consequences." The offering of the Notes will be subject to compliance with,
among other things, the Securities Act, the Investment Company Act and
ERISA.
The ISIN for the Notes issued pursuant to Regulation S under the Securities Act
is USG85278AA06.
Transfer of the Notes
Transfers of interests in the Notes will be subject to certain restrictions. See
"Purchase and Transfer Restrictions."
Payments on the Notes
The Issuer will pay interest on the Notes, quarterly in arrears, on the twentieth
day of each of March, June, September and December, commencing on March
20, 2007 (but excluding September 20, 2014) and ending on the Scheduled
Maturity Date, provided that if any such day is not a Business Day, the interest
payment date will be on the first Business Day thereafter (each, an " Interest
Payment Date"). The Issuer will pay interest on the Notes in an amount equal
to the product of (i) the daily weighted average of the Outstanding Principal
Amount of the Notes for the related Interest Accrual Period, (ii) LIBOR plus
0.83% per annum (the "Note Interest Rate"), provided that, in the case of the
first Interest Accrual Period, the Note Interest Rate shall be 6.14875%, and (iii)
the Day Count Fraction. See "Description of the Notes — Payments on the
Notes — Interest Payments."
The Notes will be scheduled to mature on September 21, 2014 (the "Scheduled
Maturity Date"). The Notes will be subject to mandatory redemption prior to
their Scheduled Maturity Date in connection with the termination of the Swap
Agreements. All or a portion of the payments of principal on the Notes may be
postponed upon the occurrence of a Credit Event or Credit Events under certain
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circumstances to a date later than the Scheduled Maturity Date.
"Description of the Notes — Payments on the Notes."
See
In addition, the Outstanding Principal A mount of the Notes will be (a) reduced
upon the settlement of the Credit Default Swap in connection with any Credit
Event in the Long Portfolio in an amount equal to the Cash Settlement Amount,
if any, owed by the Issuer to the Swap Counterparty and (b) increased upon the
settlement of the Credit Default Swap in connection with any Credit Event in the
Short Portfolio in an amount equal to the Cash Settlement Amo unt, if any, owed
by the Swap Counterparty to the Issuer. Any such reduction or increase in the
principal amount of the Notes will result in a corresponding reduction or
increase in the amount of interest payable on the Notes on subsequent Interest
Payment Dates. If the principal amount of the Notes is reduced to zero and there
can be no further Cash Settlement Amounts payable by the Swap Counterparty
to the Issuer, the notes shall be redeemed. See "Risk Factors — Effect of Credit
Events."
If the Event Determination Date and the Calculation Date in respect of a
Defaulted Reference Entity in the Long Portfolio occur in different Interest
Accrual Periods, for the purposes of determining the amount of interest payable
on an Interest Payment Date, the Outstanding Principal Amount for any day
shall be determined assuming the maximum theoretical Credit Loss Amount for
such Defaulted Reference Entity. Upon determination of the Cash Settlement
Amount for such Defaulted Reference Entity, the Calculation Agent shall
recalculate the amount of interest payable on the basis of the actual Credit Loss
Amount determined in respect of that Defaulted Reference Entity and the Issuer
shall pay to the Noteholders the pro rata share of the amount by which the
recalculated interest amount exceeds the interest amount paid, together with any
interest accrued on such amount. See "Description of the Notes — Payments on
the Notes.
Listing
Application has been made to the Irish Stock Exchange for the Notes to be
admitted to the Officia l List of the Irish Stock Exchange and trading on its
regulated market. Goodbody Stockbrokers will act as listing agent in respect of
the listing, and Maples Finance Dublin will act as Irish Paying Agent (the "Irish
Paying Agent").
The Collateral Assets
On the Closing Date the Issuer will deposit the $40,000,000 of note proceeds in
in LaSalle Enhanced Liquidity Management deposit account (the "Initial
Collateral Assets"). On March 13, 2007 the Issuer, upon receiving instruction
from the Swap Counterparty, liquidated the Initial Collateral Assets and
purchased the Replacement Collateral Assets. The "Replacement Collateral
Assets" are composed of $40,000,000 in principal amount of Series 2007-1A -3
Notes issued by NorthStar Education Finance, Inc., CUSIP 66704JBT4, ISIN
US66704JBV98 and Common Code 28979118. Upon receipt of any payments
in respect of the principal amount of the Collateral Assets (other than on the
Scheduled Maturity Date of the Notes), the Issuer shall use such payment to
acquire Eligible Investments. Any Eligible Investments will be required to
satisfy certain criteria at the time of purchase by the Issuer. See "Description of
the Collateral Assets."
The Credit Default Swap
On the Closing Date, the Issuer will enter into the Credit Default Swap with the
Swap Counterparty. The Credit Default Swap will be documented on the
standard form of Multicurrency-Cross Border Master Agreement (1992)
published by the International Swaps and Derivatives Association, Inc.
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("ISDA"), as supplemented by a related schedule and credit default swap
confirmation. The 2003 ISDA Credit Derivatives Definitions, as supplemented
by the May 2005 Supplement thereto (collectively, the "ISDA Credit
Derivatives Definitions") will apply and will be incorporated by reference into
the Credit Default Swap.
Under the Credit Default Swap, the Issuer will initially provide to the Swap
Counterparty credit protection on a portfolio of Reference Entities (the "Long
Portfolio"). In certain circumstances the Swap Counterparty may also provide
to the Issuer credit protection on a separate portfolio of Reference Entities (the
"Short Portfolio and, together with the Long Portfolio, the "Portfolios" or the
"Reference Portfolios"). The Credit Default Swap will consist of each of the
transactions referencing the Reference Entities in the Long Portfolio (the "Long
Transactions") and each of the Reference Entities in the Short Portfolio (the
"Short Transactions" and, together with the Long Transactions, the
"Transactions).
Under the Credit Default Swap, the Issuer may be obligated to pay Cash
Settlement Amounts in connection with the occurrence of Credit Events with
respect to the Long Transactions. The Long Transactions will consist of 120
Reference Entities identified in Appendix A hereto. The notional amount for
each Reference Entity in the Long Portfolio will be the product of its Credit
Position and the Implicit Portfolio Size (each as defined in "Description of the
Credit Default Swap" below). The Portfolio Manager may, on behalf of the
Issuer, replace Reference Entities in the Long Portfolio and add or remove
Reference Entities in the Short Portfolio (see "Description of the Portfolio
Management Agreement").
Under the Credit Default Swap, the Swap Counterparty will be required to make
periodic Swap Counterparty Payments to the Issuer on the Swap Counterparty
Payment Dates, as such terms are defined under "Description of the Credit
Default Swap — Payments Under the Credit Default Swap — Payments by the
Swap Counterparty."
In consideration for the Swap Counterparty Payments, the Issuer may be
required, subject to the satisfaction of certain conditions, to pay a Cash
Settlement Amount to the Swap Counterparty upon the occurrence of a Credit
Event. See " Description of the Credit Default Swap — Settlement Upon Credit
Event" for the description therein of the Credit Events and the methodology for
calculating Cash Settlement Amounts.
The obligation of the Issuer to pay any Cash Settlement Amount will be
discharged by the Issuer (i) selling Collateral Assets having an outstanding
principal balance equal to the Cash Settlement Amount and (ii) delivering the
proceeds of the sale of such Collateral Assets to the Swap Counterparty;
provided that the Swap Counterparty may instead direct the Issuer to effect
payment of the Cash Settlement Amount by delivering to the Swap Counterparty
Collateral Assets having an outstanding principal balance equal to the Cash
Settlement Amount, provided that such direction shall only be effective if made
by the Swap Counterparty at least 5 Business Days before the relevant Cash
Settlement Date.
In certain circumstances where the Issuer has been required to pay Cash
Settlement Amounts to the Swap Counterparty and Credit Events occur in
respect of Reference Entities in the Short Portfolio, the Swap Counterparty may
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be required to pay Cash Settlement Amounts to the Issuer. The obligation of the
Swap Counterparty to pay any Cash Settlement Amount will be discharged by
the Swap Counterparty (i) paying such Cash Settlement Amount to the Issuer in
cash or (ii) delivering Collateral Assets having an outstanding principal balance
equal to the Cash Settlement Amount. If the Swap Counterparty pays the Cash
Settlement Amount in cash, the Issuer shall use such cash to invest in additional
Collateral Assets.
Under certain circumstances specified in the Credit Default Swap, the Issuer or
the Swap Counterparty may terminate the Credit Default Swap prior to its
Scheduled Termination Date, in which event the Issuer or the Swap
Counterparty may be required to make a Swap Termination Payment to the other
party. See "Description of the Credit Default Swap — Termination of Credit
Default Swap" for a description of the events that may give rise to an early
termination of the Credit Default Swap and the methodology for calculating the
Swap Termination Payment. Depending upon existing market conditions at the
time of any such early termination, a Swap Termination Payment could be owed
by the Issuer to the Swap Counterparty or by the Swap Counterparty to the
Issuer. If the Issuer is required to make a Swap Termination Payment and the
Swap Counterparty is not the Defaulting Party or the Sole Affected Party, the
amount available for payment to the holders of the Notes will be
correspondingly reduced. See "Risk Factors — Early Termination of the Credit
Default Swap."
Interest Rate Swap
On the Closing Date, the Issuer will enter into the Interest Rate Swap with the
Interest Rate Swap Counterparty. The Interest Rate Swap will be documented
under the same ISDA Master Agreement and schedule as the Credit Default
Swap described above, but will be entered into under a separate confirmation.
Under the Interest Rate Swap, the Issuer will pay to the Interest Rate Swap
Counterparty on each interest payment date for the Collateral Assets or Eligible
Investments an amount equal to the interest payable on the Collateral Assets or
Eligible Investments on such date, in exchange for the Interest Rate Swap
Counterparty undertaking to pay to the Issuer on the next Swap Counterparty
Payment Date the Second Floating Payment.
On the Closing Date, the Interest Rate Swap Counterparty will make a payment
to the Issuer under the Interest Rate Swap of an amount equal to the market
premium of and interest accrued on the Initial Collateral Assets since the last
interest payment date therefor. The Issuer will use such payment, together with
the proceeds from the sale of the Notes, to acquire the Initial Collateral Assets.
On any date of a subsequent purchase or delivery of Collateral Assets, the
Interest Rate Swap Counterparty will, as necessary, make a payment to the
Issuer under the Interest Rate Swap of an amount equal to the market premium
of and interest accrued on the relevant Collateral Assets , if any, since the last
interest payment date therefor.
The Interest Rate Swap will be subject to early termination upon the occurrence
of the same events and with similar consequences as are described herein for the
Credit Default Swap. See "Description of the Interest Rate Swap — Early
Termination of Interest Rate Swap."
Certain U.S. Tax Consequences
See "Certain Federal Income Tax Consequences" for a discussion of certain
federal income tax consequences of making an investment in the Notes.
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Cayman Islands Taxation
Based upon the advice of Maples and Calder, Cayman Islands counsel to the
Issuer ("Cayman Islands Counsel"), under the current laws of the Cayman
Islands, there will be no income, corporation, capital gains, es tate, transfer, sales
or other taxes payable by the Issuer or withholding taxes applicable to
distributions by the Issuer or to the payment of proceeds upon redemption of the
Notes or liquidation of the Issuer. Certificates evidencing the Notes in registered
form to which title is not transferable should not attract stamp duty imposed
under the laws of the Cayman islands in respect of such Notes. In addition, an
instrument transferring title to a Note, if brought to or executed in the Cayman
Islands, would be subject to Cayman Islands stamp duty. See "Cayman Islands
Taxation".
ERISA Considerations
To avoid certain fiduciary concerns and the potential application of the
prohibited transaction rules under the Employee Retirement Income Security
Act of 1974, as amended (" ERISA"), and the Internal Revenue Code of 1986, as
amended (the "Code"), the Notes may not be sold or transferred to (i) a Benefit
Plan Investor or (ii) a Governmental Plan, Church Plan or foreign plan which is
subject to any federal, state, local or foreign law that is substantially similar to
Section 406 of ERISA or Section 4975 of the Code unless the purchase and
holding of the Notes would not result in the violation of such similar laws;
provided, however, that the Notes may be sold to an insurance company general
account that satisfies certain conditions. See "ERISA Considerations" and
"Purchase and Transfer Restrictions."
Trustee
LaSalle Bank National Association will act as trustee (in such capacity, the
"Trustee") on behalf of the Secured Parties under the Indenture. "Secured
Parties" means the Swap Counterparty, the Portfolio Manager and the
Noteholders.
Legal Investment
The appropriate characterization of the Notes under various legal investment
restrictions, and therefore the ability of investors subject to these restrictions to
purchase the Notes, will be subject to significant interpretive uncertainties.
Accordingly, investors whose investment authority is subject to legal restrictions
should consult their own legal advisors to determine whether and to what extent
the Notes constitute legal investments for them. See "Legal Matters."
RISK FACTORS
The purchase of the Notes will constitute an investment subject to risks. Prior to purchasing any of the
Notes, prospective investors and their professional advisors should carefully consider, among other things, the
following risk factors, which are not intended to be an exhaustive listing of all risks associated with the purchase of
the Notes.
Limited Assets to Make Payments on the Notes
The interest on the Notes will be payable solely from and to the extent of payments received from the Swap
Counterparty under the Credit Default Swap and from the Interest Rate Swap Counterparty under the Interest Rate
Swap. If such payments are not sufficient to pay interest on the Notes or if the principal amount of the Collateral
Assets on the Maturity Date of the Notes is less than the principal amount of the Collateral Assets purchased by the
Issuer on the Closing Date (which would be the case if the Issuer is required to pay a Cash Settlement Amount to the
Swap Counterparty), no other assets will be available for the payment of any such deficiency, and none of the Issuer,
the Trustee, the Portfolio Manager, the Placement Agent, the Swap Counterparty, the Interest Rate Swap
Counterparty or any of their respective Affiliates or any other persons will be obligated to pay such deficiency.
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Effect of Credit Events
In the event of the occurrence of a Credit Event in respect of a Reference Entity in the Long Portfolio,
subject to the satisfaction of certain conditions set forth in the Credit Default Swap, the Issuer may be required to
pay to the Swap Counterparty a Cash Settlement Amount (see "Description of the Credit Default Swap — Settlement
Upon Credit Event — Determination and Payment of Cash Settlement Amount"). The principal amount of the Notes
will be reduced by the Cash Settlement Amount (without any payment being made to the holders of the Notes) from
the Event Determination Date in respect of such Credit Event. Any such reduction in principal will result in a
corresponding loss of investment for the holders of the Notes and in a reduction in the amount of interest payable on
the Notes on subsequent Interest Payment Dates. Depending upon the number of Credit Events and the related Cash
Settlement Amounts, the holders of the Notes could lose a substantial portion or all of their investment in the Notes
and/or fail to realize expected returns.
There is no central source for relevant data or a standardized method for measuring the likelihood of the
occurrence of Credit Events. Furthermore, the historical experience of other obligors comparable to the Reference
Entities is not necessarily indicative of the risk of Credit Events occurring with respect to particular Reference
Entities. Accordingly, it is difficult to predict with any certainty the likely level and timing of Credit Events or the
likely level of the market value of the Reference Obligations designated to be used in calculating Cash Settlement
Amounts of the affected Reference Entities in the event that Credit Events occur.
None of the Depositor, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap
Counterparty, the Placement Agent, the Trustee or any of their respective Affiliates should be construed as making
any representations with respect to the possibility of a Credit Event occurring with respect to any of the Reference
Entities or the potential market value of any Reference Obligation that may be used in calculating Cash Settlement
Amounts upon the occurrence of a Credit Event.
The market value of the Reference Obligations selected for settlement following a Credit Event generally
will fluctuate with, among other things, the terms of such Reference Ob ligations, changes in prevailing interest rates,
general economic conditions, the condition of certain financial markets (particularly the markets for corporate debt
obligations), domestic and international political events and developments or trends in any particular industry. Any
decrease in the market value of such Reference Obligations because of adverse changes in respect of any such
conditions will correspondingly increase the Cash Settlement Amount payable to the Swap Counterparty, resulting
in a greater reduction in the principal amount of the Notes and amount of interest payable on the Notes .
A Reference Entity is likely to be in default under the designated Reference Obligation(s) at the time the
market value of the Reference Obligation(s) is determined following a Credit Event, or the Reference Entity may be
insolvent at such time. If either circumstance exists, the market value of the Reference Obligation(s) may be less
than would otherwise prevail in the absence of such circumstances, resulting in an increase in the amount of the
Cash Settlement Amount owed to the Swap Counterparty.
The Cash Settlement Amount owed to the Swap Counterparty in connection with the occurrence of any
Credit Event in the Long Portfolio may also be greater than otherwise expected because the criteria for Reference
Obligations will allow the Swap Counterparty some discretion in designating the Reference Obligation(s) to be used
in calculating the Cash Settlement Amount. The Swap Counterparty will likely designate one or more Reference
Obligations that are most advantageous to it, which in many circumstances will mean the Reference Obligations
with the lowest market values. See "Description of the Credit Default Swap — Settlement Upon Credit Event."
Deferral of Payments on the Notes
If one or more Reference Entities are Unsettled Reference Entities on any Interest Payment Date, interest
on the Notes that is otherwise payable on such Interest Payment Date may be deferred and subject to reduction as
described herein. Additionally, if one or more Reference Entities are Unsettled Reference Entities on the Business
Day prior to the Scheduled Maturity Date, then principal that is otherwise payable on the Scheduled Maturity Date
may be deferred and be subject to reduction as described herein.
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Limited Ability to Substitute Reference Entities
The Portfolio Management Agreement contains certain restrictions on the ability of the Portfolio Manager
to effect changes to the Portfolios. Consequently, if a Reference Entity referenced under the Credit Default Swap
suffers any deterioration in its credit quality or market value, the holders of the Notes may not be able to avoid the
consequences of such deterioration, and the holders of the Notes could suffer an investment loss in connection with
such deterioration.
Portfolio Manager to manage the Portfolios in respect of multiple series of obligations
The Portfolio Manager may enter into other portfolio management agreements on substantially similar
terms to the terms of the Portfolio Management Agreement in respect of one or more series of obligations issued by
the Issuer or by other entities (the "Related Obligations") or one or more unfunded credit derivative transactions
entered into between the Swap Counterparty and a third party (the "Related Transactions") in each case which
reference portfolios of Reference Entities identical to the Portfolios.
Under the terms of the Portfolio Management Agreement, the Portfolio Manager has agreed to manage the
Portfolios in the same manner as it manages the portfolios in respect of the Related Obligations and the Related
Transactions. Consequently, when making substitutions to the Portfolios, the Portfolio Manager will consider the
interests of the holders of all the Related Obligations and the counterparties to the Related Transactions in addition
to those of the holders of the Notes. It is anticipated that the interests of the holders of the Related Obligations and
the counterparties to the Related Transactions will be broadly aligned with the interests of the holders of the Notes,
i.e. to minimize losses in the Portfolios. However, there may be circumstances where the interests of the holders of
the Related Obligations and/or the interests of the counterparties to the Related Transactions cause the Portfolio
Manager to effect a substitution to the Portfolios that it would otherwise not have made, or refrain from making a
substitution that it would otherwise have made, but for the interests of such holders.
The fees that the Portfolio Manager receives in respect of acting as portfolio manager for the Related
Obligations and the Related Transactions may vary from those that it receives for acting as Portfolio Manager in
respect of the Notes. In certain circumstances, the Portfolio Manager may receive no fees for acting as portfolio
manager for Related Obligations or Related Transactions. Such circumstances may include where the holder of the
Related Obligation or the counterparty to the Related Transactions is the Portfolio Manager, an Affiliate of the
Portfolio Manager or a fund in respect of which the Portfolio Manager acts as investment advisor. The fees that the
Portfolio Manager receives in respect of the Related Obligations and Related Transactions and the method by which
such fees are determined may affect how the Portfolio Manager manages the Portfolios.
In addition, holders of the Notes will only be permitted to remove the Portfolio Manager for cause if a twothirds majority of the holders of Notes and the Related Obligations (voting as a single class) have consented to such
removal. There is therefore a risk that even if the Portfolio Manager has breached its obligations under the Portfolio
Management Agreement, the holders of Notes will not be entitled to remove the Portfolio Manager because an
insufficient number of holders of the Related Obligations has consented to such removal. Likewise, a successor to
the Portfolio Manager may only be appointed by a majority of the holders of Notes and the Related Obligations
(voting as a single class) and, if so appointed, will act as portfolio manager in respect of the Notes and all the
Related Obligations. Therefore, holders of the Notes may be prevented from selecting a successor portfolio manager
by the holders of the Related Obligations. Similarly, a successor portfolio manager may be selected to manage the
Portfolios without the consent of the holders of the Notes.
Effect of Leverage
Under the Credit Default Swap, the aggregate notional amount of all Reference Entities will be
significantly greater than the principal amount of the Notes. The effect of such leverage will be to increase the
exposure of the holders of the Notes to potential losses. Due to the leverage embedded in the Credit Default Swap,
the holders of the Notes may realize a loss of all or a substantial portion of their investment in the Notes if Credit
Events occur with respect to only a relatively small number of Reference Entities and Cash Settlement Amounts are
required to be paid to the Swap Counterparty (see "— Effect of Credit Events"). The risk that the holders of the
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Notes may lose all or most of their investment will be greater than in a hypothetical unleveraged investment in the
Reference Obligations of the Reference Entities.
The existence of leverage in the transaction, however, will provide certain positive consequences. The
leverage feature will result in greater diversification of the reference portfolio. In addition, the fact that the net loss
amounts must exceed the First Loss Amount before any Cash Settlement Amount will be required to be paid to the
Swap Counterparty will afford the holders of the Notes protection up to the First Loss Amount.
Subordination
The rights of the holders of the Notes to receive payments will be subordinate, to the extent described
herein, to the obligations of the Issuer to make required payments, if any, to the Swap Counterparty under the Credit
Default Swap, to the Interest Rate Swap Counterparty under the Interest Rate Swap and to the Portfolio Manager
under the Portfolio Management Agreement. See "Description of the Credit Default Swap — Payments Under the
Credit Default Swap — Payments by the Issuer", "Description of the Interest Rate Swap— Payments Under the
Interest Rate Swap" and "Description of the Portfolio Management Agreement— Portfolio Management Fees"
Accordingly, if a Credit Event occurs and a Cash Settlement Amount is paid to the Swap Counterparty, the principal
amount payable on the Notes will be reduced by such Cash Settlement Amount.
No Legal or Beneficial Interest in Obligations of Reference Entities
Under the Credit Default Swap, the Issuer will have a contractual relationship only with the Swap
Counterparty. Consequently, the Issuer will have no relationship with any Reference Entity or acquire any interest
in any obligation of a Reference Entity. Moreover, the Issuer will not have a security interest in any such
obligations. The Issuer will therefore have rights solely against the Swap Counterparty. The Issuer will have no
right to (i) enforce directly compliance by any Reference Entity with the terms of any specific obligation of a
Reference Entity, (ii) exercise rights of set-off against any Reference Entity or voting or other consensual rights of
ownership with respect to any such obligation, (iii) benefit directly from any collateral supporting any such
obligation, or (iv) avail itself of any remedies that would normally be available to a holder of any such obligation.
Under the Credit Default Swap, none of the Issuer, the holders of the Notes or any other person will have any rights
to acquire from the Swap Counterparty (or to require the Swap Counterparty to transfer, assign or otherwise dispose
of) any interest in any specific obligation of any Reference Entity.
Limited Information about Reference Entities
Except for the limited information contained herein, the holders of the Notes will not have the right to
obtain from the Issuer, the Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap
Counterparty, the Placement Agent or any of their respective Affiliates any additional information about the
Reference Entities. In addition, none of the Issuer, the Trustee, the Portfolio Manager, the Swap Counterparty, the
Interest Rate Swap Counterparty, the Placement Agent or any of their respective Affiliates will have any obligation
to keep the holders of the Notes informed as to matters arising in relation to any Reference Entity, 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 Portfolio Manager, or the holders of the Notes will have the right to
inspect any records of the Swap Counterparty or the Reference Entities, and neither the Swap Counterparty, the
Placement Agent nor any of their respective Affiliates will be under any obligation to disclose any further
information regarding the existence or terms of any obligation of a Reference Entity, any guarantor or any other
person, unless and until a Credit Event has occurred and the Swap Counterparty provides Publicly Available
Information (as defined in the ISDA Credit Derivatives Definitions) to the Issuer with respect to the occurrence of
such Credit Event. See "Description of the Credit Default Swap — Settlement Upon Credit Event." The Issuer will
provide, however, to the holders of the Notes upon request the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act. See "Purchase and Transfer Restrictions — Available Information."
The holders of the Notes will be directly exposed to the credit risks of the Reference Entities (see " —
Effect of Credit Events"). Investors should consult independent sources as to the condition and creditworthiness of
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the Reference Entities and the risks associated with an investment in obligations issued or guaranteed by the
Reference Entities. Each investor in the Notes will be deemed to have represented and warranted to the Issuer, the
Trustee, the Portfolio Manager, the Swap Counterparty, the Interest Rate Swap Counterparty and the Placement
Agent that it has made its own investigation of the condition and creditworthiness of the Reference Entities and has
determined that it can bear any loss associated with an investment in the Notes as described herein.
Non-Investment Grade Reference Entities
The Reference Entities under the Credit Default Swap include entities that are rated below investment
grade. In addition, Reference Obligations with respect to the Reference Entities may include high yield corporate or
other debt obligations that are rated below investment grade and which have greater credit and liquidity risk than
more highly rated obligations. Such obligations are generally unsecured, may have been issued in connection with
highly leveraged transactions and may be subordinated to certain other obligations of the Reference Entities. The
lower ratings of such securities reflect a greater possibility that adverse changes in the financial condition of the
applicable Reference Entity or in general economic conditions or both may impair the ability of the Reference Entity
to make payments of principal and interest. In addition, the market for non-investment grade obligations may be
less liquid than for more highly-rated obligations. Illiquidity in the market for such obligations may result in lower
Final Prices under the Credit Default Swap than might otherwise result if the market were more liquid. To the extent
that a Credit Event occurs with respect to a Reference Entity, it is unlikely that the Final Price of the related
Reference Obligations will be equal to the unpaid principal thereof and interest thereon. In addition, future periods
of uncertainty in the United States economy and the economies of other countries in which Reference Entities are
domiciled and the possibility of increased volatility and default rates in the high yield sector may also adversely
affect the price and liquidity of high yield bonds in this market, and thereby increase the likelihood of losses to the
Noteholders.
Early Termination of the Swap Agreements
In certain circumstances specified in the Swap Agreements, the Issuer or the Swap Counterparty or Interest
Rate Swap Counterparty will have the right to terminate a Swap Agreement prior to its Scheduled Termination Date.
For example, the Issuer or the Swap Counterparty will each have the right to terminate the Credit Default Swap, and
the Issuer or the Interest Rate Swap Counterparty will each have the right to terminate the Interest Rate Swap, upon
the occurrence of a payment default thereunder by the other party. See "Description of the Credit Default Swap —
Termination of Credit Default Swap — Early Termination of Credit Default Swap" and "Description of the Interest
Rate Swap — Early Termination of the Interest Rate Swap." An Early Termination Date under the Swap
Agreements will cause a mandatory redemption of the Notes under the Indenture.
Upon an early termination of the Swap Agreements, (a) the Issuer or the Swap Counterparty may be
required to make a termination payment to the other party and (b) the Issuer or the Interest Rate Swap Counterparty
may be required to make a termination payment to the other party (a "Swap Termination Payment"). The amount
of a Swap Termination Payment will be calculated on the basis of "Loss" as determined under the ISDA Master
Agreement, provided that "Loss" shall be determined by the Swap Counterparty irrespective of whether it is the
Defaulting Party or the Sole Affected Party (as defined in the ISDA Master Agreement). "Loss" will generally be
equal to the total losses and costs suffered or incurred in connection with the termination of the Swap Agreements,
including any loss of bargain and cost of establishing a related trading position. The Swap Termination Payment
will serve to compensate the party (which may be the "Defaulting Party" or the "Sole Affected Party" ) that incurred
the loss by reason of the early termination of the Credit Default Swap or Interest Rate Swap. If the Issuer is required
to make a Swap Termination Payment to the Swap Counterparty or the Interest Rate Swap Counterparty and the
Swap Counterparty or the Interest Rate Swap Counterparty is not the Defaulting Party or Sole Affected Party, such
payment will be deducted from amounts due and payable by the Interest Rate Swap Counterparty to the Issuer under
the Interest Rate Swap thus reducing the amount available for repayment of the principal amount of the Notes.
Consequently, if such Swap Termination Payment is substantial, the holders of the Notes could suffer the loss of all
or a substantial portion of their investment in the Notes. See "Description of the Credit Default Swap —
Termination of Credit Default Swap — Early Termination of Credit Default Swap."
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Conflicts of Interest
Bank of America and certain of its Affiliates will be acting in a number of capacities in connection with the
transactions described herein. Each of Bank of America and such Affiliates will have only the duties and
responsibilities expressly agreed to by it in the relevant capacity and will not, by reason of its or any of its Affiliates
acting in any other capacity, have any other 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 no event will Bank of America or any of its
Affiliates be deemed to have any fiduciary obligations to the holders of the Notes or to any other Person by reason
of its or any of its Affiliates acting in any capacity. See "— Swap Counterparty not a Fiduciary."
Bank of America in its capacity as Swap Counterparty under the Credit Default Swap will select the
Reference Obligations to be used in determining the Cash Settlement Amount to be paid to the Swap Counterparty
in connection with the settlement of the Credit Default Swap upon the occurrence of a Credit Event. It should be
expected that Bank of America will select Reference Obligations that will maximize its return, which could
correspondingly increase the amount of the Cash Settlement Amount payable by the Issuer to the Swap
Counterparty and reduce the outstanding principal amount of the Notes (without any payment being made to the
holders of the Notes). Bank of America will not be obligated to take any action to minimize losses with respect to
any Reference Obligation.
Bank of America and its Affiliates may purchase, hold and sell the Notes from time to time, but will be
under no obligation to do so.
Bank of America and its Affiliates may deal in the Reference Obligations or other securities of any
Reference Entity, may enter into other credit derivatives involving the Reference Entities or Reference Obligations
(including credit derivatives to hedge its obligations under the Credit Default Swap), may accept deposits from,
make loans or otherwise extend credit to, and generally engage in any kind of commercial or investment banking or
other business with, any Reference Entity, any Affiliate of any Reference Entity or any other Person having
obligations relating thereto, and may act with respect to such business in the same manner as if the Credit Default
Swap did not exist, regardless of whether any such relationship or action might have an adverse effect on any
Reference Entity or Reference Obligation (including, without limitation, any action which might constitute or give
rise to a Credit Event), or on the position of any other party to the transaction described herein or otherwise. Bank
of America and its Affiliates may, whether by reason of the types of relationships described herein or otherwise, on
the date hereof or any time hereafter, be in possession of information relating to a Reference Entity or Reference
Obligation that is or may be material in the context of the Credit Default Swap and the other transaction documents
and that may or may not be publicly available or known to the other parties to the transaction documents and which
information Bank of America or such Affiliates may be prohibited from using for the benefit of the Issuer. The
Credit Default Swap and the other transaction documents do not create any obligation on the part of Bank of
America and its Affiliates to disclose to any other such party any such relationship or information (whether or not
confidential).
Bank of America and its Affiliates currently act as administrative agent or the placement agent for entities
having investment objectives similar to those of the Issuer, and Bank of America and its Affiliates may act as
administrative agent or placement agent for such entities and other similar entities in the future.
In addition to Bank of America, N.A. acting as Swap Counterparty and Interest Rate Swap Counterparty in
respect of the Notes, Bank of America, N.A. or an affiliate thereof may act or may have acted as the sponsor, the
servicer, the originator, the transferor and/or the depositor with respect to the any Collateral Assets, Banc of
America Securities Limited may act as an underwriter with respect to such Collateral Assets, and other affiliates of
Bank of America, N.A. may perform other functions with respect to such Collateral Assets. Bank of America, N.A.,
Banc of America Securities Limited, and each such affiliate, in acting in any such capacity with respect to the Notes
or the Collateral Assets, will not be acting in a fiduciary capacity on behalf of the Noteholders and will not be
deemed to have assumed any obligations to the Noteholders beyond the duties and responsibilities expressly agreed
to by such entity in the relevant capacity.
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Certain Conflicts Relating to the Portfolio Manager
Various potential and actual conflicts of interest may arise from the overall advisory, investment and other
activities of the Portfolio Manager and any of its affiliates and their respective clients. The following briefly
summarizes some of these conflicts, but is not intended to be an exhaustive list of all such conflicts.
The Issuer is not the Portfolio Manager's exclusive client. The Portfolio Manager and its Affiliates and
associates are in no way prohibited from spending, and intend to spend, substantial business time in connection with
other businesses and activities, including, but not limited to, managing investments, advising or managing entities
whose investment objectives are the same or overlap with those of the Issuer, providing consulting, merger and
acquisition, structuring or financial advisory services, including with respect to actual, contemplated or potential
Reference Entities or Reference Obligations under the Credit Default Swap, or acting as a director, officer or
creditors' committee member of, adviser to, or participant in any corporation, partnership, trust or other business
entity. The Portfolio Manager and its Affiliates and associates may, and expect to, receive fees or other
compensation from third parties for any of these activities, which fees will be for the benefit of their own account
and not the Issuer. These fees can relate to actual, contemplated or potential Reference Entities or Reference
Obligations under the Credit Default Swap and may be payable by current or contemplated Reference Entities. The
Portfolio Manager and its Affiliates may manage other funds and accounts that invest in assets eligible for inclusion
in the Portfolios. The investment policies, fee arrangements and other circumstances of the Issuer may vary from
those of such other accounts. The Portfolio Manager and any of its affiliates each will be free, in its sole discretion,
to make recommendations to others, or effect transactions on behalf of itself or for others, which may be the same as
or different from those made with respect to the Portfolios, and shall have no duty in making such recommendations
or effecting such transactions to act in a way favorable to the holders of the Notes. Although the principals, officers
and employees of the Portfolio Manager will devote as much time to managing the Portfolios as the Portfolio
Manager deems appropriate to accomplish the objectives of the transaction consistent with the Portfolio
Management Agreement, the principals, officers and employees of the Portfolio Manager may have conflicts
allocating their time and services among the Issuer and the affiliates and other clients of the Portfolio Manager.
The Portfolio Manager, any of its Affiliates or any fund for which it serves as investment manager may be
a holder of Notes or of Related Obligations or a counterparty to a Related Transaction. In particular, on the Closing
Date the Portfolio Manager, its Affiliates or any fund for which it serves as investment manager may invest in
Notes, but neither the Portfolio Manager nor any such Affiliate is required to retain any such Notes or its interest in
any other Notes or Related Obligations it may purchase or Related Transactions it may enter into. Regardless of any
such investment or holdings, the interests and incentives of the Portfolio Manager will not necessarily be aligned
with those of the other holders of the Notes. The Portfolio Manager, its Affiliates and their respective employees
may in its discretion purchase any of the Notes for its own account or for any account for which it serves as
investment adviser.
The Portfolio Manager and its Affiliates may enter into, for their own account or for other accounts for
which they have investment discretion, any credit default swaps relating to reference entities that may be the same as
Reference Entities included in the Portfolios or that may be appropriate for inclusion as a Reference Entity in the
Portfolios. Such credit default swaps may contain terms similar to or different from those contained in the Credit
Default Swap, and may be entered into with the Swap Counterparty or other swap counterparties. The Portfolio
Manager and its Affiliates and clients may also have equity and other investments in and may be lenders to, and may
have other ongoing relationships with, the Reference Entities that may include, without limitation, serving as credit
risk manager for, investing in, lending to, or being affiliated with, Reference Entities and other trusts and pooled
investment vehicles that acquire interests in, provide financing to, or otherwise deal with Reference Entities the
obligations of which would be suitable for addition to the Portfolios. In addition, Affiliates and clients of the
Portfolio Manager may invest in securities of (or make loans to) Reference Entities that are included among, pari
passu with or senior to existing obligations of Reference Entities, or have interests different from or adverse to those
of the Noteholders or the Issuer with respect to Reference Entities or obligations of Reference Entities. The
Portfolio Manager may at certain times be simultaneously adding or removing a Reference Entity or Reference
Entities to or from, as applicable, the Portfolios and arranging for other similar entities for which it serves as
investment adviser, or for its clients or Affiliates, to purchase or sell obligations of the same Reference Entity or
Reference Entities or to add or remove obligations of the same Reference Entity or Reference Entities to or from, as
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applicable, the Portfolios under comparable credit default swaps or other cash portfolios. The Portfolio Manager
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 Noteholders.
No provision in the Portfolio Management Agreement prevents the Portfolio Manager or any of its
Affiliates from rendering services of any kind to a Reference Entity (or an issuer of any Eligible Investment) or the
Issuer, the Swap Counterparty, the Trustee, the holders of the Notes or any other Person or entity. As a result,
officers or Affiliates of the Portfolio Manager may possess information related to the Reference Entities which is not
known to the officers or employees of the Portfolio Manager responsible for managing the Portfolios and
performing the other obligations of the Portfolio Manager under the Portfolio Management Agreement. Without
prejudice to the generality of the foregoing, the Portfolio Manager, its Affiliates and the directors, officers,
employees and agents of the Portfolio Manager and its Affiliates may, among other things: (i) serve as portfolio
manager or advisor or subadvisor, directors, partners, officers, employees, agents, nominees or signatories for any
Reference Entity or other issuers who invest in assets of a similar nature to the Reference Obligations; (ii) receive
fees for services rendered to a Reference Entity or any Affiliates thereof or any such issuer; (iii) be a secured or
unsecured creditor of, or hold an equity interest in, any Reference Entity or any such issuer; (iv) make a market in
any Reference Obligation; and (v) serve as a member of any "creditors' board" with respect to any Reference Entity.
These and other present and future activities of the Portfolio Manager and/or its Affiliates may give rise to
additional conflicts of interest.
The Portfolio Manager and its Affiliates currently provide and will continue to provide advisory and other
services to clients that are Reference Entities or their Affiliates or issuers of securities similar to or the same as the
Reference Obligations. In the course of managing the Portfolios, the Portfolio Manager may consider its
relationships with other clients (including Reference Entities) and their Affiliates. The Portfolio Manager may
determine not to add a Reference Entity to the Portfolios in view of such relationships. In providing services to
other clients, the Portfolio Manager and its Affiliates may recommend activities that would compete with or
otherwise adversely affect the Noteholders or the Issuer. In connection with the foregoing activities, the Portfolio
Manager and its Affiliates may from time to time come into possession of information that limits the ability of the
Portfolio Manager to designate that a Reference Entity be added to or removed from the Portfolios, and the ability to
perform some of its duties as Portfolio Manager may be constrained as a consequence of its inability to use such
information for advisory purposes or otherwise to take actions that would be in the best interest of the Noteholders
or the Issuer.
The Portfolio Manager may, in its sole discretion, refrain from adding or removing as Reference Entities
any persons about which the Portfolio Manager or any of its Affiliates have information that the Portfolio Manager
deems confidential or nonpublic or that otherwise might prohibit it from trading (or referencing) such obligations in
accordance with applicable law. The Portfolio Manager will not be obligated to utilize any particular investment
opportunity or strategy that may arise with respect to the Reference Obligations. In the course of managing the
Portfolios, the Portfolio Manager may consider its relationships with other clients (including Reference Entities) and
their affiliates and may, in its sole discretion, determine not to add a Reference Entity to the Portfolios in view of
such relationships.
Neither the Portfolio Manager nor any of its Affiliates is under any obligation (affirmative or otherwise) to
offer investment opportunities of which it becomes aware to the Noteholders or the Issuer or to account to the
Noteholders or the Issuer for (or share with the Noteholders or the Issuer or inform the Noteholders or the Issuer of)
any such opportunity or any benefit received by it from any such opportunity before offering any investments to
other funds or accounts that the Portfolio Manager and/or its Affiliates manage or advise or before engaging in any
investments for themselves. Furthermore, the Portfolio Manager and/or any of its Affiliates may make an
investment on behalf of any account it manages or advises without offering the opportunity to add such investment,
or adding such investment, to the Portfolios. Affirmative obligations may exist or may arise in the future, whereby
the Portfolio Manager and/or any of its Affiliates is obligated to offer certain investments to funds or accounts that it
manages or advises before or without offering those investment opportunities to the Noteholders or the Issuer. The
Portfolio Manager will endeavor to resolve conflicts with respect to investment opportunities in a manner which it
deems equitable to the extent possible under the prevailing facts and circumstances and subject to applicable law.
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In addition, the Portfolio Manager and its affiliates may, in connection with their activities on behalf of
other clients, acquire confidential information concerning the Swap Counterparty, a Reference Entity or a Reference
Obligation which information the Portfolio Manager may be prohibited from using for the benefit of the Noteholders
or the Issuer.
Affiliates and clients of the Portfolio Manager may purchase all or any portion of the Notes from time to
time. The prices paid by Affiliates and clients of the Portfolio Manager may be more or less than those prices paid
by other purchasers of Notes. In addition, such Affiliates and clients may sell any Notes purchased at any time.
The Portfolio Manager and its Affiliates will not be entitled to vote on the Notes held by them or by any
account for which the Portfolio Manager or an Affiliate of the Portfolio Manager acts as investment advisor (and for
which the Portfolio Manager or such Affiliate has a majority equity interest) with respect to any matters arising
under the Portfolio Management Agreement or the Indenture, including any matter relating to the actual or potential
removal of the Portfolio Manager or with respect to the cessation of trading activity by the Portfolio Manager on the
Issuer's behalf.
The Portfolio Manager currently serves and may in the future serve as an investment advisor or advisor or
sub-advisor or general partner for other collateralized bond obligation vehicles and/or collateralized loan obligation
vehicles (or the like).
In addition, the amounts invested in Eligible Investments may be invested in funds managed or
administered by the Portfolio Manager including, without limitation, the general account of an affiliated insurance
company. In the event that Eligible Investments are invested in funds managed or administered by the Portfolio
Manager, in addition to the management fees earned by the Portfolio Manager, the Portfolio Manager will receive a
fee from such funds. The Portfolio Manager's relationship with such funds creates potential conflicts of interest for
the Portfolio Manager and may result in securities laws restrictions on the Portfolio Manager, including, without
limitation, restrictions on securities transactions for the Issuer.
The Portfolio Manager will be paid the Portfolio Manager Senior Management Fee and the Portfolio
Manager Subordinate Management Fee and may be reimbursed by the Issuer for expenses incurred by it in its
capacity as Portfolio Manager on an ongoing basis in accordance with the Priority of Payments.
Dependence on the Portfolio Manager; Limited Experience.
The Issuer has no employees and is dependent upon the employees of the Portfolio Manager to make
decisions on its behalf in accordance with the terms of the Credit Default Swap and the Portfolio Management
Agreement. The Portfolio Manager will make all investment advisory decisions with respect to the Credit Default
Swap and the addition or deletion of Reference Entities from the Portfolios under the Credit Default Swap. As a
result, the success of the Issuer, including its ability to pay principal and interest on the Notes, will be highly
dependent on the investment advisory expertise and performance of the Portfolio Manager. Although the managers
of the Portfolio Manager have significant experience managing portfolios of investment grade debt obligations, the
prior experience of the Portfolio Manager and the persons associated with the Portfolio Manager may not be
indicative of the Issuer's future results.
The ability of the Portfolio Manager to manage the Portfolios will be constrained by certain limitations,
including the requirements in the case of the Portfolios that each Reference Entity satisfy certain criteria and that the
Portfolios be in compliance with the criteria applicable to it.
The Portfolio Manager will attempt to manage the Long Portfolio to avoid the occurrence of any Credit
Event with respect to the Reference Entities therein. There can be no assurance, however, that the Portfolio
Manager will become aware of the credit deterioration of a Reference Entity in sufficient time to delete it from the
Portfolios to avoid the occurrence of a Credit Event with respect thereto.
There can be no assurance that the Portfolio Manager will be able to manage the Portfolios to produce the
desired economic results for the holders of the Notes. The achievement of such desired results will require a high
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level of analytical sophistication, and the ability to correctly assess the natures and magnitudes of the many factors
that could affect the prospects of achieving such results.
As noted above, the performance of the Portfolios will depend upon the performance of the Portfolio
Manager. As a result, the Issuer will be highly dependent upon the financial and managerial skills of certain
individuals associated with the Portfolio Manager. The loss of key personnel could have a material adverse effect
on the performance of the transaction and the interests of the holders of the Notes. In addition, under certain
circumstances, the Portfolio Management Agreement could be terminated as described under "The Portfolio
Management Agreement".
Swap Counterparty Not a Fiduciary
In taking any action with respect to the Credit Default Swap, the Swap Counterparty will be acting solely
for its own benefit and not as fiduciary, agent or in any other capacity on behalf of the Issuer, the holders of the
Notes or any other person. The interests of the Swap Counterparty under the Credit Default Swap may be adverse to
the interests of the holders of the Notes. In declaring a Credit Event, designating an early termination for the Credit
Default Swap and taking other actions permitted or required to be taken by the Swap Counterparty under the Credit
Default Swap, the Swap Counterparty will be acting on its own behalf and in its own best interests, subject to the
restrictions described under "Description of the Credit Default Swap." Actions taken by the Swap Counterparty may
not be in the interest of, and may be directly adverse to, the holders of the Notes. The Swap Counterparty will not
be obligated to consider the interests of the holders of the Notes in taking any action permitted or required to be
taken by the Swap Counterparty under the Credit Default Swap. See "— Conflicts of Interest."
