SECURITY AGREEMENT

 

 

TABLE OF CONTENTS

 

	Page
ARTICLE I            DEFINITIONS		2
Section 1.01.   Definitions		2
Section 1.02.   Assumptions as to Collateral Debt Securities		2
Section 1.03.   Generic Terms		3
Section 1.04.   Times		3
ARTICLE II           THE COLLATERAL		3
Section 2.01.   Security Interests		3
Section 2.02.   Creation of Security Interest; Transfer of Control		7
Section 2.03.   Termination of Security Interests		7
Section 2.04.   Priority of Payments		7
Section 2.05.   Representations Regarding Collateral		7
ARTICLE III          RAMP-UP PERIOD PURCHASES AND EFFECTIVE DATE ACTIONS		9
Section 3.01.   Closing Date Requirements		9
Section 3.02.   Ramp-Up Period Purchases		9
Section 3.03.   Effective Date Actions		10
ARTICLE IV          ACCOUNTS, ACCOUNTINGS AND RELEASES		11
Section 4.01.   Collection of Money		11
Section 4.02.   Collection Account		11
Section 4.03.   Interest Reserve Account		13
Section 4.04.   Expense Reserve Account		14
Section 4.05.   Collateral Account		15
Section 4.06.   Reports by Trustee		16
Section 4.07.   Accountings		16
Section 4.08.   Release of Securities		21
Section 4.09.   Reports by Independent Accountants		22
Section 4.10.   Reports to Rating Agencies		23
Section 4.11.   Notices of Noteworthy Events		23
Section 4.12.   Amendments to the Transaction Documents		23
ARTICLE V           PRIORITY OF PAYMENTS		23
Section 5.01.   Disbursements of Money from Collection Account		23
Section 5.02.   Additional Provisions		28
ARTICLE VI          PURCHASE, SALE AND REINVESTMENT OF COLLATERAL DEBT SECURITIES		29

 

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TABLE OF CONTENTS

(continued)

 

	Page
Section 6.01.   Sale of Collateral Debt Securities		29
Section 6.02.   Eligibility Criteria, Ramp-Up Criteria and Replacement Criteria		31
Section 6.03.   Conditions Applicable to all Transactions		35
Section 6.04.   Collateral Quality Tests		36
Section 6.05.   Coverage Tests		37
ARTICLE VII        SUBORDINATION		39
Section 7.01.   Subordination		39
ARTICLE VIII       HEDGE AGREEMENTS, INITIAL HEDGE AGREEMENT		42
Section 8.01.   Hedge Agreement Provisions		42
Section 8.02.   Initial Hedge Agreement		45
Section 8.03.   Acknowledgement of Custodian		45
ARTICLE IX         THE TRUSTEE AND ACCOUNTHOLDER		45
Section 9.01.   Appointment and Powers		45
Section 9.02.   Performance of Duties		45
Section 9.03.   Reliance Upon Documents		46
Section 9.04.   [Intentionally Omitted]		47
Section 9.05.   [Intentionally Omitted]		45
Section 9.06.   Indemnification		45
Section 9.07.   Compensation and Reimbursement		48
Section 9.08.   [Intentionally Omitted]		48
Section 9.09.   Accounts		48
Section 9.10.   Waiver of Setoffs		48
Section 9.11.   Provision of Information		49
ARTICLE X           COVENANTS OF THE ISSUER		49
Section 10.01.   Preservation of Collateral		49
Section 10.02.   Opinions as to Collateral		49
Section 10.03.   Non-Interference; etc.		50
ARTICLE XI         MISCELLANEOUS		50
Section 11.01.   Amendments		50
Section 11.02.   Notices		51
Section 11.03.   Severability		51
Section 11.04.   Term of This Agreement		52
Section 11.05.   Assignments		52
Section 11.06.   Non-Petition Agreement		52

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 11.07.   Trial by Jury Waived				52
Section 11.08.   Governing Law				53
Section 11.09.   Consents to Jurisdiction				53
Section 11.10.   Service of Process				53
Section 11.11.   Time of Essence				53
Section 11.12.   Counterparts				53
Section 11.13.   Integration				54
Section 11.14.   Headings				54
Section 11.15.   Limited Recourse				54
Section 11.16.   Payments in Accordance with the Priority of Payments				54
Section 11.17.   Trustee and Its Affiliates				54
Section 11.18.   Judgment Currency				54
ANNEX A		Steps Required For Delivery		Annex A-1
ANNEX B		Glossary of Certain Defined Terms		Annex B-1
ANNEX C		Specified Types		Annex C-1
SCHEDULE A		Collateral Debt Securities as of the Closing Date		Schedule A-1
SCHEDULE B		Temporary Ramp-Up Securities as of the Closing Date		Schedule B-1
SCHEDULE C		Auction Procedures		Schedule C-1
SCHEDULE D		S&P Recovery Rate Matrix		Schedule D-1
SCHEDULE E		S&P Industry Classification Group		Schedule E-1
SCHEDULE F		S&P Notching Criteria I		Schedule F-1
SCHEDULE G		S&P Notching Criteria II		Schedule G-1
SCHEDULE H		Moody’s Diversity Score		Schedule H-1
SCHEDULE I		Moody’s Recovery Rate Matrix		Schedule I-1
SCHEDULE J		Moody’s Notching Criteria		Schedule J-1
SCHEDULE K		Moody’s Industry Classification Groups		Schedule K-1
SCHEDULE L		Fitch Report		Schedule L-1
SCHEDULE M		Fitch Industry Classification Groups		Schedule M-1

 

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This SECURITY AGREEMENT (as amended from time to time, this “ Agreement ”) is made as of July 1, 2004 by and among N-Star Real Estate CDO II Ltd., a company incorporated under the laws of the Cayman Islands, as issuer (the “ Issuer ”), LaSalle Bank National Association, a national banking association (“ LaSalle ”), as trustee under the Trust Deed for and on behalf of the Secured Parties (in such capacity, the “ Trustee ”), and LaSalle as securities intermediary and depositary bank (in such capacity, the “ Accountholder ”).

 

RECITALS

 

1.             The Issuer intends to purchase for investment Collateral Debt Securities primarily consisting of CMBS Securities, REIT Debt Securities and Real Estate CDO Securities.

 

2.             In order to obtain funds for its purchases of the Collateral Debt Securities, the Issuer intends to issue on the date hereof (a) U.S.$236,000,000 aggregate principal amount of Class A-1 Floating Rate Senior Notes Due 2039 (the “ Class A-1 Notes ”), (b) U.S.$42,000,000 aggregate principal amount of Class A-2A Floating Rate Senior Notes Due 2039 (the “ Class A-2A Notes ”), (c) U.S.$15,000,000 aggregate principal amount of Class A-2B Fixed Rate Senior Notes Due 2039 (the “ Class A-2B Notes ”, and together with the Class A-2A Notes, the “ Class A-2 Notes ”, and together with the Class A-1 Notes and the Class A-2A Notes, the “ Class A Notes ”), (d) U.S.$12,000,000 aggregate principal amount of Class B-1 Floating Rate Senior Subordinate Notes Due 2039 (the “ Class B-1 Notes ”), (e) U.S.$14,000,000 aggregate principal amount of Class B-2 Floating Rate Senior Subordinate Notes Due 2039 (the “ Class B-2 Notes ”, and together with the Class B-1 Notes, the “ Class B Notes ”), (f) U.S.$24,000,000 aggregate principal amount of Class C-1 Floating Rate Subordinate Notes Due 2039 (the “ Class C-1 Notes ”), (g) U.S.$6,000,000 aggregate principal amount of Class C-2A Floating Rate Subordinate Notes Due 2039 (the “ Class C-2A Notes ”), (h) U.S.$16,000,000 aggregate principal amount of Class C-2B Fixed Rate Subordinate Notes Due 2039 (the “ Class C-2B Notes ”, and together with the Class C-2A Notes, the “ Class C-2 Notes ”, and together with the Class C-1 Notes and the Class C-2A Notes, the “ Class C Notes ”) (i) U.S.$15,000,000 aggregate principal amount of Class D Fixed Rate Subordinate Notes Due 2039 (the “ Class D Notes ”), and (j) U.S.$20,000,000 aggregate principal amount of Class E Subordinate Income Notes Due 2039 (the “ Class E Subordinate Income Notes ”) pursuant to the Trust Deed.

 

3.             N-Star Real Estate CDO II Corp., a company organized under the laws of the State of Delaware (the “ Co-Issuer ”, and together with the Issuer, the “ Co-Issuers ”) will co-issue the Class A Notes, the Class B Notes and the Class C Notes. The Class D Notes and the Class E Subordinate Income Notes will be obligations of the Issuer only.

 

4.             In order to provide security for the performance by each of the Co-Issuers of all of their obligations to pay to the Secured Parties amounts payable in respect of such Notes in accordance with their terms and the terms of the Note Agency Agreement, the Trust Deed and the other Transaction Documents, the Issuer has agreed to Grant to the Trustee, on behalf and for the benefit of the Secured Parties, a security interest in the Collateral (as defined herein) in the manner set forth in this Agreement.

