EXHIBIT (K)(5)(A)
INSURANCE AGREEMENT
Between
FINANCIAL SECURITY ASSURANCE INC.
and
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
Dated as of December 1, 1988
TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and shall
not be deemed to be a part of this Insurance Agreement.)
Page
ARTICLE I
DEFINITIONS .......................................................... 1
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.01. Representations and Warranties of the Fund ............. 2
SECTION 2.02. Affirmative Covenants of the Fund ...................... 6
SECTION 2.03. Negative Covenants of the Fund ......................... 13
SECTION 2.04. Special Covenants of the Fund .......................... 16
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
SECTION 3.01. Agreement To Issue Surety Bond ........................ 20
SECTION 3.02. Conditions Precedent to Issuance of the Surety Bond ... 20
SECTION 3.03. Payment of Fees and Premiums .......................... 21
SECTION 3.04. Reimbursement Obligation .............................. 22
SECTION 3.05. Indemnification ....................................... 22
SECTION 3.06. Payment Procedure ..................................... 23
SECTION 3.07. Subrogation ........................................... 24
ARTICLE IV
FURTHER AGREEMENTS
SECTION 4.01. Effective Date; Term of Agreement ..................... 24
SECTION 4.02. Obligations Absolute .................................. 26
SECTION 4.03. Assignments; Reinsurance; Third-Party Rights .......... 26
SECTION 4.04. Liability of Financial Security and Fund .............. 27
ARTICLE V
DEFAULTS; REMEDIES
SECTION 5.01. Defaults .............................................. 28
SECTION 5.02. Remedies; No Remedy Exclusive ......................... 30
SECTION 5.03. Waivers ............................................... 32
SECTION 5.04. Agreement To Pay Fees and Expenses of Enforcement ..... 32
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Amendments, Changes and Modifications ................. 32
SECTION 6.02. Notices ............................................... 32
SECTION 6.03. Severability .......................................... 34
SECTION 6.04. Governing Law ......................................... 34
SECTION 6.05. Consent of Financial Security ......................... 34
SECTION 6.06. Counterparts .......................................... 34
SECTION 6.07. Recitals .............................................. 34
SECTION 6.08. Headings .............................................. 34
SECTION 6.09. Custody Receipts ...................................... 35
APPENDIX I - Definitions
ANNEX I - Form of Surety Bond
ANNEX II - Form of Surety Assets Coverage Report
ANNEX III - Letter Reviewing Surety Assets
Coverage Calculation
INSURANCE AGREEMENT
THIS INSURANCE AGREEMENT is made as of December 1, 1988 by and between
Financial Security Assurance Inc. ("Financial Security") and Prospect Street(SM)
High Income Portfolio Inc. (the "Fund").
WITNESSETH:
WHEREAS, the Fund proposes to issue up to 345 shares of its Preferred Stock,
with an aggregate liquidation preference of $34,500,000, to finance the purchase
by the Fund of certain assets; and
WHEREAS, the Fund desires that Financial Security issue its Surety Bond
guaranteeing certain payments of dividends on and redemption or liquidation
preference amounts for the Preferred Stock; and
WHEREAS, Financial Security has agreed to issue and deliver its Surety Bond
upon the terms and subject to the conditions set forth herein; and
WHEREAS, as consideration for the issuance of the Surety Bond, the Fund has
agreed under the terms provided in this Agreement to reimburse Financial
Security (with interest at the Late Payment Rate) for any amounts paid by
Financial Security under the Surety Bond and to indemnify or reimburse Financial
Security for certain other costs as more fully set forth herein and has
acknowledged certain subrogation rights of Financial Security in respect of
amounts paid by Financial Security under the Surety Bond and agreed to take
certain actions as more fully set forth herein; and
WHEREAS, the parties hereto desire to specify the conditions precedent to
the issuance of the Surety Bond by Financial Security and to provide for certain
other matters;
NOW, THEREFORE, in consideration of the premises and of the agreements
herein contained, Financial Security and the Fund agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used herein shall have the meanings assigned thereto
in Appendix I hereto.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. Representations and Warranties of the Fund. The Fund
represents and warrants to, and covenants with, Financial Security as follows:
(a) Due Organization. The Fund is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Maryland.
(b) Power and Authority. The Fund has all necessary corporate power and
authority to conduct its business as a diversified closed-end management
investment company, to enter into, deliver and perform the Fund Documents
and to perform all of its obligations thereunder.
(c) Due Qualification. The Fund is duly qualified to do business and is
in good standing as a foreign corporation (or is exempt from such
requirements) in all jurisdictions in which the nature of its business
requires such qualification other than those jurisdictions in which the
failure to be so qualified would not have a material adverse effect upon the
business or financial condition of the Fund.
(d) Due Authorization. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation of the transactions contemplated thereby (i) are within the
corporate powers of the Fund, (ii) have been duly authorized by all
necessary corporate action, (iii) do not require (or have not required) the
Fund to obtain any additional approvals or consents or to take other action
or give any notice to or make any filing with any Person or governmental
agency or department except such as have been obtained and remain in full
force and effect, and (iv) do not and will not result in or require the
creation of any Lien upon or in respect of any of the Fund's properties.
(e) Noncontravention. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation by the Fund of the transactions contemplated hereby or
thereby and the fulfillment by the Fund of or compliance by the Fund with
the terms and conditions of the Fund Documents will not:
(i) conflict with or result in any breach or violation of any of the
terms, conditions or provisions of any existing law, rule, regulation
(including, without limitation, the provisions of the Investment Company
Act, the Securities Act and Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Fund or of the Certificate or Bylaws or any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Fund is a party or by which it or any of its
properties may be bound or affected, or
(ii) constitute a default (or an event which, with the giving of
notice or lapse of time or both, would constitute a default) by the Fund
under any of the foregoing;
which conflict, breach, violation or default would materially and adversely
affect the ability of the Fund to perform its obligations under the Fund
Documents or would materially and adversely affect the rights, benefits or
enforcement of remedies or practicable realization of such rights benefits
or remedies of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement, or the Certificate or otherwise with
respect to the Preferred Stock.
(f) Pending Litigation or Other Proceeding. There is no pending action,
proceeding or investigation before any court, governmental or administrative
agency or arbitrator against or affecting the Fund, or any properties or
rights of the Fund, or, to the Fund's knowledge after reasonable inquiry,
any threatened action or proceeding before any of the foregoing, which, if
decided adversely to the Fund, would materially and adversely affect the
ability of the Fund to perform its obligations under the Fund Documents or
would materially and adversely affect the rights, benefits or enforcement of
remedies or practicable realization of such rights or benefits of Financial
Security hereunder or of Financial Security or any Holder under the Custody
Agreement or the Certificate or otherwise with respect to the Preferred
Stock.