Creditworthiness of Bank of America
The ability of the Issuer to make payments and distributions in respect of the Notes will be dependent, in
part, on the receipt of payments by the Issuer from Bank of America (a) as the Swap Counterparty under the Credit
Default Swap and (b) as the Interest Rate Swap Counterparty under the Interest Rate Swap. Consequently, the
Issuer will not only be relying on the creditworthiness of the Reference Entities in order to avoid the occurrence of
Credit Events, and on the Collateral Assets in order to source repayments of principal, but also on the
creditworthiness of Bank of America to perform its obligations under the Credit Default Swap and the Interest Rate
Swap. The insolvency of Bank of America or a default by it under the Credit Default Swap or the Interest Rate
Swap would adversely affect the ability of the Issuer to make the payments due in respect of the Notes, could result
in the withdrawal or downgrading of the rating for the Notes and potentially could lead to the early termination of
the Credit Default Swap and the Interest Rate Swap.
Bank of America will be required to post collateral or take certain other actions in the event that its credit
rating is reduced below certain levels. See "The Swap Counterparty — Consequences of a Rating Downgrade."
Creditworthiness of the Obligor on the Collateral Assets and any Eligible Investments
Payments of interest and principal on the Notes will be dependent, in part, on the creditworthiness of the
obligor on the Initial Collateral Assets, the Replacement Collateral Assets and, as applicable, any Eligible
Investments . A payment default or other event of default by the obligor on the Collateral Assets could result in the
Interest Rate Swap Counterparty exercising its right to terminate the Interest Rate Swap, which would result in the
redemption of the Notes under the Indenture. In addition, payment of the principal amount of the Notes on the
Scheduled Maturity Date will depend on payments of principal on the Collateral Assets.
The holders of the Notes will have no right to obtain from the Issuer, the Trustee, the Portfolio Manager,
the Swap Counterparty, the Interest Rate Swap Counterparty, the Placement Agent or any of their respective
Affiliates any information about the Collateral Assets or the obligor thereon, and none of them will have any
obligation to disclose additional information at any time with respect thereto.
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Credit Ratings
Credit ratings of the Reference Entities represent the opinions of the rating agencies regarding the
likelihood of payment of certain obligations when due and the ultimate payment of other obligations (such as
principal payments), but are not a guarantee of the creditworthiness of the issuers thereof. Although the market
imposes a certain amount of discipline on the rating processes of the rating agencies, the rating agencies do not
assume responsibility for their rating actions in any legally cognizable sense, and investors cannot expect to have
recourse to the rating agencies for ratings actions taken. Although ratings methodologies generally attempt to
evaluate all risks capable of rational analysis, not all risks are susceptible of analysis and certain market risks are
explicitly excluded from rating analyses. For example, rating agencies have recently been focusing on analyzing the
likelihood of the occurrence of certain credit events under credit default swaps. Although the risk of nonpayment
and bankruptcy are normal analytic categories, the likelihood of a restructuring credit event is not as susceptible to
traditional analysis. Accordingly, there may be some discontinuity between the ratings of the Reference Entities and
the likelihood of certain Credit Events occurring under the Credit Default Swap. The ratings assigned to a
Reference Entity by the rating agencies may therefore not fully reflect the true risks of including a Reference Entity
under the Credit Default Swap. In addition, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that the current financial condition of a Reference Entity at any given time may be
better or worse than what the current rating indicates. Consequently, credit ratings of the Reference Entities should
not be considered definitive indicators of investment quality.
The ratings of the Notes by S&P and Moody's address solely the likelihood of timely payment of interest
on and the ultimate payment of the principal of the Notes. A rating is not a recommendation to purchase, hold or
sell securities, in as much as such rating does not comment as to market price or suitability for a particular investor
and may be subject to revision or withdrawal at any time by the assigning rating organization. There can be no
assurance that a rating of the Notes will remain for any given period of time or that a rating will not be downgraded
or withdrawn entirely by S&P or Moody's. The identity of the ultimate obligors under the Collateral Assets , and
their ratings, will likely affect the ratings of the Notes. A downgrade or withdrawal of a rating by a Rating Agency is
like ly to have an adverse effect on the market value of the Notes, which effect could be material.
Suitability of Investment
This Offering Memorandum identifies in a general way some of the information that a prospective investor
should consider prior to making an investment in the Notes. This Offering Memorandum does not purport,
however, to provide all of the information or the comprehensive analysis necessary to evaluate the economic and
other consequences of investing in the Notes. Accordingly, a prospective investor should conduct its own thorough
analysis (including its own accounting, legal and tax analysis) prior to deciding whether to invest in the Notes.
Because any evaluation of whether an investment in the Notes is suitable depends upon a prospective investor's
particular financial and other circumstances, as well as on the specific terms of the Notes, this Offering
Memorandum is not, and does not purport to be, investment advice. A prospective investor should make an
investment in the Notes only after it has determined that such investment is suitable for its financial investment
objectives. Determining whether an investment in the Notes is suitable is a prospective investor's responsibility,
even if the investor has received information from the Placement Agent or other Persons to assist it in making the
determination. If a prospective investor does not have experience in financial, business and investment matters
sufficient to permit it to make such a determination, the investor should consult with its financial advisor prior to
deciding to make an investment in the Notes.
Limited Liquidity and Transfer Restrictions
There is currently no active trading market for the Notes being offered hereby, and the Notes will be
subject to restrictions on transfer. The Placement Agent and its Affiliates will not be obligated to make a market in
the Notes or otherwise to buy and sell the Notes following the Closing Date. The Notes are expected to be owned
by a relatively small number of investors and it is highly unlikely that an active secondary market for the Notes will
develop. The holders of the Notes may find it difficult or uneconomic to liquidate their investment in the Notes, and
it may be difficult for the holders of the Notes to determine the value of the Notes at any particular time.
Consequently, a purchaser must be prepared to hold the Notes until the Scheduled Maturity Date. See "Purchase
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and Transfer Restrictions." See, also, "ERISA Considerations" regarding certain restrictions on transfers to
investors subject to ERISA.
No Registration under the Securities Act
The Notes have not been registered under any of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Securities Act of 1933, as amended (the "Securities Act"), or under any U.S.
state securities or "Blue Sky" laws or the securities laws of any other jurisdiction and are being issued and sold in
reliance upon exemptions from registration provided by such laws.
Book-Entry Registration
The Notes will be initially represented by one or more global notes registered in the name of Cede & Co.,
as nominee for DTC, in the case of Notes sold to persons other than U.S. Persons in offshore transactions in reliance
on Regulation S, for the respective accounts of Euroclear Bank S.A./N.V., as operator of the Euroclear System
("Euroclear"), or any successor operator of Euroclear, and Clearstream Banking, société anonyme ("Clearstream").
Consequently, unless and until definitive notes are issued, the beneficial owners of the Notes will not be recognized
by the Issuer or the Trustee as the "holders of the Notes" or the "Noteholders" (as such terms are used herein or in
the Indenture). Such beneficial owners will only be able to exercise the rights of the holders of the Notes indirectly
through DTC and its participating organizations. In addition, the ability of holders to pledge their Notes to persons
or entities that do not participate in the DTC system or otherwise take action in respect thereof may be limited due to
the absence of physical certificates for the Notes. See "Description of the Notes — Book -Entry Registration" and "—
Definitive Notes."
Investment Company Act
The Issuer has not registered with the Securities and Exchange Commission (the "SEC") as an investment
company pursuant to the Investment Company Act in reliance on Section 3(c)(7) of the Investment Company Act.
Section 3(c)(7) provides an exemption from registration for issuers (i) all of whose investors are "qualified
purchasers" as defined in the Investment Company Act and (ii) which do not make a public offering of their
securities in the United States. Counsel for the Issuer will opine, in connection with the sale of the Notes by the
Placement Agent on the Closing Date, that the Issuer is not required to be registered under the Investment Company
Act (assuming, for the purposes of such opinion, that the Notes are sold by the Placement Agent in accordance with
the terms of the Placement Agreement and based on representations, warranties and agreements of the initial
noteholder in its investment letter). No opinion or no-action position will be requested of the SEC.
To rely on Section 3(c)(7), the Issuer must have a "reasonable belief" that all purchasers of the Notes
(including the initial purchaser and any subsequent transferees) are Qualified Purchasers. Because transfers of
beneficial interests in the Notes will generally be effected only through DTC and its participants and indirect
participants, the Issuer will establish the existence of such a reasonable belief by means of the deemed
representations, warranties and agreements described under "Purchase and Transfer Restrictions," the agreement of
the Placement Agent referred to under "Plan of Offering" and by taking the other actions described under "Purchase
and Transfer Restrictions — Section 3(c)(7) Procedures." Although the SEC has stated that it is possible for an
issuer of securities to satisfy the reasonable belief standard referred to above by establishing procedures to provide a
means by which such issuer can make a reasonable determination as to status of its securityholders as Qualified
Purchasers, the SEC has not approved — and has stated that it will not approve — any particular set of procedures
including the Section 3(c)(7) Procedures described herein. Accordingly, there can be no assurance that the Notes
will have satisfied the reasonable belief standard referred to above.
If the SEC or a court of competent jurisdiction were to find that the Issuer is required, but failed, to register
as an investment company, possible consequences would include, but would not be limited to, the following: (i) the
SEC could apply to a U.S. District Court to enjoin the violation; (ii) the Swap Counterparty and the Interest Rate
Swap Counterparty will have the right to terminate their respective Swap Agreements; and (iii) any contract to
which the Issuer is a party that is made in, or whose performance involves a, violation of the Investment Company
Act would be unenforceable by a party to the contract unless a court were to find that under the circumstances
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enforcement would produce a more equitable result than non-enforcement and would not be inconsistent with the
purposes of the Investment Company Act. If the Issuer were to become subject to any or all of the foregoing
remedies, the Issuer would be materially and adversely affected.
International Investing
A number of the Reference Entities included in the Portfolios may be organized under the laws of
jurisdictions other than the United States. The Reference Obligations may consist of obligations of issuers or
obligors organized under the laws of jurisdictions other than the United States. Exposure to such Reference
Obligations may involve greater risks than exposure to Reference Obligations of issuers or obligors organized under
the laws of the United States. These risks may include (i) less publicly available information, (ii) varying levels of
governmental regulation and supervision, (iii) the difficulty of enforcing legal rights in a foreign jurisdiction and
uncertainties as to the status, interpretation and application of laws, (iv) risks of economic dislocations in the host
country, and (v) less data on historic default and recovery rates. Moreover, foreign companies may not be subject to
accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to
U.S. companies.
There generally is less governmental supervision and regulation of exchanges, brokers and issuers in many
foreign countries than there is in the United States. For example, there may be no comparable provisions under
certain foreign laws with respect to insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. In addition, foreign financial markets, while
generally growing in volume, have, for the most part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than securities of comparable domestic
companies.
In many foreign countries there is the possibility of expropriation, nationalization or confiscatory taxation,
or the removal of securities, property or other assets and political, economic or social instability or adverse
diplomatic developments, each of which could have an adverse effect on Reference Entities that are organized or
operating in such foreign countries. The economies of individual non-U.S. countries may also differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, volatility
of currency exchange rates, depreciation, capital reinvestment, resource self-sufficiency and balance of payments
position, which could also adversely affect Reference Entities organized or operating in such countries.
ERISA Considerations
Although no assurances can be made, the conditions and restrictions on transfers of the Notes set forth
under "Purchase and Transfer Restrictions" and "ERISA Considerations" are intended to (i) prevent the occurrence
of a "prohibited transaction" under ERISA or Section 4975 of the Code and (ii) prevent the Collateral from being
treated as the assets of a plan for purposes of Title I of ERISA. If the Collateral, however, were deemed to
constitute plan assets, (i) transactions involving the Collateral could be subject to the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code, (ii) the Collateral could be subject to
reporting and disclosure requirements of ERISA and (iii) the fiduciary causing the Benefit Plan Investor to make an
investment in the Notes could be deemed to have delegated its responsibility to manage the assets of the Benefit
Plan Investor.
Legislation and Regulations in Connection with Prevention of Money Laundering
The United States Uniting and Strengthening America By Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "PATRIOT Act"), signed into law on and effective as of
November 26, 2001, requires that financial institutions covered by the act, including banks, broker-dealers and
investment companies, establish and maintain compliance programs to guard against money laundering activities.
The PATRIOT Act requires the Secretary of the United States Department of the Treasury (the "Treasury") to
prescribe regulations in connection with anti-money laundering policies of financial institutions. Regulations have
been adopted that would require the Placement Agent, in connection with the establishment of anti-money
laundering procedures, to provide information on request to governmental authorities with respect to investors in the
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Notes. Similar regulations have been proposed that would require the Issuer likewise to provide such information.
The Issuer reserves the right to request such information as is necessary to verify the identity of a Noteholder and
the source of the payment of subscription monies, or as is necessary to comply with any customer identification
programs required by the Treasury and/or the Securities and Exchange Commission under the PATRIOT Act or
otherwise. In the event of delay or failure by any purchaser of any interest in the Notes to produce any information
required for verification purposes, an application to purchase or transfer such Notes and the subscription monies
relating to such purchase or transfer may be refused.
U.S. Federal Income Tax Considerations
The proper U.S. federal income tax treatment of the Notes will depend upon whether the Notes are
classified as debt or equity for U.S. federal income tax purposes. There are no authorities addressing similar
transactions involving securities issued by an entity with terms similar to those of the Notes. As a result, certain
aspects of the U.S. federal income tax consequences of an investment in the Notes are not certain. Moreover, the
Issuer has not obtained an opinion from tax counsel and will not seek a ruling from the U.S Internal Revenue
Service (the "IRS") regarding the characterization of the Notes for U.S. federal income tax purposes and there can
be no assurance that the IRS will agree with the conclusions expressed herein.
Although issued in the form of debt, based on the capital structure of the Issuer and the terms of the Notes,
it is likely that the Notes will be treated as equity for U.S. federal income tax purposes. The Issuer will treat, and
each holder of a Note will agree by purchase of such Note to treat, in the absence of an administrative determination
or judicial ruling to the contrary, the Notes as equity of the Issuer for U.S. federal income tax purposes. A U.S.
Holder (as defined below) of a Note would generally be treated as owning an equity interest in a passive foreign
investment company (or possibly a controlled foreign corporation) for U.S. federal income tax purposes. As such, a
U.S. Holder investing in the Notes typically has an option to either (1) make an election to treat the Issuer as a
qualified electing fund (a "QEF") and to pay income tax on its pro rata share of the Issuer's income computed on an
accrual basis or (2) pay income taxes at the highest marginal rate generally on the amount of cash distributions
received and gain on the disposition of the Notes, subject to a possible interest charge at a statutory rate on certain
"excess distributions", which includes gains recognized on the disposition of the Notes. However, depending on the
ultimate composition of the pool of equity investors, the Issuer may be classified as a controlled foreign corporation,
in which case a U.S. Holder may be required to pay income tax based on its pro rata share of the Issuer's income
generally as if such holder had made the QEF election.
Generally, a QEF election should be made on or before the due date for filing the holder's U.S. federal
income tax return for the first taxable year during which such holder held the Note that is deemed to be an equity
interest in the Issuer for U.S. federal income tax purposes. A holder making this election is required to report its pro
rata share of the Issuer's income regardless of whether the Issuer makes cash distributions during the period. In this
respect, prospective purchasers of Notes should be aware that the Issuer may have in any given year earnings for
U.S. federal income tax purposes that are not distributed on the Notes. A Holder making a QEF election generally
has the ability to defer paying the tax on such phantom income until the cash is received, subject to a non-deductible
interest charge.
A U.S. Holder that does not make a QEF election generally will pay income tax on the amount of cash
received in any year including both certain distributions by the Issuer and any gain recognized on the disposition of
the Notes. Annually, commencing in the second year of the investment, to the extent that distributions exceed 125
percent of the average distribution for the prior three years (or lesser period if the Notes are held for less than three
prior years), such "excess distributions" are allocated rateably over the holder's holding period and are subject to
income tax on ordinary income in the current year and at the highest rate in effect for individuals or corporations in
the preceding years. A non-deductible interest charge at a statutory rate may also be imposed as if the excess
distributions and the gains recognized on the disposition of the Notes were earned rateably over the holder's holding
period.
Prospective investors should carefully review the discussion under "Certain U.S. Federal Income Tax
Consequences" below for a more complete discussion regarding the characterization of, and the consequences
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of investing in, the Notes for U.S. federal income tax purposes and should consult their own tax advisors
regarding the tax consequences of investing in the Notes under their particular situation.
No Deduction or Withholding Gross-Up will be Paid to Holders of the Notes
If any deduction or withholding is required, whether with respect to the Collateral Assets or the Notes
themselves, by any applicable law, as modified by the practice of any relevant governmental revenue authority, then
none of the Issuer, the Trustee, or the issuer of the Collateral Assets will be obligated to pay any gross up or other
additional amounts in respect of such withholding or deduction.
Accounting Considerations
Special accounting considerations may apply to certain types of taxpayers. Prospective investors in the
Notes are urged to consult their own accounting advisors to determine any accounting implications of an investment
in the Notes.
Evolving Nature of the Credit Default Swap Market
Credit default swaps are relatively new instruments in the market. While ISDA has published and
supplemented the ISDA Credit Derivatives Definitions in order to facilitate transactions and promote uniformity in
the credit default swap market, the credit default swap market is expected to change and the ISDA Credit
Derivatives Definitions and terms applied to credit derivatives are subject to interpretation and further evolution.
Past events have shown that market participants may differ in opinion as to how the ISDA Credit Derivatives
Definitions operate.
The ISDA Credit Derivatives Definitions are expected to continue to evolve. Markets in different
jurisdictions have also adopted and may continue to adopt different practices with respect to the ISDA Credit
Derivatives Definitions. Furthermore, the ISDA Credit Derivatives Definitions may contain ambiguous provisions
that are subject to interpretation and may result in consequences that are adverse to the Issuer.
Therefore, in addition to the credit risk of Reference Entities and the credit risk of the Swap Counterparty
and the Interest Rate Swap Counterparty, the Issuer is also subject to the risk that the Credit Derivatives Definitions
could be interpreted in a manner that would be adverse to the Issuer or that the credit derivatives market generally
may evolve in a manner that would be adverse to the Issuer.
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THE ISSUER
The Issuer, a Cayman Islands exempted company with limited liability, was incorporated under the
Companies Law (2004 Revision) of the Cayman Islands on February 13, 2007 with company registration number
MC-182138. The registered office of the Issuer is at PO Box 1093GT, Queensgate House, South Church Street,
George Town, Grand Cayman, Cayman Island. The telephone number of the Issuer at its registered office is +1 345
945 7099.
The authorized share capital of the Issuer is U.S.$250, divided into 250 ordinary shares of U.S.$1.00 each,
250 of which have been issued. All of the issued shares (the "Shares") are fully-paid and are held by Maples Finance
Limited as share trustee ("Share Trustee") under the terms of a declaration of trust (the "Declaration of Trust") dated
February 19, 2007 under which the Share Trustee holds the Shares in trust until the Termination Date (as defined in
the Declaration of Trust) and may only dispose or otherwise deal with the 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 the 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 Shares.
The Issuer is a special purpose company specifically established for the purposes of issuing asset backed
securities.
The activities of the Issuer under the Indenture will be limited to (i) issuing the Notes pursuant to the terms
of the Indenture, (ii) acquiring Collateral Assets and, if necessary, acquiring Eligible Investments with the proceeds
realized upon the maturity or redemption of the Collateral Assets, (iii) entering into and performing its obligations
under the Credit Default Swap, (iv) entering into and performing its obligations under the Interest Rate Swap, (v)
entering into and performing its obligations under the Portfolio Management Agreement, (vi) entering into and
performing its obligations under the Placement Agreement, and (vii) engaging in such other activities, including
entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or in connection therewith.
The only assets of the Issuer will be (i) the Collateral Assets credited to the Principal Collateral Account,
(ii) the rights of the Issuer under the Credit Default Swap, (iii) the rights of the Issuer under the Interest Rate Swap,
(iv) the rights of the Issuer under the Portfolio Management Agreement, (v) the funds on deposit in the Principal
Collateral Account and Interest Collateral Account from time to time, and (v i) the payments or distributions received
in respect of the Collateral Assets, the Credit Default Swap and the Interest Rate Swap.
The Indenture will terminate with respect to the Notes upon the payment or discharge of all amounts owed
by the Issuer thereunder and otherwise in accordance with the terms thereof.
Prospective investors may obtain a copy of the Indenture, upon request, from the Placement Agent, 100
North Tryon Street, NC1-027-14-01, Charlotte, North Carolina 28255, Attention: Structured Securities Group.
Restrictions on the Offer of the Notes
No invitation whether directly or indirectly may be made to the public in the Cayman Islands to subscribe
for the Notes unless the Issuer is listed on the Cayman Islands Stock Exchange.
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Financial Statements
Since the date of incorporation, the Issuer has not commenced operations and no financial statements of the
Issuer have been prepared as at the date of this Prospectus. The Issuer is not required by Cayman Islands law, and
does not intend, to publish audited financial statements.
Capitalization
The following table sets forth the expected capitalization of the Issuer on February 20, 2007.
Shareholders' Funds
Share Capital (Authorized U.S.$250;
Issued 250 shares of U.S.$1.00 each)
Ordinary Shares of U.S.$1.00 each
U.S.$250
Total Capitalization
U.S.$250
As at the date of this Offering Memorandum, the Issuer has no borrowings or indebtedness in the nature of
borrowings (including loan capital issued or created but unissued), term loans, liabilities under acceptances or
acceptance credits, mortgages, charges or guarantees or other contingent liabilities. There has been no change in the
capitalization of the Issuer since February 13, 2007, the date of its incorporation.
Directors of the Issuer
The Directors of the Issuer are as follows:
Name
Principal Occupation
Business Address
Andrew Dean
Vice President,
Finance Limited
Maples
PO Box 1093GT
Queensgate House
South Church Street
George Town
Grand Cayman
Cayman Islands
Mora Goddard
Vice President,
Finance Limited
Maples
PO Box 1093GT
Queensgate House
South Church Street
George Town
Grand Cayman
Cayman Islands
The Administrator
Maples Finance Limited will act as the administrator (in such capacity, the "Administrator") of the Issuer.
The office of the Administrator will serve as the general business office and 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 in and from the Cayman Islands various
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management functions on behalf of the Issuer, including the provision of certain clerical, administrative and other
services until termination of the Administration Agreement. In consideration of the foregoing, the Administrator
will receive various fees and other charges payable by the Issuer at rates provided for in the Administration
Agreement and will be reimbursed for expenses and the Issuer will provide certain indemnities to the Administrator
in connection with its performance of such services.
The Administration Agreement may be terminated by the Issuer or the Administrator upon 14 days' notice
following the occurrence of certain events. In addition, the Administration Agreement may be terminated upon
three months' notice.
The Administrator's principal office is at Maples Finance Limited, P.O. Box 1093GT, Queensgate House,
South Church Street, George Town, Grand Cayman, Cayman Islands.
DESCRIPTION OF THE NOTES
The following summary, as well as other pertinent information included elsewhere in this Offering
Memorandum, describes the material terms generally applicable to the Notes, but does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the provisions of the Notes and the Indenture.
Wherever particular provisions or terms used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of this summary.
General
The Issuer will issue $40,000,000 of Floating Rate Notes, due September 21, 2014, pursuant to the
Indenture on the Closing Date. The Notes will be non-recourse to the Issuer, the Trustee, the Portfolio Manager, the
Swap Counterparty, the Interest Rate Swap Counterparty, the Placement Agent or any of their respective Affiliates.
The holders of the Notes will have no liability for any obligations of the Issuer, with respect to the Credit Default
Swap or the Interest Rate Swap or otherwise.
It is a condition to the is suance of the Notes that the Notes be rated "AA-" by Standard & Poor's and "Aa3"
by Moody's. The ratings of the Notes will represent the estimation of the Rating Agencies of the likelihood of
complete and timely payment of the principal of the Notes and the interest payable in respect thereof. A credit
rating is not a recommendation to buy, sell or hold securities and may be subject to revision, withdrawal or
suspension by the relevant Rating Agency at any time.
Payments on the Notes
Interest Payments
The Issuer will pay interest on the Notes, quarterly in arrears, on each Interest Payment Date, which will be
the 20th day of each of March, June, September and December, commencing on March 20, 2007 (but excluding
September 20, 2014) and ending on the Scheduled Maturity Date, provided that if any such day is not a Business
Day, the Interest Payment Date will be on the first Business Day thereafter. Interest will accrue from and including
each Interest Payment Date (or from the Closing Date in the case of the first Interest Payment Date) to, but
excluding the next Interest Payment Date (each such period, an "Interest Accrual Period" ); provided that the final
Interest Accrual Period will be to, but excluding, the Scheduled Termination Date under the Swap Agreements. The
Issuer will pay interest on the Notes for each Interest Accrual Period in an amount equal to the product of (i) the
daily weighted average of the Outstanding Principal Amount of the Notes for the related Interest Accrual Period, (ii)
the Note Interest Rate, which will be LIBOR plus 0.83 per cent., provided that in case of the first Interest Accrual
Period, the Note Interest Rate will be 6.14875 per cent. (the "Note Interest Rate") and (iii) the Day Count Fraction.
Each interest payment will be funded from the periodic payments made to the Issuer under the Credit
Default Swap and the Interest Rate Swap. See "Description of the Credit Default Swap — Payments Under the
Credit Default Swap" and "Description of the Interest Rate Swap — Payments Under the Interest Rate Swap." If
there is an Extended Maturity Date because a Cash Settlement Date would occur after the Scheduled Termination
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Date, the Noteholders will be paid interest that accrues on Eligible Investments held by the Issuer from the
Scheduled Termination Date to the Extended Maturity Date.
If the Event Determination Date and the Calculation Date in respect of a Defaulted Reference Entity in the
Long Portfolio occur in different Interest Accrual Periods, for the purposes of determining the amount of interest
payable on an Interest Payment Date, the Outstanding Principal Amount for any day shall be determined assuming
the maximum theoretical Credit Loss Amount for such Defaulted Reference Entity. Upon determination of the Cash
Settlement Amount for such Defaulted Reference Entity, the Calculation Agent shall recalculate the amount of
interest payable on the basis of the actual Credit Loss Amount determined in respect of that Defaulted Reference
Entity and the Issuer shall pay to the Noteholders the pro rata share of the amount by which the recalculated interest
amount exceeds the interest amount paid, together with any ni terest accrued on such amount (the "Interest
Adjustment Amount") on the relevant Adjustment Payment Date. See "Description of the Credit Default Swap –
Payments Under the Credit Default Swap" and "Description of the Interest Rate Swap – Payments Under the
Interest Rate Swap."
Under the Indenture, the Calculation Agent will determine LIBOR in connection with establishing the Note
Interest Rate. "LIBOR" will be the rate for deposits in U.S. dollars for a period of three months that appears on the
Reuters Screen LIBOR01 Page as of 11:00 a.m., London time, on the day that is two London Banking Days
immediately preceding the commencement of the Interest Accrual Period for which LIBOR is being determined
(each, a "LIBOR Determination Date"). If LIBOR does not appear on the Reuters Screen LIBOR01 Page, LIBOR
will be determined at approximately 11:00 a.m., London time, on such LIBOR Determination Date on the basis of
the rate at which three-month deposits in U.S. dollars are offered by four major banks in the London interbank
market to prime banks in the London interbank market selected by the Calculation Agent commencing on the second
London Banking Day immediately following such LIBOR Determination Date and in a principal amount that is
representative for a single transaction in such market at such time. The Calculation Agent will request the principal
London office of each of such banks to provide a quotation of its rate. If at least two such quotations are provided,
LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations. If fewer than two
quotations are provided, LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted
at approximately 11:00 a.m., eastern time, on such LIBOR Determination Date by major banks in New York City
selected by the Calculation Agent for three-month loans in U.S. dollars to leading European banks in a principal
amount that is representative for a single transaction in such market at such time. "Reuters Screen LIBOR01
Page" means the display designated Page "LIBOR01" on the Reuters service (or any successor service thereto) (or
such other page as may replace that page on that service (or successor service) for the purposes of displaying
London interbank offered rates of major banks). "London Banking Day" means a day on which commercial banks
in London, England are open for business.
Any claim by a Noteholder in respect of the Outstanding Principal Amount of, interest on and other
amounts (if any) payable in respect of, any Note shall be prescribed and become void unless made within a period of
two years after the date on which such payment first becomes due, provided that if the full amount of the moneys
payable has not been received by the Trustee on or prior to such due date, such claim by a Noteholder shall be
prescribed and become void unless made within a period of two years after the date on which notice is given to
Noteholders that such moneys have been received in full by the Trustee.
Principal Payments; Redemption; Reduction and Increase of Principal
The Notes will be scheduled to mature on September 21, 2014, which is the Scheduled Maturity Date. On
the Scheduled Maturity Date, subject to the requirement for a Holdback Amount described below, the Outstanding
Principal Amount of the Notes will be paid with the proceeds realized upon the sale or maturity of the Collateral
Assets (which includes any Eligible Investments in which the proceeds of the Replacement Collateral Assets may be
invested upon their maturity prior to the Scheduled Maturity Date), together with any Swap Counterparty Additional
Payment received from the Swap Counterparty under the Credit Default Swap.
The Notes will be subject to mandatory redemption prior to the Scheduled Maturity Date, (i) in whole, in
connection with an Early Termination Date, if any, of the Credit Default Swap or the Interest Rate Swap and (ii) in
whole, on any Cash Settlement Date on which the Outstanding Principal Amount of the Notes is reduced to zero
26
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with no possibility of any further Cash Settlement Amounts becoming payable from the Swap Counterparty to the
Issuer. The day on which the Notes are subject to mandatory redemption is referred herein as a "Mandatory
Redemption Date ." See "Description of the Credit Default Swap — Termination of the Credit Default Swap —
Early Termination of Credit Default Swap" and "Description of the Interest Rate Swap — Early Termination of
Interest Rate Swap."
Upon the occurrence of a mandatory redemption of the Notes in connection with an Early Termination
Date under the Swap Agreements, the Issuer will sell the Collateral Assets, liquidate any Eligible Investments held
under the Indenture, and distribute the proceeds thereof in accordance with the priority provisions described under
"— Priority of Payments"; provided that in connection with an Early Termination Date with respect to which the
Swap Counterparty or the Interest Rate Swap Counterparty is the Defaulting Party or the Sole Affected Party, the
Issuer will, unless directed by the Majority Noteholders on or prior to the second Business Day preceding the related
Mandatory Redemption Date to sell the Collateral Assets, deliver the Collateral Assets in-kind to the Noteholders in
accordance with the priority provisions described under "— Priority of Payments."
The Outstanding Principal Amount of the Notes will automatically be reduced on a pro rata basis on the
Event Determination Date for any Credit Event in the Long Portfolio, in an amount equal to the Cash Settlement
Amount, if any, owed to the Swap Counterparty. See "Description of the Credit Default Swap — Settlement Upon
Credit Event — Determination and Payment of Cash Settlement Amount." The reduction will be effected without
any payment being made to the holders of the Notes. Such reduction in the principal amount of the Notes will result
in a corresponding loss of investment to the holders of the Notes. See "Risk Factors – Effect of Credit Events."
Upon reduction of the Outstanding Principal Amount of the Notes to zero with no possibility of any further Cash
Settlement Amounts becoming payable from the Swap Counterparty to the Issuer, the Notes will be redeemed
without any payment being made in respect of the principal amount of the Notes. See "Description of the Credit
Default Swap – Settlement Upon Credit Event — Determination and Payment of Cash Settlement Amount."
The Outstanding Principal Amount of the Notes will automatically be increased on a pro rata basis on the
Cash Settlement Date for any Credit Event in the Short Portfolio, in an amount equal to the Cash Settlement Amount
owed by the Swap Counterparty to the Issuer up to the Issued Principal Amount of the Notes. See "Description of
the Credit Default Swap — Settlement Upon Credit Event — Determination and Payment of Cash Settlement
Amount." The increase will be effected without any payment being made to the holders of the Notes. Such increase
in the principal amount of the Notes will result in a corresponding increase in investment to the holders of the Notes.
In the event that any Cash Settlement Date or Cash Settlement Dates would occur in respect of the Long
Portfolio after the Scheduled Maturity Date, the Issuer will retain in the Principal Collateral Account on the
Scheduled Maturity Date and not distribute to the holders of the Notes an amount equal to the Holdback Amount.
The Issuer will use the Holdback Amount on each Cash Settlement Date to pay to the Swap Counterparty any Cash
Settlement Amount owed to it. On the Extended Maturity Date, the Issuer will distribute any remaining amounts in
accordance with the priority provisions described under "— Priority of Payments." The "Holdback Amount" will
be an amount equal to the maximum aggregate Cash Settlement Amount that could be payable to the Swap
Counterparty on each Cash Settlement Date occurring after the Scheduled Maturity Date (assuming that the Final
Price used in the calculation thereof will be zero), as determined by the Calculation Agent.
In the event that any Cash Settlement Date or Cash Settlement Dates would occur in respect of the Short
Portfolio after the Scheduled Maturity Date, the Trustee will retain in the Principal Collateral Account on the
Scheduled Maturity Date and not distribute to the Holders of the Notes an amount equal to USD 1 and distribute the
remainder in accordance with the priority provisions described under "— Priority of Payments." On each
subsequent Cash Settlement Date the Trustee shall apply any Cash Settlement Amount in accordance with such
priority provisions (provided that on the Extended Maturity Date the Trustee shall also apply the USD 1 retained in
the Principal Collateral Account).
Priority of Payments
Subject to the paragraph immediately below, on the Scheduled Maturity Date, an Extended Maturity Date
or a Mandatory Redemption Date, the Issuer will distribute amounts credited to the Collateral Accounts as follows:
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(i)
first, to pay amounts owed to the Swap Counterparty under the Credit Default Swap and the
Interest Rate Swap Counterparty under the Interest Rate Swap on a pari passu basis , including
any termination amounts owed to the Swap Counterparty under the Credit Default Swap or the
Interest Rate Swap Counterparty under the Interest Rate Swap;
(ii)
second, to pay amounts owed to the Portfolio Manager in respect of Senior Portfolio
Management Fees under the Portfolio Management Agreement;
(iii)
third, to pay any amounts owed to the Noteholders;
(iv)
fourth, to pay amounts owed to the Portfolio Manager in respect of Subordinate Portfolio
Management Fees under the Portfolio Management Agreement; and
(v)
fifth, to pay the remainder to the Noteholders.
If the Notes are redeemed in connection with the establishment of an Early Termination Date under the
Swap Agreements as to which the Swap Counterparty or the Interest Rate Swap Counterparty is the Defaulting Party
or the Sole Affected Party, the Trustee will apply the Collateral Assets as follows:
(i)
first, the Trustee will apply amounts (other than the Collateral Assets) credited to the Collateral
Accounts to pay to the Portfolio Manager any amounts owed in respect of Senior Portfolio
Management Fees under the Portfolio Management Agreement and then sell sufficient Collateral
Assets to pay any shortfall;
(ii)
second, the Trustee will deliver in-kind to the holders of the Notes Collateral Assets in a principal
amount equal to any accrued and unpaid interest in respect of the Notes;
(iii)
third, the Trustee will deliver in-kind to the holders of the Notes Collateral Assets in a principal
amount equal to the Outstanding Principal Amount in respect of the Notes;
(iv)
fourth, the Trustee will sell any remaining Collateral Assets and use the proceeds
(A)
first, to pay any amounts owed to the Portfolio Manager in respect of Subordinate
Portfolio Management Fees under the Portfolio Management Agreement
(B)
second, to pay amounts owed to the Swap Counterparty under the Credit Default Swap
and/or to the Interest Rate Swap Counterparty under the Interest Rate Swap on a pari
passu basis , including any termination amounts owed to the Swap Counterparty under the
Credit Default Swap or the Interest Rate Swap Counterparty under the Interest Rate
Swap; and
(C)
third, to pay any remaining funds to the holders of the Notes on a pari passu and pro rata
basis;
provided, however, that the Majority Noteholders may direct the Trustee no later than the second Business Day
preceding the related Mandatory Redemption Date to instead sell the Collateral Assets and distribute amounts
credited to the Collateral Accounts as follows:
(i)
first, to pay amounts owed to the Portfolio Manager in respect of Senior Portfolio Management
Fees under the Portfolio Management Agreement
(ii)
second, to pay any accrued and unpaid interest in respect of the Notes;
(iii)
third, to pay the outstanding principal amount in respect of the Notes;
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(iv)
fourth, to pay amounts owed to the Portfolio Manager in respect of Subordinate Portfolio
Management Fees under the Portfolio Management Agreement;
(v)
fifth, to pay amounts owed to the Swap Counterparty under the Credit Default Swap and the
Interest Rate Swap Counterparty under the Interest Rate Swap on a pari passu basis , including
any termination amounts owed to the Swap Counterparty under the Credit Default Swap or the
Interest Rate Swap Counterparty under the Interest Rate Swap; and
(vi)
sixth, to pay any remaining funds to the Noteholders .
The face amount of Collateral Assets to be delivered to each Noteholder will be rounded up or down as necessary to
permit such delivery of Collateral Assets in available denominations.
If on the Scheduled Termination Date of the Swap Agreements, the market value of the Collateral Assets
exceeds the outstanding principal amount of such assets, the Issuer will pay an amount equal to such excess to the
Swap Counterparty in accordance with the priority of payments set out above. If the market value is less than the
outstanding principal amount of the Collateral Assets on the Scheduled Termination Date, the Swap Counterparty
will pay an amount equal to the difference to the Issuer on the Scheduled Termination Date or, if applicable, on the
Extended Maturity Date. See "Description of the Credit Default Swap— Payments Under the Credit Default Swap."
Form and Denominations
The Notes will be evidenced by one or more global notes registered in the name of Cede & Co., as nominee
of DTC in the case of Notes sold to persons other than U.S. Persons in offshore transactions in reliance on
Regulation S, for the respective accounts of Euroclear, or any successor operator of Euroclear, and Clearstream. The
interests of beneficial owners of the Notes will be represented by book entries on the records of DTC and its direct
and indirect participants. See "— Book -Entry Registration." Definitive notes will be available only under limited
circumstances. See "— Definitive Notes." The Notes will be issued in minimum denominations of $1,000,000 and
integral multiples of $1,000 in excess thereof.
Book-Entry Registration
Each of the Notes initially sold to persons other than U.S. Persons in offshore transactions in reliance on
Regulation S will be initially represented by one or more permanent global notes (the "Regulation S Global
Notes"), deposited with the Trustee, acting as custodian for DTC, and registered in the name of Cede & Co., as
nominee of DTC for the respective accounts of Euroclear, or any successor operator of Euroclear, and Clearstream.
Each of the Notes initially sold in the United States or to U.S. Persons pursuant to Rule 144A under the Securities
Act will initially be represented by one or more global notes (the "Rule 144A Global Notes") registered in the name
of Cede & Co., as nominee of DTC.
Unless and until definitive notes are issued under the limited circumstances described herein, no holder of
the Notes will be entitled to receive a physical note representing a Note issued in book-entry form. With respect to
Notes evidenced by global notes, all references herein to actions by the holders thereof refer to actions taken by
DTC upon instructions from the Participants (as defined below) and all references herein to distributions, notices,
reports and statements to the holders of the Notes refer to distributions, notices, reports and statements made or
delivered to DTC or Cede & Co., as the registered holder of the Notes for distribution to the holders of the Notes in
accordance with DTC's procedures with respect thereto.
DTC has advised the Issuer that 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 Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities for its participants, including Euroclear and Clearstream
("Participants") and to facilitate the clearance and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to the DTC system
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also is available to others such as banks, brokers, dealers and trust comp anies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only through Participants or Indirect
Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect Participants.
Subject to the provisions described in this section, interests in the Notes may only be held by or through
Participants. 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.
Such Participants will not receive a physical note, but each Participant will receive a credit balance in the
records of DTC in the amount of such Participant's interest in the global note which will be confirmed in accordance
with DTC's standard procedures. Ownership interests will be further recorded on the books of the Participants.
Transfers of interests in the Notes which are registered in the name of Cede & Co., as nominee of DTC,
will be accomplished by book entries made by DTC and in turn by the Participants who act on behalf of the
beneficial owners of the Notes. For every transfer and exchange of interests in the Notes, the beneficial holders
thereof may be charged a sum sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto.
Conveyance of notices and other communications by DTC to Participants, by Participants to Indirect
Participants and by Participants and Indirect Participants to the beneficial owners of the Notes will be governed by
arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
The Issuer, the Trustee, the Portfolio Manager and the Placement Agent will rely solely on notices received by them
through the Participants and not on any direct communication, written or oral, from the beneficial owners of the
Notes except as specified herein or in the Indenture.
Neither DTC, Euroclear, Clearstream nor Cede & Co. will consent or vote with respect to the Notes. Under
its usual procedures, DTC mails an omnibus proxy to the Issuer as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Participants to whose accounts the Notes
are credited on the record date (identified in a listing attached to the omnibus proxy).
Payments on the Notes will be made to DTC. DTC's practice is to credit those Participants' accounts on
payment dates in whose name the Notes are registered on the Business Day preceding the payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on the payment date. Payment by Participants to the beneficial owners of the Notes will be
governed by standing instructions and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name" and will be the responsibility of such Participants and not of
DTC, the Issuer, the Trustee, the Portfolio Manager or the Placement Agent, subject to any statutory or regulatory
requirements as may be in effect from time to time.
The Issuer expects that Euroclear and Clearstream or their respective depositaries and participants will,
upon receipt of any payment in respect of a Regulation S Global Note held by DTC for the respective accounts of
Euroclear and Clearstream or their respective depositaries and participants, immediately credit the respective
Euroclear and Clearstream accounts with payments in amounts proportionate to their respective beneficial interests
in such Regulation S Global Note as shown on the records of Euroclear and Clearstream or their respective
depositaries and participants. The Issuer also expects that payments by Euroclear and Clearstream or their respective
depositaries and participants to owners of beneficial interests in a Regulation S Global Note will be governed by
standing instructions and customary practices of Euroclear, Clearstream and their respective depositaries and
participants, as is now the case with respect to securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of Euroclear, Clearstream and their
respective depositaries and participants. In addition, no beneficial owner of an interest will receive payments, except
in accordance with the applicable rules and operating procedures (in addition to those under the Indenture and, if
applicable, those of Euroclear and Clearstream).
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Any of DTC, Euroclear and Clearstream may discontinue providing its services as securities depository
with respect to the Notes at any time by giving reasonable notice to the Issuer and the Trustee.
The Issuer and the Trustee may treat DTC as, and deem DTC to be, the absolute owner of the Notes for all
purposes whatsoever, including without limitation:
(i)
the payment of interest and principal to the beneficial owners of the Notes;
(ii)
giving notices with respect to the Notes (except as may be otherwise specified in the Indenture);
and
(iii)
registering transfers with respect to the Notes.
Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and
the beneficial holders, the ability of an investor to pledge its Notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Notes, may be limited due to the lack of a physical note for
such Notes.
DTC has advised the Issuer and Trustee that it will take any action permitted to be taken by a beneficial
owner of the Notes only at the direction of one or more Participants (including Euroclear and Clearstream) to whose
accounts with DTC the Notes are credited. DTC may take conflicting actions with respect to other Notes to the
extent that such actions are taken on behalf of Participants whose holdings include such Notes.
Except as required by law, neither the Issuer nor the Trustee will have any liability for any aspect of the
records relating to or payments made on account of the Notes held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such Notes.
Definitive Notes
The Notes will be issued in fully registered, certificated form ("Definitive Notes") to holders, or their
respective nominees, rather than to DTC or its nominee, only if (i) the Issuer is advised in writing that any of DTC,
Clearstream or Euroclear, as the case may be, is no longer willing or able to discharge properly its responsibilities as
depository with respect to the Notes and the Issuer is unable to locate a qualified successor, or (ii) the Issuer, at its
option, elects to terminate the book-entry system through DTC. Upon the occurrence of either event, the Issuer, the
Trustee and the Swap Counterparty will execute an agreement amending the Indenture for the purpose of
terminating the book-entry deposit system with respect to such Notes and providing for the form and terms of such
Definitive Notes. The Issuer will be required to notify DTC, Euroclear and Clearstream of its intent to make
Definitive Notes available. Upon surrender by DTC of the global notes representing the Notes and receipt of
instructions for re-registration, the Issuer will reissue such Notes as Definitive Notes to the beneficial owners
thereof.
Payments and distributions on the Definitive Notes will thereafter be made in accordance with the
procedures set forth in the Indenture directly to holders of the Definitive Notes in whose names the Definitive Notes
are registered.
Subject to the satisfaction of certain transfer restrictions (see "Purchase and Transfer Restrictions"),
Definitive Notes will be transferable and exchangeable at the offices of the Issuer or of a registrar named in a notice
delivered to holders of the Definitive Notes. No service charge will be imposed for any registration of transfer or
exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
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PURCHASE AND TRANSFER RESTRICTIONS
Legend
Unless determined otherwise by the Issuer in accordance with applicable law and so long as any of the
Notes are outstanding, the Notes will bear a legend substantially as set forth below:
"UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. ("CEDE") OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC, AND ANY PAYMENT HEREON IS MADE TO CEDE
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE, HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN
PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE.
THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER
OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION
5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS NOTE AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS
NOTE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A
QUALIFIED INSTITUTIONAL BUYER IN ACCORDANCE WITH RULE 144A OF THE SECURITIES
ACT THAT IS ALSO A QUALIFIED PURCHASER (A "QUALIFIED PURCHASER") AS DEFINED IN
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND THAT IS NOT (X) A BROKERDEALER THAT OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25
MILLION IN SECURITIES OF UNAFFILIATED ISSUERS OR (Y) A PLAN REFERRED TO IN
PARAGRAPH (a)(l)(i)(D) OR (a)(l)(i)(E) OF RULE 144A OR A TRUST FUND REFERRED TO IN
PARAGRAPH (a)(l)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH A PLAN, IF
INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE BENEFICIARIES
OF SUCH PLAN; OR (ii) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT AND,
IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY
JURISDICTION AND IN A MINIMUM PRINCIPAL AMOUNT OF NOT LESS THAN THE
MINIMUM DENOMINATION. AND IN EACH CASE IN COMPLIANCE WITH THE
CERTIFICATION AND OTHER REQUIREMENTS SPECIFIED IN THE INDENTURE REFERRED TO
HEREIN, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO,
NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS
REFERRED TO IN CLAUSE (A) ABOVE. 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. IF AT ANY TIME, THE ISSUER DETERMINES OR IS NOTIFIED THAT THE
HOLDER OF THIS NOTE OR A BENEFICIAL INTEREST HEREIN WAS IN BREACH OF ANY OF
THE REPRESENTATIONS SET FORTH IN THE INDENTURE, THE ISSUER OR THE TRUSTEE
MAY DECLARE THE ACQUISITION OF THIS NOTE OR SUCH INTEREST IN THIS NOTE VOID,
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IN THE EVENT OF A BREACH AT THE TIME GIVEN, AND, IN THE EVENT OF SUCH A
DETERMINATION OR NOTICE OF A BREACH, AT THE TIME GIVEN OR AT ANY SUBSEQUENT
TIME, THE ISSUER OR THE TRUSTEE MAY REQUIRE THAT THIS NOTE OR SUCH INTEREST
HEREIN BE TRANSFERRED TO A PERSON DESIGNATED BY THE ISSUER.
EACH BENEFICIAL OWNER OF THIS NOTE WILL BE DEEMED TO HAVE MADE THE
REPRESENTATIONS AND AGREEMENTS SET FORTH IN SECTION 2.06(g)(iii) OF THE
INDENTURE. THE HOLDER AND EACH BENEFICIAL OWNER OF THIS NOTE ACKNOWLEDGE
THAT THE ISSUER AND THE TRUSTEE RESERVE THE RIGHT PRIOR TO ANY SALE OR OTHER
TRANSFER OF THIS NOTE TO REQUIRE THE DELIVERY OF SUCH CERTIFICATIONS, LEGAL
OPINIONS AND OTHER INFORMATION AS THE ISSUER AND THE TRUSTEE MAY
REASONABLY REQUIRE TO CONFIRM THAT THE PROPOSED SALE OR OTHER TRANSFER
COMPLIES WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06(g)(iii) OF THE
INDENTURE.
THIS NOTE MAY NOT BE PURCHASED BY OR OTHERWISE ACQUIRED BY ANY EMPLOYEE
BENEFIT PLAN WITHIN THE MEANING OF AND SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), A PLAN SUBJECT
TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
OR ANY PERSON OR ENTITY WHOSE ASSETS INCLUDE THE ASSETS OF ANY SUCH
EMPLOYEE BENEFIT PLAN OR PLAN BY REASON OF 29 C.F.R. 2510.3-101, AS MODIFIED BY
ERISA, OR OTHERWISE. EACH HOLDER WILL BE DEEMED TO HAVE REPRESENTED AND
AGREED THAT (A) IT IS NOT (AND IS NOT DEEMED FOR PURPOSES OF ERISA OR SECTION
4975 OF THE CODE TO BE) AND FOR SO LONG AS IT HOLDS A NOTE WILL NOT BE (OR BE
DEEMED FOR SUCH PURPOSES TO BE) AN "EMPLOYEE BENEFIT PLAN" AS DEFINED IN AND
SUBJECT TO ERISA OR A "PLAN" AS DEFINED IN SECTION 4975 OF THE CODE, AND (B) (i) IT
IS NOT AND FOR SO LONG AS IT HOLDS A NOTE WILL NOT BE AN EMPLOYEE BENEFIT
PLAN WHICH IS SUBJECT TO ANY FEDERAL, STATE, LOCAL OR FOREIGN LAW THAT IS
SUBSTANTIALLY SIMILAR TO SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, OR
(ii) THE PURCHASE AND HOLDING OF THE NOTES DO NOT AND WILL NOT VIOLATE ANY
SUCH SUBSTANTIALLY SIMILAR LAW.THE NOTES WILL BE ISSUED IN MINIMUM
DENOMINATIONS OF $1,000,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS
THEREOF."
In addition, any transfer of the Notes by the Initial Noteholder is conditioned on the Initial Noteholder
obtaining prior written consent of the Placement Agent to such transfer, such consent not to be unreasonably
withheld.
Investor Representations
No holder of any Note or beneficial owner of an interest therein may, in any transaction or series of
transactions, directly or indirectly (each of the following, a "transfer"), (i) sell, assign or otherwise in any manner
dispose of all or any part of its interest in any such Note issued to it, whether by act, deed, merger or otherwise, or
(ii) mortgage, pledge or create a lien or security interest in such Note or beneficial interest therein unless such is
effected in accordance with the following provisions, and each purchaser and transferee shall be deemed to have
represented and agreed to the following provisions:
(i)
It understands that no purchase or transfer of any Note or beneficial interest therein may be made
unless (a) the initial purchaser provides to the subsequent transferee execution copies of the
Indenture, the Swap Agreements and the Notes and any amendments to any of the foregoing, and
a copy of the final Offering Memorandum and any supplements thereto and (b) the prospective
transferee provides to the Issuer, Trustee and Swap Counterparty an investment letter
substantially in the form of Appendix C hereto.
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(ii)
It understands that the Notes (or any interest therein) may not be offered, sold, pledged or
otherwise transferred except to a Qualified Institutional Buyer purchasing for its own account in
a transaction meeting the requirements of Rule 144A which is also a Qualified Purchaser under
Section 2(a)(51) of the Investment Company Act, or in an offshore transaction within the
meaning of, and in accordance with, Regulation S under the Securities Act ("Regulation S") to a
person that is not a "U.S. Person" as defined in Regulation S (a "U.S. Person") in compliance
with any other certification and other requirements specified in the Indenture and which is
deemed to have made the representations and warranties contained herein.
(iii)
It understands that the Notes have not been approved or disapproved by the SEC or any other
governmental authority or agency of any jurisdiction, nor has the SEC or any other governmental
authority or agency passed upon the accuracy or the adequacy of this Offering Memorandum.
Any representation to the contrary is a criminal offense.
(iv)
It agrees that no Notes (or any interest therein) may be sold, pledged or otherwise transferred
except in a minimum denomination of $1,000,000 and in integral multiples of $1,000 in excess
thereof. It is aware that (a) except as otherwise provided in the Indenture, the Notes being sold or
transferred to it will be represented by one or more global notes, and that beneficial interests
therein may be held only through DTC and (b) the Issuer may receive a list of participants
holding positions in its securities from one or more book-entry depositories.
(v)
It understands that (a) the Notes are being offered only in a transaction not involving any public
offering within the meaning of the Securities Act, and (b) the Notes have not been and will not be
registered under the Securities Act and, therefore, cannot be offered or sold or otherwise
transferred unless they are registered under the Securities Act or unless an exemption from
registration is available; accordingly, the global notes representing the Notes will bear a legend
stating that the Notes have not been registered under the Securities Act and setting forth certain
of the restrictions on transfer of the Notes described herein.
(vi)
Neither it nor anyone acting on its behalf has (a) offered or sold or will offer or sell any Notes by
means of any form of general solicitation or general advertising or (b) has taken or will take any
action that would constitute a distribution of a Note under the Securities Act, would render the
disposition of a Note a violation of Section 5 of the Securities Act or any state or other securities
law or would require registration pursuant thereto.
(vii)
It (a) is (i) both a Qualified Institutional Buyer as defined in Rule 144A under the Securities Act
and a Qualified Purchaser as defined in Section 2(a)(51) of the Investment Company Act or (ii) a
person that is not a "U.S. Person" as defined in Regulation S under the Securities Act and
purchasing the Notes in an offshore transaction within the meaning of, and in accordance with
Regulation S under the Securities Act; (b) is acquiring such Notes or beneficial interest therein
for investment purposes and not with a view to the resale, distribution or other disposition thereof
(except in accordance with Rule 144A or Regulation S); (c) if it has acquired the Notes in a sale
being made in reliance on Rule 144A, is not a broker-dealer which owns and invests on a
discretionary basis less than $25 million in securities of unaffiliated issuers; (d) is not a
partnership, common trust fund, or special trust, pension fund or retirement plan, or other entity
in which the partners, beneficiaries, participants or other equity owners, as the case may be, may
designate the particular investments to be made, or the allocation thereof; (e) has received the
necessary consent from its beneficial owners if it is a private investment company formed before
April 30, 1996; (f) is not formed for the purpose of investing in the Issuer (or if it was formed for
such purpose, all of the beneficial owners thereof are Qualified Institutional Buyers and Qualified
Purchasers) and it shall not sell participation interests in the Notes or enter into any other
arrangement pursuant to which any other person shall be entitled to a beneficial interest on the
distributions on the Notes; (g) holds directly or indirectly in the aggregate not more than 40% of
its assets or capital in securities issued by the Issuer (including the Notes); (h) is acting for its
own account, or the account of another purchaser that meets these requirements; and (i) will
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provide notice of all transfer restrictions to any subsequent transferees and will provide the Issuer
from time to time such information as it may reasonably request in order to ascertain compliance
with this paragraph (vii).
(viii)
It (a) has received and carefully read the Indenture, the Swap Agreements and the Notes, and a
copy of the final Offering Memorandum, on which it has based its investment decision; (b) has
had access to such financial and other information concerning the Issuer, the Swap Agreements
and the Notes as it has deemed necessary to make its own independent decision to purchase the
Notes, including the opportunity, at a reasonable time prior to its purchase of the Notes, to ask
questions and receive answers concerning the Issuer and the terms and conditions of the offering
of the Notes; (c) has undertaken its own independent evaluation, based upon such investigation
and analysis as it deems appropriate, of the business prospects and creditworthiness of the Issuer,
the Swap Counterparty and the Reference Entities specified in the Credit Default Swap, and of
the terms and provisions of the Notes, the Indenture and the Swap Agreements; (d) is not relying
and will not at any time rely on any communication (written or oral, including any documents,
emails or term sheets) of the Issuer, Trustee, the Placement Agent, the Portfolio Manager, the
Swap Counterparty or any of their affiliates (or any representative or agent of the foregoing), or
any of the Reference Entities identified in the Credit Default Swap as accurate descriptions of the
transactions contemplated by the Basic Documents, as investment advice or as a recommendation
to purchase the Notes and (e) has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks (including for tax, legal, regulatory,
accounting, and other financial purposes) of its prospective investment in the Notes (including
the risk of loss of all or a substantial part of its investment), it is financially able to bear such risk,
and it has determined that an investment in the Notes is suitable and appropriate for it.
(ix)
It understands that the final Offering Memorandum, Indenture, Swap Agreements and Notes ,
including any exhibits or schedules thereto, contain the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and thereby and supers ede all prior
arrangements or understandings with respect thereto, including any previously distributed term
sheets, other marketing materials or other documents related to the transaction.
(x)
It acknowledges that it is not entitled to rely upon, and is not relying upon, any representation,
warranty, covenant, agreement or guarantee whatsoever (whether written or oral and whether
directly or indirectly through any other person) given by the Placement Agent, the Portfolio
Manager, the Swap Counterparty or any of their affiliates (or any representative or agent of the
foregoing). It acknowledges that none of the Placement Agent, the Portfolio Manager, the Swap
Counterparty or any of their affiliates (or any representative or agent of the foregoing) shall be
deemed to have made to it any representation or warranty regarding the Notes. It understands
that none of the Placement Agent, the Issuer, the Trustee, the Portfolio Manager, the Swap
Counterparty or any of their respective affiliates is acting as its fiduciary or financial or
investment adviser or has made any representation, warranty, covenant, agreement or guarantee
whatsoever (in each case, whether written or oral and whether directly or indirectly through any
other person) with respect to (a) whether an investment in the Notes is suitable and appropriate
for it, (b) the expected or projected success, profitability, return, performance, result, effect,
consequence or benefit (including financial, legal, regulatory, tax, accounting or otherwise) of, or
any other matters relating to its decision to invest in the Notes , including, without limitation, the
credit-worthiness of any of the Reference Entities or the Collateral Assets, or (c) any other
information or documents delivered to or made available to it or its counsel, accountants or
advisors with respect to the Notes . None of the Trustee, Paying Agent, Transfer Agent or
Registrar will have any liability for any claims, actions, demands, losses, costs, expenses or
damages, whether involving such parties or third parties, resulting from any inaccuracy in any of
its representations or warranties made, or for any breach of any of its agreements contained in
any investment letter.
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(xi)
It confirms that all investment decisions relating to its purchase of the Notes have been the result
of arm's length negotiations.
(xii)
It understands that there is no market for the Notes and that no assurance can be given as to the
liquidity of any trading market for the Notes and that it is unlikely that a trading market for any
of the Notes will develop; it further understands that the Placement Agent does not intend to
make a market in the Notes, the Placement Agent is under no obligation to do so and, if it does
make a market at any time for the Notes, the Placement Agent may, in its discretion, discontinue
the same at any time; it is prepared to hold the Notes for an indefinite period of time until their
maturity.
(xiii)
It agrees to treat, in the absence of an administrative determination or judicial ruling to the
contrary, the Notes as equity of the Issuer for U.S. federal income tax purposes.
(xiv)
It understands and acknowledges that failure to provide the Issuer, the Trustee or any Paying
Agent with the applicable U.S. federal income tax certifications (generally, a United States
Internal Revenue Service Form W-9 (or successor applicable form) in the case of a person that is
a "United States person" within the meaning of Section 7701(a)(30) of the Code or an appropriate
United States Internal Revenue Service Form W-8 (or successor applicable form) in the case of a
person that is not a "United States person" within the meaning of Section 7701(a)(30) of the
Code) may result in U.S. federal withholding from payments in respect of such Note.
(xv)
For as long as it holds the Notes, it represents that either (A)(1) it is not a Benefit Plan Investor
and (2) it will notify the Issuer and Swap Counterparty within ten (10) days if, after its initial
acquisition of the Notes, at any time it becomes a Benefit Plan Investor or (B)(1) it is an
insurance company purchasing the Notes with the assets of its general account, (2) less than 25%
of the assets of such general account are assets of Benefit Plan Investors, (3)(I)(x) the conditions
of PTCE 95-60 are met such that PTCE 95-60 is applicable to the purchase and holding of the
Notes, and (y) its purchase and holding of the Notes will not result in a nonexempt prohibited
transaction under Section 406(b) of ERISA or Section 4975(C)(1)(E) or (F) of the Code or (II) it
will provide an opinion of counsel to the Issuer and Swap Counterparty that its purchase and
holding of the Notes will not be a prohibited transaction under Section 406 of ERISA or Section
4975 of the Code and (4) it will notify the Issuer and Swap Counterparty within ten (10) days if,
after its initial acquisition of the Notes, it could no longer make the representations contained in
clauses (B)(2) or (B)(3) above or (C) (i) it is not and for so long as it holds a Note will not be an
Employee Benefit Plan which is subject to any federal, state, local or foreign law that is
substantially similar to Section 406 of ERISA or Section 4975 of the Code, or (ii) the purchase
and holding of the Notes do not and will not violate any such substantially similar law. It
acknowledges that any purported transfer of the Notes to a transferee that does not comply with
the foregoing requirements shall be null and void ab initio.
(xvi)
It agrees that (a) any sale, pledge or other transfer of a Note (or any interest therein) made in
violation of the transfer restrictions relating to the Notes contained in the Offering Memorandum
or the Indenture, or made based upon any false or inaccurate representation made by it or a
transferee to the Issuer, will be void and of no force or effect to the maximum extent permitted by
applicable law and (b) neither the Issuer nor the Trustee has any obligation to recognize any sale,
pledge or other transfer of a Note (or any interest therein) made in violation of any such transfer
restriction or made based upon any such false or inaccurate representation or which would
otherwise cause the Issuer to be required to register as an Investment Company under the
Investment Company Act.
(xvii)
It understands and agrees that (a) any purported transfer of a Note to a transferee in violation of
the transfer restrictions relating to ERISA compliance, Qualified Institutional Buyer status or
Qualified Purchaser status will be null and void ab initio and (b) the Issuer will be entitled under
the Indenture (i) to require any purchaser or transferee of such Note to sell its Notes to a person
36
12001-01597 NY:2045248.4
who complies with such requirements, and (ii) to refuse to honor a transfer to a person who does
not comply with such requirements. Any sale of a Note pursuant to this paragraph (xviii) will be
effected at the direction of the Placement Agent at the then current market price which shall be
determined by the Placement Agent, in its sole discretion.
(xviii)
It understands that federal regulations and Executive Orders administered by the U.S. Treasury
Department's Office of Foreign Assets Control (OFAC) prohibit, among other things, the
engagement in transactions with, and the provision of services to, certain foreign countries,
territories, entities and individuals, and that the lists of OFAC prohibited countries, territories,
persons and entities can be found on the OFAC website at www.treas.gov/ofac. It represents and
warrants that neither it nor any of its affiliates is a country, territory, person or entity named on
an OFAC list, nor is it or any of its affiliates a natural person or entity with whom dealings are
prohibited under any OFAC regulations.
(xix)
It represents and warrants that, except as otherwise disclosed to the Issuer and Placement Agent
in writing: (i) it is not resident in, or organized or chartered under the laws of, (a) a jurisdiction
that has been designated by the Secretary of the Treasury under Section 311 of the PATRIOT Act
as warranting special measures due to money laundering concerns or (b) any foreign country that
has been designated as non cooperative with international anti-money laundering principles or
procedures by an intergovernmental group or organization, such as the Financial Action Task
Force on Money Laundering, of which the United States is a member and with which designation
the United States representative to the group or organization continues to concur (a "Non
Cooperative Jurisdiction"); (ii) to its knowledge, its funds do not originate from, nor will they
be routed through, an account maintained at (a) a foreign bank operating under an offshore
banking license or a foreign bank that does not maintain a physical presence in any country, both
within the meaning of the PATRIOT Act, (but excluding any foreign bank whose affiliate
maintains a physical presence in any country if such foreign bank is subject to supervision by a
banking authority in the country regulating such affiliate), or (b) a bank organized or chartered
under the laws of a Non Cooperative Jurisdiction; and (iii) it is not a senior foreign political
figure, or any immediate family member or close associate of a senior foreign political figure, in
each case, within the meaning of the PATRIOT Act.
(xx)
It understands that regulations adopted pursuant to the PATRIOT Act would require the
Placement Agent, in connection with the establishment of anti-money laundering procedures, to
provide information on request to governmental authorities with respect to investors who have
purchased Notes. Similar regulations have been proposed that would require the Issuer likewise
to provide such information. It understands that the Placement Agent and the Issuer reserve the
right to request such information as is necessary to verify the identity of any purchaser or
noteholder and the source of the payment of subscription monies, or as is necessary to comply
with any customer identification programs required by the Treasury and/or the SEC under the
PATRIOT Act or otherwise. It understands that in the event of any delay or failure by any
purchaser of any interest in the Notes to produce any information required for verification
purposes, an application to purchase or transfer such Notes and the subscription monies relating
to such purchase or transfer may be refused.
(xxi)
It is an eligible contract participant as defined in Section 1(a)(12) of the U.S. Commodity
Exchange Act, as amended.
(xxii)
It has all necessary power and authority to acquire the Notes, such acquisition has been approved
by its board of directors or pursuant to properly delegated authority, and such acquisition and any
subsequent disposition will be reflected in its official records, and such acquisition does not
conflict with, or constitute a default under, any instruments governing it, any applicable law,
regulation or order, or any material agreement to which it is a party or by which it is bound.
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(xxiii)
It represents and warrants that it has obtained any consent, approval, authorization, order,
registration or qualification of or with any court or governmental agency or body that is required
for its acquisition of a Note or its execution or delivery of any investment letter provided in
connection with such acquisition, and that such investment letter constitutes its legal, valid and
binding obligation, enforceable against it in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and general principles of equity.
(xxiv)
It will take all reasonable steps including, if necessary, contacting its external auditor to ensure
proper financial accounting and reporting, and disclosure of the Notes and any related
transactions in their entirety. It represents and warrants that such treatment is consistent with its
internal policies and the Purchaser agrees that the Placement Agent and its affiliates shall have no
liability or responsibility for the Purchaser's financial and accounting treatment of the Notes or
for the Purchaser's compliance with legal, tax, accounting and regulatory reporting standards.
(xxv)
It acknowledges that the Issuer, the Placement Agent, the Portfolio Manager, the Swap
Counterparty, the Interest Rate Swap Counterparty and others will rely upon the truth and
accuracy of the foregoing acknowledgements, representations and agreements and it consents to
such reliance. It hereby represents that all information contained in its inves tment letter and any
tax form which it has been required to provide is correct and complete as of the date hereof and
will be true on the date of its purchase of the Notes. It agrees (i) that if any of the
acknowledgments, representations, warranties or agreements made by it in connection with its
purchase of the Notes are no longer accurate, it will promptly notify in writing the Issuer and the
Placement Agent and (ii) to provide such information and execute and deliver such documents as
the Issuer and the Placement Agent or its affiliates may reasonably request from time to time to
comply with any law or regulation to which the Issuer may be subject and it irrevocably
authorizes the Issuer and such other persons to produce any investment letter provided ni
connection with its acquisition of a Note or a copy thereof to any interested party in any
administrative or legal proceeding or official inquiry with respect to the matters covered hereby.
Section 3(c)(7) Procedures
In reliance on Section 3(c)(7) under the Investment Company Act, the Issuer has not registered with the
SEC as an investment company pursuant to the Investment Company Act. To rely on Section 3(c)(7), the Issuer
must have a "reasonable belief" that all purchasers of Notes (including initial purchasers and subsequent transferees)
are Qualified Purchasers. The Issuer will establish such a reasonable belief by means of the representations,
warranties and agreements made, or deemed made, by the purchasers of the Notes under "— Investor
Representations," the agreements of the initial purchasers relating to the distribution of the Notes pursuant to Rule
144A referred to under "Plan of Offering" and the covenants and undertakings of the Issuer referred to below
(collectively, the "Section 3(c)(7) Procedures").
Available Information
The Issuer will promptly make available to the holders or owners of Notes upon request the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act in order to permit compliance by such
holders or owners with Rule 144A in connection with the resale of such Notes or interests therein.
Issuer Covenants and Undertakings
Reminder Notices. Whenever the Issuer sends an annual report or other periodic report to the holders of
the Notes, the Issuer will send a "Section 3(c)(7) Reminder Notice" to such holders on substantially the form of an
exhibit to the Indenture. Each Section 3(c)(7) Reminder Notice will state that (i) each holder of Notes or an interest
in Notes must be able to make the representations and warranties described under "— Investor Representations" and
"— Rule 144A Restrictions on Transfer" (the "Section 3(c)(7) Representations"); (ii) the Notes or interests in the
Notes are transferable only to holders that are able to make the Section 3(c)(7) Representations and satisfy the other
38
12001-01597 NY:2045248.4
transfer restrictions applicable to the Notes; (iii) any sale, pledge or other transfer of a Note (or an interest therein)
made in violation of the transfer restrictions contained herein or in the Indenture or made based upon any false or
inaccurate representation made by the purchaser or a transferee to the Issuer will be void ab initio and of no force or
effect and the Issuer has no obligation to recognize any such sale, pledge or other transfer and (iv) if any holder of
Notes or an interest in Notes is determined not to be a Qualified Purchaser at the time of acquisition of such Note,
then the Issuer will have the right (exercisable in its sole discretion) to require such purchaser to sell all of its Notes
(and all interests therein) to a transferee that is a Qualified Purchaser or may sell such interest on behalf of such
holder on such terms as the Issuer may choose. The Issuer will send each annual report (and each Section 3(c)(7)
Reminder Notice) to DTC with a request that DTC Participants pass them along to the beneficial owners of the
Notes.
DTC Actions. The Issuer will direct DTC to take the following steps in connection with the Notes:
(i)
The Issuer will direct DTC to include the "3c7" marker in the DTC 20-character security
descriptor and the 48-character additional descriptor for the Notes in order to indicate that sales
are limited to Qualified Purchasers that are Qualified Institutional Buyers.
(ii)
The Issuer will direct DTC to cause each physical DTC delivery order ticket delivered by DTC to
purchasers to contain the 20-character security descriptor and will direct DTC to cause each DTC
delivery order ticket delivered by DTC to purchasers in electronic form to contain the "3c7"
indicator and the related user manual for participants.
(iii)
On or prior to the Closing Date, the Issuer will instruct DTC to send an "Important Notice" to all
DTC Participants in connection with the offering of the Notes. The "Important Notice" will be in
substantially the form of an exhibit to the Indenture relating thereto and will notify DTC's
Participants that the Notes are Section 3(c)(7) securities.
(iv)
The Issuer will request that DTC include the Notes in DTC's "Reference Directory" of Section
3(c)(7) offerings.
(v)
The Issuer will from time to time request DTC to deliver to the Trustee a list of all DTC
participants holding an interest in the Notes.
Bloomberg Screens, Etc. The Issuer will from time to time request all third-party vendors to include on screens
maintained by such vendors appropriate legends regarding Rule 144A and Section 3(c)(7) restrictions on the Notes.
Without limiting the foregoing, the Issuer will request that Bloomberg, L.P. include the following on each
Bloomberg screen containing information about the Notes as applicable:
(i)
The bottom of the "Security Display" pages describing the Notes should state: "Iss'd Under
144A/3c7."
(ii)
The "Security Display" page should have a flashing red indicator stating "Additional Note Pg."
(iii)
Such indicator for the Notes should link to an "Additional Security Information" page, which
should state that the Notes "are being offered to persons who are both (i) qualified institutional
buyers (as defined in Rule 144A under the Securities Act) and (ii) qualified purchasers (as
defined under Section 3(c)(7) of the Investment Company Act of 1940)."
CUSIP. The Placement Agent will cause the "CUSIP" number obtained for the Notes to have an attached "fixed
field" that contains "3c7" and "144A" indicators.
Legends. The Issuer will not remove the legend set forth under "Purchase and Transfer Restrictions" at any time.
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12001-01597 NY:2045248.4
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus
Directive (each, a "Relevant Member State"), the Placement Agent represents and agrees that with effect from and
including the date on which the Prospectus Directive is implemented in that Relevant Member State (the "Relevant
Implementation Date") it has not made and will not make an offer of Notes to the public in that Relevant Member
State, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Notes
to the public in that Relevant Member State:
(a)
in (or in Germany, where the offer starts within) the period beginning on the date of publication of
a prospectus in relation to those Notes which has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the Prospectus Directive and ending on the date
which is 12 months after the date of such publication;
(b)
at any time to legal entities which are authorized or regulated to operate in the financial markets
or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(c)
at any time to any legal entity which has two or more of (1) an average of at least 250 employees
during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of
more than €50,000,000, as shown in its last annual or consolidated accounts; or
(d)
at any time in any other circumstances which do not require the publication by the Issuer of a
prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an "offer of Notes to the public" in relation to any Notes
in any Relevant Member State means the communication in any form and by any means of sufficient information on
the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the
Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in
that Member State, and "Prospectus Directive " means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
United Kingdom
The Placement Agent represents and agrees that:
(a) in relation to any Notes having a maturity of less than one year, (i) it is a person whose ordinary
activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the
purposes of its business and (ii) it has not offered or sold and will not offer or sell any Notes other than to persons
whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of
investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise
constitute a contravention of section 19 of the Financial Services and Markets Act 2000 (the "FSMA") by the Issuer;
(b) it has only communicated or caused to be communicated and will only communicate or cause to be
communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of
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
(c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it
in relation to such Notes in, from or otherwise involving the United Kingdom.
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CLEARING AND SETTLEMENT
Arrangements have been made with each of DTC, Euroclear and Clearstream to facilitate the initial
issuance of the Global Notes. Transfers within DTC, Euroclear and Clearstream will be in accordance with the
usual rules and operating procedures of the relevant system. Cross-market transfers between investors who hold or
will hold Notes through DTC and investors who hold or will hold Notes through Euroclear and/or Clearstream will
be effected in accordance with the usual rules and operating procedures of the relevant system and in accordance
with the transfer provisions set forth in the Indenture.
Although DTC, Euroclear and Clearstream are expected to follow the procedures described below in order
to facilitate transfers of interests in the Global Notes among participants of DTC, Euroclear and Clearstream, they
are under no obligation to perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by
DTC, Euroclear and Clearstream or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their obligations.
Initial Settlement of Global Notes
Upon issuance of the Global Notes, DTC or its custodian will credit, on its internal system, the respective
principal balances of the individual beneficial interests in such Global Note to the accounts of persons who have
accounts with DTC ("DTC Participants"). Ownership of beneficial interests in a Global Note will be limited to
DTC Participants or persons who hold interests through DTC Participants, including Euroclear and Clearstream.
Ownership of beneficial interests in the Global Notes will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to interests of DTC Participants) and
the records of DTC Participants (with respect to interests of persons who hold through DTC Participants).
Under the terms of the Indenture, so long as DTC or its nominee is the registered Holder of a Global Note,
the Issuer and the Trustee will treat DTC or its nominee, as the case may be, as the sole Holder thereof for all
purposes under the Indenture and the Notes. Payments of principal and interest on such Global Note will be made to
DTC or its nominee, as the case may be, as the registered Holder thereof under the Indenture. The Issuer expects
that DTC or its nominee will credit the account of the relevant DTC Participants in the amounts proportionate to
such DTC Participants' beneficial interests in the Global Note as shown on the records of DTC or its nominee upon
receipt of any payment in respect of the Global Note. It is also expected that payments by DTC Participants to the
beneficial owners of the Notes represented by the Global Note will be governed by standing instructions and
customary practices. Such payments will be the responsibility of the applicable DTC Participants and will not be the
responsibility of DTC, the Issuer or the Trustee.
The laws of some states require that certain persons take physical delivery of securities in definitive,
certificated form. Consequently, this may limit the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of DTC Participants, who in turn act on behalf of their participants
and certain banks, the ability of an owner of a beneficial interest in a Global Note to pledge such interest to persons
or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be
limited by the lack of a definitive certificate for such interest.
Investors may hold their interests in a Global Note directly through Euroclear or Clearstream, if they are
participants in thes e systems, or indirectly through organizations that are participants in these systems. Euroclear
and Clearstream will hold omnibus positions in the Global Notes on behalf of their participants' ("Euroclear
Participants" and "Clearstream Participants," respectively) securities accounts for Euroclear and Clearstream on
the books of their respective depositaries
Investors that hold their interests in a Global Note through DTC will be credited with their holdings against
payment in same-day funds on the initial settlement date. Investors that hold their interests in a Global Note through
Euroclear or Clearstream will be credited with their holdings through the relevant securities custody accounts
against payment in same-day funds on the initial settlement date.
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DTC has advised the Issuer that it will take any action permitted to be taken by a Holder of Notes only at
the direction of one or more DTC Participants to whose account interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to which such DTC Participant or
Participants has or have given direction.
Secondary Market Trading of Interests in Global Notes
Since the purchaser determines the place of delivery, it is important to establish at the time of the trade
where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants
Secondary market sales of book-entry interests in the Notes between DTC Participants will occur in the
ordinary way in accordance with DTC rules and will be settled using the procedures applicable to United States
corporate debt obligations in DTC's SDFS system in same-day funds, if payment is effected in U.S. dollars, or free
of payment, if payment is not effected in U.S. dollars. Where payment is not effected in U.S. dollars, separate
payment arrangements outside DTC are required to be made between the DTC participants.
Trading between Clearstream and/or Euroclear Participants
Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream to
purchasers of book-entry interests in the Notes through Euroclear or Clearstream will be conducted in accordance
with the normal rules and operating procedures of Euroclear and Clearstream and will be settled using the
procedures applicable to conventional eurobonds.
Trading between DTC seller and Euroclear/Clearstream purchaser
When book-entry interests in the Notes are to be transferred from the account of a DTC Participant holding
a beneficial interest in a Rule 144A Global Note certificate to the account of a Euroclear or Clearstream account
holder wishing to purchase a beneficial interest in a Regulation S Global Note certificate (subject to the procedures
provided in the Indenture), the DTC Participant will deliver instructions for delivery to the relevant Euroclear or
Clearstream account holder to DTC by 12 noon, New York City time, on the settlement date. Separate payment
arrangements are required to be made between the DTC Participant and the relevant Euroclear or Clearstream
Participant. On the settlement date, the custodian for DTC will instruct the Registrar to (i) decrease the amount of
the Notes registered in the name of Cede & Co. and evidenced by the relevant Rule 144A Global Note certificate
and (ii) increase the amount of the Notes registered in the name of the nominee of the common depositary for
Euroclear and Clearstream and evidenced by the relevant Regulation S Global Note certificate. Book-entry interests
will be delivered free of payment to Euroclear or Clearstream, as the case may be, for credit to the relevant
accountholder on the first banking day following the settlement date.
Trading between Euroclear/Clearstream seller and DTC purchaser
When book-entry interests in the Notes are to be transferred from the account of a Euroclear or Clearstream
account holder to the account of a DTC Participant wishing to purchase a beneficial interest in the Rule 144A Global
Note certificate (subject to the procedures provided in the Indenture) the Euroclear or Clearstream Participant must
send to Euroclear or Clearstream delivery free of payment instructions by 7:45 p.m., Brussels or Luxembourg time,
one banking day prior to the settlement date. Euroclear or Clearstream, as the case may be, will in turn transmit
appropriate instructions to the common depositary for Euroclear and Clearstream and the Registrar to arrange
delivery to the DTC Participant on the settlement date. Separate payment arrangements are required to be made
between the DTC Participant and the relevant Euroclear or Clearstream account holder, as the case may be. On the
settlement date, the common depositary for Euroclear and Clearstream will (a) transmit appropriate instructions to
the custodian for DTC who will in turn deliver such book-entry interests in the Notes free of payment to the relevant
account of the DTC Participant and (b) instruct the Registrar to (i) decrease the amount of Notes registered in the
name of the nominee of the common depositary for Euroclear and Clearstream and evidenced by the Regulation S
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Global Note certificate and (ii) increase the amount of the Notes registered in the name of Cede & Co. as evidenced
by the Rule 144A Global Note certificate.
Although the foregoing sets out the procedures of Euroclear, Clearstream and DTC in order to facilitate the
transfers of interests in the Notes among participants of DTC, Clearstream and Euroclear, none of Euroclear,
Clearstream or DTC is under any obligation to perform or continue to perform such procedures, and such procedures
may be discontinued at any time. None of the Issuer, the Placement Agent, the Paying Agent, the Portfolio
Manager, the Registrar, the Transfer Agent or any affiliate of any of the above, or any person by whom any of the
above is controlled for the purposes of the Securities Act, will have any responsibility for the performance by DTC,
Euroclear and Clearstream or their respective direct or indirect participants or account holders of their respective
obligations under the rules and procedures governing their operations or for the sufficiency for any purpose of the
arrangements described above.
DESCRIPTION OF THE COLLATERAL ASSETS
General
On the Closing Date, the Issuer will deposit $40,000,000 in the Initial Collateral Assets consisting of the
LaSalle Enhanced Liquidity Management deposit account.
The Issuer will obtain the funds to purchase the Initial Collateral Assets from the $40,000,000 payment to
be made to the Issuer by the initial holder or holders of Notes on the Closing Date. See "Description of the Interest
Rate Swap."
On March 13, 2007 the Issuer, upon receiving instruction from the Swap Counterparty, liquidated the
Initial Collateral Assets and purchased the Replacement Collateral Assets. The "Replacement Collateral Assets"
are composed of $40,000,000 in principal amount of Series 2007-1A-3 Notes issued by NorthStar Education
Finance, Inc., CUSIP 66704JBT4, ISIN US66704JBV98 and Common Code 28979118. The Notes were issued
pursuant to an amended and restated indenture of trust, and a supplement thereto, with U.S. Bank National
Association as indenture trustee and as eligible lender trustee.
Upon receipt of any payments in respect of the principal amount of the Initial Collateral Assets,
Replacement Collateral Assets (other than on the Scheduled Maturity Date of the Notes) or any Cash Settlement
Amounts received from the Swap Counterparty in the form of cash, the Issuer will use such payment to acquire
additional Collateral Assets. Any replacement Collateral Assets will be required to meet the criteria for Eligible
Investments. See "Risk Factors–Creditworthiness of the Obligor on the Collateral Assets" for the discussion therein
of the risk to investors of the continued creditworthiness of the obligor on the Collateral Assets and the limited
information that will be provided with respect to such obligor.
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Description of the Collateral Assets in Respect of the Replacement Collateral Assets
This information concerning the $235,000,000 Series 2007-1A-3 Notes due 2046 and NorthStar Education Finance,
Inc. has been accurately reproduced from the offering memorandum dated March 7, 2007. So far as the Issuer is
aware and is able to ascertain from such information, no facts have been omitted which would render the
information reproduced on this page misleading.
Nominal Amount of Collateral Assets
in relation to the Securities:
$40,000,000
Issuer:
NorthStar Education Finance, Inc.
Issue Date:
March 13, 2007
Maturity Date:
January 29, 2046
Aggregate Principal Amount issued:
$235,000,000
Title:
Series 2007-1A-3 Notes
Form and denomination:
Book-entry. Minimum denominations in $100,000 and integral multiples of
$1,000 in excess thereof.
First Interest Payment Date:
July 30, 2007
Interest Rate:
3-month LIBOR plus 0.06%, until the initial reset date which will occur on
January 28, 2014
Interest Payment Dates:
28th day of January, April, July and October
Day Count Fraction:
Actual/360
CUSIP:
66704BJT4
ISIN:
US66704JBV98
Common Code:
28979118
Issuer's Registered Office:
444 Cedar Street, Suite 550, St. Paul, Minnesota 55101-2133, U.S.A.
Issuer's Jurisdiction of Incorporation:
Delaware, U.S.A.
Nature of Issuer's Business:
A nonprofit corporation which was established to act as a guarantee agency
and disbursement agent for other lenders under the Higher Education Act. It
currently acts as a direct lender of education loans.
Listing:
Irish Stock Exchange
Governing Law:
Minnesota and Wisconsin
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Application of Payments
See "Description of the Interest Rate Swap — Payments under the Interest Rate Swap" for the description
therein of the application of the interest payments received in respect of the Collateral Assets. See, also,
"Description of the Notes — Payments on the Notes — Principal Payments; Redemption; Reduction and Increase of
Principal" for the description therein of the application of the Collateral Assets and the proceeds thereof on a
Mandatory Redemption Date.
DESCRIPTION OF THE CREDIT DEFAULT SWAP
The following summary, as well as other pertinent information included elsewhere in this Offering
Memorandum, describes certain material terms of the Credit Default Swap, but does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the actual provisions of the Credit Default Swap. A copy
of the Credit Default Swap may be obtained by a prospective investor upon request to the Placement Agent.
General
On the Closing Date, the Issuer and the Swap Counterparty will enter into the Credit Default Swap. The
Credit Default Swap will reference a portfolio of Reference Entities consisting of 120 corporate entities identified in
Appendix A hereto (the "Long Portfolio"). Each Reference Entity will have a notional amount (the notional
amount of each Reference Entity being its "Calculation Amount") of the product of its Credit Position and the
Implicit Portfolio Size (where "Credit Position" means, with respect to a Reference Entity, the percentage set out in
the column headed "Credit Position" in Schedule A or Schedule B as applicable, to the Credit Default Swap and
"Implicit Portfolio Size" means $4,000,000,000). On the Closing Date there will be no Reference Entities in the
Short Portfolio but, from time to time, the Portfolio Manager may, on behalf of the Issuer, add names to the Short
Portfolio subject to the restrictions contained in the Portfolio Management Agreement. (See "Description of the
Portfolio Management Agreement").
Upon the occurrence of a Credit Event with respect to any Reference Entity, such Reference Entity (a
"Defaulted Reference Entity") will cease to be a part of the relevant Portfolio on the related Event Determination
Date, except in the case of a Restructuring Credit Event if the Swap Counterparty elects to exercise its right to settle
the Credit Default Swap with respect to only a portion of the Calculation Amount of such Reference Entity (the
"Exercise Amount"), in which event the Reference Entity will continue to be a part of the relevant Portfolio to the
extent of the difference between the Calculation Amount thereof outstanding prior to the related Credit Event and
the Exercise Amount. In no event may the Exercise Amount designated in a Credit Event Notice be less than
$1,000,000.
The Credit Default Swap will set forth a standard set of Credit Events for each Transaction, the criteria that
an obligation must meet in order for it to qualify as an "Obligation" that can be used to determine if a Credit Event
has occurred, and the criteria that an obligation must meet in order to qualify as a Reference Obligation that can be
used in calculating the Cash Settlement Amount. See "— Settlement Upon Credit Event."
As described below under "— Settlement Upon Credit Event," as the seller of credit protection in respect of
the Reference Entities in the Long Portfolio under the Credit Default Swap, the Issuer (and therefore the holders of
the Notes) will be subject to the credit risk of each Reference Entity. See "Risk Factors — Effect of Credit Events"
and "— Limited Information about Reference Entities." The Issuer (and therefore the holders of the Notes) will also
be subject to the credit risk of Bank of America in its capacity as Swap Counterparty because of its obligations
under the Credit Default Swap to make payments to the Issuer, including the Swap Counterparty Payments and any
Swap Termination Payment. See "Risk Factors — Creditworthiness of Bank of America" and "The Swap
Counterparty."
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Payments Under the Credit Default Swap
Payments by the Swap Counterparty
Under the Credit Default Swap, the Swap Counterparty will be required to make Swap Counterparty
Payments directly to the Issuer on the Business Day immediately preceding each Interest Payment Date,
commencing on the Business Day immediately preceding March 20, 2007 and ending on the Scheduled Termination
Date (each, a "Swap Counterparty Payment Date"). The Swap Counterparty Payment will be paid to the Issuer in
consideration for the assumption by the Issuer of a portion of the credit risk of the Reference Entity portfolio.
The amount of each "Swap Counterparty Payment" in respect of a Swap Counterparty Payment Date will
be equal to the product of (i) the Daily Average of the Fixed Rate Payer Calculation Amount, (ii) 0.83%, and (iii)
the Day Count Fraction, together with the sum of the Senior Portfolio Management Fee and the Subordinate
Portfolio Management Fee due in respect of such Swap Counterparty Payment Date.
The "Daily Average" of the Fixed Rate Payer Calculation Amount shall be determined by (i) multiplying
each Fixed Rate Payer Calculation Amount by the number of days in that Fixed Rate Payer Calculation Period
during which such Fixed Rate Payer Calculation Amount is in effect, (ii) determining the sum of such products and
(iii) dividing such sum by the number of days in the Fixed Rate Payer Calculation Period.
The "Fixed Rate Payer Calculation Amount" in respect of any day shall be $40,000,000 less the
Aggregate Cash Settlement Amount paid or payable by the Issuer to the Swap Counterparty plus the Aggregate Cash
Settlement Amount paid or payable by the Swap Counterparty to the Issuer. In respect of any Cash Settlement
Amount for a Defaulted Reference Entity in the Long Portfolio, for the purposes of determining the Fixed Rate
Payer Calculation Amount, the Cash Settlement Amount shall be deemed to have been determined as of the relevant
Event Determination Date.
"Unsettled Reference Entity" means, as of any date, a Reference Entity in respect of which an Event
Determination Date has occurred but the related Calculation Date has not occurred as of such date.
The "Aggregate Cash Settlement Amount" will mean in respect of any day of determination:
(i)
in respect of Cash Settlement Amounts payable by the Issuer to the Swap Counterparty, the sum of
all Cash Settlement Amounts in respect of Reference Entities in the Long Portfolio for which the
Event Determination Date has occurred on or prior to such day, provided for the purposes of
determining the Fixed Rate Payer Calculation Amount, during the period from the Event
Determination Date to the day on which such Cash Settlement Amount is determined, the relevant
Cash Settlement Amount shall be assumed to be the Cash Settlement Amount that would be
payable if the Final Price were zero; and
(ii)
in respect of Cash Settlement Amounts payable by the Swap Counterparty to the Issuer, the sum of
all Cash Settlement Amounts in respect of Reference Entities in the Short Portfolio paid or
payable on or prior such day.
If there is one or more Unsettled Reference Entity in the Long Portfolio on a Swap Counterparty Payment
Date, then the Swap Counterparty Payment due on such Swap Counterparty Payment Date shall be recalculated on
the day that the Credit Loss Amount is determined for such Unsettled Reference Entity and the Swap Counterparty
shall pay the difference, if any, together with any interest (at a rate determined by the Swap Counterparty in
accordance with the Credit Default Swap) accrued on such amount (the "Credit Default Swap Adjustment
Payment") to the Issuer one Business Day prior to the next following Interest Payment Date (such Interest Payment
Date, the "Adjustment Payment Date").