 

AGREEMENTS

 

In consideration of the premises and of the agreements herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each of the Issuer, the Trustee and the Accountholder hereby agree as follows:

 

 

ARTICLE I

 

DEFINITIONS

 

Section 1.01.          Definitions . Capitalized terms used herein and not defined herein shall have the meanings set forth in the Glossary of Certain Defined Terms attached as Annex B hereto (the “ Glossary ”).

 

Section 1.02.          Assumptions as to Collateral Debt Securities .

 

(a)           In connection with all calculations required to be made pursuant to this Agreement with respect to Scheduled Distributions on any Collateral Debt Security, or any payments on any other assets included in the Collateral, and with respect to the income that can be earned on Scheduled Distributions on such Collateral Debt Securities and on any other amounts that may be received for deposit in the Collection Account, the provisions set forth in this Section 1.02 shall be applied.

 

(b)           All calculations by or on behalf of the Trustee or the Issuer with respect to Scheduled Distributions on the Collateral Debt Securities shall be made on the basis of information as to the terms of each such Collateral Debt Security and upon report of payments, if any, received on such Collateral Debt Security that are furnished by or on behalf of the issuer of such Collateral Debt Security and, to the extent they are not manifestly in error, such information or report may be conclusively relied upon in making such calculations.

 

(c)           Each Scheduled Distribution receivable with respect to a Collateral Debt Security shall be assumed to be received on the applicable Due Date, and each such Scheduled Distribution shall be assumed to be immediately deposited in the Collection Account and, except as otherwise specified, to earn interest at the Assumed Investment Rate; provided, however, that if the nominal due date for any payment on any Collateral Debt Security or Eligible Investment occurs on a day during a Due Period that is not a business day under the applicable Underlying Instrument and as a result such payment is paid and received in the following Due Period, then such payment shall be deemed to have been received during the Due Period in which such nominal due date falls if such payment is timely made in accordance with the related Underlying Instrument. All such funds shall be assumed to continue to earn interest until the date on which they are required to be available in the Collection Account for transfer to the Note Payment Account and application, in accordance with the terms hereof, of the Notes and of the Trust Deed, to payments on the Notes or other amounts payable pursuant to this Agreement.

 

(d)           For accounting and reporting purposes only, for each Collateral Debt Security that bears interest based on an index, all calculations involving such index for the then-current period shall be assumed to be equal to the then-current rate as had been set in accordance with the terms of the Collateral Debt Security and all calculations involving such floating rate index for future periods shall be assumed to be equal to the applicable floating rate on the relevant Measurement Date.

 

(e)           For purposes of calculating the Class A Interest Coverage Ratio, the Class B Interest Coverage Ratio, the Class C Interest Coverage Ratio and the Class D Interest Coverage Ratio, and for purposes of the Replacement Criteria and the Ramp-Up Criteria, the expected interest income on floating rate Collateral Debt Securities and the expected interest payable on the Notes will be calculated using the then-current interest rates applicable thereto and expected interest earned on the Eligible Investments will be calculated using the then-current interest rate applicable thereto.

 

(f)            With respect to any Collateral Debt Security as to which any interest or other payment thereon is subject to withholding tax of any relevant jurisdiction, each Scheduled Distribution

 

 

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thereon shall, for purposes of the Coverage Tests and the Collateral Quality Tests, be deemed to be payable net of such withholding tax unless the issuer thereof or obligor thereon is required to make additional payments to fully compensate the Issuer for such withholding taxes (including in respect of any such additional payments). On any date of determination, the amount of any Scheduled Distribution due on any future date shall be assumed to be made net of any such uncompensated withholding tax based upon withholding tax rates in effect on such date of determination.

 

(g)           Unless otherwise provided herein, test calculations that evaluate to a percentage shall be rounded to the nearest ten-thousandth and test calculations that evaluate to a number or decimal will be rounded to the nearest one-hundredth.

 

(h)           All calculations required to be made and all reports which are to be prepared pursuant to this Security Agreement with respect to the Collateral Debt Securities, shall be made on the basis of the date on which the Issuer makes a commitment to purchase or sell an asset (the “trade date”), not the settlement date

 

Section 1.03.           Generic Terms . The terms “hereof” , “herein” or “hereunder”, unless otherwise modified by more specific reference, shall refer to this Agreement in its entirety. Unless otherwise indicated in context, the terms “Article”, “Section”, “Appendix”, “Exhibit” or “Annex” shall refer to an Article or Section of, or Appendix, Exhibit or Annex to, this Agreement. The definition of a term shall include the singular, the plural, the past, the present, the future, the active and the passive forms of such term. The words “include”, “including” and “included” shall be illustrative and shall not imply any limitation or exclusion unless the context clearly indicates otherwise.

 

Section 1.04.           Times . All times referred to herein shall be to times in the City of New York, unless otherwise expressly stated herein.

 

ARTICLE II

 

THE COLLATERAL

 

Section 2.01.          Security Interests .

 

(a)           Grant to the Trustee on behalf and for the benefit of the Secured Parties . In order to secure the full and punctual payment, and the performance by the Issuer, of all of the Issuer’s obligations with respect to the Notes, this Agreement, the Note Agency Agreement, the Trust Deed and each Hedge Agreement and to secure the performance of all obligations of the Issuer under this Agreement and the other Transaction Documents in favor of (i) the Trustee for itself and on behalf of the Noteholders, (ii) the Collateral Advisor and (iii) each Hedge Counterparty (collectively, the “ Secured Parties ”), the Issuer hereby Grants to the Trustee on behalf and for the benefit of the Secured Parties, as their respective interests may appear, subject to the provisions of this Agreement, a continuing first priority Lien on, and first priority security interest in, all of its right, title and interest in, to and under all of the assets of the Issuer, whether now owned and existing or hereafter acquired or arising and wherever located, but excluding all of the Issuer’s right, title and interest in and to the Ordinary Shares Account and any amounts on deposit therein, which will equal the sum of U.S.$2,000, representing (1) the paid up share capital of the Issuer resulting from the issuance of the Ordinary Shares (U.S.$1,000) under the Articles and (2) the fee paid to the Issuer for issuing the Notes (U.S.$1,000) (all non-excluded assets being collectively referred to as the “ Collateral ”); provided that the Collateral shall include, without limitation, the following:

 

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(i)              the Collateral Account, including all Collateral Debt Securities (listed, as of the Closing Date, in Schedule A (including Temporary Ramp-Up Securities listed in Schedule B ) and, as of the Effective Date, in a schedule to be provided by the Issuer to the Trustee) which the Issuer causes to be delivered to the Trustee for the benefit and on behalf of the Secured Parties (directly or through a Securities Intermediary or bailee) and all payments thereon or with respect thereto, and all Collateral Debt Securities that are delivered to the Trustee in the future pursuant to the terms hereof and all payments thereon or with respect thereto;

 

(ii)             the Payment Account, the Interest Reserve Account, the Expense Reserve Account, the Hedge Termination Receipts Account, the Hedge Replacement Account and the Collection Account (collectively with the Collateral Account, the “ Accounts ”);

 

(iii)            Eligible Investments purchased with funds on deposit in any Account and all funds on deposit in any Account and all income from the investments of funds in any Account;

 

(iv)            all Cash or Money delivered to the Trustee for the benefit of the Trustee (directly or through a Securities Intermediary or bailee);

 

(v)             all the Issuer’s rights under each Hedge Agreement (including any collateral pledged for the benefit of the Issuer thereunder) and all payments thereunder or with respect thereto;

 

(vi)            all the Issuer’s rights under the Collateral Advisory Agreement and the Collateral Administration Agreement;

 

(vii)           all Securities, Security Entitlements, Instruments, Money and Investment Property and other property of any type or nature in which the Issuer has an interest, including any part thereof which consists of General Intangibles; and

 

(viii)          all proceeds, accessions, profits, income, substitutions and replacements, whether voluntary or involuntary, of and to any property in which the Issuer has granted such security interest.

 

Such Grants are made, however, in trust to secure the Notes equally and ratably without prejudice, priority or distinction, except as expressly provided in this Agreement, between any Note and any other Note by reason of difference in time of issuance or otherwise, and to secure in accordance with the priorities set forth in this Agreement (i) the payment of all amounts due on the Notes in accordance with their terms, (ii) the payment of all other sums payable under this Agreement and all amounts payable to the Collateral Advisor under the Collateral Advisory Agreement and each Hedge Counterparty under a Hedge Agreement and (iii) compliance with the provisions of this Agreement, the Collateral Advisory Agreement and each Hedge Agreement, all as provided in this Agreement. The Trustee, on behalf of the Secured Parties, acknowledges such Grant, accepts the trusts hereunder and agrees to perform the duties herein in accordance with the provisions hereof.