(g) Valid and Binding Agreement. The Fund Documents constitute legal,
valid and binding agreements of the Fund enforceable in accordance with
their respective terms, except as the enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or limiting creditors' rights generally or general equitable
principles.
(h) Liabilities. Except with respect to the Notes and fees incurred in
connection with the issuance of the Preferred Stock, the Common Stock and
the Notes and the execution of this Agreement, the Fund has not incurred any
indebtedness for borrowed money or, other than in the ordinary course of
business, any other liabilities.
(i) Compliance With Law, Regulations, Etc. The Fund has no notice nor
any reason to believe that any practice, procedure or policy employed by the
Fund in the conduct of its business violates any law, regulation, judgment,
order, decree or agreement applicable to the Fund which, if enforced, would
(i) have a material adverse effect on the Fund's ability to do business,
(ii) have a material adverse impact on the Fund's earnings or financial
condition or (iii) constitute grounds for the revocation of any license,
charter, permit or registration which is material to the conduct of the
Fund's business.
(j) Taxes. The Fund has had no income to date that would require the
filing of any income tax returns of any jurisdiction.
(k) ERISA. The Fund does not maintain or contribute to any Plan subject
to ERISA and does not expect to implement any such Plan.
(1) Delivery of Information. None of the documents, reports, notices,
leases, operating agreements, schedules, certificates, statements or other
writings, including without limitation the Registration Statement and the
Prospectuses (collectively, the "Documents"), furnished to Financial
Security by the Fund contain any statement of a material fact by the Fund
which was untrue or misleading in any material respect when made; provided,
however, the Fund makes no representations or warranties as to the
information contained in the Preferred Stock Prospectus on page 4 in the
Section entitled "PROSPECTUS SUMMARY - Surety Arrangement Financial
Security," on page 7 in the section entitled "PROSPECTUS SUMMARY - The
Offering - Secondary Market," on pages 9 and 10 in the third and fourth
paragraphs in the section entitled "PROSPECTUS SUMMARY - Special
Considerations," on pages 30 and 31 in the fourth and fifth paragraphs in
the section entitled "PORTFOLIO TRADING," in the section entitled
"UNDERWRITING," in the section entitled "FINANCIAL SECURITY," or the
financial statements relating to Financial Security or the information
contained in the Note Prospectus on page 6 in the section entitled
"PROSPECTUS SUMMARY - Surety Arrangement for Preferred Shares - Financial
Security," on page 7 in the second and third paragraphs in the section
entitled "PROSPECTUS SUMMARY - Special Considerations," the information on
pages 27 and 28 in the fourth and fifth paragraphs in the section entitled
"PORTFOLIO TRADING," in the section entitled "UNDERWRITING," or on pages 45
and 46 in the section entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES -
Financial Security" or the information contained in the Common Stock
Prospectus on page 7 in the section entitled "PROSPECTUS SUMMARY Surety
Arrangement for Preferred Shares - Financial Security," on pages 8 and 9 in
the sixth and seventh paragraphs in the section entitled "PROSPECTUS SUMMARY
Special Considerations," on page 10 in the second, third and fourth
paragraphs in the section entitled "THE FUND," on pages 32 and 33 in the
fourth and fifth paragraphs in the section entitled "PORTFOLIO TRADING," in
the section entitled "UNDERWRITING" or on pages 50 and 51 in the section
entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES - Financial Security."
Except as disclosed in writing to Financial Security, there is no fact known
to the Fund (relating specifically to the Fund and not to national or local
economic conditions generally) which could materially adversely affect the
Fund or the Fund's ability to meet its obligations. Since the furnishing of
the Documents, there has been no material change nor any development or
event involving a prospective material change which would render any of the
Documents untrue or misleading in a material respect.
(m) Securities Laws Compliance; Registration Statement; Prospectuses.
The Registration Statement and the Prospectuses, and all supplements or
amendments thereto, comply in all material respects with the provisions of
the Securities Act and the Investment Company Act, and the Indenture
complies in all material respects with the Trust Indenture Act of 1939, as
amended, and the Registration Statement and the Prospectuses do not contain
an untrue statement of a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made. Neither the offer nor sale of the
Preferred Stock, Common Stock or Notes in the Transaction will be in
violation of the Securities Act or any state "blue sky" or securities laws.
The Fund is in compliance in all material respects with all provisions of
the Investment Company Act applicable to it.
(n) Federal Reserve Board Regulations. No part of the initial proceeds o
the sale of the Preferred Stock will be used to purchase or carry "Margin
Securities" within the meaning of Regulation G of the Board of Governors of
the Federal Reserve System.
(o) True and Complete Copies. All agreements and other material
delivered to Financial Security or its counsel by or on behalf of the Fund
are true and correct copies of what they purport to be.
Section 2.02. Affirmative Covenants of the Fund. The Fund hereby covenants
and agrees that during the Term of the Agreement:
(a) Compliance With Agreements. The Fund shall comply in all material
respects with the terms and conditions of the Fund Documents.
(b) Corporate Existence. The Fund shall maintain its corporate existence
and shall at all times continue to be duly organized, duly qualified and
duly authorized (as described in Section 2.01(a), (c) and (d) hereof) and
will not liquidate or dissolve nor consolidate or merge with or into any
other corporation or other entity.
(c) Fund To Provide Financial Statements; Accountants' Reports; Other
Information. The Fund shall keep or cause to be kept in reasonable detail
books and records of account of the Fund's assets and business, including,
but not limited to, books and records relating to the Transaction. The books
of the Fund shall be kept on an accrual basis and the Fund shall report its
operations for tax purposes on an accrual basis.
(i) Annual Financial Statements. The Fund shall furnish to Financial
Security as soon as available, and in any event within 90 days after the
close of each fiscal year of the Fund, the audited balance sheet of the
Fund as of the end of such fiscal year and the audited statement of
operations and an audited statement of changes in net assets of the Fund
for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the prior fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by
the report of the Fund's independent public accountants (who shall be
reasonably acceptable to Financial Security) and by the certificate
described in paragraph (d) below.
(ii) Semiannual Financial Statements. The Fund shall furnish to
Financial Security as soon as available, and in any event within 60 days
after the first six months of each fiscal year of the Fund, an unaudited
balance sheet of the Fund as of the end of such six months, an unaudited
statement of operations of the Fund for such six-month period and an
unaudited statement of changes in net assets of the Fund for such
six-month period, all in reasonable detail and stating in comparative
form the respective figures for the corresponding date and period in the
previous fiscal year, accompanied by the certificate described in
paragraph (d) below and a certificate of the chief financial officer of
the Fund to the effect that such financial statements have been prepared
in accordance with generally accepted accounting principles consistently
applied (except as noted therein) and that such financial statements
fairly present the results of operations and financial condition of the
Fund for the dates and periods indicated.