The Issuer will apply each Swap Counterparty Payment, together with each periodic payment received
under the Interest Rate Swap, to pay interest on the Notes and to pay fees to the Portfolio Manager on each Interest
Payment Date. The Issuer will also pay each Credit Default Swap Adjustment Payment to the Portfolio Manager to
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the extent of any unpaid fees, with the remainder to the Noteholders (on a pro rata basis ), on the relevant Adjustment
Payment Date. See "Description of the Notes — Payments on the Notes — Interest Payments."
Under the terms of the Credit Default Swap, the Swap Counterparty will also pay to the Issuer on each
Swap Counterparty Payment Date all amounts due from the Issuer to the Portfolio Manager in respect of the Senior
Management Fee and the Subordinated Management Fee on the corresponding Interest Payment Date. The Issuer
shall apply such amounts to pay the fees of the Portfolio Manager in accordance with the Priority of Payments.
If the Issuer has previously paid Cash Settlement Amounts to the Swap Counterparty and the Net Loss
Amount exceeds the First Loss Amount then the Swap Counterparty may, subject to the satisfaction of certain
conditions, also be required to pay to the Issuer a Cash Settlement Amount upon the occurrence of any Credit Event
with respect to a Reference Entity in the Short Portfolio (see "— Settlement Upon Credit Event"). The obligation of
the Swap Counterparty to pay any Cash Settlement Amount will be dis charged by the Swap Counterparty (i) paying
such Cash Settlement Amount to the Issuer in cash or (ii) delivering Collateral Assets having an outstanding
principal balance equal to the Cash Settlement Amount. If the Swap Counterparty pays the Cash Settlement Amount
in cash, the Issuer shall use such cash to invest in additional Collateral Assets.
On the Scheduled Termination Date (or the Extended Maturity Date, if applicable), the Swap Counterparty
will make a payment to the Issuer in an amount equal to the excess, if any, of the outstanding principal amount of
the Collateral Assets over the market value of the Collateral Assets as of the Scheduled Termination Date, as
determined by the Calculation Agent (the "Swap Counterparty Additional Payment"). The Issuer will apply any
such payment to pay principal on the Notes on the Scheduled Maturity Date.
Payments by the Issuer
In exchange for the Swap Counterparty Payment, the Issuer will, subject to the satisfaction of certain
conditions, be required to pay to the Swap Counterparty a Cash Settlement Amount upon the occurrence of any
Credit Event with respect to a Reference Entity in the Long Portfolio (see "— Settlement Upon Credit Event"). Any
payment owed by the Issuer to the Swap Counterparty will be made by the Issuer from the sources described herein.
On the Scheduled Termination Date, the Issuer will make a payment to the Swap Counterparty in an
amount equal to the excess, if any, of the market value of the Collateral Assets as of such date, as determined by the
Calculation Agent, over the outstanding principal amount of the Collateral Assets after satisfying any payments of
management fees due to the Portfolio Manager.
Settlement Upon Credit Event
All capitalized terms under this heading that are not defined hereunder or elsewhere in this Offering
Memorandum have the meanings ascribed to them in the ISDA Credit Derivatives Definitions.
Credit Events
Under the Credit Default Swap, the Issuer will be required to pay a Cash Settlement Amount, if any, to the
Swap Counterparty and the Swap Counterparty will be required to pay a Cash Settlement Amount, if any, to the
Issuer upon the occurrence of one or more of the following events with respect to a Reference Entity or certain
obligations of such Reference Entity (each, a "Credit Event"): (i) "Bankruptcy" (except in the case of the
Transaction Types identified in Appendix B as "Eastern Europe, Latin America and Middle East Sovereign,"
"Asia Sovereign," "Japan Sovereign," "Russia Sovereign," "Western European Sovereign," "Australia
Sovereign," "New Zealand Sovereign," and "Singapore Sovereign"), (ii) "Failure to Pay" or (iii) "Restructuring"
(except in the case of the Transaction Type identified as "North American High Yield Corporate"). Certain
additional Credit Events applicable to the Transaction Types identified as "Latin America Corporate," "Asia
Sovereign," "European Emerging Market Corporate," "Japan Sovereign," "Russia Sovereign," "Western
European Sovereign," "Australia Sovereign," "New Zealand Sovereign," "Singapore Sovereign," and "Eastern
Europe, Latin America and Middle East Sovereign" are specified in Appendix B. The obligations that may be
used to determine whether a Credit Event has occurred with respect to a Reference Entity will depend upon the
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transaction type category to which such Reference Entity is assigned under the Credit Default Swap. As set forth in
Appendix A, each Reference Entity will be assigned to a particular transaction type category, such as North
American Corporate, European Corporate, Asia Corporate, et al. (each, a "Transaction Type"). See Appendix B
which sets forth the type of obligations (the "Obligations") for each Transaction Type that will be used to determine
if a Credit Event has occurred. Generally, any obligation of a Reference Entity for the payment or repayment of
borrowed money including debt securities (such as bonds or notes) or loans (such as term or funded revolving loans)
will be an "Obligation" for purposes of the Credit Default Swap (except in the case of the Transaction Types
identified in Appendix B as "Latin America Corporate ," "Russia Sovereign," and "Eastern Europe, Latin
America and Middle East Sovereign," for which only bonds or notes will be used to determine if a Credit Event
has occurred). If "All Guarantees" is indicated to be applicable to a particular Reference Entity in Appendix B, the
obligations of such Reference Entity will include any guarantee of payment by it of an obligation for which another
party is the obligor, provided that such obligation is not subordinated to other obligations of the obligor.
"Bankruptcy" will mean, with respect to a Reference Entity (other than a Reference Entity of the
Transaction Type "Eastern Europe, Latin America and Middle East Sovereign," "Asia Sovereign," "Japan
Sovereign," "Russia Sovereign," "Western European Sovereign," "Australia Sovereign," "New Zealand
Sovereign," or "Singapore Sovereign," with respect to which the Bankruptcy Credit Event will not apply) the
occurrence of certain bankruptcy or insolvency events, as such term is defined in the Glossary.
"Failure to Pay" will mean the failure by a Reference Entity to make, when and where due, any payments
in an aggregate amount of not less than $1,000,000 under one or more Obligations, in accordance with the terms of
such Obligations at the time of such failure.
"Restructuring" will mean that, with respect to one or more Obligations, and in relation to an aggregate
amount of not less than $10,000,000 (or its equivalent in the currency in which the relevant Obligation is
denominated as of the date of the occurrence of the related Credit Event), any one or more of the following events
occurs in a form that binds all holders of such Obligation, is agreed between the Reference Entity or a Governmental
Authority or a sufficient number of holders of such Obligation to bind all holders of the Obligation or is announced
(or otherwise decreed) by a Reference Entity or a Governmental Authority in a form that binds all holders of such
Obligation, and such event is not expressly provided for under the terms of such Obligation in effect as of the later
of the Trade Date and the date as of which such Obligation is issued or incurred:
(i)
a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals;
(ii)
a reduction in the amount of principal or premium payable at maturity or at scheduled redemption
dates;
(iii)
a postponement or other deferral of a date or dates for either (a) the payment or accrual of interest
or (b) the payment of principal or premium;
(iv)
a change in the ranking in priority of payment of any Obligation, causing the subordination of
such Obligation to any other Obligation; or
(v)
any change in the currency or composition of any payment of interest or principal to any currency
which is not a Permitted Currency.
Except in the case of the Transaction Types identified in Appendix B as "Latin America Corporate,"
"Eastern Europe, Latin America and Middle East Sovereign," " European Emerging Market Corporate" (with
respect to Bonds only), "Japan Corporate," "Japan Sovereign," and "Russia Sovereign," the occurrence of,
agreement to or announcement of any event described above will not constitute a Restructuring Credit Event unless
the Obligation to which such event relates (i) is held by more than three holders that are not Affiliates of each other
at the time of the event and (ii) a percentage of the holders thereof (determined pursuant to the terms of the
Obligation) at least equal to sixty-six and two-thirds is required to consent to the event which constitutes the
Restructuring Credit Event (provided that any obligation that is a bond will be deemed to satisfy the requirement in
(ii)).
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Notwithstanding the foregoing, none of the following will constitute a Restructuring Credit Event:
(a)
the payment in euros of interest or principal in relation to an Obligation denominated in a currency
of a Member State of the European Union that adopts or has adopted the single currency in
accordance with the Treaty establishing the European Community, as amended by the Treaty on
European Union;
(b)
the occurrence of, agreement to or announcement of any of the events described in (i) through (v)
above due to an administrative adjustment, accounting adjustment or tax adjustment or other
technical adjustment occurring in the ordinary course of business; and
(c)
the occurrence of, agreement to or announcement of any of the events described in (i) through (v)
above in circumstances where such event does not directly or indirectly result from a deterioration
in the creditworthiness or financial condition of the Reference Entity.
If the occurrence of an event would otherwise constitute a Credit Event, such event will constitute a Credit
Event whether or not such event arises directly or indirectly from (i) any lack or alleged lack of authority or capacity
of a Reference Entity to enter into any obligation, (ii) any actual or alleged unenforceability, illegality, impossibility
or invalidity with respect to any obligation, however described, (iii) 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 (iv) 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.
Conditions to Settlement
If a Credit Event (or, in the case of the Transaction Types "Latin America Corporate," " Eastern Europe,
Latin America and Middle East Sovereign," " European Emerging Market Corporate," and "Russia
Sovereign," a Potential Failure to Pay, or in the case of the Transaction Types "Latin America Corporate,"
"Eastern Europe, Latin America and Middle East Sovereign," " European Emerging Market Corporate,"
"Russia Sovereign," "Asia Sovereign," "Japan Sovereign," "Western European Sovereign," "Australia
Sovereign," "New Zealand Sovereign," and "Singapore Sovereign," a Potential Repudiation/Moratorium) occurs
with respect to a Reference Entity on or prior to the Scheduled Termination Date, the Swap Counterparty (or the
Portfolio Manager on behalf of the Issuer in the case of a Credit Event in the Short Portfolio) will be required to
deliver to the Issuer (or the Swap Counterparty in the case of a Credit Event in the Short Portfolio) (i) a "Credit
Event Notice" containing a description in reasonable detail of the facts relevant to the determination that a Credit
Event has occurred (or, in the case of a Potential Repudiation/Moratorium, a "Repudiation/Moratorium Extension
Notice" containing a description in reasonable detail of the facts relevant to the determination that a Potential
Repudiation/Moratorium has occurred), and (ii) a "Notice of Publicly Available Information," in which information
from at least two public sources confirms the occurrence of the related Credit Event. If such notices are effectively
delivered, the first date on which such notices are both delivered will be the "Event Determination Date". The
delivery of the Credit Event Notice and the Notice of Publicly Available Information will be conditions to the
obligation to pay a Cash Settlement Amount (the "Conditions to Settlement"). To satisfy the Conditions to
Settlement, the delivery of such notices for any Credit Event will be required to be made during the period from, and
including, the Closing Date to, and including, 4:00 p.m. New York City time on (a) the Scheduled Termination
Date, (b) the Grace Period Extension Date if (i) Grace Period Extension is specified as applicable in Appendix B for
the relevant Transaction Type, (ii) the Credit Event that is the subject of the Credit Event Notice is a Failure to Pay
that occurs after the Scheduled Termination Date and (iii) the Potential Failure to Pay with respect to Failure to Pay
occurs on or prior to the Scheduled Termination Date, or (c) the Repudiation/Moratorium Evaluation Date if (i) the
Credit Event that is the subject of the Credit Event Notice is a Repudiation/Moratorium that occurs after the
Scheduled Termination Date, (ii) the Potential Repudiation/Moratorium with respect to such
Repudiation/Moratorium occurs on or prior to the Scheduled Termination Date and (iii) the Repudiation/Moratorium
Extension Condition is satisfied (the "Notice Delivery Period" ). If a Credit Event is caused by a Restructuring,
multiple Credit Event Notices may be used.
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Designation of Reference Obligations
If a Credit Event occurs and the Conditions to Settlement are satisfied within the Notice Delivery Period,
the Swap Counterparty will select the particular debt obligation or obligations of the related Reference Entity, which
may be or include the Benchmark Obligation specified in Appendix A hereto, if any, with respect to such Reference
Entity (each, a "Reference Obligation") to be used in calculating the Cash Settlement Amount for such Credit
Event. Each Reference Obligation (whether a direct obligation or a "Qualifying Affiliate Guarantee" (or, in the case
of a Reference Entity as to which the monoline provisions apply, a "Qualifying Policy") or, if "All Guarantees" is
specified for a Reference Entity, any "Qualifying Guarantee"), other than a Benchmark Obligation, if any, will be
required to (a) satisfy the requirements for a "Deliverable Obligation" of the Reference Entity under Section 2.15(a)
of the ISDA Credit Derivatives Definitions, (b) be included within the "Obligation Category" "Bond" or, except in
the case of the Transaction Types identified as "Latin America Corporate," " Eastern Europe, Latin America
and Middle East Sovereign," and "Russia Sovereign," "Loan," and (c) have the following characteristics specified
by Transaction Type in Appendix B:
(i)
with respect to a Bond, be Transferable and Not Bearer;
(ii)
with respect to a Loan, be (except in the case of the Transaction Types identified as "Latin
America Cor porate", " Eastern Europe, Latin America and Middle East Sovereign" and
"Russia Sovereign") an Assignable Loan or (except in the case of the Transaction Types
identified as "Asia Corporate," "Asia Sovereign," " Eastern Europe, Latin America and
Middle East Sovereign", "Latin America Corporate", "Russia Sovereign", "Singapore
Corporate," and "Singapore Sovereign") a Consent Required Loan; and
(iii)
with respect to a Bond or Loan,
(a)
be payable in a Standard Specified Currency (and, in the case of the Transaction Types
identified as "Singapore Corporate," "Australia and New Zealand Corporate,"
"Australia Sovereign," "New Zealand Sovereign," and "Singapore Sovereign," a
Domestic Currency);
(b)
Not Subordinated (to the Benchmark Obligation, if any) (except in the case of the
Transaction Types identified as "Japan Sovereign" and "Western European
Sovereign");
(c)
Not Contingent;
(d)
Maximum Maturity:
(1)
subject to paragraphs (2) and (3) below (and except in the case of the
Transaction Types identified as "Latin America Corporate ," " Eastern
Europe, Latin America and Middle East Sovereign," " European Emerging
Market Corporate," and "Russia Sovereign"), have a remaining maturity from
the relevant Valuation Date of no greater than 30 years;
(2)
if Restructuring is the only Credit Event specified in a Credit Event Notice and
the Transaction Type specified for the Reference Entity in Appendix A hereto is
"North American Corporate," "Australia and New Zealand Corporate,"
"North America Monoline," "Australia Sovereign," or "New Zealand
Sovereign," the Reference Obligation must have a final maturity date no later
than the earlier of (A) thirty months following the date on which a Restructuring
is legally effective and (B) the latest final maturity date of the Obligation in
respect of which a Restructuring that is the subject of a Credit Event has
occurred (a "Restructured Obligation"); provided, however, under no
circumstances may the maturity date of the Reference Obligation be earlier than
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the Scheduled Termination Date or later than thirty months following the
Scheduled Termination Date; and
(3)
if Restructuring is the only Credit Event specified in a Credit Event Notice and
the Transaction Type specified for the Reference Entity in Appendix A hereto is
"European Corporate," the maturity date of the Reference Obligation may not
occur after the later of (A) the Scheduled Termination Date and (B) sixty
months following the date on which the restructuring of the Restructured
Obligation is legally effective;
(e)
in the case of the Transaction Types identified as "Asia Corporate ," "Asia Sovereign,"
"Singapore Corporate," and "Singapore Sovereign," Not Sovereign Lender; and
(f)
in the case of the Transaction Types identified as "Latin America Corporate," "Asia
Corporate," "Asia Sovereign," " Eastern Europe, Latin America and Middle East
Sovereign," "Russia Sovereign," and "European Emerging Market Corporate," Not
Domestic Issuance and Not Domestic Law.
The Swap Counterparty will be required to give written notice (the "Reference Obligation Identification
Notice") to the Issuer of the Reference Obligation or Obligations that it selects for the calculation of the Cash
Settlement Amount on or prior to the Valuation Date. In connection with any Credit Event, the Swap Counterparty
may designate one or more Reference Obligations for determining the Cash Settlement Amount, so long as the sum
of the notional amounts of such Reference Obligations does not exceed the Calculation Amount of the related
Reference Entity. However, in the case of a Restructuring Credit Event, the Swap Counterparty may designate a
Reference Obligation or Reference Obligations having an aggregate notional amount less than the Calculation
Amo unt for such Reference Entity. In such circumstances, the Swap Counterparty may deliver multiple Credit
Event Notices, resulting in the calculation of separate Cash Settlement Amounts linked to the Reference Obligations
(and their respective notional amounts) designated in connection with each such Credit Event Notice.
The Swap Counterparty may identify one or more Obligations of a Reference Entity (which need not
satisfy the Obligation characteristics set forth above) to replace a Benchmark Obligation of such Reference Entity in
the event that (i) the Benchmark Obligation is redeemed in whole or (ii) in the opinion of the Swap Counterparty (a)
the aggregate amounts due under the Benchmark Obligation have been materially reduced by redemption or
otherwise (other than due to any scheduled redemption, amortization or prepayment), (b) the Benchmark Obligation
is an Underlying Obligation with a Qualifying Guarantee of a Reference Entity and, other than due to the existence
or occurrence of a Credit Event, the Qualifying Guarantee is no longer a valid and binding obligation of such
Reference Entity enforceable in accordance with its terms, or (c) for any other reason, other than due to the existence
or occurrence of a Credit Event, the Benchmark Obligation is no longer an obligation of the Reference Entity.
Determination and Payment of Cash Settlement Amount
If a Credit Event occurs with respect to a Reference Entity in the Long Portfolio, the Issuer will be required
to pay to the Swap Counterparty a Cash Settlement Amount in certain circumstances. If a Credit Event occurs with
respect to a Reference Entity in the Short Portfolio and the Issuer has previously been required to pay Cash
Settlement Amounts to the Swap Counterparty, the Swap Counterparty will be required to pay to the Issuer a Cash
Settlement Amount in certain circumstances.
With respect to any Cash Settlement Date, the "Cash Settlement Amount" will be:
(a)
with respect to any Defaulted Reference Entity in the Long Portfolio, an amount equal to the least
of (a) the amount by which the Net Loss Amount after giving effect to the relevant Credit Event
exceeds the First Loss Amount; (b) the Credit Loss Amount for the relevant Defaulted Reference
Entity; and (c) the amount by which the Second Loss Amount exceeds the Net Loss Amount prior
to giving effect to the relevant Credit Event subject to a minimum Cash Settlement Amount of
zero; and
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(b)
with respect to any Defaulted Reference Entity in the Short Portfolio, the lesser of (a) the amount
by which the Net Loss Amount prior to giving effect to the relevant Credit Event exceeds the First
Loss Amount; (b) the Credit Loss Amount for the relevant Defaulted Reference Entity and (c) the
amount by which the Second Loss Amount exceeds the Net Loss Amount after giving effect to the
relevant Credit Event.
If a Defaulted Reference Entity is in both the Long and the Short Portfolio, the Credit Loss Amounts shall
be determined on the same basis and any Cash Settlement Amount shall be calculated on a net basis .
The "First Loss Amount" will initially be $213,200,000. The First Loss Amount will be (a) increased by
the aggregate Positive Modification Adjustment Amount and (b) reduced by the absolute value of the aggregate
Negative Modification Adjustment Amount, subject to a minimum of zero. Accordingly, the Issuer will not be
required to pay any Cash Settlement Amount to the Swap Counterparty until the Net Loss Amount exceeds the First
Loss Amount.
The Outstanding Principal Amount of the Notes will be (i) reduced by each Cash Settlement Amount paid
to the Swap Counterparty by the Issuer as of the Event Determination Date of the relevant Defaulted Reference
Entity (provided that the Cash Settlement Amount for an Unsettled Reference Entity shall be deemed to be the Cash
Settlement Amount that would be payable to the Swap Counterparty assuming a Final Price of zero) and (ii)
increased by each Cash Settlement Amount paid by the Swap Counterparty to the Issuer as of the Cash Settlement
Date (in each case without any payment being made to the Noteholders).
The "Credit Loss Amount" for each Reference Entity will be the greater of (i) zero and (ii) the product of
(a) the Calculation Amount and (b) 100% minus the Weighted Final Price for such Reference Entity.
The "Net Loss Amount" on any day is the sum of all Credit Loss Amounts determined in respect of
Reference Entities in the Long Portfolio less the sum of all Credit Loss Amounts determined in respect of Reference
Entities in the Short Portfolio.
The "Weighted Final Price" for each Reference Entity will be, either (i) a fraction, expressed as a
percentage, having (a) a numerator equal to the sum for each Reference Obligation in the Reference Obligations
Portfolio of the product of (x) the Quotation Amount (or, if applicable, the USD equivalent thereof converted by the
Calculation Agent using the Relevant Conversion Rate) and (y) the Final Price for such Reference Obligation and
(b) a denominator equal to the sum of the Quotation Amounts for each Reference Obligation in the Reference
Obligations Portfolio (or, if applicable, the USD equivalent thereof converted by the Calculation Agent using the
Relevant Conversion Rate), or (ii) the Protocol Price.
If a Protocol Price is determined prior to the later of the relevant Valuation Date and, if applicable the final
Fallback Valuation Date and unless the Swap Counterparty and the Portfolio Manager have mutually agreed that
they will not use such Protocol Price (on the basis that the Portfolio Manager reasonably believes that the Final Price
would be higher if such Protocol Price were not used), then the Weighted Final Price shall be deemed to be the
Protocol Price and the Valuation Date and the date on which the Weighted Final Price is determined for the relevant
Reference Entity shall be deemed to be the date upon which the Protocol Price is formally published by the relevant
Sponsor.
"Protocol Price" means the price, determined in connection with a Protocol, for certain Obligations of the
Reference Entity with respect to which a Credit Event has occurred.
"Protocol" means a protocol or other market standard agreement administered or sponsored by the Sponsor
with the object of determining a Protocol Price.
"Sponsor" means the International Swaps and Derivatives Association, Inc. or another internationally
recognized trade association or organization selected by the Buyer.
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Procedure for Determining Final Price
In connection with determining the Final Price for a Reference Obligation, the Calculation Agent will
attempt to obtain on a day that is not earlier than 45, nor later than 120, Business Days following the related Event
Determination Date (the "Valuation Date") firm quotations from at least five Dealers for an amount equal to the
Quotation Amount (each such quotation, a "Full Quotation"), provided that the Portfolio Manager, on behalf of the
Issuer, shall be permitted to select one dealer from the Dealers specified in the Credit Default Swap. The
"Quotation Amount" will be, with respect to each Reference Obligation specified in the Reference Obligation
Identification Notice, the amount designated by the Swap Counterparty (or the Portfolio Manager on behalf of the
Issuer in the case of a Credit Event in the Short Portfolio), in its sole and absolute discretion; provided that the
aggregate of such amounts may not exceed the lesser of (i) the Floating Rate Payer Calculation Amount for the
related Reference Entity and (ii) $20,000,000, and may in no event be less than $1,000,000. If the Calculation
Agent is able to obtain at least two Full Quotations on the Valuation Date for the Quotation Amount, the Final Price
for such Reference Obligation will be the highest Full Quotation obtained.
If the Calculation Agent is unable to obtain at least two Full Quotations on the Valuation Date, the
Calculation Agent will attempt to obtain at least two Full Quotations on three successive dates (each, a "Fallback
Valuation Date"). Each Fallback Valuation Date will occur five Business Days after the immediately preceding
Fallback Valuation Date, with the initial Fallback Valuation Date occurring five Business Days after the Valuation
Date. If the Calculation Agent is able to obtain at least two Full Quotations on any Fallback Valuation Date, the
Final Price will be the highest such Full Quotation and no further Fallback Valuation Dates will occur. If the
Calculation Agent is unable to obtain at least two Full Quotations on the third Fallback Valuation Date, but is able to
obtain at least one Full Quotation or a Weighted Average Quotation, the Final Price will be the highest of such
quotations. If no Full Quotation and no Weighted Average Quotation have been obtained on the third Fallback
Valuation Date, the Final Price will be deemed to be zero.
If the Valuation Date or any Fallback Valuation Date is not a business day in the principal trading market
(as determined by the Calculation Agent) for the relevant Reference Obligation(s) ("PTM Business Day"), such
Valuation Date or Fallback Valuation Date will be the next following Business Day which is a PTM Business Day.
If the Calculation Agent determines that (i) a Reference Entity has proposed an exchange of substantially
all of the obligations of such Reference Entity (ignoring for this purpose all indebtedness owed to Affiliates and all
bilateral indebtedness) that the Swap Counterparty could have designated as a Reference Obligation ("Qualifying
Reference Obligation") into, or any combination of, cash, securities and/or other assets and such cash, securities
and/or other assets will not constitute Qualifying Reference Obligations, and (ii) the exchange has been agreed in a
form that binds all holders of the relevant Qualifying Reference Obligations or has been formally sanctioned by any
Governmental Authority, then the Calculation Agent may select a Business Day (that will also be a PTM Business
Day) falling after the Event Determination Date but before the Valuation Date that would otherwis e apply to such
Transaction and this selected Business Day will be the Valuation Date with respect to the Reference Obligations of
such Reference Entity.
In connection with obtaining quotations, "Dealers" will mean dealers or their affiliates specified in the
Credit Default Swap; provided that the Calculation Agent may select any other dealers in obligations of the type of
the Reference Obligations for which quotations are being obtained, provided that, unless otherwise agreed between
the Calculation Agent and the Portfolio Manager, on behalf of the Issuer, the Calculation Agent shall not obtain
quotations from a Dealer affiliated with the Swap Counterparty.
Termination of Credit Default Swap
Termination Date
The "Scheduled Termination Date" for the Credit Default Swap will be the earlier to occur of (i) the later
of September 20, 2014 and the last possible Cash Settlement Date under the Transactions and (ii) the Swap Second
Loss Date. The Termination Date with respect to each Transaction (the "Termination Date") will be either (1) in
respect of any Transaction, the Cash Settlement Date; (2) in respect of any Transaction, the date as determined in
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accordance with Section 1.11 (Grace Period Extension Date) or Section 4.6(b) (Repudiation/Moratorium Evaluation
Date) of the ISDA Credit Derivatives Definitions; or (3) in respect of each Transaction, if more than one of the dates
in (1) and (2) above is relevant, the first such date to occur will apply, and to the extent that none of the dates in (1)
and (2) above is relevant, the Termination Date will be the Scheduled Termination Date. For the avoidance of
doubt, any of the dates in (1) and (2) above can occur after the Scheduled Maturity Date. The "Swap Second Loss
Date" will be the first day on which the Net Loss Amount equals or exceeds the sum of (i) the Second Loss Amount
and (ii) the aggregate of the Calculation Amounts in respect of all Reference Entities in the Short Portfolio.
Early Termination of Credit Default Swap
Each of the Issuer and the Swap Counterparty will have the right to terminate the Credit Default Swap upon
the occurrence of certain events. Upon any such termination of the Credit Default Swap, the Issuer will sell the
Collateral Assets and distribute the proceeds thereof (or, in certain limited circumstances, deliver the Collateral
Assets in-kind) in accordance with the priority provisions described under "Description of the Notes — Payments on
the Notes — Priority of Payments."
The Issuer may exercise such termination right upon the occurrence of any of the following events (each
event, together with each of the events described in the next succeeding paragraph, an "Early Termination
Event"): (i) a payment default by the Swap Counterparty lasting a period of at least three Business Days; (ii) breach
of agreement by the Swap Counterparty which is not remedied for a period of 30 days; (iii) certain representations
of the Swap Counterparty prove to be materially incorrect; (iv) merger without assumption by the surviving entity of
the obligations of the Swap Counterparty under the Credit Default Swap; (v) bankruptcy-related events applicable to
the Swap Counterparty; (vi) illegality of the Credit Default Swap; (v ii) tax event, (v iii) tax event upon merger; or
(ix) the failure of the Swap Counterparty to comply with or perform its obligations under the Credit Support Annex,
provided that in respect of subparagraphs (ii), (iii) and (ix), the Issuer shall not exercise such termination right if
directed not to do so by the Majority Noteholders within 5 Business Days of the Issuer giving notice of such failure
to the Noteholders (see "The Swap Counterparty — Consequences of Rating Downgrade").
The Credit Default Swap will be subject to early termination by the Swap Counterparty upon any of the
following events occurring with respect to the Issuer: (i) a payment default by the Issuer lasting a period of at least
three Business Days; (ii) merger without assumption by the surviving entity of the obligations of the Issuer under the
Credit Default Swap; (iii) bankruptcy-related events applicable to the Issuer; (iv) illegality of the Credit Default
Swap; (v) tax event; (vi) the Issuer is required to register under the Investment Company Act, (vii) amendments of
the Indenture that would materially adversely affect the rights or obligations of the Swap Counterparty under the
Credit Default Swap or benefits under the Indenture or modify in any materially adverse respect the obligations of,
or materially impair the ability of, the Issuer to fully perform its obligations under the Credit Default Swap, or (viii)
the security interest in the assets of the Issuer granted to the Swap Counterparty fails to constitute a first priority,
perfected security interest. In addition, the Credit Default Swap will be subject to early termination by the Swap
Counterparty upon the occurrence of any default in payment by the obligor under any Collateral Asset, bankruptcy
or any other event of default under such Collateral Asset resulting in acceleration and nonpayment of such Collateral
Asset.
If any payment made by the Swap Counterparty is subject to any deduction or withholding for or on
account of an Indemnifiable Tax, the Swap Counterparty will be obligated to gross-up such payment for any such
deduction or withholding. "Indemnifiable Taxes" are taxes other than those levied on the basis of residence,
citizenship or other connection with the taxing jurisdiction and thus include U.S. federal withholding taxes currently
applicable to payments to non-resident foreign persons. The Issuer will not be required to gross-up any payment
required to be made to the Swap Counterparty; however, the Swap Counterparty will have the right to establish an
Early Termination Date if there is a substantial likelihood that any amount will be deducted or withheld from a
payment to it.
Upon an early termination of the Credit Default Swap, the Issuer or the Swap Counterparty may be
required to make a Swap Termination Payment to the other party. Any such Swap Termination Payment will be due
on the Early Termination Date. If the Issuer is required to make a Swap Termination Payment to the Swap
Counterparty and the Swap Counterparty is not the Defaulting Party or the Sole Affected Party, the Issuer will make
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such payment to the Swap Counterparty prior to making any distributions to the holders of the Notes. Any Swap
Termination Payment made to the Swap Counterparty will result in the holders of the Notes not recovering the full
amount of their investment in the Notes. See "Risk Factors — Early Termination of the Swap Agreements."
The Swap Termination Payment payable in connection with the termination of the Credit Default Swap will
be calculated on the basis of "Loss," as such term is defined in the Credit Default Swap, provided that the Swap
Counterparty shall determine "Loss" irrespective of whether it is the Defaulting Party or the Sole Affected Party.
"Loss" generally means the total losses and costs (or gain, in which case "Loss" will be expressed as a negative
number) of the party that is the Non-defaulting Party in connection with the termination of the Credit Default Swap,
including any loss of bargain, cost of funding or, at the election of such party, loss or cost incurred as a result of its
terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from
any of them). If such amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party. If it
is a negative number, the Non-defaulting party will pay the absolute value of that amount to the Defaulting Party
Under the Indenture, the Issuer will be obligated to take action to designate an Early Termination Date
whenever it has actual knowledge of the existence of an Event of Default (as defined in the ISDA Master
Agreement) on the part of the Swap Counterparty under Section 5(a)(i) Failure to Pay or Deliver, Section 5(a)(vii)
Bankruptcy, or Section 5(a)(viii) Merger Without Assumption of the ISDA Master Agreement. In all other
circumstances, the Issuer will take no action to designate an Early Termination Date unless so directed by the
Majority Noteholders in writing.
Miscellaneous Provisions
The payment obligations of the Swap Counterparty under the Credit Default Swap and the Interest Rate
Swap Counterparty under the Interest Rate Swap will be direct, general unsecured contractual obligations of the
Swap Counterparty and the Interest Rate Swap Counterparty, as applicable. The payment obligations of the Issuer
under the Swap Agreements will be secured by a grant by the Issuer to the Swap Counterparty and the Interest Rate
Swap Counterparty of a first priority security interest in the Collateral. Neither the Swap Counterparty nor the
Interest Rate Swap Counterparty will have any claim against any holder of the Notes in the event that the Isser
Assets are not sufficient to pay any amounts owed under the Credit Default Swap or the Interest Rate Swap
respectively.
Bank of America, N.A., as the Swap Counterparty and Interest Rate Swap Counterparty, will agree in the
schedule to the ISDA Master Agreement that it will not petition for the bankruptcy or insolvency of the Issuer at any
time prior to one year and one day following the liquidation of the Issuer.
Bank of America will also agree in the schedule to the ISDA Master Agreement to take certain actions in
the event that its rating is reduced below certain specified levels (see "The Swap Counterparty — Consequences of a
Rating Downgrade").
Whenever the Calculation Agent is required to act or to exercise judgment or discretion, it will do so in
good faith and in a commercially reasonable manner. The calculations and determinations of the Calculation Agent
will be final and binding on all parties in the absence of manifest error.
The Credit Default Swap and the Interest Rate Swap will be governed by, and construed in accordance
with, the laws of the State of New York without reference to its conflict of laws provisions.
DESCRIPTION OF THE INTEREST RATE SWAP
The following summary, as well as other pertinent information included elsewhere in this Offering
Memorandum, describes certain material terms of the Interest Rate Swap, but does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the actual provisions of the Interest Rate Swap. A copy of
the Interest Rate Swap may be obtained by a prospective investor upon request to the Placement Agent.
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General
The Issuer and the Interest Rate Swap Counterparty will enter into the Interest Rate Swap on the Closing
Date.
The Interest Rate Swap will be documented under the same ISDA Master Agreement and schedule as the
Credit Default Swap, but will be entered into under a separate confirmation. See "Description of the Credit Default
Swap — Miscellaneous Provisions" for the description therein of the nature of the payment obligations of the
Interest Rate Swap Counterparty and of certain provisions in the schedule that apply to the Interest Rate Swap, as
well as the Credit Default Swap.
Payments Under the Interest Rate Swap
Under the terms of the Interest Rate Swap, the Issuer will be obligated to pay to the Interest Rate Swap
Counterparty on each interest payment date for the Collateral Assets the interest received on the Collateral Assets.
In exchange for such payment, the Swap Counterparty will be obligated to pay to the Issuer on the Business
Day preceding each Interest Payment Date an amount equal to the product of (i) the Fixed Rate Payer Calculation
Amount (as defined under the Credit Default Swap) for the relevant calculation period, (ii) LIBOR (or, in the case of
the first calculation period, 5.31875%) and (iii) the Day Count Fraction (the "Swap Floating Payment").
If there is one or more Unsettled Reference Entity in the Long Portfolio on the Business Day preceding an
Interest Payment Date, then the Swap Floating Payment due on such date shall be recalculated on the day that the
Credit Loss Amount is determined for such Unsettled Reference Entity and, the Swap Counterparty shall pay the
difference, if any, together with any interest (at a rate determined by the Swap Counterparty in accordance with the
Interest Rate Swap) accrued on such amount (the "Interest Rate Swap Adjustment Payment") to the Issuer one
Business Day prior to the next following Interest Payment Date (such Interest Payment Date, the " Adjustment
Payment Date").
The Issuer will use the Swap Floating Payments received under the Interest Rate Swap, together with the
Swap Counterparty Payments made under the Credit Default Swap, to pay interest on the Notes on each Interest
Payment Date. The Issuer will also pay each Interest Rate Swap Adjustment Payment to the Noteholders (on a pro
rata basis ) on the relevant Adjustment Payment Date. See "Description of the Notes — Payments on the Notes."
On any date of a subsequent purchase of Collateral Assets, the Interest Rate Swap Counterparty will, as
necessary, make a payment to the Issuer under the Interest Rate Swap of an amount equal to the market premium of
and interest accrued on the relevant Collateral Assets , if any, since the last interest payment date therefor.
The Interest Rate Swap will terminate when the Credit Default Swap terminates. See "Description of the
Credit Default Swap — Termination Date."
Early Termination of Interest Rate Swap
The Interest Rate Swap will be subject to early termination upon the occurrence of the same events that
permit the Issuer or Swap Counterparty to terminate the Credit Default Swap. See "Description of the Credit
Default Swap — Early Termination of Credit Default Swap" for the description therein of the events that may give
rise to an early termination of the Interest Rate Swap and the consequences resulting therefrom.
Upon an early termination of the Interest Rate Swap, the Issuer or the Interest Rate Swap Counterparty may
be required to make a Swap Termination Payment to the other party. Any such Swap Termination Payment will be
due on the Early Termination Date. If the Issuer is required to make a Swap Termination Payment to the Interest
Rate Swap Counterparty and the Interest Rate Swap Counterparty is not the Defaulting Party or the Sole Affected
Party, the Issuer will make such payment to the Interest Rate Swap Counterparty prior to making any distributions to
the holders of the Notes. Any Swap Termination Payment made to the Interest Rate Swap Counterparty will result
in the holders of the Notes not recovering the full amount of their investment in the Notes. See "Risk Factors —
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Early Termination of the Swap Agreements." The Swap Termination Payment payable in connection with
termination of the Interest Rate Swap will be calculated on the basis of "Loss," as described above in "Description of
the Credit Default Swap — Early Termination of Credit Default Swap."
THE SWAP COUNTERPARTY, THE INTEREST RATE SWAP COUNTERPARTY AND THE
CALCULATION AGENT
The information appearing in this Section has been prepared by Bank of America, N.A. and has not been
independently verified by the Issuer, the Trustee, the Portfolio Manager or the Placement Agent. Accordingly,
notwithstanding anything to the contrary herein, the Issuer, the Trustee, Portfolio Manager and the Placement
Agent do not assume any responsibility for the accuracy, completeness or applicability of such information.
Bank of America, N.A. (the "Bank") is a national banking association organized under the laws of the
United States, with its principal executive offices located in Charlotte, North Carolina. The Bank is a wholly-owned
indirect subsidiary of Bank of America Corporation (the "Corporation") and is engaged in a general consumer
banking, commercial banking and trust business, offering a wide range of commercial, corporate, international,
financial market, retail and fiduciary banking services. As of September 30, 2006, the Bank had consolidated assets
of $1,186 billion, consolidated deposits of $721 billion and stockholder’s equity of $110 billion based on regulatory
accounting principles.
The Corporation is a bank holding company and a financial holding company, with its principal executive
offices located in Charlotte, North Carolina. Additional information regarding the Corporation is set forth in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2005, together with any subsequent documents
it filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Corporation has securities listed on the New York Stock Exchange.
Recent Developments:
Corporation.
On January 1, 2006, the Corporation completed its merger with MBNA
Additional information regarding the foregoing is available from the filings made by the Corporation with
the SEC, which filings can be inspected and copied at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549, United States, at prescribed rates. In addition, the SEC maintains a website at
http://www.sec.gov, which contains reports, proxy statements and other information regarding registrants that file
such information electronically with the SEC.
The information concerning the Corporation, the Bank and the foregoing mergers contained herein is
furnis hed solely to provide limited introductory information and does not purport to be comprehensive. Such
information is qualified in its entirety by the detailed information appearing in the documents and financial
statements referenced herein.
Moody’s Investors Service, Inc. (" Moody’s") currently rates the Bank’s long-term debt as "Aa1" and shortterm debt as "P-1." The outlook is Stable. Standard & Poor’s rates the Bank’s long-term debt as "AA" and its shortterm debt as "A-1+." Ratings are on CreditWatch Positive. Fitch Ratings, Inc. ("Fitch") rates long-term debt of the
Bank as "AA-" and short-term debt as "F1+." The outlook is Positive. Further information with respect to such
ratings may be obtained from Moody’s, Standard & Poor’s and Fitch, respectively. No assurances can be given that
the current ratings of the Bank’s instruments will be maintained.
The Bank will provide copies of the most recent Bank of America Corporation Annual Report on Form
10-K, any subsequent reports on Form 10-Q, and any required reports on Form 8-K (in each case as filed with the
Commission pursuant to the Exchange Act), and the publicly available portions of the most recent quarterly Call
Report of the Bank delivered to the Comptroller of the Currency, without charge, to each person to whom this
document is delivered, on the written request of such person. Written requests should be directed to:
Bank of America Corporate Communications
100 North Tryon Street, 18th Floor
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Charlotte, North Carolina 28255
Attention: Corporate Communications
The delivery hereof shall not create any implication that there has been no change in the affairs of the
Corporation or the Bank since the date hereof, or that the information contained or referred to in this section is
correct as of any time subsequent to its date.
Consequences of a Rating Downgrade
Standard & Poor's
If (a) the rating classification assigned to the short-term unsecured, unsubordinated indebtedness or shortterm issuer rating of Bank of America is reduced below "A-1+" by Standard & Poor's or (b) the rating classification
assigned to the long-term unsecured, unsubordinated indebtedness or long-term deposits of Bank of America is
reduced below "AA-" by Standard & Poor's, Bank of America shall be required, at its sole expense, within thirty
calendar days of such event to take one of the following actions: (a) assign or transfer its rights and obligations
under the Credit Default Swap and the Interest Rate Swap to a single entity that has a short-term unsecured debt
rating of "A-1+" from Standard & Poor's and "P1" from Moody's and a long-term unsecured debt rating of at least
"AA-" from Standard & Poor's and at least "A1" from Moody's with the prior written consent of the Issuer (such
consent not to be unreasonably withheld or delayed), (b) obtain a guaranty of another person with a short-term
unsecured debt rating of "A-1+" from Standard & Poor's and "P1" from Moody's and a long-term unsecured debt
rating of at least "AA-" from Standard & Poor's and at least "A1" from Moody's to honor the obligations of Bank of
America under the Credit Default Swap and the Interest Rate Swap, subject to satisfaction of the Rating Agency
Condition or (c) post and maintain Eligible Collateral pursuant to the Credit Support Annex.
If (a) the rating classification assigned to the short-term unsecured, unsubordinated indebtedness or shortterm issuer rating of Bank of America is reduced below "A-2" by Standard & Poor's or (b) the rating classification
assigned to the long-term unsecured, unsubordinated indebtedness or long-term deposits of Bank of America is
reduced below "BBB+" by Standard & Poor's, Bank of America shall be required, at its sole expense, within ten
Business Days of such event, to take one of the following actions: (a) assign or transfer its rights and obligations
under the Credit Default Swap and the Interest Rate Swap to a single entity that has a short-term unsecured debt
rating of "A-1+" from Standard & Poor's and "P1" from Moody's and a long-term unsecured debt rating of at least
"AA-" from Standard & Poor's and at least "A1" from Moody's, with the prior written consent of the Issuer (such
consent not to be unreasonably withheld or delayed), (b) obtain a guaranty of another person with a short-term
unsecured debt rating of "A-1+" from Standard & Poor's and "P1" from Moody's and a long-term unsecured debt
rating of at least "AA-" from Standard & Poor's and at least "A1" from Moody's to honor Bank of America's
obligations under the Credit Default Swap and the Interest Rate Swap, subject to satisfaction of the Rating Agency
Condition or (c) post and maintain Eligible Collateral pursuant to the Credit Support Annex.
Moody's
Credit Default Swap. If (a) the short-term unsecured, unsubordinated indebtedness of Bank of America is
rated by Moody's or Bank of America has a short -term issuer rating by Moody's (a "Short Term Rating"), and the
long-term unsecured, unsubordinated indebtedness or long-term deposits of Bank of America is rated by Moody's (a
"Long Term Rating"), and such Short Term Rating is reduced below "P1" by Moody's, or such Long Term Rating
is reduced below "A1" by Moody's, or (b) Bank of America has a Long Term Rating and does not have a Short
Term Rating, and such Long Term Rating is reduced below "Aa3" by Moody's, Bank of America shall be required,
at its sole expense, within ten Business Days of such event to take one of the following actions: (1) assign or
transfer its rights and obligations under the Credit Default Swap to a single entity that has a short-term unsecured
debt rating of "A-1+" from Standard & Poor's and "P1" from Moody's, and a long-term unsecured debt rating of
"A1" from Moody's, with the prior written consent of the Issuer (such consent not to be unreasonably withheld or
delayed), (2) obtain a guaranty of another person with a short-term unsecured debt rating of "A-1+" from Standard
& Poor's and "P1" from Moody's and a long-term unsecured debt rating of at least "AA-" from Standard & Poor's
and at least "A1" from Moody's to honor Bank of America's obligations under the Credit Default Swap or (3) post
and maintain Eligible Collateral pursuant to the Credit Support Annex.