 

(b)           Priorities . The Issuer intends, and the Trustee agrees, that the security interests in the Collateral securing the Issuer’s obligations with respect to the Notes and performance of all its obligations under this Agreement in favor of the Trustee for the benefit of the Secured Parties shall rank pari passu with each other, shall be prior to all other Liens in respect of the Collateral, subject to the terms of this Agreement, and shall be subject to the Priority of Payments. The Issuer shall take all actions necessary to obtain and maintain, in favor of the Trustee for the benefit of the Secured Parties, a first priority Lien on and a first priority perfected security interest in the Collateral, subject to no other Liens.

 

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(c)           Holding of Collateral . The Trustee, for the benefit and on behalf of the Secured Parties, acknowledges the Grant of the security interests under this Agreement in accordance with the provisions of this Agreement. The Collateral in the form of Securities, Security Entitlements, Instruments and Money shall be held by the Accountholder for the Trustee for the benefit and on behalf of the Secured Parties pursuant to the Account Control Agreement and the Accountholder shall comply with any instruction given by the Trustee. If so directed in writing by the Issuer, the Trustee shall, and in any event shall cause the Accountholder to, hold and perfect the security interest in the Collateral. Except as provided herein, no Collateral may be withdrawn from the Accounts.

 

(d)           Delivery of Portfolio Collateral . Collateral Debt Securities acquired prior to or on the Closing Date shall be delivered by, or at the direction of, the Issuer to the Trustee on or before the Closing Date in accordance with Annex A hereto, and the Collateral Debt Securities which the Issuer has on or before the Closing Date committed to purchase but which will not have settled on or before the Closing Date, and any additional Collateral Debt Securities or Substitute Collateral Debt Securities acquired by the Issuer after the Closing Date, shall be delivered by, or at the direction of, the Issuer to the Trustee when acquired in accordance with Annex A hereto. The Issuer shall Grant pursuant to Section 2.01(a)  all of the Issuer’s right, title and interest in and to the Collateral Debt Securities and deliver the Collateral Debt Securities in accordance with the requirements set forth in Annex A hereto in order to perfect a first priority security interest in favor of the Trustee on behalf and for the benefit of the Secured Parties. If any such Collateral Debt Securities are held through the Accountholder, delivery shall be deemed to have occurred upon receipt of evidence satisfactory to the Trustee that such Collateral Debt Securities have been credited to the Collateral Account in accordance with Annex A hereto.

 

(e)           Financing Statements . The Issuer shall cause a UCC financing statement describing the Collateral and naming the Issuer as debtor and the Trustee as secured party to be filed, by or on behalf of the Issuer, in the District of Columbia within ten (10) Business Days of the Closing Date. The Issuer shall take all actions necessary to maintain the effectiveness of such financing statement and shall notify the Trustee in writing not less than thirty (30) days prior to any change in the Issuer’s name, identity, corporate structure, jurisdiction of incorporation or jurisdiction of its chief executive office. The Issuer hereby authorizes the Trustee to, and the Trustee shall upon receipt of an Opinion of Counsel as to the necessity of such filing, file such additional financing statement or any other financing statement, amendment, assignment or continuation statement that the Issuer shall deem necessary or advisable in connection with the security interest Granted hereunder, including, without limitation, financing statements describing the Collateral. The Issuer agrees that it will from time to time cause to be filed financing statements and continuation statements required to be made, it being understood that the Trustee shall be entitled to rely upon an Opinion of Counsel as to the need to file such financing statements and continuation statements, the dates by which such filings are required to be made and the jurisdictions in which such filings are required to be made. The Issuer shall not without the written consent of the Trustee (which consent shall not be unreasonably withheld or delayed) authorize the filing of any financing statements naming it as debtor other than financing statements in favor of the Trustee.

 

(f)            Pledge Notices . Concurrently with the execution and delivery by the Issuer of the Transaction Documents, the Issuer shall deliver to each of the Accountholder, Trustee, each Paying Agent, each Hedge Counterparty and the Collateral Advisor, a notice in form and substance satisfactory to the Trustee informing such Persons of the Trustee’s charge over, and security interest in, the Hedge Agreements and all of the Issuer’s right, title and interest in, to and under the Collateral Advisory Agreement and the Collateral Administration Agreement. Each Hedge Counterparty shall, by entering into such agreement, acknowledge that the Lien of this Agreement extends to such agreement.

 

(g)           No Transfer of Duties . The security interests are Granted as security only and shall not (i) transfer or in any way affect or modify, or relieve the Issuer from any obligation to perform

 

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or satisfy, any term, covenant, condition or agreement to be performed or satisfied by the Issuer under or in connection with this Agreement or any other Transaction Document to which it is a party or (ii) impose any obligation on the Trustee, the Collateral Advisor or the Accountholder to perform or observe any such term, covenant, condition or agreement or impose any liability on the Trustee, the Collateral Advisor or the Accountholder for any act or omission on the part of the Issuer relative thereto or for any breach of any representation or warranty on the part of the Issuer contained therein or made in connection therewith.

 

(h)           Representative of Noteholders Only; Agent for All Other Secured Parties . With respect to the security interests created hereunder, the pledge of any item of Collateral to the Trustee is made to the Trustee (i) for the benefit of itself as representative of the Noteholders and (ii) as agent for each of the other Secured Parties; in furtherance of the foregoing, the possession by the Trustee of any item of Collateral, the endorsement to or registration in the name of the Trustee of any item of Collateral (including as entitlement holder of the Collateral Account) are all undertaken by the Trustee for the benefit of itself as representative of the Noteholders and as agent for each of the other Secured Parties. The Trustee shall have no fiduciary duties to any Hedge Counterparty or the Collateral Advisor; provided that the foregoing shall not limit any of the express obligations of the Trustee under this Agreement.

 

(i)            The Issuer hereby agrees, and hereby undertakes to obtain the agreement of the Collateral Advisor, in the Collateral Advisory Agreement to the following:

 

(i)              The Collateral Advisor consents to, and agrees to perform, the provisions of this Agreement and the other Transaction Documents applicable to the Collateral Advisor.

 

(ii)             The Collateral Advisor acknowledges that the Issuer is assigning all of its right, title and interest in, to and under the Collateral Advisory Agreement to the Trustee on behalf and for the benefit of the Secured Parties, and the Collateral Advisor agrees that all of the representations, covenants and agreements made by the Collateral Advisor in the Collateral Advisory Agreement are also for the benefit of the Secured Parties.

 

(iii)            Neither the Issuer nor the Collateral Advisor will enter into any agreement amending, modifying or terminating the Collateral Advisory Agreement (other than in respect of an amendment or modification of the type that may be made to this Agreement and the Trust Deed without Noteholder consent) or selecting or consenting to a successor collateral advisor, without prior written notice to the Requisite Noteholders and Rating Agency Confirmation.

 

(iv)            Except as otherwise set forth in the Collateral Advisory Agreement, the Collateral Advisor shall continue to serve as Collateral Advisor under the Collateral Advisory Agreement notwithstanding that the Collateral Advisor shall not have received amounts due it under the Collateral Advisory Agreement because sufficient funds were not then available to pay such amounts and the Collateral Advisor agrees not to cause the filing of a petition in bankruptcy against the Issuer for the non-payment to the Collateral Advisor until the later of (A) payment in full of all Notes issued under the Trust Deed, in accordance with the Priority of Payments plus ten (10) days following such payment, and (B) the expiration of a period equal to the applicable preference period under any applicable bankruptcy law; provided that nothing in this clause (B)  shall preclude, or be deemed to estop, the Collateral Advisor (1) from taking any action prior to the expiration of the ten (10) days following such payment or, if longer, the applicable preference period then in effect, in (x) any case or proceeding voluntarily filed or commenced by the Issuer or the Co-Issuer, as the case may be, or (y) any involuntary insolvency proceeding filed or commenced against the Issuer or the Co-Issuer, as the case may be, by a Person other than the Collateral Advisor or (2) from commencing against the Issuer or the Co-Issuer or any properties of the Issuer or the Co-Issuer any legal action that is not a bankruptcy, reorganization, arrangement,

 

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insolvency, moratorium or liquidation proceeding; and provided, further, that the obligations of the Issuer hereunder shall be payable solely from the Collateral in accordance with the Priority of Payments.

 

(j)            Trustee as Attorney-In-Fact . Without imposing any obligations on the Trustee with respect thereto (other than as set forth in this Agreement), the Issuer hereby appoints the Trustee as its attorney-in-fact for the specific purpose of filing any financing statements and continuation statements with respect to the security interests provided for herein.