(iii) Accountants' Reports. The Fund shall furnish to Financial
Security, promptly upon receipt thereof, copies of any reports submitted
to the Fund by its independent public accountants in connection with any
examination of the financial statements of Fund made by such
accountants.
(iv) Valuation of Eligible Portfolio Property; Periodic Reports and
Certificates.
(A) Valuation Dates. The Bank of New York, as the Fund's
custodian, is appointed the initial Collateral Evaluator and shall
determine the Market Value and Surety Assets Value of each item of
Eligible Portfolio Property and in the aggregate for all Eligible
Portfolio Property on each Valuation Date.
(B) Submission of Surety Assets Coverage Report. On or before
5:00 p.m., New York City time, on the third Business Day after each
Valuation Date, the Fund shall, and on any other date the Fund may,
deliver to Financial Security a Surety Assets Coverage Report. On a
quarterly basis (the last Business Day of January, April, July and
October, commencing January 31, 1989), such Surety Assets Coverage
Report shall be confirmed by a letter in the form attached to Annex
3 hereto from the Fund's independent accountants delivered to
Financial Security within three Business Days of the delivery of the
Surety Assets Coverage Report. If any such letter shows that an
error was made in the Surety Assets Coverage Report reviewed or
shows that a lower aggregate Surety Assets Value for the Eligible
Portfolio Property was determined by the independent accountants,
the calculation or determination made by such independent
accountants shall be final and conclusive and shall be binding on
the Fund and Financial Security, and the Collateral Evaluator shall
accordingly amend the Surety Assets Coverage Report and deliver the
amended Surety Assets Coverage Report to Financial Security.
(C) Failure To Submit Surety Assets Coverage Report. At any time
that the Fund has failed to deliver any Surety Assets Coverage
Report required by Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D)
hereof, the Fund hereby authorizes Financial Security to direct, on
behalf of the Fund, the Fund's independent accountants to prepare,
execute and deliver to Financial Security (at Financial Security's
expense in the case of a report required by Section 2.02(c)(iv)(D))
on behalf of the Fund the Surety Assets Coverage Report, as the case
may be (prepared on the same basis as is required of the Fund
pursuant to this Agreement). The Fund hereby agrees to cooperate to
the fullest extent with Financial Security and such independent
accountants in such preparation. At any time that the Fund's
independent accountants have failed to deliver confirmations and/or
verifications of the Surety Assets Coverage Report pursuant to the
terms hereof, the Fund hereby authorizes Financial Security to
contact and direct, on behalf of the Fund, such independent
accountants to deliver such confirmations and/or verifications (at
Financial Security's expense in the case of a report required by
Section 2.02(c)(iv)(D)). The Fund hereby confirms that it has given
written authorization to such accountants to take directions from
Financial Security in the situations described in this Section
2.02(c). A failure by the Fund or its independent accountants to
deliver a Surety Assets Coverage Report as required pursuant to
Section 2.02(c)(iv) shall be deemed for all purposes of this
Agreement as the delivery by the Fund of a Surety Assets Coverage
Report showing a Surety Assets Value of Eligible Portfolio Property
equal to $0.
(D) Additional Determinations of Market Value and Surety
Assets Value. At the expense of Financial Security, the Collateral
Evaluator shall make additional determinations of the Market Value
and the Surety Assets Value of the Eligible Portfolio Property and
shall deliver a Surety Assets Coverage Report within three Business
Days following the Collateral Evaluator's receipt of any written
request from Financial Security that such amounts be determined,
which request shall not be delivered more frequently than twice
during any 12-month period. Any such determination shall be done at
the expense of Financial Security unless a Default or Event of
Default shall have occurred and is continuing. To the extent
requested by and at the expense of Financial Security (unless a
Default or Event of Default shall have occurred and is continuing),
the Fund shall provide Financial Security with an executed Surety
Assets Coverage Report and the accountants' letter required by the
last sentence of Section 2.02(c)(iv)(B) hereof in connection
therewith.
(E) The Fund will provide Financial Security with a copy
of any other report or certificate that the Fund is required to
deliver, or cause to be delivered, to the Trustee under the
Indenture, the holders of the Notes or the Holders of the Preferred
Stock or the holders of the Common Stock.
(v) Other Reports and Information. Promptly after the filing or
sending thereof, copies of all proxy statements, financial statements
and reports, and copies of all regular periodic and special reports and
all registration statements which the Fund files with its public
stockholders or the Securities and Exchange Commission or any other
federal government agency, authority or body which supervises the
issuance of securities by the Fund or any national securities exchange,
as well as copies of all reports filed with the Fund pursuant to any of
the Fund Documents. If available, the Fund shall provide, or otherwise
make available, to Financial Security the registry or other listing of
the names and addresses of the Holders of the Preferred Stock on an
annual basis (or as frequently as quarterly, at the request of Financial
Security) to the extent required by Financial Security to comply with
regulation, law or court order or to comply with any request by
appropriate governmental authorities.
(d) Certificate of Compliance. The Fund shall deliver to Financial
Security concurrently with the delivery of the financial statements required
pursuant to paragraph (c)(i) and (c)(ii) above a certificate signed by the
chief financial officer of the Fund stating that:
(i) a review of such Fund's performance under this Agreement and the
Fund Documents during such period has been made under such officer's
supervision; and
(ii) to such chief financial officer's knowledge following
reasonable inquiry, no Event of Default or Default has occurred and is
continuing, or if an Event of Default or Default has occurred and is
continuing, specifying the nature thereof and, in the case of an Event
of Default or Default if the Fund has a right to cure pursuant to
Section 5.01 or otherwise, stating in reasonable detail the steps, if
any, being taken by the Fund promptly to cure such event or to otherwise
comply with the terms of this Agreement.
(e) Access to Records; Discussions With Officers and Accountants. The
Fund shall, upon the request of Financial Security (but without any
liability for expenses of Financial Security), permit Financial Security, or
its authorized agent, at reasonable times:
(i) to inspect such books and records of the Fund as they may relate
to the Preferred Stock, the obligations of the Fund under the Fund
Documents, the Fund's business and the transactions consummated in
connection herewith but not the names of ultimate beneficial holders of
the Preferred Stock except to the extent required by Financial Security
to comply with regulation, law or court order or to comply with any
request by any appropriate governmental authorities;
(ii) to discuss the affairs, finances and accounts of the Fund with
any of its officers and directors; and
(iii) to discuss the affairs, finances and accounts of the Fund with
the Fund's independent accountants, provided that an officer of the Fund
(or his designee) shall have the right to be present during such
discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the Fund.