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Interest Rate Swap. If (a) Bank of America has a Long Term Rating and a Short Term Rating, and such
Short Term Rating is reduced below "P1" by Moody's, or such Long Term Rating is reduced below "A1" by
Moody's, or (b) Bank of America has a Long Term Rating and does not have a Short Term Rating, and such Long
Term Rating is reduced below "Aa3" by Moody's, Bank of America shall be required, at its sole expense, within ten
Business Days of such event to take one of the following actions: (1) assign or transfer its rights and obligations
under the Interest Rate Swap to a single entity that has a short-term unsecured debt rating of at least "A-1" from
Standard & Poor's and "P1" from Moody's, and a long-term unsecured debt rating of "A1" from Moody's, with the
prior written consent of the Issuer (such consent not to be unreasonably withheld or delayed), (2) obtain a guaranty
of another person with a short-term unsecured debt rating of at least "A-1" from Standard & Poor's and of at least
"P1" from Moody's and a long-term unsecured debt rating of at least "AA-" from Standard & Poor's and of at least
"A1" from Moody's to honor Bank of America's obligations under Interest Rate Swap or (3) post and maintain
Eligible Collateral with respect to all Transactions under the Interest Rate Swap pursuant to the Credit Support
Annex. If (A) Bank of America has a Long Term Rating and a Short Term Rating, and such Short Term Rating is
reduced to or below "P2" by Moody's, or such Long Term Rating is reduced to or below "A3" by Moody's, or (B)
Bank of America has a Long Term Rating and does not have a Short Term Rating, and such Long Term Rating is
reduced to or below "A2" by Moody's, Bank of America shall be required within ten Business Days of such event to
assign or transfer its rights and obligations under the Interest Rate Swap to a single entity that has a short-term
unsecured debt rating of at least "A-1" from Standard & Poor's and "P1" from Moody's, and a long-term unsecured
debt rating of "A1" from Moody's, with the prior written consent of the Issuer (such consent not to be unreasonably
withheld or delayed).
If Bank of America fails to take any of the actions set out above within such period following the
downgrading of its rating(s) below the applicable rating(s) specified herein, such failure shall constitute an
Additional Termination Event for which Bank of America will be the sole Affected Party.
DESCRIPTION OF THE PORTFOLIO MANAGEMENT AGREEMENT
Duties of the Portfolio Manager
The Portfolio Manager will provide the Issuer with the following services (in accordance with the
applicable requirements of the Indenture and the Credit Default Swap):
(a)
determining the initial Portfolios;
(b)
managing the Portfolios in accordance with the Portfolio Management Agreement and the Credit
Default Swap;
(c)
consulting with the Rating Agencies at such times as may be reasonably requested by the Rating
Agencies and providing the Rating Agencies with any information reasonably requested;
(d)
monitoring the Portfolios on an ongoing basis;
(e)
providing notification, in writing, to the Trustee and the Issuer upon becoming aware of an
Indenture Event of Default;
(f)
complying with such other duties and responsibilities as may be required of the Portfolio Manager
under the Credit Default Swap;
(g)
exercising, on behalf of the Issuer, any of its rights under the Credit Default Swap; and
(h)
reviewing, on behalf of the Issuer, all determinations made, and all notices given, by the Swap
Counterparty pursuant to the Swap Agreement.
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Standard of Care
The Portfolio Manager shall, subject to the terms and conditions of the Portfolio Management Agreement
and the Indenture, perform its obligations with reasonable care and in good faith, and use its reasonable business
judgment in rendering its services as Portfolio Manager, using a degree of skill and attention no less than that which
the Portfolio Manager exercises with respect to comparable assets that it manages for itself, its affiliates, and for
others and in a manner consistent with prudent practices and procedures followed by institutional managers and
advisors of national and international standing relating to assets of the nature and character of the Portfolio, except
as expressly provided otherwise in the Portfolio Management Agreement, the Indenture or the Credit Default Swap.
To the extent not inconsistent with the foregoing, the Portfolio Manager shall follow its customary standards,
policies and procedures in performing its duties under the Indenture and the Portfolio Management Agreement. The
Portfolio Manager shall not be bound to follow any amendment to any of the Assigned Documents until it has
received written notice thereof and until it has received a copy of the amendment from the Issuer and, in addition,
the Portfolio Manager shall not be bound by any amendment to any of the Assigned Documents, which affects the
rights or that increases the duties, liabilities or obligations of the Portfolio Manager unless the Portfolio Manager
shall have consented thereto in writing.
The Portfolio Manager agrees, in performing its duties, that it will seek to manage the Portfolios in such a
way that preserves, to the extent reasonably practicable, the overall credit quality of the Notes and the level of the
Outstanding Principal Amount of the Notes taking into account the investment criteria and limitations set forth in the
Portfolio Management Agreement and in the Indenture and the Credit Default Swap, and the Portfolio Manager will
use all reasonable efforts to manage the Portfolios, taking into account the investment criteria and limitations set
forth in the Portfolio Management Agreement and in the Indenture and the Credit Default Swap, in such a way that
timely payments are made on the Notes and no Indenture Event of Default occurs; provided that (i) the Portfolio
Manager shall not be responsible if such objectives are not achieved so long as the Portfolio Manager performs its
duties under the Portfolio Management Agreement in good faith and in the manner provided for in the Portfolio
Management Agreement and (ii) there shall be no recourse to the Portfolio Manager with respect to the Notes or any
other obligations of the Issuer incurred in accordance with the Indenture. The Portfolio Manager does not hereby
guarantee that sufficient funds will be available on each payment date to satisfy the Issuer's or the Swap
Counterparty's payment obligations nor shall anything relieve the Issuer or the Swap Counterparty of their
responsibilities in such regard or otherwise alter or reallocate their responsibilities under the Indenture or the Notes
in such regard.
The Issuer grants to the Portfolio Manager an irrevocable power of attorney to execute and deliver all
necessary and appropriate documents and instruments on behalf of the Issuer with respect to the performance of the
Portfolio Manager's duties and obligations pursuant to the Portfolio Management Agreement.
Modification of the Portfolios
Subject to the Substitution Rules, the Portfolio Manager shall have the right, but not the obligation, at any
time and from time to time on any Business Day during the Substitution Period:
(a)
to modify the Long Portfolio and/or the Short Portfolio on behalf of the Issuer by removing a
Reference Entity or Reference Entities (each, a "Removed Reference Entity") comprised in the
Long Portfolio or the Short Portfo lio, as applicable; and/or
(b)
to substitute a new Reference Entity or new Reference Entities in respect of the Long Portfolio or
the Short Portfolio or to add a new Reference Entity to the Short Portfolio (in each case, an
"Added Reference Entity") in accordance with the Portfolio Management Agreement,
with each such removal or addition being referred to as a "Substitution".
In respect of each Substitution in relation to the Long Portfolio:
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(a)
the Portfolio Manager may not have effected Substitutions representing more than 25% of the
aggregate Floating Rate Payer Calculation Amount of the Long Portfolio during the twelve-month
period immediately prior to the day on which the Substitution Request is made; and
(b)
the aggregate of the Floating Rate Payer Calculation Amount for each Reference Entity contained
in the Long Portfolio following a Substitution must be equal to the aggregate of the Floating Rate
Payer Calculation Amount for each Reference Entity contained in the Long Portfolio immediately
prior to such Substitution.
If the Portfolio Manager wishes to make a Substitution, it shall on any Business Day during the
Substitution Period give to the Swap Counterparty a notice, which may be given orally or by email, (a "Substitution
Request") of its request to make a Substitution, which notice shall specify:
(a)
each proposed Removed Reference Entity or Removed Reference Entities;
(b)
each proposed Added Reference Entity or Added Reference Entities (which may be a Reference
Entity not previously included in the Long Portfolio or Short Portfolio ) and, if relevant, the
amount of the Floating Rate Payer Calculation Amount thereof; and
(c)
in respect of an Added Reference Entity, if an Added Reference Entity has a different Transaction
Type (as defined in the Credit Default Swap) to the Transaction Type for the Removed Reference
Entity (if any) or a Transaction Type not at such time applicable to any Reference Entity
comprised in the Portfolios, as applicable, the applicable Transaction Type and if, applicable, the
related Transaction Type Information. If no such Transaction Type (and, if applicable, Transaction
Type Information) is specified by the Portfolio Manager, the Swap Counterparty shall designate
the Transaction Type (and, if applicable, Transaction Type Information) in accordance with
current market convention and if no such current market convention exists, the Transaction Type
(and, if applicable, Transaction Type Information) shall be as determined by mutual agreement of
the Portfolio Manager and the Swap Counterparty.
The Portfolio Manager shall send a copy of each Substitution Request to the Verification Agent at the same
time as it sends such Substitution Request to the Swap Counterparty. The Portfolio Manager shall also, at the same
time, provide the Verification Agent with all information reasonably necessary to enable the Verification Agent to
determine if the Substitution Rules would be satisfied following the Substitutions proposed in the Substitution
Request.
If the Verification Agent receives a Substitution Request from the Portfolio Manager on or before 5.p.m.
(New York time) on a Business Day, then, the Verification Agent shall give a reply (the "Substitution Request
Verification") to the Portfolio Manager (with a copy to the Swap Counterparty) no later than 3 hours prior to the
Reply Time (the "Verification Cut-off Time"). Notwithstanding the foregoing, the Verification Agent shall use
reasonable efforts to provide the Substitution Request Verification within 3 hours of its receipt of the Substitution
Request. If the Swap Counterparty has not received a copy of the Substitution Request Verification by the
Verification Cut-off Time it shall not be obliged to provide a Substitution Reply to the Portfolio Manager.
The Substitution Request Verification shall comprise an indicative determination based on all available
information that has been provided by the Portfolio Manager to the Verification Agent at such time, of:
(i)
whether the Substitution Rules in respect of the relevant Reference Portfolio which are required to
be satisfied in connection with the making of all such proposed Substitution(s) would be satisfied or, if the
Substitution Rules would not be satisfied or, if the provision of such indicative determination is not possible based
on the information provided to the Verification Agent, the reasons and the extent to which such criteria would not be
so satisfied or why the provision of such indicative determination is not possible based on the information provided
to the Verification Agent; and
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(ii)
the maximum possible Negative Modification Adjustment Amount and/or minimum possible
Positive Modification Amount (each as defined below) in respect of the Substitution which, if accepted, would allow
the Substitution Rules to be met.
If the Substitution Request Verification indicates that the Substitution Rules would not be satisfied
following the proposed Substitution(s) then the Swap Counterparty shall not be obliged to provide a Substitution
Reply.
Following receipt of a Substitution Request, the Swap Counterparty will, prior to the relevant Reply Time,
give to the Portfolio Manager notice, which may be given orally or by email, (a "Substitution Reply") of:
(a)
the Offer Spread for the Removed Reference Entity or Removed Reference Entities;
(b)
the Bid Spread for the Added Reference Entity or Added Reference Entities;
(c)
the relevant Delta Position in respect of each Added Reference Entity and each Removed
Reference Entity (if any);
(d)
the Substitution Cost;
(e)
the amount, expressed as a percentage of the Implicit Portfolio Size, by which the First Loss
Amount would exceed the Net Loss Amount following such Substitution; and
(f)
a time period (which shall not be less than 45 minutes) for acceptance (the "Substitution
Execution Time").
The Swap Counterparty shall also determine an amo unt related to the loss or gain to the Swap
Counterparty, expressed as an adjustment to the First Loss Amount and the Second Loss Amount by a percentage, of
the Implicit Portfolio Size that will result from such substitution relating thereto (the "Modification Adjustment
Amount").
If the Modification Adjustment Amount is negative, reflecting a loss to the Swap Counterparty as a result
of a substitution, the Modification Adjustment Amount shall be a "Negative Modification Adjustment Amount";
if it is positive, reflecting a gain to the Swap Counterparty as a result of the related substitution, the Modification
Adjustment Amount shall be a "Positive Modification Adjustment Amount."
If the Swap Counterparty, in its sole and absolute discretion, determines that (1) there has been a Credit
Event in respect of the Removed Reference Entity and/or (2) that there is insufficient liquidity in the credit default
swap market for the Added Reference Entity or the Removed Reference Entity to effect such Substitution and/or (3)
the Swap Counterparty disagrees, in good faith ,with the Transaction Type or the Transaction Type Information (as
applicable) specified by the Portfolio Manager in the Substitution Request,, then it may elect not to give a
Substitution Reply. In the event that the Swap Counterparty does not give a (or gives an incomplete) Substitution
Reply prior to the Reply Time the relevant Substitution Request will, without prejudice to the Portfolio Manager’s
right to make further identical Substitution Requests, lapse without further effect.
The Portfolio Manager may request quotations in respect of any Added Reference Entity or Added
Reference Entities or Removed Reference Entity or Removed Reference Entities contained in the Substitution
Request from Eligible Dealers (excluding Ineligible Dealers) (each an Alternative Quotation). Alternative
Quotations shall be obtained from Eligible Dealers on the basis that: (i) the Eligible Dealer shall give a quotation to
sell (or buy in the case of a Removed Reference Entity in the Short Portfolio) credit protection to (or from, as
applicable) the Swap Counterparty (for a single name credit default swap with similar terms (including Scheduled
Termination Date)) on the Removed Reference Entity (the Alternative Offer Quotation) and/or buy (or sell in the
case of an Added Reference Entity in the Short Portfolio) credit protection from (or to, as applicable) the Swap
Counterparty on the Added Reference Entity (the Alternative Bid Quotation) in an amount equal to the Delta
Position in respect of such Removed Reference Entity and such Added Reference Entity, (ii) the quotation shall be
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expressed as the fixed rate (expressed in basis points) (provided that if such quotation is provided on an up-front
basis, such quotation will be converted into a comparable fixed rate (expressed in basis points) spread by the Swap
Counterparty acting in good faith) payable under a market standard single-name credit default swap incorporating
the 2003 ISDA Credit Derivative Definitions or such other definitions as the Swap Counterparty reasonably
determines are market standard for the relevant Reference Entity at the relevant time and (iii) such quotation is
obtained from an Eligible Dealer(s) by the Portfolio Manager and notified to the Swap Counterparty prior to the
Substitution Execution Time and is firm and capable of acceptance by the Swap Counterparty.
In the event that the Portfolio Manager has obtained any Alternative Quotation(s) prior to the Substitution
Execution Time, the Portfolio Manager may upon obtaining such Alternative Quotation(s) deliver a notice, which
may be given orally or by email, (an "Alternative Quotation Notice") of the Alternative Quotation(s) to the Swap
Counterparty. Each Alternative Quotation Notice shall contain sufficient details to enable the Swap Counterparty to
execute a purchase or sale (as the case may be) of credit protection in an amount equal to the relevant Delta Position
in respect of each Alternative Quotation and shall include (i) the Alternative Bid Quotation and/or Alternative Offer
Quotation, (ii) the name of the Eligible Dealer, (iii) the contact details of the individual at such Eligible Dealer from
whom the Alternative Quotation was obtained, (iv) the name of the Reference Entity for which the Alternative Bid
Quotation and/or Alternative Offer Quotation has been obtained; and (v) the relevant Reference Obligation in
respect of such Reference Entity.
Upon receipt of a Substitution Reply, the Portfolio Manager may, at any time prior to the Substitution
Execution Time or, as the case may be, at any time prior to the time at which the Alternative Quotation will expire
inform, including orally or by email, the Swap Counterparty whether the Portfolio Manager wishes to execute the
Substitution (a "Substitution Execution Notice"). In the event that the Portfolio Manager fails to give a Substitution
Execution Notice prior to the Substitution Execution Time or, as the case may be, prior to the time at which the
Alternative Quotation expires, the relevant Substitution Reply will, without prejudice to the Portfolio Manager’s
right to make further identical Substitution Requests, lapse without further effect.
To the extent the Portfolio Manager has given the Swap Counterparty an Alternative Quotation Notice and
Substitution Execution Notice in respect thereof, the Swap Counterparty shall use its reasonable efforts to effect the
Substitution by executing the relevant sale or purchase of credit protection with the relevant Eligible Dealers
("Alternative Transactions") and shall calculate the corresponding Substitution Cost on the bas is of the
information given in the Alternative Quotation Notice. To the extent the Swap Counterparty is unable to enter into
all the Alternative Transactions it shall inform the Portfolio Manager of its inability to enter into such Alternative
Transactions and, provided that it has received confirmation from the Portfolio Manager (which may be given orally
or by email) that the Portfolio Manager wishes to proceed with such Substitution, it shall enter into such Alternative
Transactions as it is able using its commercially reasonable efforts and effect the remainder of the Substitution by
calculating the Substitution Cost on the basis of the Offer Spread(s) and Bid Spread(s) provided in the original
Substitution Reply.
Any Substitution that is the subject of a Substitution Execution Notice must not cause a breach of the
Substitution Rules at the time the Substitution Execution Notice is given by the Portfolio Manager in respect of such
Substitution or, if the Substitution Rules are already breached for any reason (including, but without limitation, by
reason of any change in rating or characterisation of any Reference Entity) at the time the Substitution Execution
Notice is given by the Portfolio Manager, the Substitution Request will not cause the relevant breach to be worsened
at the time of such Substitution Execution Notice.
The Portfolio Manager, and not the Swap Counterparty, shall be responsible for ensuring the relevant
Substitution meets the relevant Substitution Rules as at the time the Substitution Execution Notice is given by the
Portfolio Manager or, as applicable, for ensuring that there is no worsening of any breach of the relevant
Substitution Rules as the result of the execution of a Substitution Request as at the time the Substitution Execution
Notice is given by the Portfolio Manager.
If a Substitution Execution Notice is given, then the adjustment, if any, to the First Loss Amount shall
become effective on the date of receipt of such Notice (each such date a "Substitution Effective Date").
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On the Substitution Effective Date (i) the rights and obligations of the Issuer and the Swap Counterparty,
with respect to the relevant Transaction under the Credit Default Swap relating to the Removed Reference Entity,
shall be terminated to the extent of the relevant reduction in the Floating Rate Payer Calculation Amount
irrespective of whether a Credit Event may have occurred or may have been subsisting at the time of the relevant
Substitution and (ii) the Issuer and the Swap Counterparty shall assume rights and obligations relating to the Added
Reference Entity to the extent of the relevant increase in the Floating Rate Payer Calculation Amount and the terms
of the relevant Transaction under the CDS Transaction relating to each Added Reference Entity.
As soon as reasonably practicable following the Substitution Effective Date, the Swap Counterparty shall
deliver to the Portfolio Manager, the Issuer, the Trustee and the Rating Agencies a written notice (i) confirming the
names of the Removed Reference Entity or Removed Reference Entities; (ii) the names of the Added Reference
Entity or Reference Entities including the amount of any increase in the Floating Rate Payer Calculation Amount
relating thereto; (iii) attaching a new Schedule A or Schedule B (as applicable) and, if applicable, Schedule C to the
Credit Default Swap reflecting the relevant Substitution; and (iv) confirming any adjustment to the First Loss
Amount made as at the Substitution Effective Date (a "Substitution Confirmation").
A Substitution Confirmation shall, notwithstanding any other information requested in or required by a
Substitution Reply, constitute a valid and effective Substitution Confirmation in accordance with the terms of the
Portfolio Management Agreement.
The Portfolio Manager shall, following receipt of any Substitution Confirmation, promptly sign a copy of
the same and return such signed copy to the Swap Counterparty. Save in the case of manifest error, the Substitution
Confirmation shall be binding on the Portfolio Manager, the Swap Counterparty and the Issuer as a true and accurate
record of any Substitution.
If a signed Substitution Confirmation is not returned within 2 Business Days of being delivered to the
Portfolio Manager then, save in the case of manifest error, the Substitution Confirmation so delivered shall be
deemed to have been signed by the Portfolio Manager and shall be binding on the Portfolio Manager, the Issuer and
the Swap Counterparty, provided that the Swap Counterparty shall provide the Portfolio Manager with a corrected
Substitution Confirmation in the event that the original Substitution Confirmation does not reflect the Substitution
Execution Notice or the Substitution Reply, to the ext ent relevant, in respect of the relevant Substitution(s).
Substitution Rules
The Substitution Rules shall be deemed to be satisfied in respect of a Substitution if such Substitution
complies with the following requirements (or if the relevant Reference Portfolio is not in compliance with each such
requirement prior to such Substitution, that the Reference Portfolio following such Substitution is no less in
compliance with each unsatisfied requirement than the Reference Portfolio prior to such Substitution) as certified by
the Portfolio Manager:
(a)
the Conditions to Settlement have not been satisfied with respect to the Removed Reference Entity
or the Added Reference Entity and no Potential Failure to Pay or Potential Repudiation/Moratorium has occurred
and is continuing with respect to the Removed Reference Entity or the Added Reference Entity;
(b)
the S&P SROC Test for the Notes immediately following such Substitution must be a positive
figure greater than or equal to 100% or, if the S&P SROC Test immediately prior to the Substitution is less than
100%, such Substitution does not cause the S&P SROC Test to be a smaller percentage value;
(c)
the Substitution will comply with the MOODY’S CDOROM "TEST 2";
(d)
following such Substitution, the aggregate Floating Rate Payer Calculation Amount of all High
Yield Reference Entities in the Long Portfolio will not exceed 10 percent of the aggregate of the Floating Rate Payer
Calculation Amount for each Reference Entity in the Long Portfolio;
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(e)
following such Substitution, the aggregate Floating Rate Payer Calculation Amount of all
Emerging Market Reference Entit ies in the Long Portfolio will not exceed 10 percent of the aggregate of the
Floating Rate Payer Calculation Amount for each Reference Entity in the Long Portfolio;
(f)
following such Substitution, the Floating Rate Payer Calculation Amount of any Reference Entity
in the Long Portfolio shall not exceed 1.50 percent of the aggregate of the Floating Rate Payer Calculation Amount
for each Reference Entity in the Long Portfolio;
(g)
following such Substitution, no one S&P Industry Category and no one Moody's Industry
Category may account for more than 15 percent of the Long Portfolio (calculated by Floating Rate Payer Calculation
Amount);
(h)
the aggregate of the Floating Rate Payer Calculation Amounts in respect of each of the Reference
Entities in the Short Portfolio may not exceed 5.00 per cent. of the aggregate of the Floating Rate Payer Calculation
Amount for each Reference Entity in the Long Portfolio;
(i)
Portfolio;
no Reference Entity with a Mid Spread of more than 4.00 per cent. may be added to the Short
(j)
following such Substitution, the product of the aggregate Floating Rate Payer Calculation
Amounts, the weighted average Mid Spread and the weighted average time to maturity of the Short Portfolio may
not exceed 10 per cent. of the product of the aggregate Floating Rate Payer Calculation Amounts, the weighted
average Mid Spread and the weighted average time to maturity of the Long Portfolio;
(k)
each Added Reference Entity must be rated by at least BB- by S&P or Ba3 by Moody's ; and
(l)
each Added Reference Entity must be a corporate Reference Entity.
Notwithstanding the foregoing, the Portfolio Manager shall be entitled to request the Substitution of any
Credit Impaired Reference Entity from the Long Portfolio without having to satisfy the Substitution Rules.
There can be no assurance that the occurrence of actual Credit Events with respect to the Reference Entities
or the timing of such Credit Events will not exceed those assumed in the application of the Standard & Poor's CDO
Evaluator or the Moody's CDOROM™. None of the Issuer, the Trustee, the Portfolio Manager, the Swap
Counterparty, the Interest Rate Swap Counterparty or the Placement Agent makes any representation as to the
expected rate of Credit Events or the timing of Credit Events or the other assumptions included in the Standard &
Poor's CDO Evaluator or the Moody's CDOROM™. In addition, none of the Issuer, the Trustee, the Portfolio
Manager, the Swap Counterparty, the Interest Rate Swap Counterparty or the Placement Agent makes any
representation as to the validity or completeness of the assumptions included in the Standard & Poor's CDO
Evaluator or the Moody's CDOROM™, and each of the Issuer, the Trustee, the Portfolio Manager, the Swap
Counterparty, the Interest Rate Swap Counterparty and the Placement Agent disclaims any responsibility for the
assumptions therein or the results produced by the application of the Standard & Poor's CDO Evaluator or the
Moody's CDOROM™ to any proposed substitution.
Conflicts of Interest; Affiliated Transactions
The Issuer acknowledges that the Portfolio Manager, its affiliates and funds or accounts for which the
Portfolio Manager or its affiliates acts as portfolio manager may at times own Notes.
In certain circumstances, the interests of the Issuer and/or the Holders of the Notes with respect to matters
as to which the Portfolio Manager is acting on behalf of the Issuer may conflict with the interests of the Portfolio
Manager, its employees or its affiliates.
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Resignation and Removal of Portfolio Manager
The Portfolio Management Agreement may be terminated at any time by the Portfolio Manager upon 90
days' prior written notice to the Issuer (or such shorter notice as is acceptable to the Issuer).
The Portfolio Management Agreement shall be terminated, and the Portfolio Manager removed,
automatically for cause if certain events of bankruptcy or insolvency occur in respect of the Portfolio Manager
In addition, the Portfolio Manager may be removed by the Holders of 66? % or more of the aggregate
outstanding principal balance of the Notes and the Related Obligations (voting as a single class) upon 15 days' prior
written notice to the Portfolio Manager and upon written notice to the Holders of the Notes and the Swap
Counterparty if: (i) the Portfolio Manager willfully violates, or takes any action that it knows violates, any provision
of the Portfolio Management Agreement or the Indenture applicable to it, or the Portfolio Manager willfully causes
or takes any action that it knows causes the Issuer to violate any provision of the Indenture, (ii) the Portfolio
Manager breaches in any material respect any material provision of the Portfolio Management Agreement or the
Indenture applicable to it (other than as specified in subparagraph (i) above) and fails to cure such breach within 30
days of becoming aware of, or receiving notice from the Issuer of, such breach, or, if such breach is not capable of
cure within 30 days, the Portfolio Manager fails to cure such breach within the period in which a reasonably diligent
person could cure such breach, which period shall not, in any case, exceed 45 days, (iii) the occurrence of any
Indenture Event of Default that results from any breach by the Portfolio Manager of its duties under the Indenture or
the Portfolio Management Agreement, which breach is not cured within any applicable cure period, or (iv) the
Portfolio Manager commits an act that constitutes fraud or criminal activity in the performance of its obligations
under the Portfolio Management Agreement or the Portfolio Manager is indicted for a criminal offense related to its
primary businesses. In no event will the Trustee be under any obligation to determine if "cause" exists.
When determining whether to remove the Portfolio Manager for cause, any Holder of a Note may request
that the Trustee send to any or all other holders of Related Obligations any written information that it has provided
to the Trustee that may assist such holders of Related Obligations to make a decision whether or not to vote in favor
or against removal of the Portfolio Manager. Such information may include, but is not limited to, the identity and
contact details of the relevant Holder of the Note, a request for the holders of the Related Obligations to identify
themselves and reasons why the Holder believes the Portfolio Manager should or should not be removed. The
Trustee shall have no liability for complying with such requests.
Following any termination of the appointment of the Portfolio Manager, no further Portfolio Changes shall
be permitted unless (a) a successor portfolio manager has assumed the role of portfolio manager in respect of the
Portfolio pursuant to a signed agreement on similar terms to the Portfolio Management Agreement; (b) the
appointment of such successor portfolio manager has been approved in writing by (i) the Issuer, (ii) the Swap
Counterparty, and (iii) the Holders of more than 50% of the Outstanding Principal Amount of the Notes, and (c) the
Rating Condition has been satisfied.
Any termination of the appointment of the Portfolio Manager under the Portfolio Management Agreement
shall constitute a termination of the appointment of the Portfolio Manager in respect of all Related Obligations.
Assignment; Delegation
The obligations of the Portfolio Manager under the Portfolio Management Agreement shall not be
delegated by the Portfolio Manager, in whole or in part, without the prior written consent of (a) the Issuer, (b) the
Swap Counterparty, and (c) the Holders of 50% or more of the Outstanding Principal Amount of the Relevant Notes.
Notwithstanding any such consent, no delegation of duties by the Portfolio Manager shall relieve it from any
liability hereunder. Any assignment of this Agreement to any Person (other than any assignment that does not
constitute an assignment under the Investment Advisors Act of 1940), in whole or in part, by the Portfolio Manager
shall be deemed null and void unless such assignment is consented to in writing by (a) the Issuer, (b) the Swap
Counterparty, and (c) the Holders of 50% or more of the Outstanding Principal Amount of the Relevant Notes. Any
assignment consented to by (a) the Issuer, (b) the Swap Counterparty, and (c) the Holders of 50% or more of the
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Outstanding Principal Amount of the Relevant Notes shall bind the assignee in the same manner as the Portfolio
Manager is bound.
Portfolio Management Fees
As compensation for its services under the Portfolio Management Agreement, the Issuer will pay to the
Portfolio Manager the Senior Management Fee and the Subordinated Management Fee on each Interest Payment
Date in accordance with the Priority of Payments.
The "Senior Management Fee" in respect of each Interest Payment Date will be an amount equal to the
product of (a) 0.10%; (b) the Daily Average of the Outstanding Principal Amount of the Notes during the relevant
Interest Accrual Period; and (c) the actual number of days in the relevant Interest Accrual Period divided by 360.
The "Subordinated Management Fee" in respect of each Interest Payment Date will be an amount equal
to the product of (a) 0.05%; (b) the Daily Average of the Hypothetical Equity Amount during the relevant Interest
Accrual Period; and (c) the actual number of days in the relevant Interest Accrual Period divided by 360.
The "Hypothetical Equity Amount" means, on any day, the product of (a) $40,000,000 and (b) one minus
the quotient of the Net Loss Amount and the First Loss Amount on such day.
If the Event Determination Date and the Calculation Date in respect of a Defaulted Reference Entity in the
Long Portfolio occur in different Interest Accrual Periods, payment of a portion of the Senior Management Fee and
the Subordinated Management Fee shall be subject to deferral until the relevant Credit Loss Amount has been
determined.
Governing Law
The Portfolio Management Agreement, and all matters arising from or connected with it, will be governed
by, and construed in accordance with, the laws of the State of New York. Each of the Issuer, the Trustee, the Swap
Counterparty and the Portfolio Manager will submit to the non-exclusive jurisdiction of the New York courts for all
purposes in connection with the Portfolio Management Agreement.
Certain Additional Definitions in respect of the Portfolio Management Agreement
"Bid Spread" means the bid side spread (expressed in basis points) for a single-name credit default swap
with similar terms (including Scheduled Termination Date) to the relevant Transaction in relation to the relevant
Added Reference Entity as determined by the Swap Counterparty.
"Credit Impaired Reference Entity" means either (a) any Reference Entity which, in the Portfolio
Manager’s reasonable opinion, has a significant risk of declining in credit quality and, with the lapse of time,
becoming a Defaulted Reference Entity, or (b) any Reference Entity in respect of which the rating of such Reference
Entity has been downgraded or placed on credit watch for possible downgrade, in either case, by one or more rating
sub-categories by S&P.
"Defaulted Reference Entity" means a Reference Entity for which either the Conditions to Settlement
have been satisfied or are capable of being satisfied or in relation to which a Potential Failure to Pay or a Potential
Repudiation/Moratorium (as defined in the Credit Default Swap) has occurred (in each case, as determined by the
Swap Counterparty acting in good faith and in a commercially reasonable manner).
"Delta Position" means, in relation to any Substitution, the notional amount, expressed in USD, as
calculated by the Swap Counterparty acting in good faith and in a commercially reasonable manner through the
application of its then current Proprietary Trading Model, of the relevant Theoretical Hedge Transaction up to a
maximum amount of the Floating Rate Payer Calculation Amount in relation to the relevant Removed Reference
Entity and Added Reference Entity.
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"Eligible Dealers" means Deutsche Bank AG, Morgan Stanley, J.P. Morgan, Chase & Co., Credit Suisse
First Boston, UBS AG, Lehman Brothers, Goldman Sachs, Dresdner Bank AG, Societe Generale, Bear Stearns
Companies, Inc., Commerzbank AG, ABN AMRO Bank N.V., Canadian Imperial Bank of Commerce, Merrill
Lynch International, BNP Paribas, Barclays Capital, CALYON, Royal Bank of Canada, Royal Bank of Scotland plc,
Citigroup Global Markets Inc., and HSBC Bank PLC. and (as the case may be) their respective Affiliates and any
other dealer specified in writing by the Swap Counterparty to the Issuer and the Portfolio Manager provided that the
Swap Counterparty may, acting in good faith, remove any of the Eligible Dealers where such Eligible Dealer no
longer satisfies the Swap Counterparty’s credit worthiness requirements or where the Swap Counterparty, acting in
good faith, has ceased dealing with that Eligible Dealer.
"Emerging Market Reference Entity" means a Reference Entity which has a country of origin with a
long-term S&P Rating of A+ or lower.
"Mid Spread" means the average of the bid spread and offer spread in respect of a single-name credit
default swap with similar terms (including Scheduled Termination Date) to the relevant Transaction in relation to a
Reference Entity in the Long Portfolio or the Short Portfolio.
"Moody's CDOROM™ " means the dynamic, analytical computer model provided by Moody's to the
Swap Counterparty and the Portfolio Manager (along with the instructions and assumptions to use with such model)
for the purpose of estimating the risk of Credit Events occurring with respect to the Reference Entities, as it may be
modified by Moody's from time to time.
"Offer Spread" means the offer side spread (expressed in basis points) for a single-name credit default
swap with similar terms (including Scheduled Termination Date) to the relevant Transaction in relation to the
relevant Removed Reference Entity in respect of the Long Portfolio or the Short Portfolio, as applicable, as
determined by the Swap Counterparty.
"Outstanding Portfolio Notional Amount" means the aggregate of the Floating Rate Payer Calculation
Amounts in respect of each Reference Entity in the Long Portfolio or the Short Portfolio, as applicable, as the same
may be reduced in whole or in part following the occurrence of a Credit Event.
"Proprietary Trading Model" means the Swap Counterparty’s trading model (as the same may be
amended and/or updated from time to time) which is used, among other things, to evaluate default risk and the
consequential trading strategy relating to the Swap Counterparty’s (and/or its Affiliates’) portfolio of credit
derivatives transactions at any time, which currently takes into account, among other things: (i) single name credit
default swap spreads, (ii) expected recovery levels, (iii) applicable correlation parameters; and (iv) interest rate
and/or foreign exchange/currency risk.
"Relevant Notes" means, at any time, the Notes that are not beneficially held by (a) the Portfolio Manager
or its Affiliates or (b) any fund or investment vehicle which is managed by the Portfolio Manager or its Affiliates
and in which the Portfolio Manager or its Affiliates hold a controlling majority of the equity interest.
"Reply Time" means 4.00 pm New York time on the first Business Day following the receipt of a
Substitution Request.
"S&P CDO Evaluator" means a dynamic, analytical computer programme developed by S&P and used to
determine the credit risk of a portfolio of debt securities and made available by S&P to the Swap Counterparty and
the Portfolio Manager on or before the date hereof, as such programme may be modified by S&P from time to time.
The rating used in respect of each Reference Entity when applying the S&P CDO Evaluator must be the S&P Rating
in respect of such Reference Entity.
"S&P Rating" shall mean, at any time, a rating in respect of a Reference Entity determined in accordance
with the following provisions:
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(A)
subject to sub-paragraphs (B) to (F) below, the S&P Rating shall be the long-term foreign
currency issuer rating assigned by S&P to the relevant Reference Entity;
(B)
if the rating of the relevant Reference Entity is put on public negative creditwatch, the S&P Rating
shall be one sub-category below the then current long-term foreign currency issuer rating assigned
by S&P to the relevant Reference Entity;
(C)
if the rating of the relevant Reference Entity is put on public positive creditwatch, the S&P Rating
shall be one sub-category above the then current long-term foreign currency issuer rating assigned
by S&P to the relevant Reference Entity;
(D)
if the Reference Entity is not at such time rated by S&P, but is publicly rated by Moody’s, the
S&P Rating shall be:
(i)
one sub-category below the S&P equivalent of the long-term foreign currency issuer
rating assigned to the relevant Reference Entity by Moody’s if the rating assigned by
Moody’s is Baa3 or higher; or
(ii)
two sub-categories below the S&P equivalent of the long-term foreign currency issuer
rating assigned to the relevant Reference Entity by Moody’s if the rating assigned by
Moody’s is Ba1 or lower;
(E)
if the relevant Reference Entity is unrated by both S&P and Moody’s, the S&P Rating shall be the
credit assessment provided by S&P; and
(F)
in the case of United States of America agency bonds, the S&P Rating shall be the subordinate
debt rating assigned by S&P (notched if appropriate).
"S&P Scenario Loss Rate" means, at any time, an estimate of the current cumulative loss rate, given the
initial rating scenario for the pool of Reference Entities included in the Long Portfolio as amended from time to
time, determined by application of the S&P CDO Evaluator at such time.
"S&P SROC Test" means at any time, the SROC percentage calculated by the S&P CDO Evaluator in
accordance with the following formula:
SROC =
A − BA
A− D
where:
A
=
the Outstanding Portfolio Notional Amount;
B
=
S&P Scenario Loss Rate as calculated by the S&P CDO Evaluator; and
D
=
greater of (a) the First Loss Amount minus the Net Loss Amount at such time and (b)
zero.
The S&P SROC Test will be satisfied if, at the time of sending of a Substitution Execution Notice, the
result of the S&P SROC Test is a positive figure greater or equal to 100 per cent. or, if the result of the S&P SROC
Test immediately prior to the time of sending of such Substitution Execution Notice is a figure less than 100 per
cent., the S&P SROC Test is not a smaller percentage at the time of sending of a Substitution Execution Notice as a
result of such Substitution Execution Notice.
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"Substitution Period" means the period commencing on the Effective Date and expiring on the day falling
1 calendar month prior to the Scheduled Termination Date of the relevant Transaction.
"Theoretical Hedge Transaction" means a theoretical credit derivative transaction that the Swap
Counterparty would be required to enter into in connection with the relevant Transaction (disregarding for this
purpose the Swap Counterparty’s general trading books and any pre-existing hedges that it may have executed in
connection with such Transaction) in respect of an Added Reference Entity, or a Removed Reference Entity, as the
case may be, as a consequence of a Substitution relating to such Added Reference Entity or Removed Reference
Entity, as the case may be, provided that nothing shall oblige the Swap Counterparty to execute any such
transaction.
"Transaction Type Information" means, in respect of a Transaction Type, the information relating to such
Transaction Type as set out in Schedule C to the Credit Default Swap.
DESCRIPTION OF THE PORTFOLIO MANAGER
The information appearing in this Section has been prepared by Vanderbilt Capital Advisors, LLC and has
not been independently verified by the Issuer, the Trustee, the Swap Counterparty or the Placement Agent.
Accordingly, notwithstanding anything to the contrary herein, the Issuer, the Trustee, the Swap Counterparty and
the Placement Agent do not assume any responsibility for the accuracy, completeness or applicability of such
information.
The "Portfolio Manager" will be Vanderbilt Capital Advisors, LLC (" Vanderbilt").
General
The Portfolio Manager's principal office is located at 200 Park Avenue, New York, New York, 10166. The
firm is a registered investment adviser under the Investment Advisers Act of 1940. Additional information about the
Portfolio Manager is available through its Form ADV which is on file with the U.S. Securities and Exchange
Commission or otherwise upon request from the Portfolio Manager. The Portfolio Manager manages in excess of
$12 billion in fixed income assets for over 45 institutional clients. The Portfolio Manager is a research-driven firm
with longstanding experience in structured fixed income products and asset backed securities.
On April 25, 2006, the Portfolio Manager was acquired by Pioneer Investment Management USA Inc., the
North American operating subsidiary of Pioneer Global Asset Management S.p.A., a global investment management
group wholly owned by UniCredito Italiano, S.p.A.
Biographies of Certain Key Individuals
Set forth below is information regarding the background, principal occupations and other affiliations during
the past five years or more of the principal officers and employees of the Portfolio Manager and its affiliates, who
will be primarily responsible for managing the Portfolios and for performing the functions related thereto under the
Portfolio Management Agreement. Their duties include providing the services described herein on behalf of the
Portfolio Manager. Such persons may not necessarily continue to be so employed during the entire term of the
Portfolio Management Agreement.
PATRICK A. LIVNEY, SENIOR MANAGING DIRECTOR
Mr. Livney is a Senior Managing Director and the Head of the Structured Finance Group of Vanderbilt
Capital Advisors , LLC, a position he has held since June 2003. In addition, Pat is the Chief Executive Officer and a
Director of the Vanderbilt Financial Trust. Previously, Mr. Livney was a founding Partner of Meritus Asset
Management, where he worked from March 2002 to May 2003. From March 2000 to February 2002, he was a
Partner at Asset Allocation & Management Company, responsible for the CDO platform and Marketing. Prior to
that, from 1986 through 2000, Mr. Livney worked in institutional fixed income sales on Wall Street where he
specialized in structured finance products. Pat serves on the Board of Directors of the Ascendant Structured Credit
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Opportunity Fund, on the Board of Directors of the CMTA, and on the Steering Committee of the American
Securitization Forum CDO Collateral Managers Subforum. He is a frequent speaker at industry conferences. Mr.
Livney holds a B.S. in Industrial Engineering from Roosevelt University, Chicago. He has over twenty years of
investment experience.
DAVID E. ORTIZ, CFA, SENIOR PORT FOLIO MANAGER
David E. Ortiz is a Senior Portfolio Manager at Vanderbilt Capital Advisors, LLC. David manages the
firm's corporate CDO platform and focuses on structured credit products research and trading. He has broad
experience in quantitative credit research and has worked closely with CreditSights, Inc. in the portfolio
management application of the BondScore model and UBS CreditDelta portfolio optimization module. Previously,
he held the position of Partner at Asset Allocation & Management responsible for private placement portfolio
management and cyclical public corporate credit research and trading. Prior to that, he worked as a corporate credit
research analyst for Prudential Capital's Information Group. David holds an M.B.A. in finance from the University
of Chicago and a B.S. in finance from Miami University of Ohio. He has twelve years of investment experience.
KURT W. FLORIAN, CHIEF OPERATING OFFICER AND COUNSEL
Mr. Florian is the Chief Operating Officer and Counsel of the Structured Finance Group at Vanderbilt
Capital Advisors, LLC. In addition, he is the Chief Operating Officer and Counsel of the Vanderbilt Financial Trust.
Previously, from 1998 to 2005, Kurt was a partner at the law firm of Katten Muchin Rosenman LLP in Chicago,
where he was co-chair of the securitization practice and focused on securitization and other corporate transactions.
From 1995 to 1998, Mr. Florian was a partner at the law firm of Lord Bissell & Brook, where he was an Associate
from 1984 to 1995. He is also an Adjunct Professor at the Chicago-Kent College of Law of the Illinois Institute of
Technology. In addition, Mr. Florian is a member of the Board of Directors of the Ascendant Structured Credit
Opportunity Fund and the Epilepsy Foundation of Greater Chicago. Kurt holds a B.A., with honors, from the
University of Chicago, and a J.D. from Duke University School of Law. He has twenty-two years of experience.
STEPHEN C. BERNHARDT, SENIOR PORTFOLIO MANAGER
Mr. Bernhardt is a Senior Portfolio Manager at Vanderbilt Capital Advisors, LLC. He is also the Chief
Investment Officer of the Vanderbilt Financial Trust. Mr. Bernhardt focuses on the CDO and ABS sectors with an
emphasis on the structured finance CDO market. Steve was employed by Meritus Asset Management from August
2002 to June 2003. Previously, Mr. Bernhardt traded mortgage backed and asset backed securities at Prudential
Securities, Smith Barney, Asset Allocation & Management, and Dean Witter Reynolds. Mr. Bernhardt holds a B.A.
from Brown University. He has twenty-one years of investment experience.
ALI HAGHIGHAT, SENIOR PORTFOLIO MANAGER
Mr. Haghighat is a Senior Portfolio Manager at Vanderbilt Capital Advisors, LLC. Ali focuses on the
mortgage market with an emphasis on the Sub-Prime Residential sector of the ABS/MBS market. He joined
Vanderbilt Capital Advisors, LLC from Standish Mellon Asset Management where he managed ABS and RMBS
securities, developed the RMBS credit platform, and was a senior member of the structured finance CDO group.
Prior to that, he was a structured debt research analyst at Banc One Capital Markets and a credit manager within the
bank's securitization conduit. Ali has an M.B.A. from Loyola University and a B.S. from the University of
Wisconsin-Madison. He has eight years of industry experience.
EDWARD J. O’HARA, SENIOR PORTFOLIO MANAGER
Mr. O’Hara is a Senior Portfolio Manager and head of the ABS CDO Group within the Structured Finance
Group at Vanderbilt Capital Advisors, LLC. Ed focuses on the mortgage sector with an emphasis on the Residential
A and Alt A sector of the ABS/MBS market. He was previously a Managing Director at INVESCO where he
specialized in Mortgage-backed and Asset-backed securities. Prior to that he was a Senior Portfolio Manager at Ark
Asset Management serving in a similar capacity. Ed holds a B.S. in accounting from the University of Bridgeport.
He has twenty-three years of investment experience.
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LAWRENCE R. ZENO, SENIOR PORTFOLIO MANAGER
Mr. Zeno is a Senior Portfolio Manager at Vanderbilt Capital Advisors, LLC. Larry focuses on the subprime and second lien residential ABS market, as well as the CMBS sector. Previously, he held the position of
Senior Manager of trading at Asset Allocation & Management Company where he also managed the ABS/CMBS
Structured Finance portfolio including the CDOs under management. Larry holds a B.A. from Northwestern
University. He has seventeen years of investment experience.
BEN SAFANDA, PORTFOLIO MANAGER
Mr. Safanda is a Portfolio Manager at Vanderbilt Capital Advisors, LLC. Ben focuses on quantitative
analysis across all of the market sectors. He assists in the monitoring of secondary CDO positions, and tracking
transaction cash flows. Mr. Safanda was employed by Meritus Asset Management from August 2002 to June 2003.
Previously, he supported the CDO platform at Asset Allocation & Management. He holds a B.A. from Haverford
College. Ben has six years of investment experience.
