Collateral Debt Securities

The Collateral Debt Securities will have to satisfy certain asset and portfolio criteria (the Asset Criteria and the Portfolio Criteria respectively and together known as the Eligibility Criteria ). For example, the Asset Criteria will provide that the Collateral Debt Security will need to have a maturity shorter than the Einal Notes. The Portfolio Criteria, will provide that the portfolio, as a whole, will not contain more than 5% of assets rated below BBB+. 

The drafting of the Priority of Payments is probably the clause that will take the most time for the documentation of the Exchangeable Notes. In addition to the Priority of Payments clause determining what would occur if the Final Notes are not issued and the collateral needs to be realised, two additional waterfalls will be necessary, one to determine what to do with the interest paid in the Collateral Debt Securities during the Warehouse Stage on the Final Closing Date, the second to determine what to do with the proceeds from the issuance of the Final Notes (see below). 

The net proceeds resulting after the application of the above waterfall will be used by the Issuer to purchase more Collateral Debt Securities. However, such investments can only be made up to the last day of the Ramp-Up Period. ... 

After the termination of the Ramp-Up Period, the Reinvestment Period will start. This period has traditionally lasted around five years, but nowadays, we are seeing longer Reinvestment Periods. In this deal, the Reinvestment Period will last seven years from the Final Closing Date. During the Reinvestment Period, any proceeds received by the issuer upon redemption of any Collateral Debt Securities will be reinvested in further Collateral Debt Securities subject to compliance with any rating agency requirements. 

No investment may be made in Collateral Debt Securities or Eligible Investments (as described below) after the termination of the Reinvestment Period or as a result of the suspension of such Reinvestment Period due to a failure of the overcollateralisation ratio test. 

The collateralized debt security is not subject to any other security arrangements. 

The legal maturity of the collateralized debt security is less than the legal maturity of the notes, and the expected maturity is less than the expected maturity of the notes. 

The collateralized debt security pays interest at least semi annually. 

The collateralized debt security will have a minimum required rating. 

The Trustee will create security over the assets of the issuer (including, without limitation, the Collateral Debt Securities, Eligible Investments and cash accounts). Such security will be by way of first fixed charge and will be for the benefit of all the secured parties including the Noteholders. If there is an event of default under the Notes, the security will become enforceable and the Trustee will be involved in liquidating the assets in order to meet the claims of the various creditors in accordance with a predetermined order of priority of payments. The Trustee is also responsible for acting on behalf of the Noteholders in order to make sure any amendments to any documents and the like are not prejudicial to the Noteholders. 

The Custodian shall be responsible for holding the Collateral Debt Securities in a Euroclear Account. 

Any such redemption shall be effected from proceeds of sale of the Collateral Debt Securities and Eligible Investments and al other funds in the cash accounts. 

Also, care should be taken on the drafting of the distributions to the Income noteholders the Luxembourg income tax (LIR) provides for the non-deductibility of the distribution of taxable income (i.e., the annual profits) or the liquidation proceeds of the SPV. Documentation should clearly state that the holders of the Junior Notes will receive the residual amount of the interest received by the SPV under the Collateral Debt Securities and not a residual amount of the overall profits of the SPV. 

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