 

Section 2.02.          Creation of Security Interest: Transfer of Control . The Issuer hereby agrees to (a) create in each item of Collateral in favor of the Trustee on behalf and for the benefit of the Secured Parties a first priority Lien on the Collateral Granted pursuant to Section 2.01(a)  and (b)  give Control over each item of the Collateral constituting a Financial Asset to the Trustee. The obligation in the preceding sentence shall be an obligation of the Issuer and not an obligation of the Trustee or the Accountholder. All procedures regarding the transfer, relinquishment or maintenance of Control by the Trustee over the Collateral shall be governed by the Account Control Agreement and Annex A hereto. The parties hereto agree that, following the occurrence of any Event of Default, the Trustee shall be entitled to take all appropriate actions on behalf of the Secured Parties as described in Section 9.01 .

 

Section 2.03.          Termination of Security Interests . On the Final Termination Date, the security interests and the rights, remedies, powers, duties, authority and obligations conferred upon the Trustee for the benefit and on behalf of the Secured Parties and the Accountholder pursuant to this Agreement shall terminate and be of no further force and effect and all rights, remedies, powers, duties, authority and obligations of the Trustee and the Accountholder with respect to the Collateral shall be automatically released in favor of the Issuer; provided, however, that each of the Trustee and the Accountholder, if requested in writing by the Issuer, shall execute and deliver such instruments of release in favor of the Issuer as the Issuer may reasonably request to effectuate such release, and any such instruments so executed and delivered shall be fully binding on each of the Trustee and the Accountholder.

 

Section 2.04.          Priority of Payments . All amounts received in respect of the Collateral (whether by payments or by sale or other disposition) that are available for distribution shall be distributed in accordance with the Priority of Payments set forth herein.

 

Section 2.05.          Representations Regarding Collateral . The Issuer, as of the date hereof (and, as of the date of each acquisition of any Collateral), represents and warrants to the following:

 

(a)           This Agreement creates a valid and continuing security interest (as defined in the applicable UCC) in the Collateral in favor of the Trustee on behalf and for the benefit of the Secured Parties, which security interest is prior to all other Liens and security interests, and is enforceable as such as against creditors of and purchasers from the Issuer and, upon delivery of the Collateral Debt Securities in accordance with the requirements set forth in Annex A hereto and filing of the appropriate financing statements in the appropriate filing offices, the Lien and security interest created by this Agreement shall be a perfected first priority security interest in favor of the Trustee for the benefit of the Secured Parties.

 

(b)           The Issuer owns and has good and marketable title to the Collateral free and clear of any Liens, claims, encumbrances or defects of any nature whatsoever except for those which are being released on the Closing Date or on the date of purchase by the Issuer or those created pursuant to or contemplated under this Agreement and encumbrances arising from due bills, if any, with respect to interest, or a portion thereof, accrued on any Collateral Debt Security prior to the first payment date and owed by the Issuer to the seller of such Collateral Debt Security.

 

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described in this financing statement will violate the rights of the Trustee on behalf and for the benefit of (A) itself and for the benefit of the Noteholders, (B) the Collateral Advisor and (C) each Hedge Counterparty.”

 

(1)                                   The authoritative copy of any chattel paper that constitutes or evidences the Collateral, if any, has been communicated to the Trustee and has no marks or notations indicating that it has been pledged, assigned or otherwise conveyed to any Person other than the Trustee on behalf and for the benefit of the Secured Parties.

 

(m)                                The Issuer has received or will receive all consents and approvals required by the terms of the underlying loan agreement, indenture or other underlying documentation, if any, relating to the Collateral to the transfer to the Trustee on behalf and for the benefit of the Secured Parties of its interest and rights in the Collateral hereunder.

 

(n)                                  The Issuer, the Accountholder and the Trustee have entered into the Account Control Agreement pursuant to which the Accountholder has agreed to comply with all instructions originated by the Trustee relating to the Accounts without further consent by the Issuer.

 

(o)                                  None of the Accounts is in the name of any person other than the Trustee, held on behalf and for the benefit of the Secured Parties. The Issuer has not consented to the Trustee or the Accountholder maintaining any of the Accounts to comply with entitlement orders or instructions of any Person other than the Trustee.

 

(p)                                  Notwithstanding any other provision of this Agreement or any other related Transaction Document, the representations in this Section 2.05 shall be continuing and deemed to be updated on any day a new item of Collateral is acquired, and remain in full force and effect until such time as all obligations under this Agreement, the Trust Deed, the Note Agency Agreement and the Notes have been finally and fully paid and performed.

 

(q)                                  The parties to this Agreement (i) shall not, without obtaining a Rating Agency Confirmation, waive any of the representations in this Section 2.05 ; (ii) shall provide each of the Rating Agencies with prompt written notice of any breach of the representations contained in this Section 2.05 upon becoming aware thereof; and (iii) shall not, without obtaining a Rating Agency Confirmation (as determined after any adjustment or withdrawal of the ratings following notice of such breach), waive a breach of any of the representations in this Section 2.05 .

 

ARTICLE III

 

RAMP-UP PERIOD PURCHASES AND EFFECTIVE DATE ACTIONS

 

Section 3.01.                              Closing Date Requirements . The Issuer hereby represents and warrants to the Trustee on behalf and for the benefit of the Secured Parties that as of the Closing Date (i) it will comply with the Collateral Quality Tests and the Coverage Tests and (ii) it will have acquired Collateral Debt Securities in an aggregate Principal Balance representing at least U.S.$350,000,000 million.

 

Section 3.02.                              Ramp-Up Period Purchases .

 

(a)                                   Any portion of the net proceeds of the issuance of the Notes that are not applied to pay for (or reserved to pay for) the purchase of all Collateral Debt Securities on the Closing Date and the Issuer’s organizational expenses and expenses related to the issuance of the Notes will be deposited in the Collection Account on the Closing Date for the purchase of additional Collateral Debt Securities

 

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during the Ramp-Up Period. The Issuer is required to use reasonable efforts to purchase, or to enter into binding agreements to purchase, Collateral Debt Securities such that the aggregate Principal Balance of all Collateral Debt Securities purchased by the Issuer by the end of the Ramp-Up Period is at least U.S.$400 million. Any portion of the net proceeds of the issuance of the Notes that are not applied to the purchase of Collateral Debt Securities on the Closing Date or during the Ramp-Up Period, shall be Collateral Principal Collections and shall be applied by the Issuer to the making of payments on the Notes, subject to and in accordance with the Priority of Payments, on the Payment Date immediately following the Effective Date.

 

(b)                                  During the Ramp-Up Period, subject to the requirements of Article VI, the Issuer is required to use reasonable efforts to purchase Collateral Debt Securities that, at the time of purchase will each satisfy the Ramp-Up Criteria, and as of the end of the Ramp-Up Period, will, in the aggregate (with all Collateral Debt Securities previously acquired by the Issuer), satisfy the Collateral Quality Tests and the Coverage Tests.

 

(c)                                   The Issuer hereby covenants to the Trustee, on behalf and for the benefit of the Secured Parties, that during the Ramp-Up Period, it will not invest in any additional Collateral Debt Securities unless such additional Collateral Debt Security satisfies the Ramp-Up Criteria and unless such acquisition will not result in the failure to satisfy the Coverage Tests.

 

Section 3.03.                              Effective Date Actions .

 

(a)                                   The Issuer (or the Collateral Advisor on behalf of the Issuer) shall cause to be delivered to the Trustee on the Effective Date an amended schedule of Collateral Debt Securities listing all Collateral Debt Securities Granted to the Trustee pursuant to Section 2.01 on or before the Effective Date, which schedule shall supersede any prior schedule of Collateral Debt Securities delivered to the Trustee. In addition, on the Effective Date and on each Calculation Date thereafter, the Trustee shall be required to provide to S&P the Electronic Default Model Input File; provided that the Trustee shall not disclose any S&P confidential private credit assessments used in preparing the Electronic Default Model Input File to any third party.

 

(b)                                  In the case of an Effective Date specified in clause (i) or (ii) of the definition of “Effective Date,” the Issuer (or the Collateral Advisor on behalf of the Issuer) shall request each Rating Agency rating a Class of Notes to confirm in writing, within thirty (30) Business Days after such Effective Date, or such later date as such Rating Agency may determine, that it has not reduced or withdrawn the rating it assigned to such Class of Notes on the Closing Date. In the event of a Ratings Confirmation Failure, on the next and succeeding Payment Dates, the Issuer is required to pay principal, to the extent of Available Funds in the Collection Account and subject to the Priority of Payments, on the Class A-1 Notes, the Class A-2 Notes, the Class B-1 Notes, the Class B-2 Notes, the Class C-1 Notes, the Class C-2 Notes and the Class D Notes, in that order, in the amounts necessary for each Rating Agency to confirm its respective ratings of the Notes assigned on the Closing Date or until each Class of Notes is paid in full. Such request by the Issuer to the Rating Agencies shall be accompanied by an accountant’s certificate as provided in Section 3.03(c) .