NICOLAS PAUWELS, QUANTITATIVE PORTFOLIO MANAGER.
Mr. Pauwels is a Quantitative Portfolio Manager at Vanderbilt Capital Advisors, LLC. He focuses on ABS
CDO quantitative risk management methodology and RMBS surveillance analytics. He is also responsible for the
development and implementation of proprietary programs and databases across the ABS CDO platform as well as
the modeling of cash flows. Previously, he was a trader at KBC Bank where he traded Eurobonds and emerging
markets forwards respectively. He holds an M.B.A. in analytic finance from the University of Chicago, a MS in Tax
Management from Solvay Business School, Belgium, and a MS in Applied Economics from the Katholieke
Universiteit Leuven, Belgium. Mr. Pauwels has eight years of investment experience.
ROBERT SALAZAR, SENIOR ADMINISTRATIVE OFFICER - CDOS
Mr. Salazar is a Senior Administrative Officer at Vanderbilt Capital Advisors, LLC. Before joining
Vanderbilt, he was a Vice President at LaSalle Bank N.A., where he worked on the closings and modeling of new
transactions, while providing oversight on a portfolio of ABS CDOs and Synthetic CDOs. He holds an MBA from
DePaul University and a B.S. in Finance from the University of Illinois -Champaign. Mr. Salazar has successfully
completed the CFA Level III exam, and has six years of investment experience.
TRACY WRIGHT, VICE PRESIDENT – HIGH YIELD CREDIT ANALYST
Tracy Wright is a high yield research analyst at Pioneer Investment Management USA Inc. Her background
includes over 5 years of high yield and distressed company experience. Prior to joining Pioneer, she was a high yield
analyst at State Street Global. Tracy holds an M.B.A. from the University of Chicago and a B.S. from Pennsylvania
State University. She joined Pioneer in 2000.
KEITH HOGAN, VICE PRESIDENT – HIGH YIELD CREDIT ANALYST
Keith Hogan is a high yield research analyst at Pioneer Investment Management USA Inc. He researches
companies within the high yield universe for names that appear to be undervalued on a near term basis, offer good
value on a long term basis, or appear to be poised to unlock hidden value not currently priced within it. Keith holds
an M.S. in Finance from the Bentley College Graduate School of Business, and a B.S in Economics & History from
the University of Massachusetts at Amherst. He joined Pioneer in 2006.
MICHAEL TEMPLE, VICE PRESIDENT - DIRECTOR OF FIXED INCOM E CREDIT RESEARCH
Michael Temple is Director of Credit Research at Pioneer Investment Management USA Inc, responsible
for purchase and sell recommendations for fixed income obligations and oversight of credit research. His duties
include independent research of credits, sector analysis, and coordination of research efforts. Prior to joining Pioneer
in 2002, Mr. Temple was a portfolio manager at Boston Partners and senior credit analyst at Putnam Investments.
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He has over 10 years of experience in investment management. Michael holds an M.B.A. and a B.A. from the
University of Colorado-Boulder.
JOANNE FISHER, CFA, VICE PRESIDENT, SENIOR CREDIT ANALYST
Ms. Fisher is a senior credit analyst at Pioneer Investment Management USA Inc, responsible for purchase
and sell recommendations for fixed income obligations. Her duties include independent credit research across
sectors and coordinating credit information from Pioneer's research analysts, as well as systems and portfolio
analysis. Prior to joining Pioneer in 1998, she worked as a credit analyst at Moody's Investors Service. Joanne holds
a B.A. from Brandeis University.
MONICA BRADY - CORPORATE BOND ANALYST
Monica joined Pioneer Investments in 2005 from Moody's Investors Service's corporate finance team
where she specialized in the technology, gaming, leisure, lodging, homebuilding, and food sectors. She joined
Moody's Investors Service in 1999 after completing her Bachelors degree in Finance and Economics at Manhattan
College in New York City.
JESSICA FRATTURA, ASSOCIATE - CREDIT ANALYST
Jessica Frattura evaluates credit worthiness of higher quality credits in support of senior credit analysts and
portfolio managers of the fixed income team using various modeling and analytical tools. She also works with the
director of research on special projects including quantitative credit screening and relative value models. Prior to
joining Pioneer's Fixed Income Department as a Trading Assistant in 2003, she was employed by State Street
Corporation as a Pension Plan Fund Accountant. Upon leaving State Street, she joined Pioneer in 2003 as an
Investment Operations Analyst, working with fixed income settlements, mortgages, foreign exchanges, and
treasuries. Ms. Frattura received a B.S. from Providence College in 2001. She is currently pursuing her M.B.A. at
Bentley College.
RAFFAELE BERTONI – HEAD OF FIXED INCOME EUROPE AND CORPORATE BOND
PORTFOLIO MANAGER
Mr Bertoni is the Head of Fixed Income at Pioneer Investments, Europe. The Fixed Income Team is
composed of Portfolio Managers and Analysts specialised in Government bonds, Investment Credit Corporate bonds
and Emerging Markets bonds. He has extensive experience at Pioneer Investments, managing corporate bonds
across all fixed income portfolios totalling approximately 38 different mutual funds. He was appointed to his present
role in October 2002 and he is the lead manager of the Pioneer Funds - Euro Corporate Bond and Pioneer Euro
Corporate Etico portfolios. Mr Bertoni joined Pioneer Investments in 2000 from INA Asset Management in Rome
where he worked as Portfolio Manager on 10 different corporate bond portfolios for four years. The portfolios were
composed of Investment Grade and High Yield Corporate bonds. He also worked as a Government Bond Trader at
Concordia Milan. He is a graduate in Economics from the University of Ancona and is a member of the Italian
Association of Financial Analysts.
JOHN O’MAHONEY – PORTFOLIO MANAGER CORPORATE BONDS/CREDIT ANALYST
Mr O’Mahony is a Portfolio Manager within the Credit Fixed Income team at Pioneer Investment
Management Limited. In addition to his portfolio management responsibilities, he is also responsible for analysis of
the utilities sector. He joined Pioneer Investments in November 2004 after more than ten years working in the
financial services industry at UBS and HSBC. His most recent position was as European Head of Credit Strategy at
HSBC and prior to that he spent nine years at UBS where he gained exposure to all aspects of the European
corporate bond markets, including research, indexation, performance attribution, relative value, strategy creation and
portfolio construction. He is a graduate of Trinity College Dublin where he was awarded the following degrees,
B.A. Mathematics, B.A.I., Engineering and an M.Sc. in Engineering
GARRETT WALSH – SENIOR CORPORATE BOND ANALYST
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Mr. Walsh is a Senior Corporate bond Analyst in the Fixed Income Team based in Dublin. He is
responsible for covering the Banking and Insurance sectors. He joined Pioneer Investments from Merrill Lynch's
credit research team in London where he was a Director and head of the European Banking team. He joined Merrill
Lynch in 2002 from Fitch Ratings where he was the lead analyst for the major UK and Scandinavian banks. Garrett,
a chartered accountant, is a graduate of University College Cork where he was awarded a Bachelor of Commerce in
addition to a Masters in European Accounting and Auditing from the Universities of Cork, Ghent and Gothenburg.
ZEKE DIWAN - HIGH YIELD BOND ANALYST
Zeke Diwan has been working in the high yield space since 1996. Prior to joining Pioneer Investments, he
was with Citigroup, most recently as a High Yield Research Analyst in Corporate Bond Research (2002 - 2004), and
before that he worked as a Leveraged Loan Research Analyst (1999-2002). Mr Diwan began his career with Bear,
Stearns Inc. in 1996 as a High Yield Capital Markets Analyst. He gained his B.Sc. from Columbia University in
Operations Research in 1996.
MARC KONHEISER, SENIOR OPERATIONS MANAGER.
Marc Konheiser is a Senior Operations Manager at Vanderbilt Capital Advisors, LLC. He is primarily
responsible for coordinating the processing of trades and resolving any settlement issues between broker-dealers and
accounts' custodian banks. Prior to Vanderbilt Capital Advisors, he held several positions at AMBAC-Cadre most
recently as a money market portfolio manager. Marc holds a B.A. from the University of New York at Stony Brook.
He has eleven years of investment experience.
JOSEPH CARLINO, OPERATIONS SPECIALIST.
Joseph Carlino is an Operations Specialist at Vanderbilt Capital Advisors, LLC. He is responsible for
developing, implementing and monitoring a comprehensive risk management program, and for hedge fund
operations. Previously, Joseph worked at Mellon Financial Corporation and at Goldman Sachs & Co. Joseph holds a
B.A. from St. Francis College. He has twenty-three years of experience in Financial Operations.
ANTHONY PILEWSKI, OPERATIONS ASSISTANT.
Anthony Pilewski is an Operations Assistant at Vanderbilt Capital Advisors, LLC. He coordinates trade
processing and resolution of settlement issues between broker-dealer and accounts’ custodian banks. Previously,
Tony worked at Garban ICAP and Nomura Securities in IT development as well as operations in fixed income
securities. Tony has attended SUNY Farmingdale and holds an A.S. in Computer Information Systems and is a
candidate for a B.S. in same. He has over twenty-two years of experience in the financial industry.
THE TRUSTEE AND AGENTS
Trustee
LaSalle Bank National Association (LaSalle) will act as trustee (in such capacity, the "Trustee") on behalf
of the Secured Parties pursuant to the Indenture.
Paying Agent, Transfer Agent, Agent Bank and Registrar
As long as LaSalle is the Trustee, LaSalle will also act as paying agent (in such capacity, the "Paying
Agent"), as registrar (in such capacity, the "Registrar"), as agent bank (in such capacity "Agent Bank") and as
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transfer agent (in such capacity, the "Transfer Agent") with respect to the Notes pursuant to the Indenture. The
Paying Agent, the Registrar, the Agent Bank and the Transfer Agent (each, an "Agent") may each resign upon 60
days' written notice to the Issuer, the Trustee and the Administrator; provided that no resignation will be effective
until a successor has been appointed. Upon such notice, the Issuer will appoint a successor paying agent, registrar,
agent bank or transfer agent. If no successor paying agent, registrar, agent bank or transfer agent is appointed within
45 days after the giving of such notice of resignation, the resigning Agent may appoint as a successor Agent in its
place a reputable financial institution of good standing of which the Issuer and the Trustee will approve (such
approval not to be unreasonably withheld or delayed).
The Holders representing at least 66 2/3 per cent. or more of the Outstanding Principal Amount of the
Notes may remove any Agent at any time, with the consent of the Swap Counterparty (such consent not to be
unreasonably withheld), delivered to such Agent and to the Issuer. Any such removal of an Agent and appointment
of a successor thereto will not become effective until acceptance of the appointment by the successor paying agent,
registrar, agent bank or transfer agent, as applicable.
Each Agent and the directors, officers, employees and agents of such Agent will be indemnified and held
harmless by the Issuer against any loss, liability or expense (including, without limitation, its reasonable legal fees
and any applicable value added tax thereon) properly incurred without negligence, willful misconduct or bad faith
arising out of or in connection with the exercise or performance of any of the powers or duties of such persons under
the Indenture.
No provision of the Indenture will be construed to relieve any Agent from liability for any damage, loss,
costs or expenses whatsoever to or by the Issuer or any Secured Party at any time caused by such Agent's own
negligence or willful misconduct, as the case may be, except that, amongst other things, such Agent will not be
liable with respect to any action it takes or refrains from taking in accordance with a direction of the person for
which it is acting as agent.
Capacities of LaSalle
As described above, LaSalle is acting as Trustee, Paying Agent, Registrar, Transfer Agent and Agent Bank.
LaSalle and each of its affiliates providing services in connection with the contemplated transactions will have only
the duties and responsibilities expressly agreed to by such entity in the relevant capacity and will not, by virtue of its
or any of its affiliates' acting in any other capacity, be deemed to have other 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. LaSalle and its
affiliates in their various capacities in connection with the contemplated transactions may enter into business
dealings, including the acquisition of investment securities as contemplated by the transaction documents, from
which they may derive revenues and profits in addition to the fees stated in the various transaction documents,
without any duty to account therefor.
THE INDENTURE
The Collateral Accounts
The Issuer will establish under the Indenture two accounts: the Principal Collateral Account (the "Principal
Collateral Account") and the Interest Collateral Account (the "Interest Collateral Account" ) (together, the
"Collateral Accounts").
The Principal Collateral Account
On the Closing Date, the Issuer will (i) credit to the Principal Collateral Account the $40,000,000 in
proceeds realized from the initial sale of the Notes and (ii) use such $40,000,000, and the amount paid under the
Interest Rate Swap for the purpose of funding the premium portion of the purchase price of the Initial Collateral
Assets , to purchase the Initial Collateral Assets. See "Description of the Collateral Assets — General." The Issuer
will also credit to the Principal Collateral Account promptly upon receipt (i) the Initial Collateral Assets and the
Replacement Collateral Assets , (ii) any Swap Termination Payment received from the Interest Rate Swap
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Counterparty under the Interest Rate Swap, (iii) any Swap Termination Payment received from the Swap
Counterparty under the Credit Default Swap, (iv) any Swap Counterparty Additional Payment received from the
Swap Counterparty under the Credit Default Swap, (v) any Cash Settlement Amount paid by the Swap Counterparty
to the Issuer in respect of a Credit Event in the Short Portfolio, and (vi) any payment of principal in respect of any
Eligible Investments held in the Principal Collateral Account. Upon receipt of any payments in respect of the
principal amount of the Replacement Collateral Assets (other than on the Scheduled Maturity Date of the Notes), the
Trustee shall give prompt notice of such receipt to the Issuer and invest such payments in Eligible Investments.
The Issuer will effect the payment of any Cash Settlement Amount in accordance with the terms of the
Credit Default Swap by delivering to the Swap Counterparty Collateral Assets, and/or proceeds or other payments
received in respect thereof held in the Principal Collateral Account, as described under "Description of the Credit
Default Swap — Settlement Upon Credit Event — Determination and Payment of Cash Settlement Amount."
On the Scheduled Maturity Date (or the Extended Maturity Date, if applicable), the Issuer will use the
proceeds realized upon the sale or maturity of the Collateral Assets, together with any Swap Counterparty
Additional Payment received from the Swap Counterparty under the Credit Default Swap, to pay the holders of the
Notes the outstanding principal amount thereof. See "Description of the Notes – Priority of Payments".
See, also, "Description of the Notes — Payments on the Notes — Principal Payments; Redemption;
Reduction and Increase of Principal" for the description therein of the source and application of funds upon the
mandatory redemption of the Notes.
Pending application in accordance with the terms hereof, moneys held in the Principal Collateral Account
will be reinvested by the Trustee in Eligible Investments as directed by the Issuer. Any Eligible Investments
purchased by the Issuer that constitute asset backed securities shall be acquired in an ordinary course open-market
transaction unless such acquisition otherwise satisfies the Rating Condition.
The Interest Collateral Account
The Issuer will credit to the Interest Collateral Account, promptly upon receipt from time to time (i) any
payment received from the Interest Rate Swap Counterparty under the Interest Rate Swap (other than any Swap
Termination Payment received from the Interest Rate Swap Counterparty under the Interest Rate Swap), (ii) the
Swap Counterparty Payments (other than any Swap Termination Payment) received from the Swap Counterparty
under the Credit Default Swap, (iii) any interest or other distributions received in respect of the Collateral Assets
(other than distributions of principal), and (iv) any interest or other distributions received in respect of the Eligible
Investments, if any, held in the Interest Collateral Account or the Principal Collateral Account (other than the
repayment of the principal amount of any Eligible Investment held in the Principal Collateral Account).
Amounts on deposit in the Interest Collateral Account will be used to make payments to the Interest Rate
Swap Counterparty under the Interest Rate Swap and to make payments of interest on the Notes.
Pending application in accordance with the terms hereof, moneys held in the Interest Collateral Account
will be reinvested in Eligible Investments by the Trustee, acting at the direction of the Issuer, that mature no later
than the Business Day immediately preceding the next Interest Payment Date. Any Eligible Investments purchased
by the Issuer that constitute asset backed securities shall be acquired in an ordinary course open-market transaction
unless such acquisition otherwise satisfies the Rating Condition.
Duties of Trustee
The Trustee will undertake to perform only the duties specifically set forth in the Indenture. The Trustee
will not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act, its
own willful malfeasance or its own reckless disregard of obligations, except that the Trustee will not be liable for an
error of judgment made in good faith by a Responsible Officer unless it is determined by the final and unappealable
judgment of a court of competent jurisdiction that the Trustee was grossly negligent, reckless or engaged in willful
misconduct, and will not be liable with respect to any action it takes or omits to take in good faith in accordance
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with a direction received by it from the Majority Noteholders. In addition, the Trustee will not be liable for interest
on any money received by it except as the Trustee may agree in writing with the Issuer. The Trustee will not be
required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties
under the Indenture or in the exercise of any of its rights or powers (including but not limited to the institution or
defense of legal proceedings) which in its judgment may cause it to incur or suffer any expense or liability for which
it is not indemnified. In no event will the Trustee be liable under the Indenture for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been
advised of the likelihood of such loss or damage and regardless of the form of action. "Responsible Officer"
means, when used with respect to the Trustee, any Officer within the CDO Trust Services Group of the Corporate
Trust Office (or any successor group of the Trustee).
Reports and Notices
The Trustee shall deliver or make available a monthly report to each Holder of Notes on the performance of
Reference Portfolios, which may differ in format but at minimum will contain all the information set out in the form
attached to the Indenture.
The Trustee will also (i) deliver or make available to each holder of Notes such information with respect to
the Notes as may be required to enable such holder to prepare its U.S. federal, state and local income tax returns (ii)
deliver to each holder of Notes at least once a year, the Section 3(c)(7) Reminder Notice and (iii) promptly forward
to the Rating Agencies and Holders of the Notes (provided such Holders have certified their ownership to the
Trustee) copies of reports and notices received from the Swap Counterparty in connection with any Credit Event or
otherwise under the Credit Default Swap. In addition, for so long as the Notes are listed on the Irish Stock
Exchange, and so long as the rules of the Irish Stock Exchange so require, notices to the Noteholders shall also be
delivered by the Trustee to the Company Announcements Office of the Irish Stock Exchange
Indenture Events of Default
Each of the following events constitutes an " Event of De fault":
(a)
Failure to Pay: the Issuer defaults in the payment of any interest or principal due in respect of any
Notes and such default continues for a period of five Business Days; or
(b)
Failure to Perform: the Issuer fails to perform or observe any of its other obligations under the
Notes or any other transaction document and such failure materially and adversely affects the rights of the
Noteholders, and each such failure continues unremedied for a period of 45 days (or such longer period as the
Trustee may permit) following the delivery by the Trustee (or by Holders of at least 25% of the Outstanding
Principal Amount of the Notes) of written notice thereof to the Issuer; or
(c)
Security Interest Unenforceable: the Trustee ceases to have a valid and enforceable security
interest in, or such security interest proves not to have been valid or enforceable when granted or purported to have
been granted, in the Collateral; or
(d)
Insolvency, Winding Up, etc.: (i) an involuntary proceeding is commenced or an involuntary
petition is filed seeking (A) liquidation, reorganization or other relief in respect of the Issuer of its debts, or of a
substantial part of its assets, under any bankruptcy, insolvency, receivership or similar law now or hereafter in effect
or (B) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Issuer or
for a substantial part of its assets, and, in any such case, such proceeding or petition continues undismissed for 60
days; or an order or decree approving or ordering any of the foregoing is entered; or (ii) the Issuer (A) voluntarily
commences any proceeding or files any petition seeking liquidation, reorganization or other relief under any
bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (B) consents to the institution of, or
fails to contest in a timely and appropriate manner, any proceeding or petition described in clause (i) of this
paragraph (d), (C) applies for or consents to the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Issuer or for a substantial part of its assets, (D) files an answer admitting the
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material allegations of a petition filed against it in any such proceeding, (E) makes a general assignment for the
benefit of creditors or (F) takes any action for the purpose of effecting any of the foregoing; or
(e)
Investment Company Act: the Issuer is required to register as an "investment company" under the
Investment Company Act.
In the case of any event described in clause (d) or (e) above, the Notes will be accelerated without any
notice or other action on the part of the Trustee or the Noteholders immediately upon the occurrence of such event.
In the case of any event described in clause (a), (b) or (c) above, the Notes will be accelerated only if, after the
expiration of any applicable grace period and while such event is continuing, the Trustee, if so requested in writing
by the holders of at least a majority of the Outstanding Principal Amount of the Notes , subject to being indemnified
or provided with security to its satisfaction, declares the Notes to be due and payable.
If an Event of Default has occurred that will result in the Notes becoming immediately due and payable
without further action or formality, as set forth above, the Trustee will notify the Noteholders of such Event of
Default by sending or publishing a notice in accordance with the procedures set forth in the Indenture.
At any time after an acceleration of the Notes and before a judgment or decree for payment of the money
due has been obtained by the Trustee, the holders of at least a majority of the Outstanding Principal Amount of the
Notes entitled to vote may, by written notice to the Issuer and Trustee, rescind and annul such acceleration and its
consequences if the Issuer has paid or deposited with the Trustee (or provided for the payment or deposit with the
Trustee of) an amount sufficient to pay all overdue interest in respect of the Notes, the Outstanding Principal
Amount of and interest on any Notes and other amounts payable on the Notes which have become due otherwise
than by reason of such acceleration.
The Trustee will promptly give written notice to each Rating Agency of any remedy of an Event of Default.
Within five Business Days after the occurrence of any Default or Event of Default of which the Trustee has received
notice or of which a responsible officer of the Trustee has actual knowledge, the Trustee will give notice to the
Issuer, the Swap Counterparty, the Interest Rate Swap Counterparty, the Rating Agencies and to all Noteholders of
each such Default or Event of Default hereunder so known to the Trustee, unless such Default or Event of Default
shall have been cured or waived. "Default" means any occurrence that is, or with notice or the lapse of time or both
would become, an Event of Default.
The Majority Noteholders will have the right to direct the Trustee in the conduct of any proceedings for any
remedy available to the Trustee (other than any proceeding in which the Trustee is acting in its individual capacity),
provided that (a) such direction will not conflict with any rule of law or any provision of the Indenture, (b) the
Trustee may take any other action consistent with such direction and (c) the Trustee has been provided with
indemnity satisfactory to it (and the Trustee need not take any action that it determines might involve it in liability
unless it has received such indemnity against such liability).
No Noteholder will have the right to institute any proceeding with respect to the Indenture unless (a) such
person previously has given to the Trustee written notice of a continuing Event of Default, (b) the Holders of at least
25% of the Outstanding Principal Amount of the Notes have made a written request upon the Trustee to institute
such proceeding in its own name as Trustee and such persons have offered the Trustee reasonable indemnity, (c) the
Trustee has, for 30 days following the receipt of a request described in (b) above, failed to institute any such
proceeding, and (d) no direction inconsistent with such written request and indemnity has been given to the Trustee
during such 30 day period by the Holders of at least 25% of the Outstanding Principal Amount of the Notes.
In determining whether the Holders of the requisite percentage of Notes have given any direction, notice or
consent, Notes owned by the Issuer, the Swap Counterparty or any of their Affiliates shall be disregarded and
deemed not to be outstanding.
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Replacement of Trustee
The Trustee may resign at any time in respect of the Notes and the Related Obligations by giving 60 days'
prior written notice to the Issuer, the Swap Counterparty, the Interest Rate Swap Counterparty, Maples Finance
Limited and the holders of the Notes. The Holders of 66? % or more of the Outstanding Principal Amount of the
Notes, with the consent of the Swap Counterparty (such consent not to be unreasonably withheld), may remove the
Trustee by providing 60 days' prior written notice to the Trustee and may appoint a successor trustee. In determining
whether such consent should be given, the Swap Counterparty may take into account whether the Trustee remains
trustee in respect of the Related Obligations and whether the successor trustee will become trustee in respect of the
Related Obligations in addition to the Notes.
No resignation or removal of the Trustee will become effective until a successor trustee assumes the
position of trustee under the Indenture. The Issuer will be required to remove the Trustee immediately if the Trustee
(i) fails to be in compliance with the eligibility requirements, (ii) fails to comply with any lawful action or request
for action made to the Trustee in accordance with the terms of the Indenture by the Majority Noteholders, (iii) is
adjudged bankrupt or insolvent, (iv) a receiver or other public officer takes charge of the Trustee or its property, or
(v) it otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason (the
Trustee in such event being referred to herein as the retiring trustee), the Issuer must, at the direction of the Holders
of 66? % or more of the Outstanding Principal Amount of the Notes and with the consent of the Swap Counterparty
(which consent may not be unreasonably withheld), promptly appoint a successor trustee which meets the eligibility
requirements set forth in the Indenture and pay to the Trustee all amounts due and owing to the Trustee.
In no event will the retiring trustee be liable for the acts or omissions of any successor trustee under the
Indenture. If a successor trustee does not take office within 45 days after the retiring trustee resigns or is removed,
the retiring trustee, the Depositor or any holder of the Notes may petition a court of competent jurisdiction for the
appointment of a successor trustee. For the avoidance of doubt, no resignation by or removal of the Trustee shall
become effective hereunder until a successor Trustee shall have been appointed. If the Trustee fails to be in
compliance with the eligibility requirements, any holder of the Notes may petition a court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor trustee. The obligations of the Issuer for
compensation will continue for the benefit of the retiring trustee, but only with respect to the period prior to the
resignation or removal.
Performance of Obligations
Except as otherwise provided in this paragraph, the Issuer will agree under the Indenture that it will not,
without the prior written consent of the Majority Noteholders, amend, modify, waive, supplement, terminate or
surrender, or agree to any amendment, modification, supplement, termination, waiver or surrender of, the terms of
the Credit Default Swap or the Interest Rate Swap including timely performance or observance by the Swap
Counterparty or the Interest Rate Swap Counterparty, as applicable, and will not enter into any other contractual
arrangements without the prior written consent of the Majority Noteholders. If any such amendment, modification,
supplement or waiver shall be consented to by the Majority Noteholders, the Issuer will promptly execute and
deliver such agreements, instruments, consents and other documents as the Issuer may deem necessary or
appropriate in the circumstances. Notwithstanding the foregoing, the Issuer may, without the prior written consent
of the Majority Noteholders, amend, modify, waive, supplement, or agree to any amendment, modification, waiver
or supplement, of the Credit Default Swap or the Interest Rate Swap, if any such amendment, modification, waiver
or supplement is for any of the following purposes:
(i)
to cure any ambiguity (so long as the interest of any holder will not be adversely affected thereby);
(ii)
to correct or supplement any provision of the Credit Default Swap or the Interest Rate Swap which
may be inconsistent with other provisions thereof (so long as the interest of any holder will not be
adversely affected thereby); or
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(iii)
to effect any other change that will not adversely affect the interest of any holder.
Agreements Supplemental to the Indenture
Without the consent of the Noteholders, the Interest Rate Swap Counterparty, or the Swap Counterparty
(but with written notice to the Noteholders, the Swap Counterparty, the Interest Rate Swap Counterparty, the
Portfolio Manager and the Rating Agencies), at any time and from time to time, the Issuer and the Trustee may enter
into one or more indentures supplemental to the Indenture, in form satisfactory to the Trustee, for any of the
following purposes: (i) to add to the covenants of the Issuer contained in the Indenture or in any of the Notes for the
benefit of the Trustee or the Secured Parties or to surrender any right or power conferred upon the Issuer; provided,
that any such addition of covenants or surrender of rights or powers shall not have a material adverse effect on the
rights and interests of the Holders of Notes, the Portfolio Manager, the Swap Counterparty, or the Interest Rate
Swap Counterparty (as evidenced by an Opinion of Counsel); (ii) to cure any ambiguity in the Indenture or in any of
the Notes; (iii) to evidence and provide for the acceptance of appointment by a successor entity to any of the Trustee
or any Agent and to add to or change any of the provisions of the Indenture as shall be necessary to facilitate the
administration of the Collateral by more than one trustee; (iv) to correct, modify or supplement any provision in the
Indenture or in any of the Notes which is defective or inconsistent with any other provision in the Indenture or in
any of the Notes; (v) to pledge any property to or with the Trustee; (vi) to correct or amplify the description of any
property at any time subject to the terms of the Indenture, or better to assure, convey and confirm unto the Trustee
any property subject to the terms of the Indenture; (vii) to make any changes required by the Irish Paying Agent so
long as any of the Notes are listed on the Irish Stock Exchange, or any other stock exchange on which any Notes are
listed, in each case in order to permit or maintain such listing; or (viii) to correct, modify or supplement any
provision which is inconsistent with this Offering Memorandum; provided that any such correction, modification or
supplement made pursuant to this clause shall be consistent with this Offering Memorandum.
With the consent of Holders of Notes representing at least a majority of the aggregate Outstanding
Principal Amount of the Notes affected by such supplemental indenture and entitled to vote, by Act of such Holders
delivered to the Issuer and the Trustee, and with the consent of the Swap Counterparty, the Interest Rate Swap
Counterparty and the Portfolio Manager, the Issuer and the Trustee may enter into an indenture or indentures
supplemental to the Indenture for the purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, the Indenture or of modifying in any manner the rights of the Holders of the Notes or the
rights of the Swap Counterparty or the Interest Rate Swap Counterparty under the Indenture; provided, that no such
supplemental indenture shall, without the consent of each Holder of each Outstanding Note affected thereby and
without the consent of the Portfolio Manager, the Swap Counterparty and the Interest Rate Swap Counterparty and
the satisfaction of the Rating Condition: (i) change the Scheduled Maturity Date, or any Interest Payment Date, or
reduce the Outstanding Principal Amount of any Note or the amount of interest payable thereon or change the coin
or currency in which any Note or interest thereon is payable; (ii) change the Priority of Payments; (iii) impair the
right to institute suit for the enforcement of any such payment on or after the date any such payment becomes due
and payable; (iv) reduce the percentage of Outstanding Principal Amount, the consent of the Noteholders of which is
required for the execution of any such amendment or supplement hereto, or the consent of the Noteholders of which
is required for any waiver of compliance with provisions hereof or for any waiver of Events of Defaults hereunder
and their consequences provided for in the Indenture; (v) change any obligation to redeem Notes or change any
redemption price or dates; (vi) modify or alter the provisions of the Indenture regarding the voting of Notes held by
the Swap Counterparty, the Interest Rate Swap Counterparty or any Affiliate of the Swap Counterparty or the
Interest Rate Swap Counterparty; (vii) permit the creation of any lien ranking prior to, or on a parity with, the lien in
favor of the Swap Counterparty or the Interest Rate Swap Counterparty or the lien of the Trustee for the benefit of
the Noteholders under the Indenture with respect to any part of the Collateral (other than the prior lien in favor of the
Swap Counterparty or the Interest Rate Swap Counterparty), or except as otherwise permitted under the terms of the
Indenture, terminate the lien in favor of the Swap Counterparty or the Interest Rate Swap Counterparty or the lien
under the Indenture under on any property at any time subject thereto or deprive the Swap Counterparty, the Interest
Rate Swap Counterparty, the Portfolio Manager or a Noteholder of the security afforded by such liens; (viii) modify
any of the provisions of the Indenture (subject to certain exceptions set out in the Indenture); or (ix) modify or alter
the provisions of the proviso to the definition of the term Outstanding.
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Governing Law
The Indenture and the Notes will be governed by, and construed in accordance with, the laws of the State of
New York without reference to its conflict of laws provisions.
THE PLACEMENT AGENT
Banc of America Securities Limited will act as Placement Agent (the "Placement Agent") pursuant to the
Placement Agreement for the Notes. As Placement Agent, Banc of America Securities Limited will place the Notes
with the initial Noteholder in accordance with the terms and conditions described herein.
The Placement Agent is a wholly-owned investment banking subsidiary of Bank of America Corporation.
The Placement Agent is a broker-dealer registered with the Securities and Exchange Commission and a member of
the National Association of Securities Dealers, Inc.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
To ensure compliance with Internal Revenue Service Circular 230, investors are hereby notified that:
(a) any discussion of U.S. federal tax issues contained or referred to in this Offering Memorandum is not
intended or written to be used, and cannot be used, by investors for the purpose of avoiding penalties that
may be imposed on them under the Internal Revenue Code; (b) such discussion is written to support the
promotion or marketing of the transactions or matters addressed herein; and (c) prospective investors should
seek advice based on their particular circumstances from an independent tax advisor.
General
The following is a general summary of certain material U.S. federal income tax consequences that may be
relevant with respect to the purchase, ownership and disposition of the Notes. This summary addresses only the
U.S. federal income tax considerations of holders who purchase the Notes in the original offering at the original
issue price and that will hold the Notes as capital assets. It is not a comprehensive description of all the tax
considerations that may be relevant to a decision to purchase the Notes. In particular, this summary does not address
tax considerations applicable to holders that are subject to special tax rules, including, without limitation, the
following (i) financial institutions; (ii) insurance companies; (iii) dealers or traders in securities or currencies or
notional principal contracts; (iv) tax-exempt entities; (v) regulated investment companies; (vi) real estate investment
trusts; (vii) persons that will hold the Notes as part of a "hedging" or "conversion" transaction or as a position in a
"straddle" or as part of a "synthetic security" or other integrated transaction for U.S. federal income tax purposes;
(viii) partnerships or pass-through entities or persons who hold the Notes through partnerships or other pass-through
entities; (ix) persons that own (or are deemed to own) 10 per cent. or more of the voting shares (or interests treated
as equity) of the Issuer; (x) persons (or their "qualified business units") that have a "functional currency" other than
the U.S. dollar; and (xi) certain U.S. expatriates and former long-term residents of the United States. Further, this
summary does not address alternative minimum tax consequences or the indirect effects on the holders of equity
interests in a holder of the Notes. This summary also does not describe any tax consequences arising under the laws
of any taxing jurisdiction other than the federal income tax laws of the U.S. federal government.
This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury
Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date
of this Offering Memorandum. All of the foregoing are subject to change, which change could apply retroactively
and could affect the tax consequences described below.
For the purposes of this summary, a "U.S. Holder" is a beneficial owner of the Notes that is, for U.S.
federal income tax purposes: (i) a citizen or individual resident of the United States; (ii) a corporation or other entity
treated as a corporation, created or organized in or under the laws of the United States or any state thereof (including
the District of Columbia); (iii) an estate the income of which is subject to U.S. federal income taxation regardless of
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its source; or (iv) a trust if (x) a court within the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all of the substantial decisions of such
trust or (y) it has a valid election in effect under the applicable Treasury Regulations to be treated as a U.S. person.
A "Non-U.S. Holder" is a beneficial owner of the Notes that is not a U.S. Holder. If a partnership or other passthrough entity taxable as a partnership holds the Notes, the tax treatment of a partner will generally depend upon the
status of the partner and upon the activities of the partnership. A partner of a partnership holding the Notes should
consult its own tax advisor.
No rulings have been sought from the IRS regarding the matters discussed herein and there can be no
assurance that the IRS or the courts will agree with the conclusions expressed. This discussion is a general summary
and does not cover all tax matters that may be important to a particular investor. Prospective investors should
consult their own tax advisors regarding the proper treatment of the Notes for U.S. federal income tax
purposes and the tax consequences of an investment in the Notes under the federal, state and local laws of the
United States and any other jurisdiction where the investor may be subject to taxation with respect to their
particular situation.
Taxation of the Issuer.
Subject to the assumptions and qualifications contained therein, upon issuance of the Notes, Allen & Overy
LLP (U.S. Tax Counsel) will provide an opinion as of the Closing Date that although there is no authority directly
addressing activities closely comparable to that contemplated by the Issuer, the Issuer will not be treated as engaged
in a trade or business within the United States solely as a result of the transactions contemplated herein. The opinion
is based on (i) covenants made by the Issuer, the Portfolio Manager and any of their agents in the transaction
documents, and (ii) the assumption that the Issuer, the Portfolio Manager and other transaction parties will comply
with the terms of the Portfolio Management Agreement and other relevant transaction documents and adopt certain
operating procedures designed to reduce the risk that the Issuer will be deemed to be engaged in a trade or business
within the United States. An opinion of legal counsel is not binding on the IRS or the courts, and accordingly, it is
possible that the IRS or the courts could disagree with U.S. Tax Counsel's conclusion. If, notwithstanding U.S. Tax
Counsel's opinion, it were determined that the Issuer was engaged in a U.S. trade or business and had taxable
income that is effectively connected with such U.S. trade or business, the Issuer would be subject to substantial U.S.
federal income taxes, the imposition of which would materially impair its ability to make payments on the Notes and
could materially affect the yield of the Notes.
If the Issuer is a controlled foreign corporation (a CFC, as defined below), the Issuer would incur U.S.
withholding tax on interest received from a related United States person. Additionally, while it is anticipated that
payments received in respect of swaps are not subject to U.S. federal withholding tax, it should be noted that the tax
treatment of credit default swaps is uncertain as the IRS is currently studying this issue and may ultimately
promulgate rules that would adversely impact the Issuer.
If withholding or deduction of any taxes from payments is required by law in any jurisdiction, the Issuer
shall be under no obligation to make any additional payments to the holders of any Notes in respect of such
withholding or deduction.
Taxation of U.S. Holders of the Notes
The Issuer is a corporation which is not treated as a U.S. real property holding company (as defined under
the Code) for U.S. federal income tax purposes. Although not denominated as equity, based on the capital structure
of the Issuer and the terms of the Notes, it is likely the Notes will be treated as equity for U.S. federal income tax
purposes. The Issuer will treat, and each holder of Notes will agree by purchase of such Notes to treat, in the
absence of an administrative determination or judicial ruling to the contrary, the Notes as equity in the Issuer for
U.S. federal income tax purposes. As a result, a U.S. Holder of a Note would be treated as owning an equity interest
in a passive foreign investment company (and possibly a controlled foreign corporation) for U.S. federal income tax
purposes. Accordingly, a U.S. Holder of a Note may be subject to adverse tax consequences upon the sale,
exchange, retirement or other disposition of, or the receipt of certain types of distributions on, such Note. In
addition, the Issuer's income, gain or loss, as determined for U.S. federal income tax purposes, could impact the
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recognition of income, gain or loss with respect to the Notes by a U.S. Holder for U.S. federal income tax purposes.
Prospective investors should consult their own tax advisors about the U.S. federal income tax consequences of
a U.S. Holder owning equity interests in a passive foreign investment company or a controlled foreign
corporation. The following discussion is based on the assumption that the Notes are treated as equity of the Issuer
for U.S. federal income tax purposes.
Investment in a Passive Foreign Investment Company. The Issuer will constitute a "passive foreign
investment company" (a "PFIC") and the Notes will be treated as equity in the Issuer. Accordingly, U.S. Holders of
Notes (other than certain U.S. Holders that are subject to the rules pertaining to a "controlled foreign corporation"
with respect to the Issuer, described below) 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" (a "QEF") with
respect to such U.S. Holder. Generally, a QEF election should be made with the filing of a U.S. Holder's federal
income tax return for the first taxable year for which it held the 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 earnings and (ii) as long-term capital gain, such holder's
pro rata share of the Issuer's net capital gain, whether or not distributed. For this purpose, a U.S. Holder's pro rata
share of the Issuer's ordinary income and net capital gain is the amount which would have been distributed to the
U.S. Holder if, on each day during its taxable year, the Issuer had distributed to each U.S. Holder of an equity
interest a pro rata share of that day's pro rata share of the Issuer's ordinary earnings and net capital gain for such
year. A U.S. Holder will not be eligible for the preferential income tax rate on "qualified dividend income" (as
defined in the Code) or the dividends received deduction in respect of such income or gain. 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. An amount included in an
electing U.S. Holder's gross income should be treated as income from sources outside the United States for U.S.
foreign tax credit limitation purposes. However, if U.S. Holders collectively own (directly or constructively) 50
percent or more (measured by vote or value) of the Notes, such amount will be treated as income from sources
within the United States for such purposes to the extent that such amount is attributable to income of the Issuer from
sources within the United States. If applicable to a U.S. Holder of 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.
The Issuer's income, gain or loss, as determined for U.S. federal income tax purposes, could impact the
U.S. Holder's recognition of income, gain or loss for U.S. federal income tax purposes where such holder has made a
QEF election. In certain cases in which a QEF does not distribute all of its earnings in a taxable year, U.S.
shareholders may also be permitted to elect to defer payment of some or all of the taxes on the QEF's undistributed
income subject to an interest charge on the deferred amount. In this respect, prospective purchasers of Notes should
be aware that the Issuer may have in any given year earnings for U.S. federal income tax purposes that are not
distributed on Notes. Thus, absent an election to defer payment of taxes, U.S. Holders that make a QEF election
with respect to the Issuer may owe tax on "phantom" income.
Each U.S. Holder who desires to make a QEF election must individually make the QEF election. The QEF
election is effective for the U.S. Holder's taxable year for which it is made and all subsequent taxable years and may
not be revoked without the consent of the IRS. U.S. Holders seeking to make a QEF election must timely file an
IRS Form 8621 with its U.S. federal income tax return for the relevant taxable year. The Issuer will provide, upon
written request, all information and documentation that a U.S. Holder making a QEF election is required to obtain
for U.S. federal income tax purposes.
A U.S. Holder of Notes (other than certain U.S. Holders that are subject to the rules pertaining to a
"controlled foreign corporation", described below) that does not make a timely QEF election will be required to
report any gain on disposition of any Notes as if it were an excess distribution, rather than capital gain, and to
compute the tax liability on such gain and other "excess distributions" received in respect of the Notes as if such
items had been earned ratably over each day in the U.S. Holder's holding period (or a certain portion thereof) for the
Notes. The U.S. Holder will be subject to tax on such items at the highest ordinary income tax rate for each taxable
year, other than the current year of the U.S. Holder, in which the items were treated as having been earned,
regardless of the rate otherwise applicable to the U.S. Holder. Further, such U.S. Holder will also be liable for an
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additional tax equal to interest on the tax liability attributable to income allocated to prior years as if such liability
had been due with respect to each such prior year. For purposes of these rules, gifts, exchanges pursuant to
corporate reorganizations and use of the Notes as security for a loan may be treated as a taxable disposition of the
Notes. Very generally, an "excess distribution" is the amount by which distributions during a taxable year in
respect of the Notes exceed 125 percent of the average amount of distributions in respect thereof during the three
preceding taxable years (or, if shorter, the U.S. Holder's holding period for the Notes).
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. Accordingly, U.S.
Holders of Notes should consider carefully whether to make a QEF election with respect to the Notes and the
consequences of not making such an election and should consult their own tax advisors as to the procedures
required to be followed in making a QEF election and all the consequences of making and failure to make a
QEF election.
PFIC Information Returns. Each U.S. Holder of Notes must make an annual return on IRS Form 8621,
reporting distributions received and gains realised with respect to each PFIC in which it holds a direct or indirect
interest. Prospective purchasers should consult their own tax advisers regarding the status of the Issuer as a PFIC,
whether an investment in the Notes will be treated as an investment in PFIC stock and the consequences of an
investment in a PFIC.
Investment in a Controlled Foreign Corporation. The Issuer may be classified as a controlled foreign
corporation (a "CFC"). In general, a foreign corporation will be classified as a CFC if more than 50% of the shares
of the corporation, measured by reference to combined voting power or value, is owned (actually or constructively)
by U.S. Shareholders. A "U.S. Shareholder", for this purpose, is in general any U.S. Holder that possesses
(actually or constructively) 10% or more of the combined voting power (generally the right to vote for directors of
the corporation) of all classes of shares of a corporation. Although the Notes do not vote for directors of the Issuer,
it is possible that the IRS would assert that the Notes are de facto voting securities and that U.S. Holders possessing
(actually or constructively) 10% or more of the total stated amount of Notes are U.S. Shareholders. If this argument
were successful and more than 50% of the Notes (determined with respect to aggregate value or vote) 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 (at the end of the taxable year of the
Issuer) would be treated, subject to certain exceptions, as receiving a deemed dividend in an amount equal to that
person's pro rata share of the "subpart F income" of the Issuer. Such deemed dividend normally would be treated
as income from sources within the United States for U.S. foreign tax credit limitation purposes to the extent that it is
attributable to income of the Issuer from sources within the United States. 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, income from certain notional principal contracts, certain types of
insurance income and income from certain transactions with related parties. It is likely that, if the Issuer were to
constitute a CFC, all or most of its income would be subpart F income. In general, if the subpart F income exceeds
70% of the Issuer's gross income, the entire amount of the Issuer's income will be subpart F income. U.S. Holders
should consult their tax advisors regarding these special rules.
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 subpart F income of the Issuer under rules described in the preceding
paragraph and not under the QEF rules previously described. As a result, to the extent subpart F income of the
Issuer includes net capital gains, such gains would 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 QEF rules.
Furthermore, if the Issuer were treated as a CFC and a U.S. Holder were treated as a U.S. Shareholder
therein, the Issuer would not be treated as a PFIC or a QEF with respect to such U.S. Holder for the period during
which the Issuer remained a CFC and such U.S. Holder remained a U.S. Shareholder therein (the "qualified
portion" of the U.S. Holder's holding period for the Notes). If the qualified portion of such U.S. Holder's holding
period for the Notes subsequently ceased (either because the Issuer ceased to be a CFC or the U.S. Holder ceased to
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be a U.S. Shareholder), then solely for purposes of the PFIC rules, such U.S. Holder's holding period for the Notes
would be treated as beginning on the first day following the end of such qualified portion, unless the U.S. Holder
had owned any Notes for any period of time prior to such qualified portion and had not made a QEF election with
respect to the Issuer. In that case, the Issuer would again be treated as a PFIC which is not a QEF with respect to
such U.S. Holder and the beginning of such U.S. Holder's holding period for the Notes would continue to be the date
upon which such U.S. Holder acquired the Notes, unless the U.S. Holder made an election to recognize gain with
respect to the Notes and a QEF election with respect to the Issuer.
