EXHIBIT 10.38.6
WAREHOUSE AGREEMENT dated as of August 28, 2006 (this "AGREEMENT"), between
Xxxxxxx Xxxxx International ("MLI") and Hanover Capital Mortgage Holdings, Inc.
("COLLATERAL MANAGER").
RECITALS
WHEREAS, pursuant to an engagement letter dated June 14, 2006 (the "ENGAGEMENT
LETTER"), between Xxxxxxx Lynch, Pierce, Xxxxxx & Xxxxx Incorporated ("MLPFS")
and the Collateral Manager, the Collateral Manager engaged MLPFS with respect
to, among other things, (a) the formation of a special purpose entity to be
organized under the law of the Cayman Islands (the "ISSUER") for the purpose of
acquiring a diversified portfolio of mezzanine grade asset-backed securities
(such securities, "COLLATERAL DEBT SECURITIES"), and certain other investments
and assets including one or more eligible investments ("ELIGIBLE INVESTMENTS"),
and (b) the structuring of several classes of notes (the "NOTES") and preference
shares (the "PREFERENCE SHARES" and, collectively with the Notes, the "OFFERED
SECURITIES") to be issued by the Issuer and secured or backed by such Collateral
Debt Securities and the Eligible Investments;
WHEREAS, Collateral Manager will act as collateral manager to the Issuer; and
WHEREAS, the Offered Securities are to be offered and sold (the "OFFERING") by
the Issuer in a transaction (the "TRANSACTION") exempt from the registration
requirements of the Securities Act of 1933, as amended;
NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties hereby agree as follows:
DEFINITIONS
1. Capitalized terms used herein and not otherwise defined herein shall have
the meanings set forth in the Engagement Letter. The following terms have the
respective meanings set forth below for all purposes of this Agreement
(including the recitals set forth above):
"ACCUMULATION PERIOD" means the period commencing on the date hereof and ending
on, but excluding, the earlier of (a) the date three Business Days prior to the
Closing Date and (b) the Termination Date.
"ADJUSTED PURCHASE PRICE" means, with respect to any Collateral Debt Security
constituting part of the Warehouse Portfolio on any date of determination, a
price equal to (a) the Gross Purchase Price of such Collateral Debt Security
(together with the aggregate amount of all scheduled periodic payments made on
or prior to such date of determination by MLI under any Pre-Pricing Hedge
related to such Collateral Debt Security) MINUS (b) the aggregate amount of all
distributions of principal and interest actually received from the issuer
thereof by MLI on or prior to such date of determination in respect of such
Collateral Debt Security (together with the aggregate amount of all scheduled
periodic payments received on or prior to such date of determination by MLI
under any Pre-Pricing Hedge related to such Collateral Debt Security).
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"AFFILIATE" means, in relation to any specified Person, (a) any other Person
who, directly or indirectly, is in control of, or controlled by, or is under
common control with, such Person or (b) any other Person who is a director,
officer, member or partner of (i) such Person or (ii) any such other Person
described in clause (a) above; PROVIDED that no other special purpose company to
which an administrator of the Issuer provides directors and acts as share
trustee shall be an Affiliate of the Issuer. For the purposes of this
definition, CONTROL of a Person means the power, direct or indirect, (i) to vote
more than 50% of the securities having ordinary voting power for the election of
directors of such Person or (ii) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"ASSET-BACKED SECURITIES" means (a) securities (excluding, for the avoidance of
doubt, any commercial loan or participation interest in a commercial loan) that
entitle the holders thereof to receive payments that depend primarily on the
cash flow from a specified pool of financial assets or securities, either fixed
or revolving, that by their terms convert into cash within a finite time period,
together with rights or other assets designed to assure the servicing or timely
distribution of proceeds to holders of such securities and (b) corporate debt
securities issued by REITs.
"BUSINESS DAY" means any day (a) that is a trading day on the New York Stock
Exchange and (b) on which commercial banks are open for general business
(including dealings in foreign exchange and foreign currency deposits) in New
York City and London.
"CARRY PERIOD" means, with respect to any Collateral Debt Security constituting
part of the Warehouse Portfolio, the period commencing on (and including) the
settlement date on which MLI purchases such Collateral Debt Security hereunder
and ending on (and excluding) (A) if such Collateral Debt Security is sold to
the Issuer on the Closing Date, the Closing Date and (B) otherwise, the
occurrence of any Realization Event with respect to such Collateral Debt
Security.
"CARRY YIELD" means, with respect to a Collateral Debt Security, the effective
yield (determined by MLI in good faith) on such Collateral Debt Security on the
first day of the Carry Period for such Collateral Debt Security implied by the
Gross Purchase Price (expressed on a "clean" basis); PROVIDED that, with respect
to any such Collateral Debt Security that bears interest at an interest rate
determined by reference to a fixed spread above or below a London Interbank
offered rate, such effective yield (as determined by MLI in good faith) shall be
expressed as the sum of (i) such London Interbank offered rate (as in effect
from time to time) plus (or minus) (ii) a spread above or below the level of
such London Interbank offered rate used to calculate such interest rate for the
period that includes the first day of the Carry Period for such Collateral Debt
Security.
"CDO SECURITY" means a debt security issued by an entity formed for the purpose
of investing and, in certain cases, reinvesting in a pool comprised primarily of
debt obligations and/or debt securities (including Asset-Backed Securities)
subject to specified investment and management criteria.
"CLOSING DATE" means the date on which the Offered Securities are issued.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended.
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"COLLATERAL MANAGER EVENT" means any of the following events:
(a) the Collateral Manager shall fail to perform any of its obligations
under, or shall breach any provision of, this Agreement or the Engagement
Letter, where such failure or breach could have a material adverse effect
on Xxxxxxx Xxxxx or the Transaction;
(b) any representation or warranty made or deemed made by or on behalf of the
Collateral Manager in or pursuant to this Agreement or the Engagement
Letter, or in any certificate or other document furnished pursuant hereto
or thereto, shall prove to have been incorrect in any material respect
when made or deemed made;
(c) the occurrence of an act by the Collateral Manager or any of its
Affiliates that constitutes fraud, misappropriation, embezzlement or
other intentional misconduct; or any director, officer or
management-level employee of the Collateral Manager or any of its
Affiliates is convicted of a felony related to its activities in any
securities, financial advisory or other investment business; or the
Collateral Manager or any of its Affiliates is indicted for, adjudged
liable in a civil suit for or convicted of a violation of any United
States Federal securities law or any rules or regulations thereunder; or
(d) the Collateral Manager shall seek to terminate (or shall disaffirm,
disclaim, repudiate or reject, in whole or in part, or shall challenge
the validity of, any of its obligations under) this Agreement or the
Engagement Letter (other than any termination hereof or thereof effected
or to be effected with the consent of each other party);
PROVIDED that none of the foregoing events, if remediable, shall constitute a
"Collateral Manager Event" unless and until such event shall have continued for
two Business Days after the earlier of (A) actual knowledge thereof by the
Collateral Manager and (B) notice thereof to the Collateral Manager from MLI or
any of its Affiliates.