Such requests will not be made more frequently than semiannually until such
time, if any, as Financial Security determines, in its sole discretion, that
increased access is reasonably necessary under the circumstances which then
exist and provides the Fund a written statement to that effect, specifying
such circumstances. The books and records of the Fund will be maintained at
the address of the Fund designated herein for receipt of notices, unless the
Fund shall otherwise advise the parties hereto in writing.
Financial Security shall keep confidential any matter of which it
becomes aware through such inspections or discussions, except as may be
otherwise required by regulation, law or court order or requested by
appropriate governmental authorities or as necessary to enforce this
Agreement, the Custody Agreement or the other Fund Documents. If Financial
Security is requested or required (by oral questions, interrogatories,
requests for information or documents subpoena, civil investigative demand
or similar process) to disclose any information of which it becomes aware
through such inspections or discussions, Financial Security will promptly
notify the Fund of such request(s) so that the Fund may seek an appropriate
protective order and/or waive Financial Security's compliance with the
provisions of this Agreement. If, in the absence of a protective order or
the receipt of a waiver hereunder, Financial Security is legally required,
in the opinion of its counsel, to disclose such information, Financial
Security may disclose such information without liability hereunder.
(f) Inform Financial Security of Material Events. The Fund shall
promptly inform Financial Security in writing of the following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against
the Fund involving an uninsured amount in excess of $100,000 in any one
instance or $500,000 in the aggregate;
(ii) the occurrence of any Default or Event of Default;
(iii) the occurrence of any event of default (or event which with
notice or the lapse of time or both would constitute an event of
default) under the Indenture;
(iv) any proceedings instituted by or against the Fund in any
federal, state or local court or before any governmental body or agency,
or before any arbitration board, or any such proceedings threatened by
any governmental agency, which, if adversely determined, would have a
material adverse effect upon the Fund's ability to perform its
obligations under any Fund Document; and
(v) the receipt of notice from any agency or governmental body
having authority over the conduct of the Fund's business that (A) the
Fund is being placed under regulatory supervision, (B) any license,
permit, charter, membership or registration material to the conduct of
the Fund's business is to be suspended or revoked, or (C) the Fund is to
cease and desist any practice, procedure or policy employed by the Fund
in the conduct of its business, and such cessation will materially
adversely affect the conduct of the Fund's business or materially
adversely affect the financial affairs of the Fund.
(g) Further Assurances. Subject to Section 6.01, the Fund shall, upon
the request of Financial Security, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such
further instruments and take such further action as may be reasonably
necessary to effectuate the intention, performance and provisions of this
Agreement. In addition, the Fund agrees to cooperate with S&P and Moody's in
connection with any review of the Transaction which may be undertaken by S&P
or Moody's after the date hereof and take such actions as may reasonably be
required thereby to confirm the initial "AAA/Aaa" ratings on the Preferred
Stock provided that the Fund shall not be required to take any action with
respect to such ratings if in the reasonable judgment of the Fund such
action would be adverse to the Fund or the holders of the Common Stock of
the Fund or to obtain or maintain a Shadow Rating on the Preferred Stock of
an investment grade provided that the Fund shall not be required to take any
action with respect to a Shadow Rating if in its sole judgment such action
would be detrimental to the Fund or the holders of the Common Stock of the
Fund.
(h) Compliance With Investment Company Act. The Fund shall comply in all
material respects with provisions of the Investment Company Act applicable
to it and the related regulations and rules promulgated by the Commission
under the Investment Company Act.
(i) ERISA. The Fund shall comply in all material respects with ERISA and
shall not incur any liabilities to the PBGC or to any multiemployer plan
under ERISA in connection with any Plan which would have a material adverse
effect upon the financial condition of the Fund.
(j) Custody Agreement. The Fund agrees to recognize, and hereby
acknowledges, the rights of the Holders as described in Section 3.04 of the
Custody Agreement.
(k) Paying Agent Agreement. The Fund shall cause the Paying Agent to
execute an agreement in such form and substance as shall be acceptable to
Financial Security in which the Paying Agent agrees to give notices to
Financial Security and the Custodian regarding moneys received from the Fund
to pay amounts due under the Preferred Stock.
Section 2.03. Negative Covenants of the Fund. The Fund agrees and covenants
with Financial Security that at all times during the Term of the Agreement:
(a) Amendments to Organic Documents; Changes in Nature or Conduct of
Business. Without the prior written consent of Financial Security, which
consent shall not be unreasonably withheld, the Fund shall not (i) amend,
supplement or otherwise modify its Certificate or Bylaws (or permit any of
the foregoing); (ii) change the nature of its business or operations from
that of a closed-end management investment company incorporated in the State
of Maryland and subject to regulation by the Commission under the Investment
Company Act; or (iii) employ or pursue an investment strategy inconsistent
with or in violation of the fundamental policies described in the Preferred
Stock Prospectus under the heading "INVESTMENT OBJECTIVE AND
POLICIES--Investment Restrictions"; provided, however, in the event that the
claims paying ability of Financial Security is rated less than "AA+" by
Standard & Poor's or "Aal" by Moody's, Financial Security agrees to provide
such written consent if (A) reasonably required to maintain for the
Preferred Stock a "AA+" or higher rating from SOP or a "Aal" or higher
rating from Moody's and (B) the effect of the proposed action for which
consent is required would not materially and adversely affect the rights,
benefits or enforcement of remedies or practicable realization of such
rights or benefits of Financial Security hereunder or of Financial Security
or any Holder under the Custody Agreement or the Certificate or otherwise
with respect to the Preferred Stock.
(b) Creation of Indebtedness. Without the prior written consent of
Financial Security, the Fund shall not create, incur, assume or suffer to
exist any Indebtedness other than Permitted Indebtedness.
(c) Restrictions on Liens. The Fund will not create, incur or suffer to
exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence, of any Lien on any of its assets except
for (i) Liens the validity of which are being contested in good faith by
appropriate proceedings, (ii) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (iii) Liens to
secure payment for services rendered by the Auction Agent or the Trustee
with respect to the Notes in connection with the Preferred Stock or the
Notes and (iv) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Fund's stated
investment objective, policies and restrictions.
(d) Subsidiaries. The Fund shall not form, or cause to be formed, any
subsidiaries.
(e) Restrictions on Dividends. The Fund shall not declare or pay any
dividends, or apply any of its property or assets to purchase, redeem or
retire, or make any distribution by reduction of capital or otherwise in
respect of, shares of capital stock of the Fund (other than the Preferred
Stock) (all of the foregoing, "Restricted Payments"), unless such Restricted
Payment is permitted by the Certificate and the Surety Assets Coverage is
met immediately following such payment or application based upon the most
recent Surety Assets Coverage Report.