 

(c)                                   Within fifteen (15) Business Days after the Effective Date, (i) the Issuer, or the Collateral Advisor on the Issuer’s behalf, shall be required to obtain and deliver to the Trustee an accountants’ certificate from the Independent Accountants (A) confirming the information with respect to each Collateral Debt Security set forth on the amended schedule of Collateral Debt Securities delivered pursuant to Section 3.03(a)  as of the end of the Ramp-Up Period, and the information provided by the Issuer with respect to every other asset included in the Collateral, by reference to such sources as will be specified therein, (B) certifying as of the end of the Ramp-Up Period the procedures applied and the

 

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associated findings with respect to (1) the Coverage Tests and (2) the Collateral Quality Tests and (C) specifying the procedures undertaken by them to review data and computations relating to the foregoing statement, (ii) the Trustee shall be required to run the S&P CDO Monitor and report to S&P whether or not the S&P CDO Monitor Test has been satisfied and (iii) the Trustee will be required to report the S&P scenario default and break-even default rate for each Class of Notes.

 

ARTICLE IV

 

ACCOUNTS, ACCOUNTINGS AND RELEASES

 

Section 4.01.                              Collection of Money . The Accounts established by the Trustee pursuant to Section 8.01 and this Article IV may include any number of sub-accounts requested by the Collateral Advisor for convenience in administering Collateral Debt Securities. In addition, all Cash deposited in the Accounts established pursuant to this Article IV shall be invested in Eligible Investments in accordance with the procedures set forth in this Article IV and any restrictions applicable to such Accounts.

 

Section 4.02.                              Collection Account .

 

(a)                                   The Trustee shall, prior to the Closing Date, establish a single, segregated trust account in the United States which shall be designated as the “Collection Account ”, which shall be held in the name of the Trustee for the benefit and on behalf of the Secured Parties and over which the Trustee shall have exclusive Control and the sole right of withdrawal, into which the Trustee shall from time to time deposit, in addition to the deposits required pursuant to Section 4.04(d) , (i) all distributions on the Collateral Debt Securities and (ii) all proceeds received from the disposition of any Collateral Debt Securities (unless simultaneously reinvested in additional Collateral Debt Securities or Substitute Collateral Debt Securities, subject to the Replacement Criteria (other than with respect to proceeds received from the disposition of any Temporary Ramp-Up Securities), or in Eligible Investments) and (iii) all Collections. Funds in the Collection Account shall not be commingled with any other Money. The Trustee shall give to the Issuer and the Collateral Advisor prompt notice if the Collection Account or any funds on deposit therein, or otherwise to the credit thereof, shall become subject to any writ, order, judgment, warranty of attachment, execution or similar process. The Issuer shall not have any legal, equitable or beneficial interest in the Collection Account other than in accordance with the Priority of Payments. In addition, (x) the Issuer may, but under no circumstances shall be required to, deposit or cause to be deposited from time to time such Moneys in the Collection Account as it deems, in its sole discretion, to be advisable and by notice to the Trustee and (y) the Collateral Advisor may designate such Money to be treated as Collateral Principal Collections or Collateral Interest Collections hereunder at its discretion. All Money deposited from time to time in the Collection Account pursuant to this Agreement shall be held by the Trustee as part of the Collateral and shall be applied in accordance with the terms hereof and to the purposes herein provided. The Collection Account shall remain at all times with a financial institution having a long-term debt rating of at least “BBB+” by S&P, at least “Baal” by Moody’s and, at least “BBB+” by Fitch and a short-term debt rating of at least “A-1” by S&P, at least “P-1” by Moody’s and, at least “F-1” by Fitch.

 

(b)                                  All Distributions, any deposit required pursuant to Section 4.02(c)  and any net proceeds from the sale or disposition of a Collateral Debt Security received by the Trustee shall be immediately deposited into the Collection Account. All such property, together with any securities in which funds included in such property are or will be invested or reinvested during the term of this Agreement, and any income or other gain realized from such investments, shall be held by the Trustee in the Collection Account as part of the Collateral subject to disbursement and withdrawal as provided in this Section 4.02 . By Issuer Order (which may be in the form of standing instructions), the Issuer (or the

 

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Collateral Advisor on behalf of the Issuer) may at any time direct the Trustee to, and upon receipt of such Issuer Order the Trustee shall, invest all funds received into the Collection Account during a Due Period, and amounts received in prior Due Periods and retained in the Collection Account, as so directed in Eligible Investments maturing no later than the Business Day immediately preceding the next Payment Date. The Trustee shall, within one (1) Business Day after receipt of any Distribution or other proceeds which is not Cash, so notify the Issuer and the Issuer (or the Collateral Advisor on behalf of the Issuer) shall, within thirty (30) Business Days after receipt of such notice from the Trustee, sell such Distribution or other proceeds for Cash in an arm’s-length transaction to a Person which is not an Affiliate (other than a Permitted Affiliate, subject to the Investment Advisers Act) of the Issuer or the Collateral Advisor and deposit the proceeds thereof in the Collection Account for investment pursuant to this Section 4.02 ; provided, however, that the Issuer (or the Collateral Advisor on behalf of the Issuer) need not sell such Distributions or other proceeds if it delivers an Officer’s certificate to the Trustee certifying that such Distributions or other proceeds constitute Collateral Debt Securities or Eligible Investments.

 

(c)                                   If, prior to the occurrence of an Event of Default, the Issuer shall not have given any investment directions pursuant to Section 4.02(b) , the Trustee shall seek instructions from the Collateral Advisor within three (3) Business Days after transfer of such funds to the Collection Account. If the Trustee does not thereupon receive written instructions from the Issuer (or the Collateral Advisor on behalf of the Issuer) within thirty (30) Business Days after transfer of such funds to the Collection Account, it shall invest and reinvest the funds held in the Collection Account, as fully as practicable, but only in one or more Eligible Investments described in clause (iii) of the definition of Eligible Investments of its selection maturing no later than the Business Day immediately preceding the next Payment Date. If, after the occurrence of an Event of Default, the Issuer shall not have given investment directions to the Trustee pursuant to Section 4.02(b)  for three (3) consecutive days, the Trustee shall invest and reinvest such Money as fully as practicable in Eligible Investments as described in clause (iii) of the definition of Eligible Investments of its selection maturing not later than the Business Day immediately preceding the next Payment Date. All interest and other income from such investments shall be deposited in the Collection Account, any gain realized from such investments shall be credited to the Collection Account and any loss resulting from such investments shall be charged to the Collection Account. The Trustee shall not in any way be held liable by reason of any insufficiency of such Collection Account resulting from any loss relating to any such Eligible Investment, except with respect to investments in obligations of the Trustee or any Affiliate thereof.

 

(d)                                  Upon Issuer Order executed by the Issuer (or the Collateral Advisor on behalf of the Issuer) and subject to the requirements of Section 3.02 , between the Closing Date and the close of business on the Effective Date only, all or a portion of any deposit and any reinvestment income thereon shall be released from the Collection Account and applied by the Trustee in accordance with such Issuer Order in payment for Collateral Debt Securities purchased in accordance with Section 3.02 and Granted to the Trustee for and on behalf of the Secured Parties.

 

(e)                                   During the Ramp-Up Period, the Collateral Advisor may reinvest Collateral Principal Collections (including Sale Proceeds) in Substitute Collateral Debt Securities as permitted under and in accordance with the requirements of Article VI or temporarily reinvest such amounts in Eligible Investments pursuant to Section 4.02(b)  pending reinvestment in Substitute Collateral Debt Securities. After the Ramp-Up Period, the Collateral Advisor may reinvest Prepaid Collateral Principal Collections in Substitute Collateral Principal Collections as permitted under and in accordance with the requirements of Article VI or temporarily reinvest such amounts as Eligible Investments pursuant to Section 4.02(b) pending reinvestment in Substitute Collateral Debt Securities. If the Collateral Advisor does not reinvest such Collateral Principal Collections (including Sale Proceeds) in accordance with the requirements of Article VI , such amounts shall be used to redeem the Notes in accordance with the Priority of Payments

 

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in an amount equal to the lesser of (i) the Collateral Principal Collections and (ii) the amount of Available Funds remaining in the Collection Account.

 

Section 4.03.                              Interest Reserve Account .

 

(a)                                   The Trustee shall, prior to the Closing Date, establish a single, segregated trust account which shall be designated as the “ Interest Reserve Account ”, which shall be held in the name of the Trustee for the benefit and on behalf of the Secured Parties and over which the Trustee shall have exclusive Control and the sole right of withdrawal, into which the Trustee shall deposit on each Payment Date, the Interest Reserve Amount, if any, in accordance with Section 5.01(a)(ix) . Funds in the Interest Reserve Account shall not be commingled with any other Money. The Trustee shall give to the Issuer and the Collateral Advisor prompt notice if the Interest Reserve Account or any funds on deposit therein, or otherwise to the credit of the Interest Reserve Account, shall become subject to any writ, order, judgment, warranty of attachment, execution or similar process. All Money deposited from time to time in the Interest Reserve Account pursuant to this Agreement shall be held by the Trustee as part of the Collateral and shall be applied in accordance with the terms hereof and to the purposes herein provided. The Issuer shall not have any legal, equitable or beneficial interest in the Interest Reserve Account other than in accordance with the Priority of Payments. The Interest Reserve Account shall remain at all times with a financial institution having a long-term debt rating of at least “BBB+” by S&P, at least “Baal” by Moody’s and, at least “BBB+” by Fitch and a short-term debt rating of at least “A-1” by S&P, at least “P-1” by Moody’s and, at least “F-1” by Fitch.