"CREDIT RISK ASSET" means any Collateral Debt Security that, in the sole
judgment of MLI exercised in good faith, has a material risk of declining in
credit quality, becoming a Defaulted Asset or becoming an Ineligible Asset.
"DEFAULTED ASSET" means any Collateral Debt Security as to which (A) there has
occurred a default as to the payment of principal and/or interest (without
regard to any notice requirement or grace period), (B) there has occurred a
default with respect to such Collateral Debt Security that MLI believes or has
reason to believe will likely result in a default as to the payment of principal
and/or interest on such Collateral Debt Security, (C) there has occurred a
default as to the payment of principal and/or interest on any other material
obligation of any obligor on such Collateral Debt Security (without regard to
any notice requirement or grace period), (D) an Insolvency Event has occurred
with respect to any obligor on such Collateral Debt Security or (E) there has
been proposed or effected any distressed exchange or other debt package of
securities that either (1) amount to a diminished financial obligation or (2)
has the sole purpose of enabling the obligor to avoid a default; PROVIDED that,
with respect to a default referred to in clause (A), (B) or (C) above, the
related Collateral Debt Security will only constitute a "Defaulted Asset" for so
long as such default has not been cured or waived.
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"ELIGIBILITY CRITERIA" means the criteria relating to the acquisition of
Collateral Debt Securities set forth in Annex A.
"EQUITY SECURITY" means any obligation or security that does not entitle the
holder thereof to receive periodic payments of interest and one or more
installments of principal or any other obligation or security convertible into
or exchangeable for any such obligation or security.
"EXPECTED PORTFOLIO BALANCE" means U.S.$125,000,000; PROVIDED that the Expected
Portfolio Balance may be adjusted by mutual agreement in writing by the parties
hereto.
"FITCH" means Fitch, Inc., or any successor or successors thereto.
"GROSS PURCHASE PRICE" means, in respect of any Collateral Debt Security
constituting part of the Warehouse Portfolio, the aggregate dollar amount paid
by MLI to acquire such Collateral Debt Security (including accrued interest).
"GUARANTEED ASSET-BACKED SECURITY" means an Asset-Backed Security as to which
the timely payment of interest when due, and the payment of principal no later
than stated legal maturity thereof, is unconditionally guaranteed pursuant to a
corporate guarantee or other similar instrument, but only if such corporate
guarantee or other similar instrument (a) expires no earlier than such stated or
actual legal maturity, (b) provides that payment thereunder is independent of
the performance by the obligor on the relevant Asset-Backed Security and (c) is
issued by a Person having a credit rating assigned by each nationally recognized
statistical rating organization that currently rates such Asset-Backed Security
higher than the credit rating assigned by such rating organization to such
Asset-Backed Security determined without giving effect to such corporate
guarantee or other similar instrument.
"HEDGE ADJUSTED PURCHASE PRICE" means, with respect to any Collateral Debt
Security constituting part of the Warehouse Portfolio on any date of
determination, a price equal to (a) the Adjusted Purchase Price of such
Collateral Debt Security on such date PLUS (b) the Carry Yield accrued on such
Collateral Debt Security during the Carry Period therefor PLUS (c) any
Pre-Pricing Hedge Termination Payment with respect to such Collateral Debt
Security MINUS (d) any Pre-Pricing Hedge Termination Receipt with respect to
such Collateral Debt Security.
"HEDGE AGREEMENT" means any Pre-Pricing Hedge or Portfolio Hedge.
"HYBRID SECURITY" means any security (including, without limitation,
Asset-Backed Securities the payments on which depend on the cash flow from
adjustable-rate mortgages) that, pursuant to its Underlying Instruments, bears
interest at a fixed rate for a limited period of time, after which it bears
interest based upon a floating rate index for U.S. dollar-denominated
obligations commonly used as a reference rate in the United States of America or
the United Kingdom.
"INELIGIBLE ASSET" means any Collateral Debt Security that
(i) does not satisfy on the date on which such Collateral Debt Security was
purchased by MLI hereunder, or on any date thereafter on or prior to the
Termination Date, the Eligibility Criteria; or
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(ii) fails to conform to the investment criteria established by any of the
Rating Agencies as applicable to the Transaction, including by reason of
any change in the investment criteria established by any of the Rating
Agencies.
"INSOLVENCY EVENT" means, with respect to any Person, such Person (1) shall be
dissolved or liquidated; (2) shall become insolvent or unable to pay its debts
as they become due; (3) shall make a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) shall institute or
have 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 (A) 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 (B) is not dismissed,
discharged, stayed or restrained in each case within 60 days of the institution
or presentation thereof; (5) shall have a resolution passed for its winding-up,
official management or liquidation (other than pursuant to a consolidation,
amalgamation or merger); (6) shall seek or become 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 its
property; (7) shall have a secured party take possession of all or substantially
all its property or have a distress, execution, attachment, sequestration or
other legal process levied, enforced or sued on or against all or substantially
all its property and such secured party shall maintain possession, or any such
process is not dismissed, discharged, stayed or restrained, in each case within
30 days thereafter; (8) shall cause or become 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 (1) to (7) (inclusive); or (9)
shall take any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the foregoing acts.
"ISSUER DOCUMENTATION" means, collectively, the documentation related to the
offering, placement, issuance or sale of any of the Offered Securities
(including any indenture), in any revision or completed version thereof or in
any amendment, supplement or modification of any thereof or any other agreement
or instrument binding upon the Issuer referred to therein.
"MARKET VALUE" means, in respect of any Realization Event and a Collateral Debt
Security constituting part of the Warehouse Portfolio, an amount equal to
either:
(a) if an actual sale or liquidation of such Collateral Debt Security by or
on behalf of MLI has occurred at the time the Market Value is determined,
the net proceeds (after deducting all costs, fees and expenses incurred
in connection therewith) received by MLI from a sale on an arm's length
basis of such Collateral Debt Security to any Person other than MLI or
any of its Affiliates, or
(b) otherwise, the arithmetic average of at least three bids obtained by or
on behalf of MLI from nationally recognized securities dealers in the
relevant market (other than MLI or any of its Affiliates) to purchase
such Collateral Debt Security (inclusive of accrued interest, but after
deducting all costs, fees and expenses that MLI estimates would be
incurred in connection with any actual sale of such Collateral Debt
Security by MLI).
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Any determination of the Market Value of a Collateral Debt Security (including
by reference to any cost, fee or expense that would be incurred in consideration
of a sale thereof) made by or on behalf of MLI in the manner described above
shall be conclusive if made in good faith and on any commercially reasonable
basis.