(f) Issuance of Stock. Without the prior written consent of Financial
Security, the Fund shall not issue any capital stock other than (i) the
Preferred Stock issued on the Date of Issuance or authorized to be issued
under Section 4.01(b) hereof and (ii) the Common Stock.
(g) Insolvency. The Fund shall not (i) commence any case, proceeding or
other actions under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seek appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or make a
general assignment for the benefit of its creditors; the Fund shall not take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth above; the Fund shall generally
pay its debts as they become due and shall not admit in writing its
inability to pay its debts as they become due.
(h) Impairment of Rights. Without the prior written consent of Financial
Security, the Fund shall not take any action, or fail to take any action, if
such action or failure to take action will interfere with the enforcement of
any rights under the Fund Documents that are material to the rights,
benefits or obligations of Financial Security.
(i) Waiver, Amendments, Etc. Subject to Section 2.03(a) above, without
the prior written consent of Financial Security, the Fund shall not waive,
modify or amend, or consent to any waiver, modification or amendment of any
of the terms, provisions or conditions of the Fund Documents that are
material to the rights, benefits or obligations of Financial Security.
(j) Purchase or Sale of Securities. The Fund shall not, and shall cause
its Investment Adviser not to, purchase or sell a security with knowledge
that the effect of such purchase or sale will be to cause, or be likely to
cause, the Surety Assets Coverage not to be met immediately subsequent to
the consummation of such purchase or sale.
(k) Investment Adviser. The Fund shall not designate a new Investment
Adviser unless the Person to be designated as Investment Adviser has been
approved by Financial Security which approval shall not be unreasonably
withheld.
(l) ERISA. The Fund shall not contribute or incur any obligation to
contribute to any Plan.
Section 2.04. Special Covenants of the Fund.
(a) Redemption of Preferred Stock or Notes. Upon redemption of any
shares of Preferred Stock pursuant to the Certificate and upon redemption of
any Notes pursuant to the Indenture during the Term of the Agreement, the
Fund shall furnish or cause to be furnished to Financial Security a notice
of such redemption.
(b) Maintenance of Surety Assets Value. The Fund shall maintain Eligible
Portfolio Property having a Surety Assets Value at least equal to the Surety
Assets Coverage at all times during the Term of the Agreement.
(c) Optional Redemptions by the Fund.
(i) Unless otherwise approved in writing by Financial Security, the
Fund shall not give any Notice of Redemption to effect any optional
redemption of the Preferred Stock unless, prior to the mailing of such
notice, the Fund shall have Deposit Securities in an amount available to
pay in full the cash redemption price on the Redemption Date. Following
the mailing of such Notice of Redemption, the Fund shall not reinvest
the moneys so invested in Deposit Securities without the prior written
consent of Financial Security.
(ii) Without in any way affecting its obligations hereunder, this
Section 2.04(c) shall not be deemed to limit the Fund's right to effect
optional redemptions of Preferred Stock in its own discretion to the
extent authorized by law and the Certificate.
(d) Redemption Date and Redemption Notice. Unless Financial Security
shall otherwise consent or request in writing, the Fund shall set the
redemption date for any mandatory redemption of the Preferred Stock required
under the Certificate at the latest Business Day possible under the
provision of Section 5 of Article IV(C) of the Certificate.
(e) Sale of Eligible Portfolio Property to Financial Security. Prior to
liquidating any portion of its Eligible Portfolio Property pursuant to this
Section 2.04, the Fund shall offer and sell such Eligible Portfolio Property
to Financial Security if Financial Security offers a price which is equal to
or greater than the price at which the Fund proposed to sell such Eligible
Portfolio Property. Financial Security shall accept or reject each such
offer as promptly as practicable and in any event not later than 24 hours
after receipt thereof; provided, however, that in the event Financial
Security fails to respond to any such offer by the close of business on the
date such offer is received, the applicable price shall be the price at
which the Fund proposes to sell such Eligible Portfolio Property on the
following day.
(f) Periodic Liquidation of Property.
(i) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay the redemption price of any
Preferred Stock on any Redemption Date. Unless Financial Security shall
otherwise direct, such property will be liquidated at a rate no slower
than equal weekly installments during the applicable Liquidation Period.
"Liquidation Period" shall commence upon the occurrence of an event
requiring redemption and shall expire on the date of mailing of the
Notice of Redemption. Proceeds from such liquidation of property shall
be invested in Deposit Securities.
(ii) The Fund shall liquidate Eligible Portfolio Property consisting
of Other Corporate Bonds and invest the proceeds thereof in Deposit
Securities not later than a date 90 days after the occurrence of the
Event of Default stated in Section 5.01(e) (the "First Deposit Date")
unless on such date the Fund shall otherwise have Deposit Securities
sufficient to redeem the Preferred Stock required to be redeemed in full
on the date redemption of such Preferred Stock is required pursuant to
this Agreement. Unless Financial Security shall otherwise direct, such
Other Corporate Bonds will be liquidated at a rate no slower than equal
weekly installments between the occurrence of such Event of Default and
the First Deposit Date. The Fund shall liquidate remaining Eligible
Portfolio Property and invest in Deposit Securities in an amount
sufficient, when added to Deposit Securities held resulting from the
liquidation required in the second preceding sentence, to pay the
redemption price of the Preferred Stock not later than a date 30 days
prior to the redemption of the Preferred Stock (the "Second Deposit
Date"). Unless Financial Security shall otherwise direct, such Eligible
Portfolio Property will be liquidated at a rate no slower than equal
weekly installments between the First Deposit Date and the Second
Deposit Date. Proceeds from such liquidation of Eligible Portfolio
Property shall be invested in Deposit Securities.
(iii) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay dividends on the Preferred
Stock no later than 20 days prior to each Dividend Payment Date.
(iv) On or before 12:00 noon, New York time, on the third Business
Day prior to each Dividend Payment Date or a Redemption Date
constituting a Scheduled Payment, but no earlier than five Business Days
prior to each Dividend Payment Date or a Redemption Date constituting a
Scheduled Payment of the Preferred Stock, as applicable, and on the
Business Day preceding any other Redemption Date, the Fund shall deliver
to the Paying Agent Cash out of the Deposit Securities sufficient to
make the required payment with respect to the Preferred Stock.
(v) The Fund shall specify on each Surety Assets Coverage Report the
Deposit Securities that satisfy the requirements of Section 2.04(c) or
Section 2.04(f) as of the related Valuation Date.