A U.S. Holder of Notes that owns (actually or constructively) at least 10% by vote or value of the Issuer
may be required to file an information return on IRS Form 5471. A U.S. Holder of Notes generally is required to
provide additional information regarding the Issuer annually on IRS Form 5471 if it owns (actually or
constructively) more than 50% by vote or value of the Issuer. U.S. Holders should consult their own tax advisors
regarding whether they are required to file IRS Form 5471.
The relationship between the PFIC and CFC rules and the possible consequences of those rules for a
particular U.S. Holder depend upon the circumstances of the Issuer and the U.S. Holder. U.S. Holders should note
that, under the PFIC or CFC rules described above, U.S. Holders may be required to recognize income for tax
purposes that exceeds the cash they receive in any taxable period. Each prospective investor should consult its
tax adviser about the possible application of the PFIC and CFC rules to its particular situation.
Distributions on the Notes. The treatment of actual distributions of cash on the 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 pursuant to a QEF election (or pursuant to the CFC rules, if applicable) will be taxable to U.S. Holders as
ordinary income upon receipt to the extent of any remaining amounts of untaxed current and accumulated earnings
and profits of the Issuer. Distributions in excess of any current and accumulated earnings and profits will be treated
first as a nontaxable reduction to the U.S. Holder's tax basis for the 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
distributions with respect to the Notes may constitute "excess distributions", taxable as previously described. See
"—Investment in a Passive Foreign Investment Company". In that event, except to the extent that distributions may
be attributable to amounts previously taxed to the U.S. Holder pursuant to the CFC rules or are treated as "excess
distributions", distributions on the Notes generally would be treated as dividends to the extent paid out of the Issuer's
current or accumulated earnings and profits not allocated to any "excess distributions", then as a nontaxable
reduction to the U.S. Holder's tax basis for the Notes to the extent thereof and then as capital gain. Dividends
received from a foreign corporation generally will be treated as income from sources outside the United States for
U.S. foreign tax credit limitation purposes. However, if U.S. Holders collectively own (directly or constructively)
50 percent or more (measured by vote or value) of the Notes, a percentage of the dividend income equal to the
proportion of the Issuer's earnings and profits from sources within the United States generally will be treated as
income from sources within the United States for such purposes.
Sale, Exchange or other Disposition of the Notes. In general, a U.S. Holder of a Note will recognize a
gain or loss upon the sale, exchange, redemption or other taxable disposition of a Note equal to the difference
between the amount realized and such U.S. Holder's adjusted tax basis in the Note. Except as discussed below, such
gain or loss will be a capital gain or loss and will be a long-term capital gain or loss if the U.S. Holder held the
Notes for more than one year at the time of the disposition. Prospective investors should consult their own tax
advisors with respect to the treatment of capital gains (which may be taxed at lower rates than ordinary income for
taxpayers that are individuals, trusts or estates and that held the Notes for more than one year) and capital losses (the
deductibility of which is subject to limitations). Any gain recognized by a U.S. Holder on the sale, exchange,
redemption or other taxable disposition of a (other than, in the case of a U.S. Holder treated as a "U.S. Shareholder",
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any such gain characterized as a dividend, as discussed below) generally will be treated as from sources within the
United States and loss so recognized generally will offset income from sources within the United States.
Initially, a U.S. Holder's tax basis for a Note will equal the cost of such Note to such U.S. Holder. 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 distributions 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 Note (as
described above).
If a U.S. Holder does not make a timely QEF election as described above, any gain realized on the sale,
exchange, redemption or other taxable disposition of a Note (or any gain deemed to accrue prior to the time a nontimely QEF election is made) will be taxed as ordinary income and subject to an additional tax reflecting a deemed
interest charge under the special tax rules governing excess distributions 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 Notes, 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 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.
Transfer Reporting Requirements. Generally, U.S. Holders would need to file IRS Form 926 with respect
to their acquisition at original issuance of the Notes for U.S. federal income tax purposes. A U.S. person that
purchases the Notes for cash will be required to file Form 926 or a similar form with the IRS if (i) such person
owned, directly or by attribution, immediately after the transfer, at least 10 percent by voting power or value of the
Issuer or (ii) if the transfer, when aggregated with all transfers made by such person (or any related person) within
the preceding 12-month period, exceeds U.S. $100,000. In the event a U.S. Holder fails to file any such required
form, the U.S. Holder could be required to pay a penalty equal to 10 percent of the gross amount paid for
such Notes up to a maximum penalty of US$100,000 except in the case of intentional disregard. U.S. Holders
should consult their own tax advisors with respect to this or any other reporting requirement which may
apply with respect to their acquisition of the Notes.
Alternative Characterization. It is possible, although unlikely, that the Notes, consistent with their form,
could be treated as debt rather than equity in the Issuer for U.S. federal income tax purposes. If the Notes were
characterized as debt instruments, the Notes could be treated as contingent payment debt instruments ("CPDIs ")
subject to the "non-contingent bond method" under the U.S. Treasury Regulations governing CPDIs (the "CPDI
Regulations"). The CPDI Regulations generally require a U.S. Holder of a CPDI subject to the non-contingent
bond method to include future contingent and non-contingent interest payments in income as such interest accrues as
original issue discount ("OID") based upon a projected payment schedule that reflects the yield of a comparable
non-contingent debt instrument issued by the Issuer. Thus, under this characterization, a U.S. Holder would be
required to accrue amounts of OID in income prior to the receipt of payments of such amounts. Further, under the
CPDI Regulations, any gain or loss such U.S. Holder recognizes on the sale, exchange or retirement of a CPDI will
generally be treated as U.S. source ordinary income or loss, except that a portion of any loss recognized could be
treated as capital loss (depending on the circumstances). Prospective investors are urged consult their own tax
advisors regarding the characterization of the Notes and the application and consequences of the CPDI
Regulations to the Notes.
Taxation of Non-U.S Holders of Notes
Subject to the backup withholding tax discussion below, a Non-U.S. Holder generally should not be subject
to U.S. federal income or withholding tax on any payments on the Notes and gain from the sale, exchange,
redemption or other disposition of the Notes unless (i) that payment and/or gain is effectively connected with the
conduct by that Non-U.S. Holder of a trade or business in the United States; (ii) in the case of any gain realized by
an individual Non-U.S. Holder, that Non-U.S. Holder is present in the United States for 183 days or more in the
taxable year of the sale or other disposition and certain other conditions are met; or (iii) the Non-U.S. Holder is
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subject to tax pursuant to provisions of the Code applicable to certain expatriates. Non-U.S. Holders should consult
their own tax advisors regarding the U.S. federal income tax considerations and other tax consequences of owning
the Notes.
An investment in the Notes by a Non-U.S. Holder that itself is treated as a PFIC and/or a CFC could result
in adverse consequences to the U.S. Holders of its equity similar to the PFIC and CFC consequences to U.S. Holders
described in detail above. Non-U.S. Holders should consult their own tax advisors as to the tax consequences
of an investment in the Notes with respect to their particular situation, including any tax consequences that
may be applicable to the holders of equity in such Non-U.S. Holders.
Backup Withholding and Information Reporting
Backup withholding and information reporting requirements may apply to certain payments on the Notes
and proceeds of the sale, exchange, redemption or other disposition of the Notes to U.S. Holders. The Issuer, its
agent, a broker, or any paying agent, as the case may be, may be required to withhold tax from any payment that is
subject to backup withholding if the U.S. Holder fails to furnish the U.S. Holder's taxpayer identification number
(typically by providing a completed and executed IRS Form W-9), to certify that such U.S. Holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of the backup withholding rules.
Certain U.S. Holders (including, among others, corporations) are not subject to the backup withholding and
information reporting requirements. Non-U.S. Holders may be required to comply with applicable certification
procedures (typically by providing a completed and executed IRS Form W-8BEN) to establish that they are not U.S.
Holders in order to avoid the application of such information reporting requirements and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a
payment to a U.S. Holder generally may be claimed as a credit against such U.S. Holder's U.S. federal income tax
liability, provided that the required information is timely furnished to the IRS. Prospective investors in the Notes
should consult their own tax advisors as to their qualification for exemption from backup withholding and the
procedure for obtaining an exemption.
IRS Disclosure Reporting Requirements
U.S. Treasury Regulations (the "Disclosure Regulations") meant to require the reporting of certain tax
shelter transactions ("Reportable Transactions") could be interpreted to cover transactions generally not regarded
as tax shelters. Under the Disclosure Regulations it may be possible that certain transactions with respect to the
Notes may be characterized as Reportable Transactions requiring a holder to disclose such transaction, such as a
sale, exchange, retirement or other taxable disposition of a Note that results in a loss that exceeds certain thresholds
and other specified conditions are met. If the Issuer participates in a Reportable Transaction, a U.S. Holder of the
Notes that is a "reporting shareholder" of the Issuer will be treated as participating in the transaction and will be
subject to the rules described above. Although most of the Issuer's activities generally are unlikely to give rise to
"reportable transactions", it is nonetheless possible that the Issuer will participate in certain types of transactions that
could be treated as reportable transactions. A U.S. Holder of the Notes will be treated as a reporting shareholder of
the Issuer if (i) such U.S. Holder owns 10 per cent. or more of the Notes and makes a QEF election with respect to
the Issuer or (ii) the Issuer is treated as a CFC and such U.S. Holder is a United States Shareholder (as defined
above) of the Issuer. Prospective investors in the Notes should consult with their own tax advisors to
determine the tax return obligations, if any, with respect to an investment in the Notes, including any
requirement to file IRS Form 8886 (Reportable Transaction Statement).
CAYMAN ISLANDS TAXATION
The following summary solely describes the principal Cayman Islands tax consequences of the purchase,
ownership and disposition of the Notes under Cayman Islands law in effect as of the date hereof. The following
summary is based upon the advice of the Cayman Islands Counsel. It does not purport to be a comprehensive
description of all Cayman Islands tax considerations that may be relevant to a decision to purchase the Notes.
Prospective investors should consult their professional advisors on possible tax consequences in their country of
citizenship, residence or domicile.
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Under current Cayman Islands Law:
(i)
payments of principal and interest in respect of any Notes will not be subject to taxation in the
Cayman Islands and no withholding will be required on such payments to any Holder of Notes and gains derived
from the sale of any 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 or gift tax;
(ii)
Certificates evidencing the Notes, in registered form, to which title is not transferable by delivery
should not attract stamp duty imposed under the laws of the Cayman Islands in respect of such Notes; and
(iii)
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 applied for and expects to obtain an undertaking from the Governor-in -Council of the Cayman Islands in
substantially the following form:
CAYMAN ISLANDS GOVERNMENT
THE TAX CONCESSIONS LAW
(1999 REVISIONS)
UNDERTAKING AS TO TAX CONCESSIONS
In accordance with Section 6 of the Tax Concessions Law (1999 Revision), the Governor in Cabinet
undertakes with STRATA 2007-1, Limited (the "Company"):
(a)
that no Law which is hereafter enacted in the Islands imposing any tax to be levied on profits,
income, gains or appreciation will apply to the Company or its operation; 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 will be payable:
(i)
on or in respect of the share 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 will be for a period of twenty years from the date the certificate is issued.
ERISA CONSIDERATIONS
To ensure compliance with U.S. Treasury Department Circular 230, investors in the Notes are hereby
notified that: (a) any discussion of U.S. federal tax below is not intended or written by the Issuer to be relied upon,
and cannot be relied upon by investors in the Notes, for the purpose of avoiding penalties that may be imposed on
investors in the Notes under the U.S. Internal Revenue Code; (b) such discussion is written in connection with the
promotion or marketing of the transactions or matters addressed herein by the Issuer and the initial purchaser, and
(c) investors in the Notes should seek advice based on their particular circumstances from their own independent tax
advisors.
The following summary regarding certain aspects of ERISA is based on ERISA, the Pension Protection Act
of 2006 (the "Pension Act"), judicial decisions, and DOL regulations and rulings that are in existence on the date
herof. This summary is general in nature and does not address every issue pertaining to ERISA that may be
applicable to the Issuer or a particular investor. Accordingly, each prospective investor should consul with its own
counsel in order to understand the ERISA-related issues that affect or may affect the investor with respect to this
investment.
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ERISA and the Code impose certain requirements on employee benefit plans as defined in Section 3(3) of
ERISA that are subject to Title I of ERISA and on Plans as defined in Section 4975 of the Code ("Plans") and on
those persons who are "fiduciaries" with respect to Plans. In considering an investment of the assets of a Plan
subject to Title I of ERISA in the Notes, a fiduciary must, among other things, discharge its duties solely in the
interest of the participants of such Plan and their beneficiaries and for the exclusive purpose of providing benefits to
such participants and beneficiaries and defraying reasonable expenses of administering the Plan. A fiduciary must
act prudently and must diversify the investments of a Plan subject to Title I of ERISA, as well as discharge its duties
in accordance with the documents and instruments governing such Plan. In addition, a fiduciary may not cause a
Plan to engage in certain transactions that are prohibited under ERISA or Section 4975 of the Code. Furthermore,
ERISA requires fiduciaries to hold all assets of a Plan subject to Title I of ERISA in trust and to maintain the indicia
of ownership of any assets of a Plan subject to Title I of ERISA within the jurisdiction of the U.S. district courts.
In applying these rules to the acquisition of the Notes, it is necessary to identify whether Plan assets are
involved. United States Department of Labor ("DOL") Regulation Section 2510.3-101 as modified by ERISA (the
"Plan Asset Regulation") defines "plan assets" to include not only securities held by a Plan but also the underlying
assets of the issuer of any "equity interest" owned by a Plan (the "Look-Through Rule") unless one or more
exceptions are applicable. The Plan Asset Regulation specifically identifies beneficial interests in a trust as equity
interests. Thus, the Notes are equity interests as defined in the Plan Asset Regulation, and, under the Look-Through
Rule, unless an exception applies, the assets of the Issuer would be plan assets of any Plan subject to Title I of
ERISA that purchases Notes. Furthermore, if Plan assets are involved in the acquisition of the Notes, the
management of the assets of the Issuer may be subject to the fiduciary duties described above.
One exception to the Look-Through Rule provides generally that the Look-Through Rule does not apply to
an entity if less than 25% of each class of the entity's equity interests is owned by "benefit plan investors". A
"benefit plan investor" is defined in the Plan Asset Regulation, as amended by the Pension Act, as (i) an employee
benefit plan subject to Part 4 of Title I of ERISA, (ii) any plan to which section 4975 of the Code applies (e.g., an
individual retirement account), or (iii) any entity whose underlying assets include plan assets by reason of a plan’s
investment in the entity (e.g., if benefit plan investors own more than 25% of its equity) (each of (i), (ii) and (iii), a
"Benefit Plan Investor").
Under the exception noted above, the Look-Through Rule will not apply to the underlying assets of the
Issuer if less than 25% of the value of any class of its equity interests are held by Benefit Plan Investors. Several
rules apply in calculating this percentage under the Plan Asset Regulation as amended by the Pension Act. First, a
proportionate rule applies to investments by one entity in another entity. Under this rule, if more than 25% of an
investor’s equity interests are held by Benefit Plan Investors, only a proportionate amount of its investment counts
towards the 25% threshold (but if less than 25% of an investor’s equity interests are held by Benefit Plan Investors,
none of the investor’s investment counts). Second, an entity must determine whether the 25% threshold has been
reached each time an investor acquires an equity interest in the entity. The DOL has taken the position in this regard
that a redemption of an equity interest by an investor constitutes the acquisition of an equity interest by the
remaining investors (through an increase in their percentage ownership of the remaining equity interests). Third, for
this purpose, the value of any equity interests held by a person (other than a Benefit Plan Investor) who has
discretionary authority or control with respect to the assets of an entity or any person who provides investment
advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, is disregarded.
Based on the U.S. Supreme Court decision in John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank , 510 U.S. 86 (1993), the purchase, by a Plan subject to Title I of ERISA, of an insurance contract that
is not guaranteed by the insurance company will result in the portion of the insurance company's general account
attributable to such purchase being deemed to be "plan assets." Thus an insurance company that is purchasing the
Notes with the assets of its general account will be a Benefit Plan Investor if such general account contains any
assets of a Plan subject to Title I of ERISA. However, under the Plan Asset Regulation, if less than 25% of the
assets of the insurance company's general account are assets of Benefit Plan Investors, the Look-Through Rule will
not apply to purchases of the Notes by the insurance company.
In addition to the impact of the Look-Through Rule, an investor who is considering purchasing Notes with
Plan assets also must be concerned that the acquisition will not constitute or result in a non-exempt prohibited
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transaction. Sections 406(a) and 407 of ERISA and Sections 4975(c)(1)(A), (B), (C) and (D) of the Code prohibit
certain transactions that involve a Plan and a "party in interest" as defined in Section 3(14) of ERISA or a
"disqualified person" as defined in Section 4975(e)(2) of the Code with respect to such Plan. Examples of such
prohibited transactions include, but are not limited to, sales of property (such as the Notes) or extensions of credit
between a Plan and a party in interest or disqualified person. Section 406(b) of ERISA and Sections 4975(c)(1)(E)
and (F) of the Code generally prohibit a fiduciary with respect to a Plan from dealing with the assets of the Plan for
its own benefit (for examp le when a fiduciary of a Plan uses its position to cause the Plan to make investments from
which the fiduciary (or a party related to the fiduciary) receives a fee or other consideration). A prohibited
transaction under Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code will not occur if (i)
neither an investor in the Notes nor any affiliate of such investor has discretionary authority or control with respect
to the assets of the Issuer or provides investment advice for a fee (direct or indirect) with respect to such assets and
(ii)(a) none of the Placement Agent, the Swap Counterparty or the Trustee, or any of their affiliates (the "Affected
Persons") is a "fiduciary" within the meaning of Section 3(21) of ERISA with respect to an investor in the Notes or
(b) the investment decision to purchase the Notes was made by a "fiduciary" within the meaning of Section 3(21) of
ERISA with respect to the investor other than the Affected Persons and neither such fiduciary nor the investor has
relied on any advice or recommendation from the Affected Persons as a basis for the decision to purchase the Notes.
ERISA and the Code contain certain exemptions from the prohibited transactions described above, and the
DOL has issued several exemptions, including DOL Prohibited Transaction Class Exemption ("PTCE") 95-60
applicable to transactions involving insurance company general accounts. Under Section 4975 of the Code, excise
taxes are imposed on parties involved in non-exempt prohibited transactions.
As a general rule, certain plans, including governmental plans (as defined in Section 3(32) of ERISA)
("Governmental Plans"), church plans (as defined in Section 3(33) of ERISA) that have not made an election under
Section 410(d) of the Code (" Church Plans") and foreign plans, are not subject to ERISA's requirements.
Accordingly, assets of such plans may be invested without regard to the fiduciary and prohibited transaction
considerations described above. Although a Governmental Plan, a Church Plan or a foreign plan is not subject to
ERISA or Section 4975 of the Code, it may be subject to other federal, state, or local laws, which are, to a material
extent, similar to Title I of ERISA or Section 4975 of the Code (a "Similar Law" ). A fiduciary of a Governmental
Plan, a Church Plan or a foreign plan should make its own determination as to the requirements, if any, under a
Similar Law applicable to the purchase of the Notes.
In order to eliminate the need to monitor ownership of the Notes by Benefit Plan Investors and to avoid a
potential prohibited transaction or the applicability of ERISA's fiduciary duties to the management of the assets of
the Issuer and to avoid a violation of any Similar Law, except as otherwise provided in the next sentence, any
investor using Plan assets cannot acquire the Notes if such investor is a Benefit Plan Investor or a Governmental
Plan, a Church Plan or a foreign plan. However, if the Benefit Plan Investor is an insurance company using the
assets of its general account to purchase the Notes and less than 25% of the assets of such general account are assets
of Benefit Plan Investors, such insurance company may purchase the Notes with the assets of its general account as
provided below.
Therefore, no Notes may be purchased by or transferred to any investor unless such investor represents that
either (A)(1) such investor is not a Benefit Plan Investor, a Governmental Plan, a Church Plan or a foreign plan and
(2) such investor will notify the Trustee and the Swap Counterparty within ten (10) days if, after its initial
acquisition of the Notes, at any time it becomes a Benefit Plan Investor or (B)(1) such investor is an insurance
company purchasing the Notes with the assets of its general account, (2) less than 25% of the assets of such general
account are assets of Benefit Plan Investors, (3)(I)(x) the conditions of PTCE 95-60 are met such that PTCE 95-60 is
applicable to the purchase and holding of the Notes, and (y) the purchase and holding of the Notes will not result in
a non-exempt prohibited transaction under Section 406(b) of ERISA or Section 4975(C)(1)(E) or (F) of the Code or
(II) such investor will provide an opinion of counsel to the Trustee and the Swap Counterparty that its purchase and
holding of the Notes will not be a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code
and (4) such investor will notify the Trustee and the Swap Counterparty within ten (10) days if, after its initial
acquisition of the Notes, it could no longer make the representations contained in clauses (B)(2) or (B)(3) above or
(C) such investor is not a Government Plan, a Church Plan or a foreign plan unless the purchase and holding of the
Note would not violate any Similar Law. Any purported transfer of the Notes to a transferee that does does not
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comply with the foregoing requirements shall be null and void ab initio. The Trustee shall have no liability if it does
not receive any such notification.
AVAILABLE INFORMATIO N
The Issuer will promptly upon request make available to any holders of the Notes, or any owners of
interests therein, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act in
order to permit compliance by such holders or owners with Rule 144A in connection with the resale of the Notes or
interests therein.
LEGAL MATTERS
Certain legal and federal income tax matters relating to the Notes will be passed upon for the Issuer and the
Placement Agent by Allen & Overy LLP, New York, special counsel to the Issuer and the Placement Agent.
PLAN OF OFFERING
Pursuant to the terms of the Placement Agreement, dated as of the Closing Date, Banc of America
Securities Limited will agree to act as Placement Agent in connection with the offering of the Notes.
The Notes will be offered to Qualified Institutional Buyers that are Qualified Purchasers and in offshore
transactions to persons who are not U.S. Persons under Regulation S subject to the restrictions described under
"Purchase and Transfer Restrictions."
Each purchaser of Notes will be required to make the representations described in "Purchase and Transfer
Restrictions — Investor Representations."
Each Note will bear a legend stating that such Note has not been registered under the Securities Act and
setting forth the restrictions on transfer and sale thereof.
Any purchaser of Notes must be able to bear the economic risk of its investment in the Notes for an
indefinite period of time. There is no obligation or undertaking by any person to register Notes under the Securities
Act at any time.
The Placement Agent reserves the right to reject any offer to purchase, in whole or in part, for any reason,
or to sell less than the principal amount of the Notes offered. This Offering Memorandum does not constitute an
offer to any person other than a Qualified Institutional Buyer that is also a Qualified Purchaser or to a person who is
not a U.S. Person within the meaning of Regulation S to which an offer has been made directly by the Placement
Agent. Distribution of the Offering Memorandum to any person by any person other than the Placement Agent is
unauthorized. Persons receiving this Offering Memorandum (and each employee, representative, or other agent of
such persons) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure
of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to them
relating to such tax treatment and tax structure.
No action is being taken or is contemplated by the Issuer that would permit a public offering of the Notes
or possession or distribution of this Offering Memorandum 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.
GENERAL INFORMATION
Expenses
The estimated total expenses relating to the issuance of the Notes are none.
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Board Resolutions
The issuance of the Notes was authorized by resolutions of the Board of Directors of the Issuer passed on
February 19, 2007.
No Litigation
The Issuer is not involved, and has not been involved, in any governmental, legal or arbitration proceedings
(including any such proceedings which are pending or threatened of which the Issuer is aware) which may have or
have had since the date of its incorporation a significant effect on the Issuer's financial position
Documents available for inspection
Copies of the following documents may be inspected in physical form or electronic form at the specified
offices of the Paying Agent and at the registered offices of the Issuer during usual business hours on any weekday
(Saturdays, Sundays and public holidays excepted) for the term of the Notes:
•
Memorandum and Articles of Association of the Issuer; and
•
all transaction documents referred to herein including the Indenture, the Portfolio Management
Agreement, the Credit Default Swap and the Interest Rate Swap.
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Schedule A
GLOSSARY OF DEFINITIONS
The following capitalized terms used in the text of the Offering Memorandum herein have the definitions
set forth below:
"Additional Termination Event" has the meaning specified in the Credit Default Swap.
"Affiliate" means, as to any Person, any other Person that, directly or indirectly, is in control of, is
controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person
means the power, directly or indirectly, either to (a) vote 51% or more of the securities having ordinary voting
power for the election of directors of such Person or (b) direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Assigned Documents" means the Portfolio Management Agreement, the Credit Default Swap, the Interest
Rate Swap, and any other agreements, instruments or other documents constituting part of the Collateral.
"Bankruptcy" means a Reference Entity (a) is dissolved (other than pursuant to a consolidation,
amalgamation or merger); (b) becomes insolvent or is unable to pay its debts or fails or admits in writing in a
judicial, regulatory or administrative proceeding or filing its inability generally to pay its debts as they become due;
(c) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (d) institutes or
has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any
bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its
winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such
proceeding or petition (i) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or (ii) is not dismissed, discharged, stayed or restrained in each
case with thirty calendar days of the institution or presentation thereof; (e) has a resolution passed for its windingup, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (f) seeks or
becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee,
custodian or other similar official for it or for all or substantially all of its assets; (g) has a secured party take
possession of all or substantially all of its assets or has a distress, execution, attachment, sequestration or other legal
process levied, enforced or sued on or against all or substantially all of its assets and such secured party maintains
possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within thirty calendar
days thereafter; or (h) causes or is subject to any event with respect to it which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events specified in clauses (a) to (g) (inclusive).
"Basic Documents" means the Indenture, the Portfolio Management Agreement, the Credit Default Swap,
and the Interest Rate Swap.
"Benchmark Obligation" means the Benchmark Ob ligation specified in Appendix A hereto, if any, with
respect to a Reference Entity.
"Business Day" means any day other than a Saturday, Sunday or any other day on which commercial banks
in New York, New York, London, England and the city in which the Corporate Trust Office is located, which shall
initially be Chicago, Illinois, are authorized or required by law to be closed, provided that with respect to any act
required of the Irish Paying Agent in Ireland (or any act to be performed through the Irish Paying Agent in Ireland),
Business Day shall be construed to include a reference to Dublin, Ireland.
"Calculation Agent" means, with respect to the Credit Default Swap, Bank of Ame rica, N.A. and any
successor thereto.
"Calculation Date" means, with respect to a Credit Event, the date on which the associated Cash Settlement
Amount (if any) is determined.
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"Cash Settlement Date" means, with respect to a Credit Event, the third Business Day following the
Calculation Date.
"Closing Date" means February 20, 2007.
"Collateral Assets" means the Initial Collateral Assets, the Replacement Collateral Assets and any
additional debt obligations acquired by the Issuer from time to time pursuant to the Indenture, together with all other
investments (including Eligible Investments) purchased with proceeds of any such assets and all cash, instruments,
securities and other investment property substituted therefor or arising therefrom, as such assets may be reduced
from time to time.
"Corporate Trust Office" will be the corporate trust office of the Trustee at which at any particular time its
acts and activities hereunder will be administered, which office at the Closing Date is located at 181 West Madison
Street, 32nd Floor, Chicago, Illinois 60602, Attention: CDO Trust Services Group – STRATA 2007-1, Limited,
Fax: (312) 271 2573.
"Credit Support Annex" means the 1994 credit support annex dated February 20, 2007 between the Issuer
and Bank of America, N.A.
"Day Count Fraction" means a fraction, the numerator of which will be the actual number of days in the
related Interest Accrual Period or Fixed Rate Payer Calculation Period, as applicable, and the denominator of which
will be 360.
"Defaulting Party" has the meaning specified in the Credit Default Swap.
"Deleted Reference Entity" has the meaning specified in "Description of the Credit Default Swap –
Modification of Reference Entity Portfolio".
"DTC" means The Depository Trust Company.
"Early Termination Date" means, with respect to the Swap Agreements, a termination date resulting from
the occurrence of an Event of Default or Termination Event (as defined under the Standard form of Multi-Currency
Cross Border Master Agreement (1992)) under the Swap Agreements.
"Eligible Investments" means (a) floating rate credit card or student loan asset backed securities
denominated in U.S. Dollars that have a maturity date closely approximate to the Scheduled Maturity Date and have
a rating of "AAA" by Standard & Poor's and "Aaa" by Moody's, (b) time deposits held with LaSalle Bank National
Association, provided that LaSalle Bank National Association shall at all relevant times meet the then current
requirements of the Rating Agencies, and (c) interests in a money market fund denominated in U.S. Dollars which at
the date of acquisition of the interests in such funds and throughout the time the interest is held in such funds has a
rating of "AAA-m" or "AAA-g" by Standard & Poor's and "Aaa" by Moody's, in each case as determined by the
Depositor, provided that (a) the denomination of any Eligible Investment shall be smaller than or equal to the
Authorized Denomination, (b) the maximum number of obligors in respect of all Eligible Investments shall be 10,
(c) any Eligible Investments purchased by the Issuer that constitute asset-backed securities shall be acquired in an
ordinary course open market transaction unless such acquisition otherwise satisfies the Rating Agency Condition
and (d) any Eligible Investment shall not be subject to withholding tax. Eligible Investments may include
investments for which the Issuer or its affiliates receives a fee and (i) provides services for any obligor thereon or
(ii) is an investment manager, broker or advisor with respect thereto.
"Extended Maturity Date" means the later of (a) the final Cash Settlement Date occurring after the
Scheduled Termination Date, and (b) the second Business Day following the date occurring after the Scheduled
Termination Date upon which the last Potential Failure to Pay or Potential Repudiation/Moratorium has been cured.
"Final Price" has the meaning specified in the Credit Default Swap.
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"Fixed Rate Payer Calculation Amount" has the meaning specified in the Credit Default Swap.
"Fixed Rate Payer Calculation Period" has the meaning specified in the Credit Default Swap.
"Floating Rate Payer Calculation Amount" has the meaning specified in the Credit Default Swap.
"Initial Collateral Assets" means $40,000,000 deposited in the LaSalle Enhanced Liquidity Management
deposit account. .
"Initial Noteholder" has the meaning specified in "Description of the Portfolio Management Agreement –
Modification of the Portfolios".
"Investment Company Act" means the Investment Company Act of 1940, as amended.
"ISDA Master Agreement" means the Multicurrency-Cross Border Master Agreement (1992) published by
ISDA, dated February 20, 2007, between the Issuer and Bank of America as supplemented by a schedule and the
confirmation for the Credit Default Swap and the Interest Rate Swap entered into or to be entered into thereunder.
"Long Term Rating" has the meaning specified under "The Swap Counterparty, the Interest Rate Swap
Counterparty and the Calculation Agent – Consequences of a Rating Downgrade".
"Majority Noteholders" means, at any time of determination, the holders of the Notes owning more than
50% of the Outstanding Principal Amount of the Notes.
"Moody's" means Moody's Investors Service, Inc.
"Noteholder" or "Holder" means any owner of a Note on the applicable record date as reflected on the
books of the Issuer.
"Non Cooperative Jurisdiction" has the meaning specified under the section "Purchase and Transfer
Restrictions – Investor Representations."
"Obligation" has the meaning specified in the Credit Default Swap.
"OFAC" has the meaning specified under the section "Purchase and Transfer Restrictions – Investor
Representations."
"Outstanding Principal Amount" means, as of any date, the principal amount of the Notes as reduced
pursuant to the Indenture.
"PATRIOT Act" has the meaning specified under the section "Purchase and Transfer Restrictions –
Investor Representations.`"
"Permitted Currency" means (a) the legal tender of any Group of 7 (as defined in the ISDA Credit
Derivatives Definitions) country (or any country that becomes a member of the Group of 7 if such Group of 7
expands its membership) or (b) the legal tender of any country which, as of the date of such change, is a member of
the Organization for Economic Cooperation and Development and has a local currency long-term debt rating of
either "AAA" by Standard & Poor's, "Aaa" by Moody's or "AAA" by Fitch.
"Person" means any legal person, including, without limitation, any individual, corporation, estate,
partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), limited
liability company, unincorporated organization or government or any agency or political subdivision thereof or other
entity of similar nature.
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"Placement Agent" means Banc of America Securities Limited, in its capacity as Placement Agent, and any
successor or successors thereto.
"Placement Agreement" means the placement agreement entered into between the Placement Agent and the
Issuer in connection with the initial placement of the Notes.
"Protocol" has the meaning specified under the section "Description of the Credit Default Swap –
Settlement upon Credit Events – Determination and Payment of Cash Settlement Amounts."
"Protocol Price" has the meaning specified under the section "Description of the Credit Default Swap –
Settlement upon Credit Events – Determination and Payment of Cash Settlement Amounts."
"Qualified Institutional Buyer" means a "qualified institutional buyer" as defined in Rule 144A under the
Securities Act.
"Qualified Purchaser" means a "qualified purchaser" as defined under Section 2(a)(51) of the Investment
Company Act.
"Rating Agencies" means Standard & Poor's or any successor thereto and Moody's or any successor
thereto.
"Rating Condition" means, with respect to any action taken or to be taken under the Indenture, a condition
that is satisfied when the Rating Agencies have confirmed in writing to the Issuer that such action in and of itself
will not result in the withdrawal, suspension, reduction or other adverse action with respect to any then-current
ratings of the Notes.
"Reference Portfolios" has the meaning specified in "Description of the Portfolio Management Agreement
– Modification of the Portfolios".
"Replacement Collateral Assets " means the Series 2007-1A-3 Notes issued by NorthStar Education
Finance, Inc., CUSIP 66704JBT4, ISIN US66704JBV98 and Common Code 28979118..
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Second Floating Payment" has the meaning specified in the Interest Rate Swap.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means Internal Revenue Service.
"Short Term Rating" has the meaning specified under "The Swap Counterparty, the Interest Rate Swap
Counterparty and the Calculation Agent – Consequences of a Rating Downgrade".
"Sole Affected Party" has the meaning specified in the Credit Default Swap.
"Sponsor" has the meaning specified under the section "Description of the Credit Default Swap –
Settlement upon Credit Events – Determination and Payment of Cash Settlement Amounts."
"Standard & Poor's" or "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
"Substitution Execution Time" has the meaning specified in "Description of the Portfolio Management
Agreement – Modification of the Portfolios".
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"Succession Event" has the meaning specified in the Credit Default Swap.
"Swap Agreements" means the Credit Default Swap and the Interest Rate Swap.
"Weighted Average Quotation" means the weighted average of firm quotations obtained by the Calculation
Agent from Dealers at the time of valuation, each for an amount of the relevant Reference Obligation with an
outstanding principal balance of as large a size as is available, but less than the Quotation Amount, that in the
aggregate are approximately equal to the Quotation Amount.
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INDEX
Added Reference Entity................................................................................................................................................................ 59
Additional Termination Event..................................................................................................................................................... 91
Administration Agreement........................................................................................................................................................... 24
Administrator.................................................................................................................................................................................. 24
Affected Persons ............................................................................................................................................................................ 88
Affiliate............................................................................................................................................................................................ 91
Aggregate Cash Settlement Amount .......................................................................................................................................... 45
Alternative Bid Quotation............................................................................................................................................................ 61
Alternative Offer Quotation......................................................................................................................................................... 61
Alternative Quotation.................................................................................................................................................................... 61
Alternative Quotation Notice....................................................................................................................................................... 61
Alternative Transactions............................................................................................................................................................... 62
Assigned Documents..................................................................................................................................................................... 91
Bank ................................................................................................................................................................................................. 55
Bankruptcy................................................................................................................................................................................46, 91
Basic Documents ........................................................................................................................................................................... 91
Benchmark Obligation.................................................................................................................................................................. 91
Bid Spread....................................................................................................................................................................................... 66
Business Day .................................................................................................................................................................................. 91
Calculation Agent.......................................................................................................................................................................... 91
Calculation Amount ...................................................................................................................................................................... 44
Cash Settlement Amount.............................................................................................................................................................. 50
Cash Settlement Date .................................................................................................................................................................... 92
Church Plans................................................................................................................................................................................... 88
Clearstream Participants............................................................................................................................................................... 41
Closing Date ................................................................................................................................................................................... 92
Code ................................................................................................................................................................................................... 8
Collateral Accounts ....................................................................................................................................................................... 74
Collateral Assets ........................................................................................................................................................................1, 92
Conditions to Settlement .............................................................................................................................................................. 48
Corporation ..................................................................................................................................................................................... 55
Credit Default Swap ........................................................................................................................................................................ 1
Credit Event.................................................................................................................................................................................... 46
Credit Impaired Reference Entity ............................................................................................................................................... 66
Credit Loss Amount...................................................................................................................................................................... 51
Credit Support Annex.............................................................................................................................................................53, 92
Daily Average................................................................................................................................................................................. 44
Day Count Fraction ....................................................................................................................................................................... 92
Dealers ............................................................................................................................................................................................. 52
Defaulted Reference Entitiy ......................................................................................................................................................... 44
Defaulted Reference Entity.......................................................................................................................................................... 66
Defaulting Party ............................................................................................................................................................................. 92
Definitive Notes ............................................................................................................................................................................. 31
Deleted Reference Entity.............................................................................................................................................................. 92
Delta Position ................................................................................................................................................................................. 66
DOL.................................................................................................................................................................................................. 87
DTC.................................................................................................................................................................................................. 92
DTC Participants............................................................................................................................................................................ 41
Early Termination Date ................................................................................................................................................................ 92
Early Termination Event .............................................................................................................................................................. 53
Eligible Dealers .............................................................................................................................................................................. 66
Eligible Investments...................................................................................................................................................................... 92
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Emerging Market Reference Entity ............................................................................................................................................ 66
ERISA ................................................................................................................................................................................................ 8
Euroclear Participants ................................................................................................................................................................... 41
Event Determination Date ............................................................................................................................................................ 48
Exchange Act.................................................................................................................................................................................. 56
Exercise Amount............................................................................................................................................................................ 44
Extended Maturity Date................................................................................................................................................................ 92
Failure to Pay.................................................................................................................................................................................. 47
Fallback Valuation Date ............................................................................................................................................................... 51
Final Price ....................................................................................................................................................................................... 92
First Loss Amount.....................................................................................................................................................................2, 50
Fitch.................................................................................................................................................................................................. 56
Fixed Rate Payer Calculation Amount....................................................................................................................................... 45
Fixed Rate Payer Calculation Period.......................................................................................................................................... 93
Floating Rate Payer Calculation Amount............................................................................................................................51, 93
Full Quotation................................................................................................................................................................................. 51
Governmental Plans ...................................................................................................................................................................... 88
Holdback Amount.......................................................................................................................................................................... 27
Holder .............................................................................................................................................................................................. 93
Indemnifiable Taxes ...................................................................................................................................................................... 53
Indenture........................................................................................................................................................................................1, 3
Indirect Participants....................................................................................................................................................................... 30
Initial Collateral Assets........................................................................................................................................................ 1, 5, 93
Initial Noteholder........................................................................................................................................................................... 93
Interest Accrual Period ................................................................................................................................................................. 25
Interest Adjustment Amount........................................................................................................................................................ 26
Interest Collateral Account........................................................................................................................................................... 74
Interest Payment Date .................................................................................................................................................................1, 4
Interest Rate Swap ........................................................................................................................................................................... 1
Interest Rate Swap Counterparty................................................................................................................................................... 1
Investment Company Act.......................................................................................................................................................19, 93
Irish Paying Agent........................................................................................................................................................................... 5
ISDA .................................................................................................................................................................................................. 6
ISDA Credit Derivatives Definitions ........................................................................................................................................... 6
ISDA Master Agreement.............................................................................................................................................................. 93
Issued Principal Amount ................................................................................................................................................................ 1
Issuer.................................................................................................................................................................................................. 1
Issuer Additional Payment ........................................................................................................................................................... 46
Issuer Assets ..................................................................................................................................................................................... 3
LIBOR ............................................................................................................................................................................................. 26
LIBOR Determination Date ......................................................................................................................................................... 26
London Banking Day .................................................................................................................................................................... 26
Long Portfolio ....................................................................................................................................................................... 1, 6, 44
Long Term Rating....................................................................................................................................................................57, 93
Long Transactions.......................................................................................................................................................................1, 6
Look-Through Rule ....................................................................................................................................................................... 87
Loss .................................................................................................................................................................................................. 53
Majority Noteholders .................................................................................................................................................................... 93
Mandatory Redemption Date....................................................................................................................................................... 27
Mid Spread...................................................................................................................................................................................... 66
Moody's ................................................................................................................................................................................1, 56, 93
Moody's CDOROM™ .................................................................................................................................................................. 66
Net Loss Amount.......................................................................................................................................................................3, 51
Non Cooperative Jurisdiction .......................................................................................................................................37, 93, 114
Note Interest Rate ................................................................................................................................................................. 1, 4, 25
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Noteholder....................................................................................................................................................................................... 93
Notes .....................................................................................................................................................................................1, 3, 109
Notice Delivery Period ................................................................................................................................................................. 48
Obligation........................................................................................................................................................................................ 93
Obligations...................................................................................................................................................................................... 46
OFAC................................................................................................................................................................................37, 93, 114
Offer Spread.................................................................................................................................................................................... 67
Offering Memorandum...............................................................................................................................................................109
Official List....................................................................................................................................................................................... 1
Outstanding Portfolio Notional Amount.................................................................................................................................... 67
Outstanding Principal Amount.................................................................................................................................................... 93
Participants...................................................................................................................................................................................... 29
PATRIOT Act ................................................................................................................................................................................ 93
Permitted Currency........................................................................................................................................................................ 93
Person............................................................................................................................................................................................... 93
Placement Agent.................................................................................................................................................................2, 79, 94
Placement Agreement ................................................................................................................................................................... 94
Plan Asset Regulation................................................................................................................................................................... 87
Plans................................................................................................................................................................................................. 87
Portfolio Change..........................................................................................................................................................................1, 2
Portfolio Management Agreement................................................................................................................................................ 1
Portfolio Manager................................................................................................................................................................. 1, 2, 68
Portfolios.......................................................................................................................................................................................1, 6
Principal Collateral Account........................................................................................................................................................ 74
Proprietary Trading Model........................................................................................................................................................... 67
Prospectus ......................................................................................................................................................................................... 1
Prospectus Directive........................................................................................................................................................................ 1
Protocol......................................................................................................................................................................................51, 94
Protocol Price ...........................................................................................................................................................................51, 94
PTCE................................................................................................................................................................................................ 88
PTM Business Day........................................................................................................................................................................ 52
Purchaser.......................................................................................................................................................................................109
Qualified Institutional Buyer ....................................................................................................................................................... 94
Qualified Purchaser....................................................................................................................................................................... 94
Qualifying Reference Obligation ................................................................................................................................................ 52
Quotation Amount......................................................................................................................................................................... 51
Rating Agencies ............................................................................................................................................................................. 94
Rating Condition............................................................................................................................................................................ 94
Reference Entities ............................................................................................................................................................................ 2
Reference Obligation..................................................................................................................................................................... 48
Reference Obligation Identification Notice .............................................................................................................................. 50
Reference Portfolios....................................................................................................................................................................1, 6
Regulation S Global Notes........................................................................................................................................................... 29
Relevant Notes ............................................................................................................................................................................... 67
Removed Reference Entity........................................................................................................................................................... 59
Replacement Collateral Assets .................................................................................................................................................... 94
Reply Time ...................................................................................................................................................................................... 67
Responsible Officer....................................................................................................................................................................... 75
Restructured Obligation................................................................................................................................................................ 49
Restructuring .................................................................................................................................................................................. 47
Reuters Screen LIBOR01 Page ................................................................................................................................................... 26
Rule 144A ....................................................................................................................................................................................... 94
Rule 144A Global Notes............................................................................................................................................................... 29
S&P CDO Evaluator ..................................................................................................................................................................... 67
S&P Rating ..................................................................................................................................................................................... 67
100
12001-01597 NY:2045248.4
S&P Scenario Loss Rate............................................................................................................................................................... 68
S&P SROC Test............................................................................................................................................................................. 68
Scheduled Maturity Date............................................................................................................................................................1, 4
Scheduled Termination Date........................................................................................................................................................ 52
SEC................................................................................................................................................................................................... 19
Second Floating Payment.........................................................................................................................................................7, 94
Section 3(c)(7) Procedures........................................................................................................................................................... 38
Section 3(c)(7) Reminder Notice ................................................................................................................................................ 38
Section 3(c)(7) Representations .................................................................................................................................................. 38
Securities Act.......................................................................................................................................................................1, 19, 94
SEK .................................................................................................................................................................................................. 56
Senior Management Fee ............................................................................................................................................................... 65
Service ............................................................................................................................................................................................. 94
Short Portfolio ..............................................................................................................................................................................1, 6
Short Term Rating ...................................................................................................................................................................57, 94
Short Transactions .......................................................................................................................................................................1, 6
Similar Law..................................................................................................................................................................................... 89
Sole Affected Party........................................................................................................................................................................ 94
Sponsor......................................................................................................................................................................................51, 94
Standard & Poor's ......................................................................................................................................................................1, 94
Subordinated Management Fee ................................................................................................................................................... 65
Substitution..................................................................................................................................................................................... 59
Substitution Confirmation ............................................................................................................................................................ 62
Substitution Effective Date .......................................................................................................................................................... 62
Substitution Execution Notice ..................................................................................................................................................... 62
Substitution Execution Time ..................................................................................................................................................61, 94
Substitution Period ........................................................................................................................................................................ 68
Substitution Reply ......................................................................................................................................................................... 60
Substitution Request...................................................................................................................................................................... 59
Substitution Request Verification ............................................................................................................................................... 60
Succession Event ........................................................................................................................................................................... 95
Swap Agreements .......................................................................................................................................................................... 95
Swap Counterparty.......................................................................................................................................................................... 1
Swap Counterparty Additional Payment ................................................................................................................................... 46
Swap Counterparty Adjustment Payment.................................................................................................................................. 45
Swap Counterparty Adjustment Payment Date ..................................................................................................................45, 55
Swap Counterparty Payment........................................................................................................................................................ 44
Swap Counterparty Payment Date .............................................................................................................................................. 44
Swap Floating Adjustment Payment .......................................................................................................................................... 55
Swap Floating Payment ................................................................................................................................................................ 55
Swap Second Loss Date................................................................................................................................................................ 52
Swap Termination Payment......................................................................................................................................................... 12
Termination Date ........................................................................................................................................................................... 52
Theoretical Hedge Transaction.................................................................................................................................................... 68
Transaction Type........................................................................................................................................................................... 46
Transaction Type Information ..................................................................................................................................................... 68
Transactions..................................................................................................................................................................................1, 6
transfer............................................................................................................................................................................................. 33
Treasury........................................................................................................................................................................................... 20
Trust Agreement ..........................................................................................................................................................................109
Trustee.......................................................................................................................................................................................1, 109
Unsettled Reference Entity........................................................................................................................................................... 45
USA PATRIOT Act ...................................................................................................................................................................... 20
Valuation Date................................................................................................................................................................................ 51
Vanderbilt ........................................................................................................................................................................................ 68
101
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Verification Agent.......................................................................................................................................................................1, 2
Verification Cut-off Time ............................................................................................................................................................ 60
Weighted Average Quotation...................................................................................................................................................... 95
Weighted Final Price..................................................................................................................................................................... 51
102
12001-01597 NY:2045248.4
APPENDIX A
REFERENCE ENTITY INFORMATION
Reference Entity
AIR PRODUCTS AND CHEMICALS, INC.