"MATERIAL ADVERSE CHANGE" means the occurrence of one or both of the following
events:
(a) there occurs after the date hereof a material adverse change in the
business, operations, financial condition or prospects of the Collateral
Manager; or
(b) the Collateral Manager or any of its Affiliates becomes the subject of an
Insolvency Event;
PROVIDED that, in the case of any event or circumstance specified above other
than an Insolvency Event with respect to the Collateral Manager, such event or
circumstance has, or could reasonably be expected to have, a material adverse
effect on the marketability of the Offered Securities or on the economic terms
of the Transaction or on the ability of the Collateral Manager to perform its
obligations under the Engagement Letter or in connection with the Transaction,
each as determined in good faith and on a commercially reasonable basis by MLI.
"MOODY'S" means Xxxxx'x Investors Service, Inc. and any successor or successors
thereto.
"NET GAIN" means the excess, if any, of (a) the sum of (i) the aggregate amount
of all Realized Gains PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Receipts OVER (b) the sum of (i) the aggregate amount of all
Realized Losses PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Payments.
"NET LOSS" means the excess, if any, of (a) the sum of (i) the aggregate amount
of all Realized Losses PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Payments OVER (b) the sum of (i) the aggregate amount of all
Realized Gains PLUS (ii) the aggregate amount of all Portfolio Hedge Termination
Receipts.
"NON-CONFORMING ASSET" means any Credit Risk Asset, Ineligible Asset, Defaulted
Asset or Written-Down Security.
"OTHER ABS" means (i) a debt security (other than a CDO Security) issued by an
entity formed for the purpose of holding or investing and, in certain cases,
reinvesting in a pool of receivables, debt obligations, debt securities, finance
leases subject to specified acquisition or investment and management criteria or
(ii) a beneficial interest in a trust all of the assets of which would satisfy
the Eligibility Criteria.
"PERSON" means any individual, corporation, company, voluntary association,
partnership, limited liability company, joint venture, trust, unincorporated
organization or government (or any agency, instrumentality or political
subdivision thereof).
"XXX XXXX" means any security that, pursuant to the terms of the related
Underlying Instruments, permits the payment of interest thereon to be deferred
and capitalized as additional principal thereof or that issues identical
securities in place of payments of interest in cash.
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"PORTFOLIO HEDGE" has the meaning assigned to such term in Section 2.
"PORTFOLIO HEDGE TERMINATION PAYMENT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid by MLI upon the early
termination or liquidation of the Portfolio Hedge MINUS (b) any amounts included
in the calculation of the amount specified in clause (a) of this definition
owing by MLI that have accrued under the Portfolio Hedge prior to but excluding
the date of the early termination or liquidation of the Portfolio Hedge but not
yet been paid PLUS (c) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing to MLI that have accrued (but
not yet been paid) under the Portfolio Hedge prior to but excluding the date of
the early termination or liquidation of the Portfolio Hedge; and otherwise,
zero.
"PORTFOLIO HEDGE TERMINATION RECEIPT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid to MLI upon the early
termination or liquidation of the Portfolio Hedge PLUS (b) any amounts included
in the calculation of the amount specified in clause (a) of this definition
owing by MLI that have accrued under the Portfolio Hedge prior to but excluding
the date of the early termination or liquidation of the Portfolio Hedge (but not
yet been paid) MINUS (c) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing to MLI that have accrued (but
not yet been paid) under the Portfolio Hedge prior to but excluding the date of
the early termination or liquidation of the Portfolio Hedge; and otherwise,
zero.
"PRE-PRICING HEDGE" has the meaning assigned to such term in Section 2.
"PRE-PRICING HEDGE TERMINATION PAYMENT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid by MLI upon the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security MINUS (b) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing by MLI that have accrued under
the related Pre-Pricing Hedge prior to but excluding the date of the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security but not yet been paid PLUS (c) any amounts included in the
calculation of the amount specified in clause (a) of this definition owing to
MLI that have accrued (but not yet been paid) under the related Pre-Pricing
Hedge prior to but excluding the date of the early termination or liquidation of
the Pre-Pricing Hedge related to such Collateral Debt Security; and otherwise,
zero.
"PRE-PRICING HEDGE TERMINATION RECEIPT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid to MLI upon the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security PLUS (b) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing by MLI that have accrued under
the related Pre-Pricing Hedge prior to but excluding the date of the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security but not yet been paid MINUS (c) any amounts included in the
calculation of the amount specified in clause (a) of this definition owing to
MLI that have accrued (but not yet been paid) under the related Pre-Pricing
Hedge prior to but excluding the date of the early termination or liquidation of
the Pre-Pricing Hedge related to such Collateral Debt Security; and otherwise,
zero.
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"PRICING DATE" means the date on which MLPFS, in its capacity as placement agent
for the Issuer, prices the Notes.
"QUALIFYING FOREIGN OBLIGOR" means a corporation, partnership or other entity
located in any of Australia, Canada, France, Germany, Ireland, New Zealand,
Sweden, Switzerland or the United Kingdom, so long as the unguaranteed,
unsecured and otherwise unsupported long-term U.S. dollar sovereign debt
obligations of such country are rated "Aa2" or better by Moody's and "AA" or
better by Standard & Poor's.
"RATING AGENCY" means each of Moody's and Standard & Poor's.
"REALIZATION EVENT" means, with respect to any Collateral Debt Security
constituting part of the Warehouse Portfolio, the sale or other liquidation of
such Collateral Debt Security pursuant to Section 3(a) to the Issuer or Section
4 (including any sale to the Collateral Manager) or the election by MLI to
retain such Collateral Debt Security for its own account pursuant to Section 4.
"REALIZED GAIN" means, with respect to any Realization Event and a Collateral
Debt Security constituting part of the Warehouse Portfolio, the amount, if any,
by which the Market Value of such Collateral Debt Security exceeds the Hedge
Adjusted Purchase Price for such Collateral Debt Security, in each case,
determined as of the date of such Realization Event.
"REALIZED LOSS" means, with respect to any Realization Event and a Collateral
Debt Security constituting part of the Warehouse Portfolio, the amount, if any,
by which the Hedge Adjusted Purchase Price for such Collateral Debt Security
exceeds the Market Value of such Collateral Debt Security, in each case,
determined as of the date of such Realization Event.
"REIT" means a real estate investment trust within the meaning of Section 856 of
the Code or any successor provision.
"RESIDENTIAL INTEREST ONLY SECURITY" means any Asset-Backed Security that (a)
entitles the holders thereof to receive payments that depend on the cash flow
from residential mortgage loans and (b) does not provide for payment or
repayment of a stated principal amount.
"RMBS SECURITIES" means securities (excluding, for the avoidance of doubt, any
commercial loan or participation interest in a commercial loan) that entitle the
holders thereof to receive payments that depend (except for rights or other
assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from a pool of residential mortgage
loans.