(g) Certain Investment Limitations. The Fund shall not (i) acquire or
otherwise invest in (A) repurchase agreements except those described in
paragraph (b) of the definition of Short Term Money Market Instruments, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on
futures contracts except to the extent such options do not exceed five
percentum of the value of the total assets of the Fund, (ii) engage in short
sales, (iii) overdraw any bank account, (iv) write options on portfolio
securities other than call options on securities held in the Fund's
portfolio or that the Fund has an immediate right to acquire through
conversion or exchange of securities held in its portfolio or (v) engage in
the lending of portfolio securities unless such lending would be permitted
pursuant to the terms of the Indenture or, unless, in any such case, the
Fund shall have received written consent from Financial Security.
(h) Redemption of the Notes. If the Fund is prohibited from redeeming
shares of Preferred Stock in connection with any Redemption Request by the
provisions of the Investment Company Act, the Fund shall redeem as soon as
practicable under the Indenture and from time to time the maximum principal
amount of the Notes permitted to be redeemed under the Indenture as shall
permit redemption of the Preferred Stock to proceed.
(i) Redemption Prior to Stated Termination Date. The Fund agrees for the
benefit of the Holders to call for redemption all outstanding shares of the
Preferred Stock so that the Redemption Date for such redemption is on the
Dividend Payment Date next preceding the Stated Termination Date unless the
Fund shall have received written evidence from S&P, if the Preferred Stock
is then rated by S&P, and from Moody's, if the Preferred Stock is then rated
by Moody's, that the termination of the Surety Bond would not, of itself,
result in a reduction or withdrawal of the ratings then applicable to the
Preferred Stock.
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
Section 3.01. Agreement To Issue Surety Bond. Financial Security agrees,
subject to the conditions set forth in Section 3.02 hereof, to issue the Surety
Bond.
Section 3.02. Conditions Precedent to Issuance of the Surety Bond. As
conditions precedent to the obligation of Financial Security to issue the Surety
Bond, the Fund shall have complied with the terms and satisfied the conditions
precedent set forth below, which compliance and satisfaction may be simultaneous
with the delivery of the Surety Bond:
(a) Financial Security shall have received a fully executed copy of each
of this Agreement, the Indenture, the Custody Agreement, the Auction Agent
Agreement, the Certificate, the agreement referred to in Section 2.02(k)
hereof, the Premium Side Letter and the DTC Letter.
(b) Financial Security shall have received a copy of the resolutions of
the Fund's Board of Directors authorizing the execution and delivery and
performance by the Fund of the Fund Documents and other matters contemplated
thereby, and of all other documents evidencing any other necessary action of
the Fund to enter into the Fund Documents certified by the Secretary or
Assistant Secretary of the Fund accompanied by a certified copy of the
Bylaws empowering the Board of Directors to authorize the foregoing (which
certificate shall state that such resolutions are in full force and effect
on the Date of Issuance).
(c) Financial Security shall have received a certificate of the
Secretary or an Assistant Secretary of the Fund certifying the name and true
signatures of the officers of the Fund authorized to sign the Fund Documents
and that stockholder consent to the execution and delivery of such documents
and instruments is not necessary.
(d) Financial Security shall have received a certificate of appropriate
officers of the Fund to the effect that the representations and warranties
of the Fund in this Agreement are true and correct in all material respects.
(e) Financial Security shall have received all favorable opinions of
counsel reasonably requested by Financial Security in form and substance
reasonably acceptable to Financial Security and its counsel.
(f) Financial Security shall have received true and correct copies of
all governmental approvals, if any, necessary for the transactions
contemplated by this Agreement.
(g) Financial Security shall have received a copy of the written
authorization given by the Fund to its independent accountants in connection
with Section 2.02(c) hereof.
(h) Financial Security shall have received such other documents,
instruments, approvals or opinions requested by Financial Security as may be
reasonably necessary to effect the Transaction.
(i) There shall have been received from S&P and Moody's ratings of "AAA"
and "aaa," respectively, on the Preferred Stock.
(j) Financial Security shall have received payment in full of the
portion of the Premium due on the Date of Issuance.
Section 3.03. Payment of Fees and Premiums.
(a) Legal Fees. The Fund (i) shall pay or cause to be paid legal fees
and expenses (not to exceed $80,000) incurred to and including the Date of
Issuance by Financial Security in connection with the issuance of the Surety
Bond and (ii) shall reimburse Financial Security for all legal fees and
expenses reasonably incurred after the Date of Issuance in connection with
any amendment, waiver or other action of or with respect to the Agreement or
any Fund Document or the Transaction.
(b) Rating Agency Fees. The initial fees of S&P and Moody's with respect
to the Preferred Stock and the transactions contemplated hereby shall be
paid by the Fund in full on the date of issuance of the Surety Bond. All
periodic and subsequent fees of S&P or Moody's with respect to the Preferred
Stock shall be for the account of the Fund or, if paid by Financial
Security, reimbursed by the Fund to Financial Security upon demand. The fees
for any other rating agency shall be paid by the party requesting such other
agency's rating, unless such other agency is a substitute for S&P or Moody's
in the event that S&P or Xxxxx'x is no longer rating securities, in which
case the cost for such agency shall be paid by the Fund.
(c) Premium. The Premium shall be paid by the Fund pursuant to the terms
of the Premium Side Letter.
(d) Custodial Fees. The Fund shall pay or cause to be paid all fees and
other amounts payable to the Custodian under the Custody Agreement.
Section 3.04. Reimbursement Obligation. The Fund shall reimburse and
indemnify Financial Security and shall immediately be liable for payment in full
to Financial Security in accordance with this Agreement of the amount of any
payment by Financial Security under the Surety Bond and the Fund shall pay
interest on such amounts at the late Payment Rate until paid; provided that such
payment obligation may be satisfied pursuant to the provisions of Section 3.07
hereof. The Fund agrees to pay to Financial Security any and all reasonable
charges and expenses which Financial Security may pay or incur relative to the
performance of this Agreement including, but not limited to, attorneys'
(including up to $80,000 of attorneys' fees in connection with the issuance of
the Surety Bond) and accountants' fees and expenses (including fees for any
consent provided in connection with the Registration Statement or Prospectuses,
any periodic reports or any materials used in connection with the auction of the
Preferred Stock), payments of any fees and charges in connection with any
accounts established to facilitate payments under the Surety Bond and any costs
and expenses incurred by Financial Security in connection with the
administration and enforcement of the Custody Agreement or the Fund Documents.
All such amounts are to be immediately due and payable without demand.