 

(b)                                  Any deposit required pursuant to Section 4.03(c)  shall be immediately deposited into the Interest Reserve Account. All such property, together with any securities in which funds included in such property are or will be invested or reinvested during the term of this Agreement, and any income or other gain realized from such investments, shall be held by the Trustee in the Interest Reserve Account as part of the Collateral subject to disbursement and withdrawal as provided in this Section 4.03 . By Issuer Order (which may be in the form of standing instructions), the Issuer (or the Collateral Advisor on behalf of the Issuer) may at any time direct the Trustee to, and upon receipt of such Issuer Order the Trustee shall, invest all funds received into the Interest Reserve Account during a Due Period, and amounts received in prior Due Periods and retained in the Interest Reserve Account, as so directed in Eligible Investments maturing no later than the Business Day immediately preceding the next Payment Date. The Trustee shall, within one (1) Business Day after receipt of any Distribution or other proceeds which is not Cash, so notify the Issuer and the Issuer (or the Collateral Advisor on behalf of the Issuer) shall, within thirty (30) Business Days after receipt of such notice from the Trustee, sell such Distribution or other proceeds for Cash in an arm’s-length transaction to a Person which is not an Affiliate (other than a Permitted Affiliate, subject to the Investment Advisers Act) of the Issuer or the Collateral Advisor and deposit the proceeds thereof in the Interest Reserve Account for investment pursuant to this Section 4.03 ; provided, however, that the Issuer (or the Collateral Advisor on behalf of the Issuer) need not sell such Distributions or other proceeds if it delivers an Officer’s certificate to the Trustee certifying that such Distributions or other proceeds constitute Collateral Debt Securities or Eligible Investments.

 

(c)                                   If, prior to the occurrence of an Event of Default, the Issuer (or the Collateral Advisor on behalf of the Issuer) shall not have given any investment directions pursuant to Section 4.03(b) , the Trustee shall seek instructions from the Collateral Advisor within three (3) Business Days after transfer of such funds to the Interest Reserve Account. If the Trustee does not thereupon receive written instructions from the Issuer (or the Collateral Advisor on behalf of the Issuer) within three (3) Business Days after transfer of such funds to the Interest Reserve Account, it shall invest and reinvest the funds held in the Interest Reserve Account, as fully as practicable, but only in one or more Eligible Investments in clause (iii) of the definition of Eligible Investments of its selection maturing no later than the Business Day immediately preceding the next Payment Date. If, after the occurrence of an Event of

 

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Default, the Issuer (or the Collateral Advisor on behalf of the Issuer) shall not have given investment directions to the Trustee pursuant to Section 4.03(b)  for three (3) consecutive days, the Trustee shall invest and reinvest such Money as fully as practicable in Eligible Investments as described in clause (iii) of the definition of Eligible Investments of its selection maturing not later than the Business Day immediately preceding the next Payment Date. All interest and other income from such investments shall be deposited in the Interest Reserve Account, any gain realized from such investments shall be credited to the Interest Reserve Account and any loss resulting from such investments shall be charged to the Interest Reserve Account. The Trustee shall not in any way be held liable by reason of any insufficiency of such Interest Reserve Account resulting from any loss relating to any such Eligible Investment, except with respect to investments in obligations of the Trustee or any Affiliate thereof.

 

(d)                                  On the Business Day immediately preceding each Payment Date, the Trustee shall deposit into the Collection Account the balance of the Interest Reserve Account for distribution in accordance with the Priority of Payments on the related Payment Date.

 

Section 4.04.                              Expense Reserve Account .

 

(a)                                   The Trustee shall, prior to the Closing Date, establish a single, segregated trust account which shall be designated as the “ Expense Reserve Account ”, which shall be held in the name of the Trustee for the benefit and on behalf of the Secured Parties and over which the Trustee shall have exclusive Control and the sole right of withdrawal, into which the Trustee shall deposit, on the Closing Date, an amount equal to U.S.$25,000 and, on each Payment Date, an amount in accordance with Section 5.01(a)(i) . Funds in the Expense Reserve Account shall not be commingled with any other Money. The Trustee shall give to the Issuer and the Collateral Advisor prompt notice if the Expense Reserve Account or any funds on deposit therein, or otherwise to the credit of the Expense Reserve Account, shall become subject to any writ, order, judgment, warranty of attachment, execution or similar process. All Money deposited from time to time in the Expense Reserve Account pursuant to this Agreement shall be held by the Trustee as part of the Collateral and shall be applied in accordance with the terms hereof and to the purposes herein provided. The Issuer shall not have any legal, equitable or beneficial interest in the Expense Reserve Account other than in accordance with this Agreement. The Expense Reserve Account shall remain at all times with a financial institution having a long-term debt rating of at least “BBB+” by S&P, at least “Baal” by Moody’s and, at least “BBB+” by Fitch and a short-term debt rating of at least “Al”- by S&P, at least “P-1” by Moody’s and, at least “F-1” by Fitch.

 

(b)                                  Any deposit required pursuant to Section 4.04(c)  shall be immediately deposited into the Expense Reserve Account. All such property, together with any securities in which funds included in such property are or will be invested or reinvested during the term of this Agreement, and any income or other gain realized from such investments, shall be held by the Trustee in the Expense Reserve Account as part of the Collateral subject to disbursement and withdrawal as provided in this Section 4.04 . By Issuer Order (which may be in the form of standing instructions), the Issuer (or the Collateral Advisor on behalf of the Issuer) may at any time direct the Trustee to, and upon receipt of such Issuer Order the Trustee shall, invest all funds received into the Expense Reserve Account during a Due Period, and amounts received in prior Due Periods and retained in the Expense Reserve Account, as so directed in Eligible Investments maturing not later than the second (2 nd ) Business Day immediately preceding the next Payment Date unless such Eligible Investments are investments of the type described in clause (i) or (iii) of the definition of “Eligible Investments”, in which event such Eligible Investments may mature on the Business Day immediately preceding such Payment Date. The Trustee shall, within one (1) Business Day after receipt of any Distribution or other proceeds which is not Cash, so notify the Issuer and the Issuer (or the Collateral Advisor on behalf of the Issuer) shall, within thirty (30) Business Days after receipt of such notice from the Trustee, sell such Distribution or other proceeds for Cash in an arm’s-length transaction to a Person that is not an Affiliate (other than a Permitted Affiliate, subject to the

 

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Investment Advisers Act) of the Issuer or the Collateral Advisor and deposit the proceeds thereof in the Expense Reserve Account for investment pursuant to this Section 4.04 ; provided, however, that the Issuer (or the Collateral Advisor on behalf of the Issuer) need not sell such Distributions or other proceeds if it delivers an Officer’s certificate to the Trustee certifying that such Distributions or other proceeds constitute Collateral Debt Securities or Eligible Investments.

 

(c)                                   If, prior to the occurrence of an Event of Default, the Issuer shall not have given any investment directions pursuant to Section 4.04(b) , the Trustee shall seek instructions from the Collateral Advisor within three (3) Business Days after transfer of such funds to the Expense Reserve Account. If the Trustee does not thereupon receive written instructions from the Issuer (or the Collateral Advisor on behalf of the Issuer) within thirty (30) Business Days after transfer of such funds to the Expense Reserve Account, it shall invest and reinvest the funds held in the Expense Reserve Account, as fully as practicable, but only in Eligible Investments of the type described in clause (iii) of the definition of “Eligible Investments”, maturing the Business Day immediately preceding such Payment Date. If, after the occurrence of an Event of Default, the Issuer shall not have given investment directions to the Trustee pursuant to Section 4.04(b)  for three (3) consecutive days, the Trustee shall invest and reinvest such Money as fully as practicable, but only in Eligible Investments of its selection of the type described in clause (iii) of the definition of “Eligible Investments”, maturing on the Business Day immediately preceding such Payment Date. All interest and other income from such investments shall be deposited in the Expense Reserve Account, any gain realized from such investments shall be credited to the Expense Reserve Account and any loss resulting from such investments shall be charged to the Expense Reserve Account. The Trustee shall not in any way be held liable by reason of any insufficiency of such Expense Reserve Account resulting from any loss relating to any such Eligible Investment, except with respect to investments in obligations of the Trustee or any Affiliate thereof.