"SECURITIES ACT" means the United States Securities Act of 1933, as amended.
"SPV FOREIGN OBLIGOR" means a corporation, partnership or other entity located
in the Bahamas, Bermuda, the Cayman Islands, the Channel Islands, the
Netherlands Antilles or any other similar jurisdiction generally imposing either
no or nominal taxes on the income of entities organized under the law of such
jurisdiction.
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"STANDARD & POOR'S" means Standard & Poor's Ratings Services, a division of The
XxXxxx-Xxxx Companies, Inc., and any successor or successors thereto.
"STEP-DOWN BOND" means a security which by the terms of the related Underlying
Instruments provides for a decrease in the per annum interest rate on such
security (other than by reason of any change in the applicable index or
benchmark rate used to determine such interest rate) or in the spread over the
applicable index or benchmark rate, solely as a function of the passage of time;
PROVIDED that a Step-Down Bond shall exclude (a) any such security that provides
for payment of a constant rate of interest at all times after the date of
acquisition by MLI and (b) any Hybrid Security.
"STEP-UP BOND" means a security which by the terms of the related Underlying
Instruments provides for an increase in the per annum interest rate on such
security or in the spread over the applicable index or benchmark rate, solely as
a function of the passage of time; PROVIDED that a Step-Up Bond shall exclude
(a) any such security providing for payment of a constant rate of interest at
all times after the date of acquisition by MLI and (b) any Hybrid Security.
"TERMINATION DATE" means the earliest to occur of (a) the Closing Date, (b) the
date on which (after the expiration of any applicable grace period and
fulfillment of applicable notice requirements) a Collateral Manager Event
occurs, (c) any date on which MLI determines that any event or circumstance
occurring after the date hereof has resulted in a Material Adverse Change and
(d) the date of any termination or expiration of the Engagement Letter.
"UNDERLYING INSTRUMENTS" means the indenture or other agreement pursuant to
which a Collateral Debt Security or Reference Obligation has been issued or
created and each other agreement that governs the terms of or secures the
obligations represented by such Collateral Debt Security or Reference Obligation
(or of which the holders of such Collateral Debt Security or Reference
Obligation are the beneficiaries).
"WAREHOUSE ACCOUNT" has the meaning assigned to such term in Section 2.
"WAREHOUSE PORTFOLIO" means the Collateral Debt Securities acquired from time to
time hereunder.
"WRAPPED ASSET-BACKED SECURITY" means a CDO Security or Other ABS guaranteed as
to ultimate or timely payment of principal or interest by a monoline financial
insurance company.
"WRITTEN-DOWN SECURITY" means, as of any date of determination, any security as
to which the aggregate outstanding par amount of such Collateral Debt Security
and all other securities secured by the same pool of collateral that rank pari
passu with or senior in priority of payment to such Collateral Debt Security
exceeds the aggregate outstanding principal amount (including reserved interest
or other amounts available for overcollateralization) of all collateral securing
such securities (excluding defaulted collateral).
"ZERO COUPON BOND" means a security that, pursuant to the terms of its
Underlying Instruments, on the date on which it is purchased, does not provide
for the payment of interest, or provides that all payments of interest will be
deferred until the final maturity thereof.
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ACCUMULATION OF COLLATERAL DEBT SECURITIES
2.(a) Subject to the other provisions of this Agreement and in particular the
right of MLI in its sole discretion to refuse to acquire any Collateral
Debt Security hereunder, the Collateral Manager may, so long as it has
complied and is continuing to comply with all of its obligations
hereunder and under the Engagement Letter, send a written or electronic
request to MLI on any Business Day occurring during the Accumulation
Period which shall specify (i) the Collateral Debt Securities that the
Collateral Manager wishes to be included in the Warehouse Portfolio and
(ii) for each Collateral Debt Security identified therein, the price that
MLI shall purchase such Collateral Debt Security. The Collateral Manager
hereby acknowledges that MLI may acquire such Collateral Debt Securities
and otherwise perform its obligations under this Agreement through any of
its Affiliates.
(b) In respect of a purchase of a Collateral Debt Security, (i) subject to
MLI's prior approval, the Collateral Manager shall direct the seller of
the Collateral Debt Security specified under Section 2(a) above to
transfer such Collateral Debt Security to MLI and (ii) MLI shall hold all
such Collateral Debt Securities in an account established by MLI (the
"WAREHOUSE ACCOUNT") pending the resale of such Collateral Debt
Securities in accordance with Section 3 or Section 4; PROVIDED that MLI
may in its sole discretion refuse to acquire any Collateral Debt Security
hereunder for inclusion in the Warehouse Portfolio, including, without
limitation, by reason of any of the following conditions failing to be
satisfied (after giving effect to any such acquisition):
(A) MLI is satisfied in its sole discretion that such Collateral Debt
Security satisfies the Eligibility Criteria; and
(B) in the case of any Collateral Debt Security to be acquired by MLI
prior to the Pricing Date, MLI is satisfied in its sole discretion
that the risk of depreciation in market value of such Collateral
Debt Security by reason of an increase in interest rates during
the Carry Period for such Collateral Debt Security is hedged
pursuant to one or more interest rate protection arrangements
entered into by MLI that are satisfactory in form and substance to
MLI acting in its sole discretion exercised in good faith (a
"PRE-PRICING HEDGE").
(c) MLI shall provide the Collateral Manager, on or before the relevant trade
settlement date, with a written confirmation of, or a copy of the trade
ticket for each acquisition or sale of a Collateral Debt Security by MLI
hereunder and, if any, each Hedge Agreement entered into, sold or
terminated by MLI in connection herewith.
(d) The Collateral Manager hereby represents, warrants and undertakes to MLI
that (i) the Collateral Manager will not issue any request to MLI in
connection with the purchase of a Collateral Debt Security if (A) at the
time of the issuance of such request, any of the Eligibility Criteria
will not be satisfied with respect to such Collateral Debt Security
immediately after giving effect to such purchase or entry or (B) the
acquisition and ownership of such Collateral Debt Security by the Issuer
would cause the Issuer to be engaged in a trade or business within the
United States for United States Federal income tax purposes (PROVIDED
that the Collateral Manager shall be entitled to rely upon
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compliance with the procedures set forth in Annex E) and (ii) it will
promptly notify MLI if at any time during the Carry Period it obtains
actual knowledge that one or more of the Eligibility Criteria are not
satisfied with respect to any Collateral Debt Security constituting part
of the Warehouse Portfolio.
(e) MLI shall be entitled to retain for its own benefit all distributions of
principal, interest and/or other amounts received by MLI in respect of
any Collateral Debt Security constituting part of the Warehouse Portfolio
during the Carry Period for such Collateral Debt Security (together with
all payments received under any Hedge Agreement during such Carry Period)
constituting part of the Warehouse Portfolio.