Section 3.05. Indemnification. In addition to any and all rights of
indemnification, subrogation or any other rights pursuant hereto or under law or
equity, the Fund agrees to pay, and to protect, indemnify and save harmless,
Financial Security and its officers, directors, shareholders, employees and
agents from and against any and all losses, liabilities (including penalties),
actions, suits, judgments, demands, damages, costs or expenses of any nature
arising out of or relating to the transactions contemplated by the Custody
Agreement or the Fund Documents by reason of:
(a) any omission or action (other than of or by Financial Security) in
connection with the offering, issuance, sale, remarketing, auction or
delivery of the Preferred Stock, the Common Stock or the Notes;
(b) the negligence, willful misconduct, misfeasance, malfeasance or
theft committed by any director, officer, employee or agent of the Fund in
connection with any transaction arising from or relating to the Custody
Agreement or any of the Fund Documents;
(c) the violation by the Fund of any federal or state securities,
banking or antitrust laws, rules or regulations in connection with any
transaction arising from or relating to the Custody Agreement or any of the
Fund Documents;
(d) the violation by the Fund of any federal or state laws, rules or
regulations relating to the maximum amount of interest permitted to be
received on account of the loan of money in connection with any transaction
arising from or relating to the Custody Agreement or any of the Fund
Documents;
(e) the breach by the Fund of its obligations under any of the Fund
Documents; and
(f) the breach by the Fund of any representation or warranty or
misrepresentation on the part of the Fund contained in any of the Fund
Documents or in any certificate furnished or delivered to Financial Security
in connection herewith or therewith or pursuant hereto or thereto.
This indemnity provision, as well as the payment obligation set forth in Section
3.04, shall survive the termination of this Agreement and shall survive until
the statute of limitations has run on any causes of action which arise from one
of these reasons and until all suits filed as a result thereof have been finally
concluded.
Section 3.06. Payment Procedure. In the event of any payment by Financial
Security, the Fund agrees to accept the voucher or other evidence of payment as
prima facie evidence of the propriety thereof and the liability therefor to
Financial Security to the extent provided herein. All payments to be made to
Financial Security under this Agreement shall be made to Financial Security in
lawful currency of the United States of America in immediately available funds
at the address of Financial Security, provided in Section 6.02 hereof, before
1:00 p.m. (New York, New York time) on the date when due. Payments to be made
to Financial Security under this Agreement shall bear interest at the Late
Payment Rate from the date when due to the date paid.
Section 3.07. Subrogation. The Fund acknowledges that, to the extent of
any payment made by Financial Security pursuant to the Surety Bond, Financial
Security is to be fully subrogated to the extent of such payment, to the rights
of the Fund and the Holders to any moneys paid or payable under the Fund
Documents. The Fund agrees to such subrogation and, further, agrees to execute
such instruments and to take such actions as, in the sole judgment of Financial
Security, are necessary to evidence such subrogation and to perfect the rights
of Financial Security to receive any moneys paid or payable under the Fund
Documents. Any amount applied to payment on the shares of Preferred Stock as to
which Financial Security has made payment under the Surety Bond shall be deemed
to satisfy the obligation of the Fund pursuant to Section 3.04 to reimburse
Financial Security in an amount equal to the amount so applied. To the extent
the Fund fully reimburses Financial Security pursuant to Section 3.04 hereof,
the payment obligations of the Fund pursuant to the Fund Documents shall be
deemed satisfied and Financial Security agrees to execute such instruments as
may be necessary to demonstrate such satisfaction.
ARTICLE IV
FURTHER AGREEMENTS
Section 4.01. Effective Date; Term of Agreement.
(a) This Agreement shall take effect on the Date of Issuance and shall
remain in effect until such time as Financial Security is no longer subject
to a claim under the Surety Bond (or Financial Security shall have received
an opinion in form and substance and from counsel acceptable to Financial
Security to the effect that Financial Security is no longer subject to a
claim under the Surety Bond) and all amounts payable by the Fund hereunder,
under the Premium Side Letter, under the Fund Documents and under the
Preferred Stock have been paid in full.
(b) At the request of the Fund, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond to increase the coverage thereof
in connection with an increase in the number of shares of Preferred Stock up
to the number set forth in the first WHEREAS clause, provided (1) the
conditions for the purchase of such Preferred Stock set forth in the
Underwriting Agreement with respect to the Preferred Stock are satisfied,
(2) the conditions set forth in Sections 4.01(c)(ii) and 4.01(c)(iii) (A),
(B) and (D) hereof are met and (3) the ratio of the number of shares of
Common Stock and Preferred Stock and the principal amount of Notes
outstanding on the Date of Issuance and immediately following such issuance
of additional Preferred Stock shall be the same.
(c) The Surety Bond shall expire on December 5, 1993; provided however,
that such expiration date shall be extended in one or more successive terms
of one, two, three, four or five years as designated by the Fund but in no
event later than December 5, 1998, such extension to be effective six months
prior to the Stated Termination Date, in the event that (i) Financial
Security has received no later than 190 days prior to the Stated Termination
Date a written request from the Fund requesting such extension and
specifying such new expiration date, (ii) the Fund has paid all premiums due
hereunder and under the Premium Side Letter and (iii) as of the date of such
request and the date of such extension (A) there has not occurred and is not
continuing a Default or Event of Default, (B) the Surety Assets Coverage is
met, (C) the ratio of the outstanding principal of Notes plus the aggregate
liquidation value of the Preferred Stock to the Fund "assets" less
"liabilities" not constituting "senior securities" (as such terms are used
in Section 18 of the Investment Company Act) does not exceed 45% and (D) the
Fund is not in violation of any material provision of the Investment Company
Act of 1940. In consideration for the agreement by Financial Security to
such extension of the term of the Surety Bond and provided that the claims
paying ability of Financial Security is not then rated "AA+" or less by S&P
or "Aa" or less by Moody's, the Fund shall not replace the Surety Bond at
any time prior to December 5, 1998 with any surety bond, financial guaranty
or other credit enhancement. In the event the conditions described in the
preceding sentence are met and the conditions described in (ii) and (iii) of
the preceding sentence are met, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond providing for such extension of
the expiration date.
Section 4.02. Obligations Absolute. The obligations of the Fund hereunder
during the Term of the Agreement shall be absolute and unconditional, and will
be paid or performed strictly in accordance with this Agreement irrespective of:
(i) any lack of validity or enforceability of, or any amendment or
other modifications of, or waiver with respect to any agreement of the
Fund relating to the Fund Documents, the Custody Agreement, the Surety
Bond or this Agreement;
(ii) any exchange or release of any other obligations hereunder; or
(iii) any other circumstances, other than payment in full, which
might otherwise constitute a defense available to, or discharge of, the
Fund in respect to this Agreement or any other Fund Document and the
Fund hereby waives its rights of, abatement, diminution, postponement or
deduction, or to any defense other than payment, or to any right of
setoff or recoupment arising out of any breach under any of the Fund
Documents, by any party thereto or any beneficiary thereof, or out of
any obligation at any time owing to the Fund.