ALCOA INC.
ALLERGAN, INC.
APACHE CORPORATION
AVERY DENNISON CORPORATION
AVON PRODUCTS, INC.
AXA
BAKER HUGHES INCORPORATED
BANCA POPOLARE DI MILANO SOC. COOP. A R.L.
BARRICK GOLD CORPORATION
THE BEAR STEARNS COMPANIES INC.
BERKSHIRE HATHAWAY INC.
THE BLACK & DECKER CORPORATION
THE BOEING COMPANY
BRITISH AMERICAN TOBACCO P.L.C.
BRUNSWICK CORPORATION
CAMPBELL SOUP COMPANY
CARNIVAL CORPORATION
CENTEX CORPORATION
CENTURYTEL, INC.
CIT GROUP INC.
CLEAR CHANNEL COMMUNICATIONS, INC.
THE CLOROX COMPANY
COCA -COLA ENTERPRISES INC.
COMMERZBANK AKTIENGESELLSCHAFT
COMPAGNIE DE SAINT-GOBAIN
COMPUTER SCIENCES CORPORATION
CONOCOPHILLIPS
COSTCO WHOLESALE CORPORATION
Benchmark
Obligations
XS0113911761
US013817AF82
US018490AD46
US037411AN57
US05361HCV42
US054303AM47
XS0122028904
US057224AJ66
XS0131739665
US068494AA16
US073902BR87
US084664AD30
US091797AJ96
US097023AD79
XS0094703799
US117043AF61
US134429AM12
US143658AK82
US152312AG95
US156700AA43
US125581AB41
US184502AK84
US189054AC36
US191219BJ28
XS0074717421
FR0000494973
US205363AB03
US20825CAB00
US22160KAA34
103
12001-01597 NY:2045248.4
Transaction Type
FRPCA
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Subordinated Insurer
North American Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
0.417%
0.833%
0.833%
0.833%
1.250%
0.833%
0.833%
0.833%
0.833%
0.833%
0.833%
1.250%
0.833%
0.417%
0.417%
1.250%
0.417%
0.833%
0.833%
1.250%
0.833%
0.833%
0.417%
0.417%
0.833%
0.417%
1.250%
0.833%
0.417%
Reference Entity
COUNTRYWIDE FINANCIAL CORPORATION
CREDIT SUISSE (USA), INC.
DAIMLERCHRYSLER AG
DANAHER CORPORATION
DEERE & COMPANY
DELL INC.
DEUTSCHE TELEKOM AG
DOVER CORPORATION
THE DOW CHEMICAL COMPANY
D.R. HORTON, INC.
E. I. DU PONT DE NEMOURS AND COMPANY
EASTMAN CHEMICAL COMPANY
EATON CORPORATION
EMERSON ELECTRIC CO.
ENTERPRISE RENT-A-CAR COMPANY INC
FEDERATED DEPARTMENT STORES, INC.
FORTUNE BRANDS, INC.
FPL GROUP CAPITAL INC
GENERAL DYNAMICS CORPORATION
GENERAL ELECTRIC CAPITAL CORPORATION
GENWORTH FINANCIAL, INC.
THE GOLDMAN SACHS GROUP, INC.
HANNOVER RUECKVERSICHERUNG AG
HARRIS CORPORATION
HEALTH MANAGEMENT ASSOCIATES, INC.
HONEYWELL INTERNATIONAL INC.
HUTCHISON WHAMPOA LIMITED
IAC/INTERACTIVECORP
INGERSOLL-RAND COMPANY
INTERNATIONAL BUSINESS MACHINES CORPORATION
INTERNATIONAL GAME TECHNOLOGY
INTERNATIONAL LEASE FINANCE CORPORATION
ISTAR FINANCIAL INC.
Benchmark
Obligations
US22237LHE56
US22541LAC72
US233835AA55
US235851AD49
US244199AY13
US247025AD11
DE0002317807
US260003AB46
US260543BL65
US23331AAD19
US263534BJ72
US277432AE06
US278058AP79
US291011AM63
US26882PAN24
US31410HAR21
US349631AK79
US302570AJ58
US369550AK41
US36962GXS82
US37247DAF33
US38141GBU76
XS0126063386
US413875AF26
US421933AF94
US438516AK21
USG4671XAC41
US902984AD51
US456866AG74
US459200AT86
US459905AK86
US459745EZ45
US45031UAB70
104
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Transaction Type
FRPCA
North American Corporate
North American Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Subordinated Insurer
North American Corporate
North American Corporate
North American Corporate
Asia Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
1.250%
1.250%
0.833%
0.833%
0.417%
0.417%
1.250%
0.833%
0.833%
0.833%
0.833%
0.417%
0.833%
0.833%
1.250%
1.250%
0.417%
0.833%
0.417%
1.250%
1.250%
1.250%
0.833%
0.417%
1.250%
0.833%
1.250%
0.417%
0.417%
0.833%
0.417%
0.833%
0.417%
Reference Entity
ITT CORPORATION
JPMORGAN CHASE & CO.
KIMBERLY-CLARK CORPORATION
KINDER MORGAN ENERGY PARTNERS, L.P.
KONINKLIJKE PHILIPS ELECTRONICS N.V.
KRAFT FOODS INC.
LEHMAN BROTHERS HOLDINGS INC.
LENNAR CORPORATION
LIMITED BRANDS, INC.
LOUISIANA-PACIFIC CORPORATION
MASCO CORPORATION
MBIA INC.
MCDONALD'S CORPORATION
MERRILL LYNCH & CO., INC.
MGIC INVESTMENT CORPORATION
MOHAWK INDUSTRIES, INC.
MORGAN STANLEY
MUEN CHENER RUECKVERSICHERUNGS-GESELLSCHAFT
AKTIENGESELLSCHAFT IN MUENCHEN
NEWMONT MINING CORPORATION
OCCIDENTAL PETROLEUM CORPORATION
OLIN CORPORATION
ONEOK, INC.
ORACLE SYSTEMS CORPORATION
PPG INDUSTRIES, INC.
PPL CORPORATION
PRAXAIR, INC.
RADIAN GROUP INC.
RELIANCE INDUSTRIES LIMITED
REUTERS GROUP PLC
ROCKWELL COLLINS, INC.
ROHM AND HAAS COMPANY
R.R. DONNELLEY & SONS COMPANY
Benchmark
Obligations
US450679AT20
US46625HAJ95
US494368AR42
US494550AH91
XS0129477633
US50075NAB01
US524908CM04
US526057AG99
US532716AH08
US546347AB19
US574599AX44
US55262CAF77
US58013MDM38
US590188JP48
US552845AF69
US608190AF11
US617446HC69
XS0166965797
Transaction Type
FRPCA
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Subordinated Insurer
0.417%
1.250%
1.250%
0.417%
0.833%
0.833%
0.833%
0.833%
0.417%
1.250%
1.250%
1.250%
0.417%
1.250%
1.250%
0.417%
0.833%
1.250%
US651639AD87
US674599BV68
US680665AD83
US682680AL72
US68389YAB92
US693506AY35
US69351EAA73
US74005PAJ30
US750236AB78
US759470AC16
XS0171205650
US774341AA97
US775371AR80
US257867AM36
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North Ame rican Corporate
North American Corporate
North American Corporate
North American Corporate
Asia Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
0.417%
0.833%
0.417%
1.250%
0.417%
0.833%
0.417%
0.417%
1.250%
0.417%
0.833%
1.250%
0.833%
1.250%
105
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Reference Entity
RYDER SYSTEM, INC.
SABRE HOLDINGS CORPORATION
THE SHERWIN-WILLIAMS COMPANY
SLM CORPORATION
SONY CORPORATION
THE SOUTHERN COMPANY
THE STANLEY WORKS
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
TELECOM ITALIA SPA
TELEFONOS DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL
VARIABLE
TEXAS INSTRUMENTS INCORPORATED
TEXTRON INC.
TIME WARNER INC.
THE TJX COMPANIES, INC.
UNITED PARCEL SERVICE, INC.
UNITED TECHNOLOGIES CORPORATION
UST INC.
V.F. CORPORATION
VODAFONE GROUP PUBLIC LIMITED COMPANY
VOLKSWAGEN AKTIENGESELLSCHAFT
WACHOVIA CORPORATION
THE WALT DISNEY COMPANY
WASHINGTON MUTUAL, INC.
WEYERHAEUSER COMPANY
WHIRLPOOL CORPORATION
ZURICH INSURANCE COMPANY
Benchmark
Obligations
US783549AZ16
US785905AA83
US824348AL09
US78442PAB22
JP343500B090
US842634AE7
US854616AJ88
US85590AAD63
XS0142531903
US879403AG85
Transaction Type
FRPCA
North American Corporate
North American Corporate
North American Corporate
North American Corporate
Japan Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
Latin America Corporate
0.417%
1.250%
1.250%
0.833%
1.250%
0.833%
1.250%
1.250%
0.417%
1.250%
US882508AH74
US883203BH38
US00184AAB17
US872540AH26
US911308AA21
US913017BF56
US902911AM82
US918204AM01
US92857TAG22
XS0168882495
US92976GAB77
US25468PBX33
US939322AL70
US962166BP84
US963320AK24
XS0177601811
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Corporate
European Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
North American Corporate
European Subordinated Insurer
1.250%
0.833%
0.417%
0.417%
0.833%
0.833%
1.250%
0.833%
1.250%
0.833%
0.417%
0.833%
0.833%
0.417%
0.417%
0.833%
106
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APPENDIX B:
TRANSACTION TYPE INFORMATION
North American
Corporate
North American
High Yield Corporate
North America
Monoline
European Corporate
Europe Subordinated
Insurer
European
Emerging Market
Corporate
All Guarantees:
Not Applicable
Not Applicable
Not Applicable
Applicable
Applicable
Applicable
Credit Events:
Bankruptcy
Bankruptcy
Bankruptcy
Bankruptcy
Bankruptcy
Bankruptcy
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Restructuring
Restructuring
Restructuring
Grace Period
Extension: Applicable
Restructuring
Restructuring
Maturity Limitation
and Fully
Transferable
Obligation:
Applicable
Restructuring
Maturity Limitation
and Fully
Transferable
Obligation:
Applicable
Modified
Restructuring
Maturity Limitation
and Conditionally
Transferable
Obligation:
Applicable
Obligation Acceleration
Repudiation/Moratorium
Restructuring
Multiple Holder
Obligation: Not
Applicable only with
respect to Bonds
Obligation Category:
Borrowed Money
Borrowed Money
Borrowed Money
Borrowed Money
Borrowed Money
Bond or Loan
Obligation
Characteristics:
None
None
None
None
None
Not Subordinated
Not Domestic Currency
Not Domestic Law
Not Domestic Issuance
Deliverable Obligation
Category:
Bond or Loan
Bond or Loan
Bond or Loan
Bond or Loan
Bond or Loan
Bond or Loan
Deliverable Obligation
Characteristics:
Not Subordinated
Not Subordinated
Specified Currency
Not Subordinated
Specified Currency
Not Subordinated
Specified Currency
Not Subordinated
Specified Currency
Not Subordinated
Specified Currency
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Not Domestic Law
Not Contingent
Not Domestic Issuance
Assignable Loan
Maximum Maturity: 30
years
Not Bearer
Maximum Maturity: 30
years
Not Bearer
Maximum Maturity: 30
years
Not Bearer
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Maximum Maturity: 30
years
Not Bearer
Specified Currency
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Maximum Maturity: 30
years
Not Bearer
107
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Consent Required Loan
Transferable
Not Bearer
Asia Corporate
Japan Corporate
Singapore Corporate
Australia and New Zealand
Corporate
Latin America Corporate
All Guarantees:
Applicable
Applicable
Applicable
Applicable
Applicable
Credit Events:
Bankruptcy
Bankruptcy
Bankruptcy
Bankruptcy
Bankruptcy
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Restructuring
Restructuring
Restructuring
Restructuring
Multiple Holder
Obligation: Not
Applicable
Restructuring Maturity
Limitation and Fully
Transferable Obligation:
Applicable
Grace Period Extension:
Applicable
Obligation Acceleration
Repudiation/Moratorium
Restructuring
Multiple Holder
Obligation: Not
Applicable
Obligation Category:
Bond or Loan
Borrowed Money
Bond or Loan
Borrowed Money
Bond
Obligation
Characteristics:
Not Subordinated
Not Sovereign Lender
Not Domestic Currency
Not Domestic Law
Not Domestic Issuance
Not Subordinated
Not Subordinated
Specified Currency: Standard Specified
Currencies and Domestic Currency
Not Sovereign Lender
None
Not Subordinated
Not Domestic Currency
Not Domestic Law
Not Domestic Issuance
Deliverable Obligation
Category:
Bond or Loan
Bond or Loan
Bond or Loan
Bond or Loan
Bond
Deliverable Obligation
Characteristics:
Not Subordinated
Not Subordinated
Not Subordinated
Not Subordinated
Specified Currency
Not Sovereign Lender
Not Domestic Law
Not Contingent
Not Domestic Issuance
Assignable Loan
Transferable
Specified Currency
Not Subordinated
Specified Currency:
Specified Currency:
Specified Currency
Standard Specified
Currencies and Domestic
Currency
Not Domestic Law
Not Contingent
Not Domestic Issuance
Transferable
Not Bearer
Maximum Maturity: 30
years
Not Bearer
Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Maximum Maturity: 30
years
Not Bearer
Standard Specified Currencies and
Domestic Currency
Not Sovereign Lender
Not Contingent
Assignable Loan
Transferable
Maximum Maturity: 30 years
Not Bearer
108
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Not Contingent
Assignable Loan
Consent Required Loan
Transferable
Maximum Maturity: 30 years
Not Bearer
Eastern Europe ,
Asia Sovereign
Latin America and
Middle East Sovereign
Japan Sovereign
Russia Sovereign
Western European Sovereign
All Guarantees:
Applicable
Applicable
Applicable
Applicable
Applicable
Credit Events:
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Failure to Pay
Repudiation/Moratorium
Restructuring
Grace Period Extension:
Applicable
Repudiation/Moratorium
Restructuring
Obligation Acceleration
Multiple Holder
Obligation: Not
Applicable
Repudiation/Moratorium
Restructuring
Multiple Holder
Obligation: Not
Applicable
Grace Period Extension:
Applicable
Repudiation/Moratorium
Restructuring
Obligation Acceleration
Repudiation/Moratorium
Restructuring
Multiple Holder
Obligation: Not
Applicable
Obligation Category:
Bond or Loan
Bond
Borrowed Money
Bond
Borrowed Money
Obligation Characteristics:
Not Subordinated
Not Sovereign Lender
Not Domestic Currency
Not Domestic Law
Not Domestic Issuance
Not Subordinated
None
Not Subordinated
None
Deliverable Obligation
Category:
Bond or Loan
Bond
Bond or Loan
Bond
Bond or Loan
Deliverable Obligation
Characteristics:
Not Subordinated
Not Subordinated
Specified Currency
Not Subordinated
Specified Currency
Specified Currency
Specified Currency
Specified Currency
Not Contingent
Not Sovereign Lender
Not Domestic Law
Not Contingent
Not Domestic Issuance
Assignable Loan
Transferable
Not Domestic Law
Not Contingent
Assignable Loan
Not Domestic Law
Assignable Loan
Not Contingent
Consent Required Loan
Not Domestic Issuance
Transferable
Maximum Maturity: 30 years
Maximum Maturity: 30 years
Not Bearer
Not Bearer
Transferable
Not Bearer
Not Domestic Currency
Not Domestic Currency
Not Domestic Law
Not Domestic Law
Not Domestic Issuance
Not Domestic Issuance
Not Contingent
Not Domestic Issuance
Transferable
Consent Required Loan
Transferable
Maximum Maturity: 30 years
Not Bearer
109
12001-01597 NY:2045248.4
Not Bearer
Australia Sovereign
New Zealand Sovereign
Singapore Sovereign
All Guarantees:
Applicable
Applicable
Applicable
Credit Events:
Failure to Pay
Failure to Pay
Failure to Pay
Repudiation/Moratorium
Repudiation/Moratorium
Repudiation/Moratorium
Restructuring
Restructuring
Restructuring
Restructuring Maturity
Limitation and Fully
Transferable Obligation:
Applicable
Restructuring Maturity
Limitation and Fully
Transferable Obligation:
Applicable
Obligation Category:
Borrowed Money
Borrowed Money
Bond or Loan
Obligation Characteristics:
None
None
Not Subordinated
Specified Currency: Standard
Specified Currencies &
Domestic Currency
Not Sovereign Lender
Deliverable Obligation
Category:
Bond or Loan
Bond or Loan
Bond or Loan
Deliverable Obligation
Characteristics:
Not Subordinated
Not Subordinated
Not Subordinated
Specified Currency: Standard
Specified Currencies &
Domestic Currency
Specified Currency: Standard
Specified Currencies &
Domestic Currency
Specified Currency: Standard
Specified Currencies &
Domestic Currency
Not Contingent
Assignable Loan
Consent Required Loan
Not Contingent
Assignable Loan
Consent Required Loan
Not Sovereign Lender
Transferable
Transferable
Not Contingent
Assignable Loan
Transferable
Maximum Maturity: 30 years
Not Bearer
Maximum Maturity: 30 years
Not Bearer
Maximum Maturity: 30 years
Not Bearer
110
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APPENDIX C
FORM OF INVESTMENT LETTER
Strata 2007-1, Limited
P.O. Box 1093GT
Queensgate House
South Church Street
George Town, Grand Cayman
Cayman Islands
LaSalle Bank National Association
181 West Madison Street, 32nd Floor
Chicago, Illinois 60602
Banc of America Securities LLC
100 North Tryon Street
Charlotte, North Carolina 28255
Re:
Strata 2007-1, Limited
Ladies and Gentlemen:
Reference is hereby made to the Indenture, dated as of February 20, 2007 (the "Indenture") among Strata 2007-1,
Limited, as issuer (the "Issuer"), Bank of America, N.A., as swap counterparty (the "Swap Counterparty" and the
"Interest Rate Swap Counterparty") and LaSalle Bank National Association, as trustee (the "Trustee").
Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.
In connection with the purchase of $40,000,000 principal amount of Floating Rate Notes (the "Notes") described in
the offering memorandum dated February 20, 2007 (the "Offering Memorandum") and issued by the Issuer, the
purchaser of the Notes named below (the "Purchaser") hereby represents and warrants to you as follows:
1.
The Purchaser (a) is (i) both a Qualified Institutional Buyer as defined in Rule 144A under the
Securities Act and a Qualified Purchaser as defined in Section 2(a)(51) of the Investment Company Act or (ii) a
person that is not a "U.S. Person" as defined in Regulation S under the Securities Act and purchasing the Notes in an
offshore transaction within the meaning of, and in accordance with Regulation S under the Securities Act; (b) is
acquiring such Notes or beneficial interest therein for investment purposes and not with a view to the resale,
distribution or other disposition thereof (except in accordance with Rule 144A or Regulation S); (c) if it has acquired
the Notes in a sale being made in reliance on Rule 144A, is not a broker-dealer which owns and invests on a
discretionary basis less than $25,000,000 in securities of unaffiliated issuers; (d) is not a partnership, common trust
fund, or special trust, pension fund or retirement plan, or other entity in which the partners, beneficiaries,
participants or other equity owners, as the case may be, may designate the particular investments to be made, or the
allocation thereof; (e) has received the necessary consent from its beneficial owners if it is a private investment
company formed before April 30, 1996; (f) is not formed for the purpose of investing in the Issuer (or if it is formed
for such purpose, all of the beneficial owners thereof are Qualified Institutional Buyers and Qualified Purchasers)
and shall not sell participation interests in the Notes or enter into any other arrangement pursuant to which any other
person shall be entitled to a beneficial interest in the distributions on the Notes; (g) holds directly or indirectly in the
aggregate not more than 40% of its assets or capital in securities issued by the Issuer (including the Notes); (h) is
acting for its own account or the account of another purchaser that meets the foregoing requirements; and (i) will
provide notice of all transfer restrictions to any subsequent transferees, and 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.
The Purchaser understands that (a) the Notes are being offered only in a transaction not
involving any public offering within the meaning of the Securities Act, and (b) the Notes have not been and will not
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be registered under the Securities Act and, therefore, cannot be offered, sold or otherwise transferred unless they are
registered under the Securities Act or unless an exemption from registration is available. Accordingly, the Purchaser
understands that the Global Note representing the Notes will bear a legend stating that the Notes have not been
registered under the Securities Act and setting forth the restrictions on transfer described herein. The Purchaser
understands that the Issuer has no obligation to register the Notes under the Securities Act or to comply with the
requirements for any exemption from the registration requirements of the Securities Act (other than to supply Rule
144A Information as required by the Indenture), and it acknowledges that no representation has been made as to the
availability of any exemption under the Securities Act or any state securities laws for resale of the Notes.
3.
The Purchaser understands that the Notes (or any interest therein) may not be offered, sold,
pledged or otherwise transferred other than in an offshore transaction to a person that is not a U.S. Person as defined
in Regulation S or to a purchaser which is a Qualified Institutional Buyer purchasing for its own account in a
transaction meeting the requirements of Rule 144A which is also a Qualified Purchaser under Section 2(a)(51) of the
Investment Company Act, and which is deemed to have made the representations and warranties contained in the
Indenture.
4.
The Purchaser understands that the Notes have not been approved or disapproved by the SEC
or any other governmental authority or agency of any jurisdiction, nor has the SEC or any other governmental
authority or agency passed upon the accuracy or the adequacy of the Offering Memorandum. Any representation to
the contrary is a criminal offense.
5.
The Purchaser agrees that no Notes (or any interest therein) may be sold, pledged or otherwise
transferred except in a denomination of $1,000,000 and in integral multiples of $1,000, in excess thereof. The
Purchaser is aware that (a) except as otherwise provided in the Indenture, the Notes being sold to it will be
represented by one or more Global Notes, and that beneficial interests therein may be held only through DTC and
(b) the Issuer may receive a list of participants holding positions in its securities from one or more book-entry
depositories.
6.
The Purchaser confirms that it (a) has received and carefully read execution copies of the
Indenture, the Swap Agreements and the Notes, and a copy of the final Offering Memorandum, on which it has
based its investment decision; (b) has had access to such financial and other information concerning the Issuer, the
Swap Agreements and the Notes as it has deemed necessary to make its own independent decision to purchase the
Notes, including the opportunity, at a reasonable time prior to its purchase of the Notes, to ask questions and receive
answers concerning the Issuer and the terms and conditions of the offering of the Notes; (c) has undertaken its own
independent evaluation, based upon such investigation and analysis as it deems appropriate, of the business
prospects and creditworthiness of the Issuer, the Swap Counterparty and the Reference Entities specified in the
Credit Default Swap, and of the terms and provisions of the Notes, the Indenture and the Swap Agreements; (d) is
not relying and will not at any time rely on any communication (written or oral, including any documents, emails or
term sheets, other than, with respect only to (i) below, the Basic Documents and the Offering Memorandum) of the
Issuer, the Trustee, the Placement Agent, the Swap Counterparty or any of their affiliates (or any representative or
agent of the foregoing), or any of the Reference Entities identified in the Credit Default Swap as (i) accurate
descriptions of the transactions, (ii) as investment advice or (iii) as a recommendation to purchase the Notes, and (e)
has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and
risks (including for tax, legal, regulatory, accounting, and other financial purposes) of its prospective investment in
the Notes (including the risk of loss of all or a substantial part of its investment), it is financially able to bear such
risk, and it has determined that an investment in the Notes is suitable and appropriate for it.
7.
The Purchaser confirms that all investment decisions relating to its purchase of the Notes have
been the result of arm's length negotiations.
8.
The Purchaser understands that there is no market for the Notes and that no assurance can be
given as to the liquidity of any trading market for the Notes and that it is unlikely that a trading market for any of the
Notes will develop. The Purchaser further understands that the Placement Agent does not intend to make a market
in the Notes, the Placement Agent is under no obligation to do so and, if it does make a market at any time for the
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Notes, the Placement Agent may, at its discretion, discontinue the same at any time. Accordingly, the Purchaser
must be prepared to hold the Notes for an indefinite period of time until their maturity.
9.
The Purchaser understands that the Portfolio Manager may enter into other portfolio
management agreements on substantially similar terms to the terms of the Portfolio Management Agreement in
respect of one or more series of obligations issued by the Issuer or other entities (the "Related Obligations") or one
or more unfunded credit derivative transactions entered into between the Swap Counterparty and a third party (the
"Related Transactions"), in each case which reference portfolios of Reference Entities identical to the Portfolios.
The Portfolio Manager has agreed to manage the portfolios in respect of the Related Obligations and the Related
Transactions in the same manner as it manages the Portfolios. The Purchaser therefore understands that, when
making substitutions to the Portfolios, the Portfolio Manager will consider the interests of the holders of all the
Related Obligations and the counterparties to the Related Transactions in addition to those of the holders of the
Notes.
10.
The Purchaser acknowledges that the holders of the Notes will only be permitted to remove
the Portfolio Manager for cause and appoint a successor portfolio manager if a two-thirds majority of the holders of
Notes together with the holders of the Related Obligations (voting as a single class) have consented to such removal.
The Purchaser understands that even if the Portfolio Manager has breached its obligations under the Portfolio
Management Agreement, the holders of Notes will not be entitled to remove the Portfolio Manager unless a
sufficient number of holders of the Related Obligations have also consented to such removal. The Purchaser further
understands that the holders of the Notes may be prevented from selecting a successor portfolio manager by the
holders of the Related Obligations and that a successor portfolio manager may be selected to manage the Portfolios
without the consent of the holders of the Notes.
11.
The Purchaser agrees to treat, in the absence of an administrative determination or judicial
ruling to the contrary, the Notes as equity of the Issuer for U.S. federal income tax purposes.
12.
It understands and acknowledges that failure to provide the Issuer, the Trustee or any Paying
Agent with the applicable U.S. federal income tax certifications (generally, a United States Internal Revenue Service
Form W-9 (or successor applicable form) in the case of a person that is a "United States person" within the meaning
of Section 7701(a)(30) of the Code or an appropriate United States Internal Revenue Service Form W-8 (or
successor applicable form) in the case of a person that is not a "United States person" within the meaning of Section
7701(a)(30) of the Code) may result in U.S. federal withholding from payments in respect of such Note.
13.
Either (A)(1) the Purchaser is not a Benefit Plan Investor or a Governmental Plan, a Church
Plan or a foreign plan and (2) the Purchaser will notify the Issuer and the Swap Counterparty within ten (10) days if,
after its initial acquisition of the Notes, at any time it becomes a Benefit Plan Investor, (B)(1) the Purchaser is an
insurance company purchasing the Notes with the assets of its general account, (2) less than 25% of the assets of
such general account are assets of Benefit Plan Investors, (3)(I)(x) the conditions of PTCE 95-60 are met such that
PTCE 95-60 is applicable to the purchase and holding of the Notes, and (y) the purchase and holding of the Notes
will not result in a nonexempt prohibited transaction under Section 406(b) of ERISA or Section 4975(C)(1)(E) or (F)
of the Code or (II) the Purchaser will provide an opinion of counsel to the Issuer and the Swap Counterparty that its
purchase and holding of the Notes will not be a prohibited transaction under Section 406 of ERISA or Section 4975
of the Code and (4) the Purchaser will notify the Issuer and the Swap Counterparty within ten (10) days if, after its
initial acquisition of the Notes, it could no longer make the representations contained in clauses (B)(2) or (B)(3)
above, or (C) such investor is not a Government Plan, a Church Plan or a foreign plan unless the purchase and
holding of the Note would not violate any Similar Law. The Purchaser acknowledges that any purported transfer of
the Notes to a transferee that does not comply with the foregoing requirements shall be null and void ab initio.
14.
The Purchaser agrees that (a) any sale, pledge or other transfer of a Note (or any interest
therein) made in violation of the transfer restrictions relating to the Notes contained in the Indenture or the Offering
Memorandum or made based upon any false or inaccurate representation made by the Purchaser or a transferee to
the Issuer, will be void and of no force or effect to the maximum extent permitted by applicable law and (b) the
Issuer has no obligation to recognize any sale, pledge or other transfer of a Note (or any interest therein) made in
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violation of any such transfer restriction or made based upon any such false or inaccurate representation or which
would otherwise cause the Issuer to be required to register as an Investment Company under the Investment
Company Act.
15.
The Purchaser understands and agrees that (a) any purported transfer of a Note to a transferee
in violation of the transfer restrictions relating to ERISA compliance, offshore transactions to persons other than
U.S. Persons, Qualified Institutional Buyer status or Qualified Purchaser status will be null and void ab initio and (b)
the Issuer will be entitled under the Indenture (i) to require any purchaser or transferee of such Note to sell its Notes
to a person who complies with such requirements, and (ii) to refuse to honor a transfer to a person who does not
comply with such requirements. Any sale of a Note pursuant to this paragraph 11 shall be effected at the direction
of the Placement Agent at the then current market price which shall be determined by the Placement Agent, in its
sole discretion.
16.
The Purchaser understands that it may not transfer its Notes or beneficial interests therein
unless (a) it provides to the subsequent transferee execution copies of the Indenture, the Swap Agreements and the
Notes and any amendments to any of the foregoing, and a copy of the final Offering Memorandum and any
supplements thereto and (b) the subsequent transferee delivers to the Issuer an executed Investment Letter.
17.
The Purchaser represents and warrants that neither the Purchaser nor anyone acting on its
behalf has (a) offered or sold or will offer or sell any Notes by means of any form of general solicitation or general
advertising or (b) has taken or will take any action that would constitute a distribution of a Note under the Securities
Act, would render the disposition of a Note a violation of Section 5 of the Securities Act or any state or other
securities law or would require registration pursuant thereto.
18.
The Purchaser understands that pursuant to the terms of the Indenture, the Issuer has agreed
that the Notes will bear a legend to the following effect unless the Issuer determines otherwis e in compliance with
applicable law:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. ("CEDE" ) OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC, AND ANY PAYMENT HEREON IS MADE TO CEDE
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE, HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT
IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE.
THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER
OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION
5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS NOTE AGREES FOR THE BENEFIT OF THE ISSUER THAT (A)
THIS NOTE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i)
TO A QUALIFIED INSTITUTIONAL BUYER IN ACCORDANCE WITH RULE 144A OF THE
SECURITIES ACT THAT IS ALSO A QUALIFIED PURCHASER (A "QUALIFIED PURCHASER")
AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND THAT IS
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NOT (X) A BROKER-DEALER THAT OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS
THAN U.S.$25 MILLION IN SECURITIES OF UNAFFILIATED ISSUERS OR (Y) A PLAN
REFERRED TO IN PARAGRAPH (a)(l)(i)(D) OR (a)(l)(i)(E) OF RULE 144A OR A TRUST FUND
REFERRED TO IN PARAGRAPH (a)(l)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH
A PLAN, IF INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE
BENEFICIARIES OF SUCH PLAN; OR (ii) TO A NON-U.S. PERSON IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE
SECURITIES ACT AND, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY JURISDICTION AND IN A MINIMUM PRINCIPAL AMOUNT OF
NOT LESS THAN THE MINIMUM DENOMINATION AND IN EACH CASE IN COMPLIANCE
WITH THE CERTIFICATION AND OTHER REQUIREMENTS SPECIFIED IN THE INDENTURE
REFERRED TO HEREIN, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE
RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. 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. IF AT ANY TIME, THE ISSUER DETERMINES OR IS NOTIFIED THAT THE
HOLDER OF THIS NOTE OR A BENEFICIAL INTEREST HEREIN WAS IN BREACH OF ANY OF
THE REPRESENTATIONS SET FORTH IN THE INDENTURE, THE ISSUER MAY DECLARE THE
ACQUISITION OF THIS NOTE OR SUCH INTEREST IN THIS NOTE VOID, IN THE EVENT OF A
BREACH AT THE TIME GIVEN, AND, IN THE EVENT OF SUCH A DETERMINATION OR
NOTICE OF A BREACH, AT THE TIME GIVEN OR AT ANY SUBSEQUENT TIME, THE ISSUER
MAY REQUIRE THAT THIS NOTE OR SUCH INTEREST HEREIN BE TRANSFERRED TO A
PERSON DESIGNATED BY THE ISSUER.
EACH BENEFICIAL OWNER OF THIS NOTE WILL BE DEEMED TO HAVE MADE THE
REPRESENTATIONS AND AGREEMENTS SET FORTH IN SECTIONS 2.06(g)(iii) OF THE
INDENTURE. THE HOLDER AND EACH BENEFICIAL OWNER OF THIS NOTE ACKNOWLEDGE
THAT THE ISSUER AND THE TRUSTEE RESERVE THE RIGHT PRIOR TO ANY SALE OR OTHER
TRANSFER OF THIS NOTE TO REQUIRE THE DELIVERY OF SUCH CERTIFICATIONS, LEGAL
OPINIONS AND OTHER INFORMATION AS THE ISSUER MAY REASONABLY REQUIRE TO
CONFIRM THAT THE PROPOSED SALE OR OTHER TRANSFER COMPLIES WITH THE
RESTRICTIONS SET FORTH IN SECTIONS 2.06(g)(iii) OF THE INDENTURE.
THIS NOTE MAY NOT BE PURCHASED BY OR OTHERWISE ACQUIRED BY ANY
EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF AND SUBJECT TO TITLE I OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), A PLAN
SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), OR ANY PERSON OR ENTITY WHOSE ASSETS INCLUDE THE ASSETS OF ANY SUCH
EMPLOYEE BENEFIT PLAN OR PLAN BY REASON OF 29 C.F.R. 2510.3-101, AS MODIFIED BY
ERISA, OR OTHERWISE. EACH HOLDER WILL BE DEEMED TO HAVE REPRESENTED AND
AGREED THAT (A) IT IS NOT (AND IS NOT DEEMED FOR PURPOSES OF ERISA OR SECTION
4975 OF THE CODE TO BE) AND FOR SO LONG AS IT HOLDS A NOTE WILL NOT BE (OR BE
DEEMED FOR SUCH PURPOSES TO BE) AN "EMPLOYEE BENEFIT PLAN" AS DEFINED IN AND
SUBJECT TO ERISA OR A "PLAN" AS DEFINED IN SECTION 4975 OF THE CODE, AND (B) (i) IT
IS NOT AND FOR SO LONG AS IT HOLDS A NOTE WILL NOT BE AN EMPLOYEE BENEFIT
PLAN WHICH IS SUBJECT TO ANY FEDERAL, STATE, LOCAL OR FOREIGN LAW THAT IS
SUBSTANTIALLY SIMILAR TO SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, OR
(ii) THE PURCHASE AND HOLDING OF THE NOTES DO NOT AND WILL NOT VIOLATE ANY
SUCH SUBSTANTIALLY SIMILAR LAW.
THE NOTES WILL BE ISSUED IN MINIMUM DENOMINATIONS OF $1,000,000 AND
INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF."
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19.
The Purchaser has all necessary power and authority to acquire the Notes, such acquisition
has been approved by the Purchaser's board of directors or pursuant to properly delegated authority, and such
acquisition and any subsequent disposition will be reflected in the Purchaser's officia l records, and such acquisition
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.
20.
The Purchaser represents and warrants that it has obtained any consent, approval,
authorization, order, registration or qualification of or with any court or governmental agency or body that is
required for its execution or delivery of this Investment Letter and this Investment Letter constitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting
creditors' rights and general principles of equity.
21.
The Purchaser will take all reasonable steps including, if necessary, contacting its external
auditor to ensure proper financial accounting and reporting, and disclosure of the Notes and any related transactions
in their entirety. The Purchaser represents and warrants that such treatment is consistent with its internal policies
and the Purchaser agrees that the Placement Agent and its affiliates shall have no liability or responsibility for the
Purchaser's financial and accounting treatment of the Notes or for the Purchaser's compliance with legal, tax,
accounting and regulatory reporting standards.
22.
The Purchaser understands that federal regulations and Executive Orders administered by the
U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") prohibit, among other things, the
engagement in transactions with, and the provision of services to, certain foreign countries, territories, entities and
individuals, and that the lists of OFAC prohibited countries, territories, persons and entities can be found on the
OFAC website at www.treas.gov/ofac. The Purchaser represents and warrants that none of the Purchaser or any of
its affiliates is a country, territory, person or entity named on an OFAC list, nor is it or any of its affiliates a natural
person or entity with whom dealings are prohibited under any OFAC regulations.
23.
The Purchaser represents and warrants that, except as otherwise disclosed to the Issuer and the
Placement Agent in writing: (a) it is not resident in, or organized or chartered under the laws of, (i) a jurisdiction that
has been designated by the Secretary of the Treasury under Section 311 of the USA PATRIOT Act of 2001 (the
"PATRIOT Act" as warranting special measures due to money laundering concerns or (ii) any foreign country that
has been designated as non cooperative with international anti-money laundering principles or procedures by an
intergovernmental group or organization, such as the Financial Action Task Force on Money Laundering, of which
the United States is a member and with which designation the United States representative to the group or
organization continues to concur (a "Non Cooperative Jurisdiction"); (b) to its knowledge, its funds do not
originate from, nor will they be routed through, an account maintained at (i) a foreign bank operating under an
offshore banking license or a foreign bank that does not maintain a physical presence in any country, both within the
meaning of the PATRIOT Act, (but excluding any foreign bank whose affiliate maintains a physical presence in any
country if such foreign bank is subject to supervision by a banking authority in the country regulating such affiliate),
or (ii) a bank organized or chartered under the laws of a Non Cooperative Jurisdiction; and (c) it is not a senior
foreign political figure, or any immediate family member or close associate of a senior foreign political figure, in
each case, within the meaning of the PATRIOT Act.
24.
The Purchaser understands that regulations adopted pursuant to the PATRIOT Act would
require the Placement Agent, in connection with the establishment of anti-money laundering procedures, to provide
information on request to governmental authorities with respect to investors who have purchased Notes. Similar
regulations have been proposed that would require the Issuer likewise to provide such information. The Purchaser
understands that the Placement Agent and the Issuer reserve the right to request such information as is necessary to
verify the identity of any purchaser or noteholder and the source of the payment of subscription monies, or as is
necessary to comply with any customer identification programs required by the Department of Treasury and/or the
Securities and Exchange Commission under the PATRIOT Act or otherwise. The Purchaser understands that in the
event of any delay or failure by any purchaser of any interest in the Notes to produce any information required for
verification purposes, an application to purchase or transfer such Notes and the subscription monies relating to such
purchase or transfer may be refused.
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25.
The Purchaser represents and warrants that the Purchaser is an eligible contract participant as
defined in Section 1(a)(12) of the U.S. Commodity Exchange Act, as amended.
26.
The Purchaser agrees, for all relevant U.S. federal income tax purposes (if any), to treat each
of the Credit Default Swap and the Interest Rate Swap as a notional principal contract.
27.
The undersigned hereby represents and warrants that it has the authority to act on behalf of
the Purchaser to execute this Investment Letter.
28.
The Purchaser acknowledges that the Issuer, Trustee, the Placement Agent, the Swap
Counterparty and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations
and agreements and the Purchaser consents to such reliance. The Purchaser hereby represents that all information
contained in its investment letter and any tax form which it has been required to provide is correct and complete as
of the date hereof and will be true on the date of its purchase of the Notes. The Purchaser agrees (a) that if any of
the acknowledgments, representations, warranties or agreements made by it in connection with its purchase of the
Notes are no longer accurate, the Purchaser will promptly notify in writing the Issuer and the Placement Agent and
(b) to provide such information and execute and deliver such documents as the Issuer and the Placement Agent or its
affiliates may reasonably request from time to time to comply with any law of regulation to which the Issuer may be
subject and it irrevocably authorizes the Issuer and such other persons to produce this letter or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered
hereby. None of the Trustee, Paying Agent, Transfer Agent or Registrar will have any liability for any claims,
actions, demands, losses, costs, expenses or damages, whether involving such parties or third parties, resulting from
any inaccuracy in any of its representations or warranties made, or for any breach of any of its agreements contained
in this investment letter. All of the representations, acknowledgements and agreements contained herein shall
survive the date of this letter.
This letter is not a commitment by the Purchaser to purchase any Notes or a commitment by the Placement
Agent or the Issuer to sell any Notes to the Purchaser.
You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters
covered hereby.
This letter agreement shall be governed by and construed in accordance with the laws of the State of New
York. With respect to any suit, action or proceedings relating to this letter agreement or the Notes each party
irrevocably submits to the jurisdiction of the courts of the State of New York.
Any photocopy, facsimile or other copy of this letter shall be deemed of equal effect as a signed original.
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Very truly yours,
[Name of Purchaser]
By: [l], as [Administrator][Manager] and Attorney
in Fact]
By:________________________________
Name:
Title:
By:______________________________
Name:
Title:
Purchaser's Address:
__________________________________________
__________________________________________
__________________________________________
__________________________________________
Telephone:
__________________________________________
Facsimile:
__________________________________________
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REGISTERED OFFICE OF THE ISSUER
STRATA 2007-1, LIMITED
P.O. Box 1093GT
Queensgate House
South Church Street
George Town, Grand Cayman
Cayman Islands
SWAP COUNTERPARTY AND INTEREST
RATE SWAP COUNTERPARTY
Bank of America N.A.
200 North College Street, 4th Floor
NC1-004-04-15
Charlotte, North Carolina 28255
TRUSTEE, PAYING AGENT, TRANSFER
AGENT AND REGISTRAR
LaSalle Bank National Association
181 West Madison Street, 32nd Floor
Chicago, Illinois 60602
PORTFOLIO MANAGER
Vanderbilt Capital Advisors, LLC
233 South Wacker Drive, Suite 8630
Chicago, Illinois 60606
PLACEMENT AGENT
BANC OF AMERICA SECURITIES LIMITED
5 Canada Square
London E14 5AQ
United Kingdom
VERIFICATION AGENT
U.S. BANK NATIONAL ASSOCIATION
214 North Tyron Street, 26th Floor
Charlotte, North Carolina 28202
IRISH LISTING AGENT
Goodbody Stockbrokers
Ballsbridge Park
Ballsbridge, Dublin 4
Ireland
IRISH PAYING AGENT
Maples Finance Dublin
75 St Stephen's Green
Dublin 2, Ireland
ADMINISTRATOR
Maples Finance Limited
P.O. Box 1093GT
Queensgate House
South Church Street
George Town, Grand Cayman
Cayman Islands
LEGAL ADVISORS TO THE SWAP COUNTERPARTY,
INTEREST RATE SWAP COUNTERPARTY AND PLACEMENT AGENT
Allen & Overy LLP
1221 Avenue of the Americas
New York, New York 10020
LEGAL ADVISORS TO THE TRUSTEE
Kennedy Covington Lobdell and Hickman, L.L.P.
Hearst Tower, 47th Floor
214 North Tryon Street
Charlotte, North Carolina 28202
LEGAL ADVISORS TO THE ISSUER
Maples and Calder
P.O. Box 309GT
Ugland House, South Church Street
George Town, Grand Cayman
Cayman Island
LEGAL ADVISORS TO THE VERIFICATION AGENT
Locke Liddell & Sapp LLP
600 Travis, Suite 3200
Houston, Texas 77002
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