(f) Subject to Sections 4(a)(iii) and 4(b)(iii), on or about the Pricing Date
or on any other date as determined by MLI in its sole discretion (the
"PORTFOLIO HEDGE PRICE DATE"), MLI shall terminate all Pre-Pricing Xxxxxx
entered into by it in respect of the Collateral Debt Securities pursuant
to this Agreement. On the Portfolio Hedge Price Date, the Collateral
Manager shall arrange for the entry into an interest rate hedging
agreement for account of the Issuer with respect to the portfolio of
securities expected to be acquired by the Issuer on the Closing Date (the
"PORTFOLIO HEDGE").
(g) None of MLI and its Affiliates shall have any obligation to ascertain
whether the acquisition hereunder of any Collateral Debt Security
complies with any Issuer Documentation or the Eligibility Criteria.
FORWARD SALE OF COLLATERAL DEBT SECURITIES TO ISSUER ON THE CLOSING DATE
3. Each of MLI and the Collateral Manager (both in its individual capacity
and as Collateral Manager for the Issuer) hereby agrees as follows:
(a) subject to the consummation of the Offering on the Closing Date, MLI
shall sell to the Issuer, and the Issuer shall purchase from MLI, each
Collateral Debt Security (other than any Non-Conforming Asset) held in
the Warehouse Account on the Closing Date at a purchase price equal to
the Hedge Adjusted Purchase Price.
(b) delivery by MLI to the Issuer of any Collateral Debt Security on the
Closing Date shall be made only against receipt by MLI or its designee of
the Hedge Adjusted Purchase Price therefor, and none of the property
interest of MLI in any such Collateral Debt Security shall pass to the
Issuer until such payment is received;
(c) upon receipt by MLI or its designee of the Hedge Adjusted Purchase Price
for a Collateral Debt Security held in the Warehouse Account, MLI shall
sell, assign and transfer such Collateral Debt Security to or upon order
of the Issuer; PROVIDED that such sale, assignment and transfer shall be
made without recourse and without any representation or warranty other
than as provided under applicable law; and
(d) MLI hereby waives all commissions, fees and other similar amounts payable
with respect to any sale to the Issuer of a Collateral Debt Security
constituting part of the Warehouse Portfolio held in the Warehouse
Account pursuant to this Section 3.
11
REALIZATION EVENTS; LIABILITY FOR LOSSES
4.(a) If the Closing Date shall fail to occur on or prior to the Termination
Date:
(i) each of the Collateral Manager and the Issuer shall cease
to have any rights against MLI or any of its Affiliates with
respect to the purchase, finance, entry into or warehousing of
Collateral Debt Securities hereunder;
(ii) MLI may, in its sole discretion, sell, otherwise liquidate,
enter into an offsetting hedge with respect to, or retain for its
own account each Collateral Debt Security held in the Warehouse
Account; and
(iii) MLI may, in its sole discretion, terminate any Pre-Pricing
Hedge then outstanding, and MLI may, in its sole discretion,
terminate or instruct the Collateral Manager to cause the Issuer
or other relevant Person to terminate any Portfolio Hedge then
outstanding, and the Collateral Manager shall act in accordance
with such instructions.
(b) If, at any time during the Carry Period, a Collateral Debt Security held
in the Warehouse Account is or becomes a Non-Conforming Asset:
(i) each of the Collateral Manager and the Issuer shall cease
to have any rights against MLI or any of its Affiliates with
respect to the purchase, finance, entry into or warehousing of
such Collateral Debt Security by MLI hereunder; and
(ii) MLI may, in its sole discretion, sell, otherwise liquidate,
enter into an offsetting hedge with respect to, or retain for its
own account such Collateral Debt Security held in the Warehouse
Account; and
(iii) MLI may, in its sole discretion and in good faith,
terminate any related Pre-Pricing Hedge then outstanding, and MLI
may, in its sole discretion, instruct the Collateral Manager to
cause the Issuer to modify any Portfolio Hedge then outstanding,
and the Collateral Manager shall act in accordance with such
instructions.
(c) MLI shall be entitled to retain any Net Gain in respect of the Warehouse
Portfolio. The Net Loss, if any, incurred with respect to the Warehouse
Portfolio shall be solely for the account of MLI, except that if the
Closing Date shall fail to occur on or prior to the Termination Date, the
Collateral Manager shall on the Termination Date pay to MLI an amount
equal to 100% of the Net Loss in respect of the Warehouse Portfolio.
(d) Any payment by the Collateral Manager to MLI or any of its Affiliates
hereunder shall be made to the account of MLI or such Affiliate most
recently designated by MLI or such Affiliate for such purpose by notice
to the Collateral Manager.
(e) In the event that any payment made with respect to any Collateral Debt
Security is required to be repaid or returned to any issuer, guarantor or
other obligor thereon (an "UNDERLYING OBLIGOR"), or any other person
(including, without limitation, any
12
bankruptcy trustee for any Underlying Obligor) in accordance with a
sharing or similar clause in any Collateral Debt Security or as required
by bankruptcy, insolvency or similar law (a "REPAYMENT"), then (i) each
payment obligation under this Agreement that preceded such repayment or
return shall be recomputed by MLI in good faith, as if such repaid or
returned amount had not been paid, and MLI shall promptly notify the
parties to this Agreement of such recomputed amounts, and (ii) any
additional amount required to be paid by MLI, the Issuer or the
Collateral Manager in light of such recomputation shall be paid to the
other party within three Business Days after such other party's demand
therefor. The obligations of the parties under this paragraph shall
survive the Termination Date; PROVIDED that no party shall be liable
hereunder with respect to a claim for a Repayment that is first made by
an Underlying Obligor or other person more than two years after the
Termination Date.
INDEMNITY
5. The Collateral Manager hereby indemnifies and holds harmless each of MLI
and its Affiliates on the terms, and subject to the general limitations and
qualifications, set forth in the indemnification provisions in the Engagement
Letter, which terms are incorporated herein by reference.
REPRESENTATIONS AND ACKNOWLEDGEMENTS
6.(a) Each party hereto represents and warrants to the other party that:
(i) it is duly authorized to execute and deliver this Agreement
and to perform its obligations hereunder and has taken all
necessary action to authorize such execution, delivery and
performance;
(ii) the person signing this Agreement on its behalf is duly
authorized to do so on its behalf;
(iii) it has obtained all authorizations of any governmental body
required in connection with this Agreement and the transactions
contemplated hereby and such authorizations are in full force and
effect; and
(iv) the execution, delivery and performance of this Agreement
and the transactions contemplated hereby will not violate any law,
ordinance, charter, by-law or rule applicable to it or any other
agreement by which it is bound or by which any of its assets are
affected. Each party shall be deemed to repeat all of the
foregoing representations made by it on each date on which MLI
acquires any Collateral Debt Security prior to the Termination
Date.