 

(d)                                  On the Business Day prior to each Payment Date, the Trustee shall deposit into the Collection Account the balance of the Expense Reserve Account (including reinvestment income) for distribution in accordance with the Priority of Payments on the related Payment Date.

 

(e)                                   The Trustee may, from time to time and at any time, withdraw amounts from the Expense Reserve Account to pay accrued and unpaid administrative expenses of the Co-Issuers. All amounts remaining on deposit in the Expense Reserve Account at the time when substantially all of the Issuer’s assets have been sold or otherwise disposed of will be deposited by the Trustee into the Collection Account (including reinvestment income) as Collateral Interest Collections for distribution in accordance with the Priority of Payments on the immediately succeeding Payment Date.

 

Section 4.05.                              Collateral Account . The Trustee shall, prior to the Closing Date, establish a single, segregated trust account (or a subaccount of the Collection Account) which shall be designated as the “Collateral Account”, which shall be held in the name of the Trustee for the benefit and on behalf of the Secured Parties and over which the Trustee shall have exclusive Control and the sole right of withdrawal. Any and all assets or securities at any time on deposit in, or otherwise to the credit of, the Collateral Account shall be held in trust by the Trustee for the benefit and on behalf of the Secured Parties. The only permitted withdrawals from the Collateral Account shall be in accordance with this Agreement. The Trustee agrees to give the Issuer prompt notice if the Collateral Account or any funds on deposit therein, or otherwise to the credit of the Collateral Account, shall become subject to any writ, order, judgment, warrant of attachment, execution or similar process. The Issuer shall not have any legal, equitable or beneficial interest in the Collateral Account other than in accordance with this Agreement. The Collateral Account shall remain at all times with a financial institution located in the United States having a long-term debt rating of at least “BBB+” by S&P, at least “Baal” by Moody’s and at least “BBB+” by Fitch and a short-term debt rating of at least “A-1” by S&P, at least “P-1” by Moody’s and, at least “F-1” by Fitch.

 

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Section 4.06.                              Reports by Trustee . The Trustee shall supply, in a timely fashion, to the Co-Issuers, each Hedge Counterparty, the Principal Paying Agent, each Rating Agency (so long as any Notes are rated by such Rating Agency), the Initial Purchasers and the Collateral Advisor any information regularly maintained by the Trustee that each such party may from time to time request with respect to the Collateral Debt Securities, any Hedge Agreement, the Collection Account and the Collateral Account and such other information as is regularly maintained by the Trustee and is reasonably needed to verify information contained in the Note Report. Additionally, the Trustee shall promptly provide any other information reasonably available to the Trustee by reason of its acting as Trustee hereunder and required to be provided by Section 4.07 or to permit the Collateral Advisor to perform its obligations under the Collateral Advisory Agreement. The Trustee shall forward to the Collateral Advisor copies of all notices and other writings received by it from the issuer of any Collateral Debt Security or from any Clearing Agency with respect to any Collateral Debt Security advising the holders of such security of any rights that the holders might have with respect thereto (including, without limitation, notices of calls and redemptions of securities) as well as all periodic financial reports received from such issuer and Clearing Agencies with respect to such issuer. The Trustee shall also cause the amount of interest paid on the Notes on each Payment Date to be communicated to Euroclear, Clearstream and the Irish Stock Exchange (as long as any of the Notes are listed thereon) on or prior to such Payment Date.

 

Section 4.07.                              Accountings .

 

(a)                                   Payment Date Accounting: Note Reports . Commencing on the Payment Date in September 2004, not later than the Business Day prior to each Payment Date and after the reconciliation process described in this Section 4.07(a), the Issuer (or the Collateral Administrator on its behalf) shall make available on the Collateral Administrator’s website, initially located at www.cdotrustee.net and deliver by electronic mail to S&P and otherwise upon request, an account of the amounts that will be paid in accordance with the Priority of Payments (each, a “ Payment Report ”). Each Payment Report shall be delivered to the Collateral Advisor, the Trustee, the Principal Paying Agent, each Hedge Counterparty, if any, each Rating Agency (so long as any notes are rated by such Rating Agency), the Initial Purchasers and the Depository (accompanied by a request that it be transmitted to the Holders of Notes on the books of the Depository). Not later than the close of business on each Payment Date commencing on the Payment Date in September 2004, the Collateral Administrator (on behalf of the Issuer) shall make available on the Collateral Administrator’s website, initially located at www.cdotrustee.net and deliver by email to S&P and otherwise upon request, an accounting (each, a “ Note Report ”), determined as of the preceding Calculation Date, and deliver the Note Reports, after the reconciliation process described in this Section 4.07(a), to the Collateral Advisor, the Issuer, the Trustee, the Principal Paying Agent, each Hedge Counterparty and the Depository (accompanied by a request that it be transmitted to the Holders of Notes on the books of the Depository). The Collateral Advisor shall provide any information reasonably requested by or on behalf of the Issuer for preparation of a Payment Report or Note Report in accordance with this Section 4.07(a). Upon receipt of each Payment Report and each Note Report, the Trustee, in the name and at the expense of the Co-Issuers, shall notify the Irish Paying Agent, so long as any Notes are listed thereon, of the aggregate outstanding amount of the Notes of each Class after giving effect to the principal payments, if any, on the next Payment Date. The Note Report shall contain the following information:

 

(i)                                      the calculation showing compliance with each of the Coverage Tests, accompanied by a list setting forth the applicable maximum or minimum value, percentage or ratio which must be maintained pursuant to this Agreement with respect to each of the Coverage Tests and a list setting forth the results of the calculation of each of the Coverage Tests with respect to the Collateral Debt Securities, the calculation showing whether the S&P CDO Monitor Test is satisfied (including the weighted average rating, the default measure, variability measure and correlation measure, the scenario default rate and/or such other information required to be computed with respect to the S&P CDO Monitor

 

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Test), and the calculation showing the Weighted Average Moody’s Rating Factor, the Fitch Weighted Average Rating Factor, the Weighted Average Fixed Rate Coupon, the Moody’s Diversity Score, the Weighted Average Life, the Moody’s Recovery Rate and the S&P Minimum Average Recovery Rate;

 

(ii)                                   the estimated remaining average life (on each asset and on an aggregate basis) of all Collateral Debt Securities;

 

(iii)                                the Applicable Periodic Interest Rate in respect of each Class of Notes and the amount of Periodic Interest payable to the Holders of the Notes for such Payment Date (in the aggregate and by Class);

 

(iv)                               the amount (if any) payable to each Hedge Counterparty pursuant to the related Hedge Agreement;

 

(v)                                  the amount (if any) payable by each Hedge Counterparty pursuant to the related Hedge Agreement;

 

(vi)                               the Aggregate Fees and Expenses payable on the next Payment Date on an itemized basis;

 

(vii)                            the Aggregate Fees and Expenses paid during a period of twelve (12) months ending on the next Payment Date on an itemized basis;

 

(viii)                         for the Collection Account:

 

(A)                               the Balance on deposit in the Collection Account at the end of the related Due Period;

 

(B)                                 the nature and source of any Collections in the Collection Account, including Collections received since the date of the last Note Report;

 

(C)                                 the amounts payable from the Collection Account pursuant to each priority in the Priority of Payments on the next Payment Date; and

 

(D)                                the Balance remaining in the Collection Account immediately after all payments and deposits to be made on such Payment Date;

 

(ix)                                 for the Interest Reserve Account:

 

(A)                               the balance on deposit in the Interest Reserve Account at the end of the related Due Period;

 

(B)                                 the amount payable from the Interest Reserve Account pursuant to the Priority of Payments on the next Payment Date;

 

(C)                                 the Interest Reserve Amount to be paid into the Interest Reserve Account on the next Payment Date; and

 

(D)                                the Balance remaining in the Interest Reserve Account immediately after all payments and deposits to be made on such Payment Date;

 

(x)                                    for the Expense Reserve Account,

 

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(A)                               the amount to be paid into the Expense Reserve Account on the next Payment Date; and

 

(B)                                 the Balance remaining in the Expense Reserve Account immediately after all payments and deposits to be made on such Payment Date;

 

(xi)                                 the Hedge Receipt Amount or the Hedge Payment Amount for the related Payment Date, and for each Hedge Agreement, the outstanding notional amount of such Hedge Agreement and the amounts, if any, scheduled to be received or paid, as the case may be, by the Issuer pursuant to such Hedge Agreement for the related Payment Date, separately stating the portion payable under the Priority of Payments;

 

(xii)                              the amount of Excess Funds to be paid to the Holders of the Class E Subordinate Income Notes on the related Payment Date;

 

(xiii)                           the amount of the Senior Collateral Advisory Fee and the amount of the Subordinate Collateral Advisory Fee;

 

(xiv)                          the amount of the Deferred Subordinate Collateral Advisory Fee (including the amounts of the Monitoring Fee and the Senior Structuring Fee);

 

(xv)                             such other information as the Collateral Advisor, the Initial Purchasers, the Trustee, S&P, Moody’s or any Hedge Counterparty may reasonably request;