(b) The Collateral Manager hereby acknowledges and agrees that neither MLI
nor any of its Affiliates is, or holds itself out to be, an advisor as to
legal, tax, accounting or regulatory matters in any jurisdiction. The
Collateral Manager shall consult with its own advisors concerning such
matters and shall be responsible for making its own independent
investigation and appraisal of the risks, benefits and suitability of the
transactions contemplated by this Agreement, and agrees that neither MLI
nor any of its Affiliates
13
shall have any responsibility or liability to the Collateral Manager or
the Issuer or any other Person with respect thereto.
NOTICES
7. Unless expressly provided in writing by the parties hereto, all notices,
requests, demands and other communications required or permitted under this
Agreement must be in writing and shall be deemed to have been duly given, made
and received when delivered against receipt or upon actual receipt of registered
or certified mail, postage prepaid, return receipt requested, or in the case of
facsimile, when confirmation of transmission is received, addressed as set forth
below:
(a) If to MLI:
Xxxxxxx Xxxxx International
c/o Merrill Lynch, Pierce, Xxxxxx & Xxxxx Incorporated
4 World Financial Center, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx Xx Xxxxx
Phone No.: (000) 000-0000
Fax No.: (000) 000-0000
With a copy to:
Xxxxxxx Xxxxx International
c/o Merrill Lynch, Pierce, Xxxxxx & Xxxxx Incorporated
4 World Financial Center, 7th Floor
New York, New York 10080
Attention: Xxxxxxx Xxxxxxxx
Phone No.: (000) 000-0000
Fax No.: (000) 000-0000
With a copy to:
Xxxxxxx Lynch, Pierce, Xxxxxx & Xxxxx Incorporated
4 World Financial Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Sales & Trading TM Group
Phone No.: (000) 000-0000
Fax No.: (000) 000-0000
14
(b) If to the Collateral Manager:
Hanover Capital Mortgage Holdings, Inc.
000 Xxxxxxxxx Xxxxx, Xxxxx 000
Xxxxxx, XX 00000
Attention: Xxxxxx XxXxxxxx, CFO & Treasurer
Phone No.: (000) 000-0000
Fax No.: (000) 000-0000
Each party hereto may alter the address or facsimile number to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this Section 7 for the giving of
notice.
WAIVER; SPECIFIC PERFORMANCE; PAYMENTS; FURTHER ASSURANCES
8.(a) No failure on the part of either party hereto to exercise and no delay in
exercising, and no course of dealing with respect to, any right, power or
privilege under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege
under this Agreement preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided
by law.
(b) If either party hereto fails to comply in any material respect with any
provision of this Agreement that is applicable to such party, the other
party hereto may, to the fullest extent permitted by applicable law,
demand specific performance of this Agreement and may exercise any other
remedy available at law or equity.
(c) All payments to be made to MLI or any of its Affiliates hereunder shall
be made in U.S. Dollars and in immediately available funds, without
set-off, deduction or counterclaim.
(d) Any amount payable by the Collateral Manager to MLI hereunder or by the
Collateral Manager to MLPFS under the Engagement Letter will, at the
option of MLI (and without prior notice to the Collateral Manager), be
reduced by MLI's set-off against any amount(s) payable (whether at such
time or in the future or upon the occurrence of a contingency) by MLI or
any of its Affiliates to the Collateral Manager (irrespective of the
currency, place of payment or booking office of the obligation) hereunder
or under any other agreement(s) between MLI or any of its Affiliates and
the Collateral Manager or instrument(s) or undertaking(s) issued or
executed by MLI or any of its Affiliates to, or in favor of, the
Collateral Manager. For this purpose, any amount so payable may be
converted by MLI into the currency in which any other amount is
denominated at the rate of exchange at which MLI would be able, acting in
a reasonable manner and in good faith, to purchase the relevant amount of
such currency.
(e) Each party hereto shall execute such documents and take such other
actions as may be reasonably requested by the other party hereto to give
effect to the transactions contemplated by this Agreement and the
Engagement Letter.
15
AMENDMENTS; SUCCESSORS; ASSIGNMENTS
9.(a) Except where otherwise expressly provided herein, no amendment,
modification or waiver in respect of this Agreement will be effective
unless in writing (including a writing evidenced by a facsimile
transmission) and executed by each party hereto.
(b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
(c) This Agreement, together with the Engagement Letter, sets forth the
entire understanding of the parties hereto relating to the subject matter
hereof, and supersedes and cancels all prior and contemporaneous
agreements, understandings, inducements and conditions, express or
implied, oral or written, of any nature whatsoever with respect to the
subject matter hereof.
(d) Neither this Agreement nor any interest or obligation in or under this
Agreement may be transferred (whether by way of security or otherwise) by
MLI without the prior written consent of the Collateral Manager or by the
Collateral Manager without the prior written consent of MLI. Any
purported transfer that is not in compliance with this Section will be
void. No Person other than the parties hereto shall have any rights or
obligations under this Agreement.
GOVERNING LAW; SUBMISSION TO JURISDICTION; ETC.
10.(a) GOVERNING LAW. This Agreement shall be construed in accordance with, and
this Agreement and all matters arising out of or relating in any way
whatsoever to this Agreement (whether in contract, tort or otherwise)
shall be governed by, the law of the State of New York.
(b) SUBMISSION TO JURISDICTION. With respect to any suit, action or
proceedings relating to this Agreement (PROCEEDINGS), each party
irrevocably (i) submits to the non-exclusive jurisdiction of the courts
of the State of New York and the United States District Court located in
the Borough of Manhattan in New York City and (ii) waives any objection
which it may have at any time to the laying of venue of any Proceedings
brought in any such court, waives any claim that such Proceedings have
been brought in an inconvenient forum and further waives the right to
object, with respect to such Proceedings, that such court does not have
any jurisdiction over such party. Nothing in this Agreement precludes
either party hereto from bringing Proceedings in any other jurisdiction,
nor will the bringing of Proceedings in any one or more jurisdictions
preclude the bringing of Proceedings in any other jurisdiction.
WAIVER OF JURY TRIAL
11. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
16
TERM OF AGREEMENT; EXPENSES OF ENFORCEMENT
12.(a) This Agreement shall continue in full force and effect until the
Termination Date.
(b) Notwithstanding any termination of this Agreement pursuant to Section
12(a), the provisions of Sections 4 and 5 shall survive and remain in
full force and effect regardless of the consummation of the transactions
contemplated hereby or the termination of this Agreement or any provision
hereof.
(c) A party that defaults in any of its payment obligations hereunder will,
on demand, indemnify and hold harmless the other party for and against
all reasonable out-of-pocket expenses, including legal fees, incurred by
such other party by reason of the enforcement and protection of its
rights under this Agreement, including, but not limited to, costs of
collection.
EXECUTION IN COUNTERPARTS
13. This Agreement (and each amendment, modification and waiver in respect of
it) may be executed and delivered in counterparts (including by facsimile
transmission), each of which will be deemed an original.
PROVISIONS SEPARABLE
14. If any term, provision, covenant or condition of this Agreement, or the
application thereof to either party or any circumstance, is held to be
unenforceable, invalid or illegal (in whole or in part) for any reason (in any
relevant jurisdiction), the remaining terms, provisions, covenants and
conditions of this Agreement, modified by the deletion of the unenforceable,
invalid or illegal portion (in any relevant jurisdiction), will continue in full
force and effect, and such unenforceability, invalidity, or illegality will not
otherwise affect the enforceability, validity or legality of the remaining
terms, provisions, covenants and conditions of this Agreement so long as this
Agreement as so modified continues to express, without material change, the
original intentions of the parties as to the subject matter hereof and the
deletion of such portion of this Agreement will not substantially impair the
respective expectations or reciprocal obligations of the parties or the
practical realization of the benefits that would otherwise be conferred upon the
parties. The parties will endeavour in good faith negotiations to replace the
prohibited or unenforceable provision with a valid provision, the economic
effect of which comes as close as possible to that of the prohibited or
unenforceable provision.
HEADINGS NOT TO AFFECT INTERPRETATION
15. The headings used in this Agreement are for convenience of reference only
and are not to affect the construction of or to be taken into consideration in
interpreting this Agreement.
17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
XXXXXXX XXXXX INTERNATIONAL
By: /s/ Xxxxx Xxxxxxx
-----------------------------------
Name: Xxxxx Xxxxxxx
-----------------------------
Title: Director
----------------------------
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: /s/ Xxxx X. Xxxxxxxx
-----------------------------------
Name: Xxxx X. Xxxxxxxx
-----------------------------
Title: President and CEO
----------------------------
18
ANNEX A - ELIGIBILITY CRITERIA
A Collateral Debt Security will be eligible for purchase by MLI for inclusion in
the Warehouse Portfolio if, in each case, at the time, and immediately after, it
is so purchased or designated:
(a) such obligation or security is one of the following:
(i) an Asset-Backed Security publicly issued or privately placed by an
issuer that is incorporated or organized under the laws of the
United States or any state thereof, by a Qualifying Foreign
Obligor or by an SPV Foreign Obligor;
(ii) a Guaranteed Asset-Backed Security;
(b) such obligation or security is a RMBS Security;
(c) such obligation or security is denominated in U.S. dollars and is not
convertible into an obligation or security denominated in a currency
other than U.S. dollars;
(d) such obligation or security is eligible under the instrument or agreement
pursuant to which it was issued or created to be purchased by each of MLI
and the Issuer and assigned, pledged or otherwise transferred free and
clear or any existing liens, claims or encumbrances of any nature
whatsoever (other than any lien created by the Issuer Documentation) by
the Issuer to its designee;
(e) such obligation or security is not a Non-Conforming Asset;
(f) such obligation or security is an obligation or security in respect of
which the Rating from Standard & Poor's does not include the subscript
"r" or "t";
(g) such obligation or security provides for periodic payments of interest in
cash no less frequently than semi-annually;
(h) the acquisition (including the manner of acquisition), ownership,
enforcement and disposition of such obligation or security will not cause
the Issuer to be treated as engaged in a U.S. trade or business for U.S.
Federal income tax purposes or otherwise to be subject to tax on a net
income basis in any jurisdiction outside the Issuer's jurisdiction of
incorporation;
(i) each of MLI and the Issuer will receive all payments from and all
proceeds from the disposition of such obligation or security free and
clear of withholding taxes, other than withholding tax as to which the
obligor or issuer must make additional payments so that the net amount
received by MLI or the Issuer after satisfaction of such tax is the
amount due to MLI or the Issuer before the imposition of such withholding
tax;
(j) such obligation or security is in registered form for purposes of the
Code and it (and if it is a certificate of interest in a trust that is
treated as a grantor trust and not as a REMIC or FASIT for U.S. Federal
income tax purposes, each of the obligations or securities held by such
trust) was issued after July 18, 1984;
19
(k) such obligation or security is not (i) an obligation or security issued
by an issuer located in a country that imposes foreign exchange controls
that effectively limit the availability or use of U.S. dollars to make
when due the scheduled payments of principal of and interest on such
security; (ii) "margin stock" as defined under Regulation U issued by the
Board of Governors of the Federal Reserve System; (iii) a financing by a
debtor-in-possession in any insolvency proceeding; (iv) an obligation or
security that by the terms of its Underlying Instruments provides for
mandatory conversion or exchange into equity capital at any time prior to
its maturity; or (v) the subject of a call for redemption or exchange by
the issuer thereof in connection with an offering to prospective
investors;
(l) such obligation or security is not an obligation or security of which the
holder is required by the related Underlying Instruments to make any
payment or advance after its acquisition by such holder to the issuer
thereof;
(m) such obligation or security is not a Residential Interest Only Security;
(n) if the stated maturity of such security or obligation occurs later than
2045, the aggregate principal balance of all such securities and
obligations in the Warehouse Portfolio does not exceed 5% of the Expected
Portfolio Balance; PROVIDED that the Weighted Average Life of all such
securities and obligations shall not be greater than 15 years; For
purposes of this clause (n), (1) "Weighted Average Life" shall mean the
number obtained by (i) summing the products obtained by multiplying (a)
the Average Life at such time of each such Collateral Debt Security by
(b) the outstanding principal balance of such Collateral Debt Security
and (ii) dividing such sum by the aggregate principal balance at such
time of all such Collateral Debt Securities, and (2) "Average Life" shall
mean the quotient obtained by dividing (i) the sum of the products of (a)
the number of years (rounded to the nearest one tenth thereof) from such
measurement date to the respective dates of each successive scheduled
distribution of principal of such Collateral Debt Security and (b) the
respective amounts of principal of such scheduled distributions by (ii)
the sum of all successive scheduled distributions of principal on such
Collateral Debt Security.
(o) such obligation or security is not publicly rated below "BBB-" by
Standard & Poor's and/or Fitch, and/or "Baa3" by Moody's;
(p) Standard & Poor's has not placed its rating of such obligation or
security on a watch list for possible downgrade;(1)
(q) the aggregate principal balance of all securities and obligations in the
Warehouse Portfolio publicly rated below "A-" by Standard & Poor's and/or
Fitch, and/or A3 by Moody's does not exceed $75,000,000;
(r) if such obligation or security is a REIT debt security, such obligation
or security is publicly rated at least "Baa2" by Moody's and "BBB" by
Standard & Poor's and Fitch;
----------
(1) See Annex D for description of notching criteria of Moody's and S&P.