 

(xvi)                          with respect to each Collateral Debt Security, the Principal Balance, the annual coupon rate or spread to the relevant floating rate index, the frequency of coupon payments, the amount of principal payments received, the maturity date, the issuer, the country in which the issuer is incorporated or organized, the Moody’s Industry Classification Group, the S&P Industry Classification Group, the Fitch Industry Classification Group, the S&P Recovery Rate, the Moody’s Recovery Rate, the S&P Weighted Average Recovery Rate for each Class of Notes, the Moody’s Rating, the S&P Rating and the Fitch Rating (provided that if any Moody’s Rating, S&P Rating or Fitch Rating for any Collateral Debt Security is an “estimated” or “shadow” rating, such rating shall be identified as “estimated” or “shadow rated”, shall be disclosed with an asterisk in the place of the applicable estimated or shadow rating and shall include the date as of which such rating was first provided by Moody’s, S&P or Fitch, as the case may be, to the Issuer);

 

(xvii)                       the Principal Balance, the annual interest rate, the maturity date, the Moody’s Rating, the S&P Rating, the Fitch Rating and the issuer of each Eligible Investment included in the Collateral;

 

(xviii)                    (A) the identity and Principal Balance of each Collateral Debt Security that became a Credit Risk Security, a Defaulted Security, an Equity Security, a Written Down Security, a Withholding Tax Security, a Deferred Interest PIK Bond or, except with respect to Defaulted Securities, a Collateral Debt Security whose Moody’s Rating has been reduced below “Ba3” since the last Note Report, (B) the date, as provided by the Collateral Advisor, on which any Collateral Debt Security became a Credit Risk Security, a Defaulted Security, an Equity Security, a Written Down Security or a Withholding Tax Security, (C) the date by which the Issuer or the Collateral Advisor is required to declare its intention to sell or to hold such Collateral Debt Security, (D) whether the Collateral Advisor has directed the Issuer to sell or not to sell such Collateral Debt Security, and (E) the date by which any such sale must occur;

 

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the Collateral and shall, within two (2) Business Days after receipt of such Note Report, notify each of the Issuer, each Hedge Counterparty, the Collateral Advisor, the Trustee, Moody’s and S&P if the information contained in the Note Report does not conform to the information maintained by the Trustee or the Collateral Advisor as applicable, with respect to the Collateral, and detail any discrepancies. In the event that any discrepancy exists, the Trustee and the Issuer, or the Collateral Advisor shall attempt to promptly resolve the discrepancy. If such discrepancy cannot be promptly resolved, the Trustee shall within five (5) Business Days after discovery of such discrepancy cause the Independent Accountants of recognized international reputation to review such Note Report and the Trustee’s and the Collateral Advisor’s records to determine the cause of such discrepancy. If such review reveals an error in the Note Report or the Trustee’s or the Collateral Advisor’s records, the Note Report or Trustee’s and the Collateral Advisor’s records, as the case may be, shall be revised accordingly and, as so revised, shall be utilized in making further calculations.

 

Subject to the terms of this Agreement, the Trustee shall be entitled to rely on the information supplied by the Collateral Advisor in relation to the preparation of the Note Report and shall not be liable for the accuracy or completeness of such information or the lack thereof.

 

(b)                                  Each Note Report sent to any Holder or beneficial owner of any Note shall contain, or be accompanied by, the following notice:

 

“The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the “ Securities Act ”), and the Co-Issuers have not been registered under the United States Investment Company Act of 1940, as amended (the “ 1940 Act ”). Each Holder of the Notes, other than those Holders that are not “U.S. persons” ( “ U.S. Person ”) within the meaning of Regulation S (“ Regulation S ”) under the Securities Act and have acquired their Notes outside the United States pursuant to Regulation S, is required to be (i) a “qualified institutional buyer” as defined in Rule 144A under the Securities Act (“ `Qualified Institutional Buyer ”) and (ii) a “qualified purchaser” (“ Qualified Purchaser ”) within the meaning of Section 2(a)(51) of the 1940 Act that can make all of the representations in the Trust Deed and the Note Agency Agreement applicable to a holder that is a U.S. Person. The beneficial interest in the Notes may only be transferred to a transferee that is a Qualified Institutional Buyer and a Qualified Purchaser that can make all of the representations in the Trust Deed and the Note Agency Agreement applicable to a holder that is a U.S. Person, except that in the case of any such transfer in reliance on Regulation S, only to a transferee that is not a U.S. Person. The Issuer has the right to compel any Holder that does not meet the qualifications and the transfer restrictions set forth in the Trust Deed and the Note Agency Agreement to sell its interest in the Notes, or may sell such interest on behalf of such owner, pursuant to the Trust Deed and the Note Agency Agreement.”

 

(c)                                   Additional Reporting Requirements . The Collateral Advisor on behalf of the Issuer shall provide or cause to be provided to Fitch the current portfolio of all Collateral Debt Securities in electronic and modifiable form with the fields listed in Schedule M , no later than the fifteenth (15 th ) day of each month.

 

For all Collateral Debt Securities which are not rated by Fitch, the Issuer shall provide, or cause to be provided to, Fitch with the following:

 

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(i)                                           within thirty (30) days of the Closing Date for such Collateral Debt Securities held by the Issuer as of the Closing Date, and within ten (10) Business Days of purchase for all Collateral Debt Securities purchased subsequent to the Closing Date, the prospectus, prospectus supplement, offering circular or offering memoranda, as applicable, and the most recent remittance reports for all such Collateral Debt Securities; and

 

(ii)                                        ongoing remittance reports for such Collateral Debt Securities within ten (10) days of receipt of the remittance report.

 

The information referenced above shall be sent via e-mail to reporting.abscdo@fitchratings.com or hardcopy to Fitch Ratings, One State Street Plaza, New York, New York 10004, Attention: Credit Products Surveillance — Additional Reporting.

 

(d)                                  Payment Date Instructions . The Issuer (or the Collateral Advisor on behalf of the Issuer) shall by Issuer Order instruct the Trustee to withdraw on the related Payment Date from the Collection Account, and to pay or transfer, the amounts set forth in such Note Report in the manner specified in, and in accordance with, the Priority of Payments. The Issuer will be deemed to have given such instructions upon the Collateral Advisor’s approval of the Note Report.

 

(e)                                   Redemption Date Instructions . Not later than five (5) Business Days after receiving an Issuer Request (executed by the Issuer or the Collateral Advisor on behalf of the Issuer) requesting information regarding a redemption of the Notes of a Class as of a proposed Redemption Date set forth in such Issuer Request, the Collateral Advisor on behalf of the Issuer shall cause to be computed the following information and the Issuer shall provide such information in a statement made available to the Co-Issuers, the Collateral Advisor, the Trustee, the Initial Hedge Counterparty, the Principal Paying Agent, and delivered by e-mail to each Rating Agency and, so long as the Notes are listed on the Irish Stock Exchange, the Irish Paying Agent:

 

(i)                                           the aggregate principal amount of the Notes of the Class or Classes to be redeemed as of such Redemption Date;

 

(ii)                                        the amount of accrued interest due on such Notes as of the last day of the Periodic Interest Accrual Period immediately preceding such Redemption Date;

 

(iii)                                     the amount due and payable to the Initial Hedge Counterparty pursuant to the Initial Hedge Agreement;

 

(iv)                                    the amount due and payable to any other Hedge Counterparty pursuant to the applicable Hedge Agreement (other than the Initial Hedge Agreement); and

 

(v)                                       the amount in the Collection Account available for application to the redemption of such Notes.

 

Section 4.08.                              Release of Securities .

 

(a)                                   Subject to Article VI , the Issuer (or the Collateral Advisor on behalf of the Issuer) may, by Issuer Order delivered to the Trustee at least two (2) Business Days prior to the settlement date for any sale of a security certifying that (i) the Issuer (or the Collateral Advisor on behalf of the Issuer) has determined that a Collateral Debt Security has become a Credit Risk Security (which certification shall contain a short statement of the reason for such determination), a Withholding Tax Security, a Written Down Security, a Defaulted Security or an Equity Security and, in each case, that the

 

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Issuer (or the Collateral Advisor on behalf of the Issuer) has directed the Trustee to sell such security pursuant to Section 6.01(a) , (ii) the Collateral Advisor on the Issuer’s behalf has directed the Trustee to sell such security pursuant to Section 6.01(b) , or (iii) the Collateral Advisor on the Issuer’s behalf has directed the Trustee to sell such security pursuant to Section 6.01(f) , direct the Trustee to release such security and, upon receipt of such Issuer Order, the Trustee shall release any such security from the Lien of this Agreement and deliver any such security, if in physical form, duly endorsed to the broker or purchaser designated in such Issuer Order or, if such security is a Clearing Corporation Security, cause an appropriate transfer thereof to be made, in each case against receipt of the sales price therefor as s