20
(s) the aggregate principal balance of all securities and obligations in the
Warehouse Portfolio that form part of the same issue as such obligation
or security does not exceed 5% of the Expected Portfolio Balance;
PROVIDED that, up to five issues in the Warehouse Portfolio may each
exceed 5% of the Expected Portfolio balance but may not exceed 6% of the
Expected Portfolio Balance;
(u) the aggregate principal balance of all securities and obligations in the
Warehouse Portfolio that are PIK Bonds, Step-Up Bonds, Step-Down Bonds or
Zero Coupon Bonds does not exceed 5.0% of the Expected Portfolio Balance;
PROVIDED that, notwithstanding the foregoing, MLI and the Collateral Manager may
by mutual written consent designate an obligation or security for inclusion in
the Warehouse Portfolio that does not comply with one or more of the clauses
above (other than clauses (g) through (i)).
As used herein:
"MOODY'S MAXIMUM RATING DISTRIBUTION" is the number determined on any date by
DIVIDING:
(a) the summation of the series of products obtained by MULTIPLYING (i) the
principal balance on such date of each Collateral Debt Security or
Reference Obligation BY (ii) its respective Xxxxx'x Rating Factor on such
date, BY
(b) the aggregate principal balance on such date of all Collateral Debt
Securities and Reference Obligations,
and rounding the result up to the nearest whole number.
"XXXXX'X RATING FACTOR" means, for purposes of computing the Moody's Maximum
Rating Distribution, the number assigned below to the Xxxxx'x Rating applicable
to each Collateral Debt Security or Reference Obligation.
MOODY'S XXXXX'X
RATING RATING
XXXXX'X RATING FACTOR XXXXX'X RATING FACTOR
Aaa 1 Ba1 940
Aa1 10 Ba2 1,350
Aa2 20 Ba3 1,780
Aa3 40 B1 2,220
A1 70 B2 2,720
A2 120 B3 3,490
A3 180 Caa1 4,770
Baa1 260 Caa2 6,500
Baa2 360 Caa3 8,070
Baa3 610 Ca or lower 10,000
Notwithstanding the foregoing, each of the parties hereto acknowledges and
agrees that (a) any reference to a rating by a Rating Agency in the Eligibility
Criteria set forth in this Annex A shall,
21
where applicable, be construed as a reference to the eventual rating given by
such Rating Agency to the applicable Collateral Debt Security or Reference
Obligation following the application by such Rating Agency of its notching
practices and guidelines with respect to such Collateral Debt Security or
Reference Obligation (as the same may be amended or modified from time to time)
and (b) the Eligibility Criteria set forth in this Annex A represent an
approximation of the expected investment criteria to be applied to the
Collateral Debt Securities and Reference Obligations for the Transaction, and
remain subject to further amendment by the mutual consent of both parties
including, without limitation, as a result of comments received from MLI, the
Collateral Manager, the Rating Agencies or the trustee for the holders of the
Notes.
22
ANNEX B - MOODY'S INDUSTRIES
The relevant industries for purposes of the Moody's Asset Correlation are as
follows:
1. ABS-auto
2. ABS-auto BIG
3. ABS-aircraft lease
4. ABS-aircraft lease BIG
5. ABS-credit card
6. ABS-credit card BIG
7. ABS-entertainment
8 ABS-entertainment BIG
9. ABS-HEL
10. ABS-HEL BIG
11. ABS-MH
12. ABS-MH BIG
13. ABS-student loans
14. ABS-student loans BIG
15. ABS-residential A mtg
16. ABS-residential A mtg BIG
17. ABS-residential B&C mtg
18. ABS-residential B&C mtg BIG
19. ABS-CMBS Conduit
20. ABS-CMBS Conduit BIG
21. ABS-CMBS CTL
22. ABS-CMBS CTL BIG
23. ABS-CMBS Large Loan
24. ABS-CMBS Large Loan BIG
25. ABS-SBL
26. ABS-SBL BIG
27. ABS-Tax Liens
28. ABS-Tax Liens BIG
29. ABS-Mutual Fund Fees
30. ABS-Mutual Fund Fees BIG
31. ABS-Structured Settlements
32. ABS-Structured Settlements BIG
33. ABS-Utility
34. ABS-Utility BIG
35. REITS-Hotel
36. REITS-Multi Family
37. REITS-Office
38. REITS-Retail
39. REITS-Industrial
40. REITS--Healthcare
41. REITS-Self-storage
42. REITS-Diversified
43. CBO-EM CBO Aaa
23
44. CBO-EM CBO Aa
45. CBO-EM CBO A
46. CBO-EM Baa
47. Corp-EM CBO Ba
48. Corp-EM CBO B
49. Corp-HY CBO Aaa
50. Corp-HY CBO Aa
51. Corp-HY CBO A
52. Corp-HY CBO Baa
53. Corp-HY CBO Ba
54. Corp-HY CBO B
55. Corp-ABS CBO Aaa
56. Corp-ABS CBO Aa
57. Corp-ABS CBO A
58. Corp-ABS CBO Baa
59. Corp-ABS CBO Ba
60. Corp-ABS CBO B
24
ANNEX C - STANDARD & POOR'S ASSET CLASSES
1. Consumer ABS
Automobile Loan Receivable Securities
Automobile Lease Receivable Securities
Car Rental Receivables Securities
Credit Card Securities
Healthcare Securities
Student Loan Securities
2. Commercial ABS
Cargo Securities
Equipment Leasing Securities
Aircraft Leasing Securities
Small Business Loan Securities
Restaurant and Food Services Securities
Tobacco Litigation Securities
3. Non-RE-REMIC RMBS
Manufactured Housing Loan Securities
4. Non-RE-REMIC CMBS
CMBS - Conduit
CMBS - Credit Tenant Lease
CMBS - Large Loan
CMBS - Single Borrower
CMBS - Single Property
5. CBO/CLO Cashflow Securities
Cash Flow CBO - at least 80% High Yield Corporate
Cash Flow CBO - at least 80% Investment Grade Corporate
Cash Flow CLO - at least 80% High Yield Corporate
Cash Flow CLO - at least 80% Investment Grade Corporate
6. REITs
REIT - Multifamily & Mobile Home Park
REIT - Retail
REIT - Hospitality
REIT - Office
REIT - Industrial
REIT - Healthcare
REIT - Warehouse
REIT - Self Storage
REIT - Mixed Use
7. Real Estate Operating Companies
8. Residential Mortgages
Residential "A"
Residential "B/C"
Home equity loans
25
9. Specialty Structured
Stadium Financings
Project Finance
Future flows
26
ANNEX D - RATING AGENCY NOTCHING CRITERIA
PART 1: MOODY'S GUIDELINES
CMBS - Conduit 1.5 notches off the lower of S&P and Fitch
if Moody's has rated a tranche senior to the
security / 2 notches if Moody's has not -
Credit Estimate required if only one agency
has rated security
CMBS - CTL or Large Loan Credit Estimate required
Residential Jumbo A/Alt A 1/2/3 off S&P's AAA/AA/AA->; 2/3/4 off Fitch
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