Nothing herein shall be construed as prohibiting the Fund from pursuing any
rights or remedies it may have against any other Person in a separate legal
proceeding.
Section 4.03. Assignments; Reinsurance; Third-Party Rights.
(a) This Agreement shall be a continuing obligation of the Fund and
shall (i) be binding upon the Fund and its respective successors and
assigns, and (ii) inure to the benefit of and be enforceable by Financial
Security and its successors, transferees and assigns. The Fund may not
assign this Agreement, or delegate any of its duties hereunder, without the
prior written consent of Financial Security. Nothing contained herein shall
restrict Financial Security from assigning to any lender or lenders under
any liquidity facility any rights of Financial Security under this Agreement
or with respect to any real or personal property or other interests pledged
to Financial Security, or in which Financial Security has a security
interest, in connection with the transaction contemplated hereby. No
assignment by Financial Security of any of its rights or obligations under
this Agreement shall discharge any obligation of Financial Security under
the Surety Bond or give any party other than Financial Security the right to
exercise rights, consents and waivers hereunder.
(b) Financial Security shall have the right to give participations in
its rights under this Agreement and to enter into contracts of reinsurance
with respect to the Surety Bond and each such participant or reinsurer shall
be entitled to the benefit of any representation, warranty, covenant and
obligation of the Fund hereunder as if such participant or reinsurer was a
party hereto.
(c) Except as provided herein with respect to participants and
reinsurers and as provided in the Surety Bond, nothing in this Agreement
shall confer any right, remedy or claim, express or implied, upon any
Person, including, particularly, any Holder, other than Financial Security,
against the Fund, and all the terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of
the parties hereto and their successors and permitted assigns. No Holder
shall have any right to payment from any premiums paid or payable hereunder
or from any amounts paid by the Fund pursuant to Section 3.04 or 3.05
hereof.
Section 4.04. Liability of Financial Security and Fund. Neither Financial
Security nor the Fund shall be responsible for any act or omission of the
Custodian with respect to its use of the Surety Bond. Neither Financial
Security, the Fund nor any of their respective officers, directors or employees
shall be liable or responsible for: (a) the use which may be made of the Surety
Bond by the Custodian or for any acts or omissions of the Custodian in
connection therewith; or (b) the validity, sufficiency, accuracy or genuineness
of documents, or of any endorsement(s) thereon (other than signatures or other
endorsements actually signed by Financial Security or the Fund), even if such
documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged. In furtherance and not in limitation of the
foregoing, Financial Security may accept documents that appear on their face to
be in order, without responsibility for further investigation.
ARTICLE V
DEFAULTS; REMEDIES
Section 5.01. Defaults. The occurrence of any of the following events shall
constitute an Event of Default hereunder:
(a) the Fund shall fail to pay to Financial Security when due any amount
payable by the Fund hereunder or under any other Fund Document;
(b) any default by the Fund in its performance of any covenant contained
herein (other than as set forth in Section 2.04(b), (e) or (f) hereof) and
such default shall continue for at least 30 days after written notice
thereof by Financial Security to the Fund requesting that such default be
cured if such default would, in the reasonable judgment of Financial
Security, materially and adversely affect the ability of the Fund to perform
its material obligations under any Fund Document or would materially and
adversely affect the material rights, material benefits or enforcement of
remedies or the practicable realization of such material rights or material
benefits of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement or the Certificate or otherwise with
respect to the Preferred Stock;
(c) any material representation or warranty made by the Fund herein or
in connection herewith shall prove to be incorrect in any material respect
when made or deemed made if such breach would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(d) any failure by the Fund to maintain Eligible Portfolio Assets having
a Surety Assets Value at least equal to the Surety Assets Coverage, which
failure is not cured within eight Business Days;
(e) any failure by the Fund, on or prior to the date six months prior to
the Stated Termination Date of the Surety Bond, to either (A) obtain from
Financial Security an extension to the term of the Surety Bond or (B) obtain
notice in writing from each of Xxxxx'x and S&P that termination of the
Surety Bond will not adversely affect the then outstanding ratings of the
Preferred Stock;
(f) the Internal Revenue Service makes a final determination that the
Fund does not qualify for any taxable year for exemption from federal income
taxation and such determination would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(g) the Fund commences a voluntary case concerning it under Title 11 of
the United States Code entitled "Bankruptcy" as now or hereafter in effect,
or any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commented against the Fund under any the Bankruptcy Code and relief is
ordered against the Fund or the petition is controverted but is not
dismissed within 60 days after the commencement of the case; or the Fund is
not generally paying its debts as such debts become due; or a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Fund; or a decree or order is
entered by a court or agency or supervisory authority having jurisdiction in
the premises for the appointment of a conservator, receiver or liquidator
for the Fund in any insolvency, readjustment of debt, marshalling of assets
and liabilities, or similar proceeding, or for the winding up or liquidation
of the affairs of the Fund, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or the Fund
consents to the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and liabilities,
or similar proceeding, or relating to the Fund or of or relating to
substantially all of its property; or the Fund makes a general assignment
for the benefit of creditors; or any action is taken by the Fund for the
purpose of effecting any of the foregoing;
(h) the Fund shall have denied that it has any or further liability or
obligation under any Fund Document, or the Preferred Stock or any
governmental agency or authority shall find or rule that any Fund Document
or the Preferred Stock are not valid or binding on the Fund, if such denial,
finding or ruling would, in the reasonable judgment of Financial Security,
materially and adversely affect the ability of the Fund to perform its
material obligations under any Fund Document or the Preferred Stock or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Certificate or otherwise with respect to
the Preferred Stock;
(i) the Fund shall fail to perform or observe any of its covenants or
agreements set forth in, or to take any action required by, Section 2.04(e)
or (f) hereof; or
(j) the failure by the Fund to make a payment of dividend or redemption
price when due on the Preferred Stock or to declare a dividend on the
Preferred Stock when contemplated by the Certificate and not prohibited by
applicable corporate law or the Investment Company Act.
Section 5.02. Remedies; No Remedy Exclusive.
(a) Upon the occurrence of an Event of Default (other than a Surety
Assets Coverage Event of Default), Financial Security may take whatever
action at law or in equity as may appear necessary or desirable in its
judgment to collect the amounts then due and thereafter to become due under
the Fund Documents or to enforce performance and observance of any
obligation, agreement or covenant of the Fund under the Fund Documents.
(b) If an Event of Default shall have occurred and be continuing, the
Fund shall, upon receipt of a written request from Financial Security (a
"Redemption Request"), deliver a Notice of Redemption pursuant to Section
5(b) of Article IV(C) of the Certificate with respect to, and shall redeem,
such number of shares of Preferred Stock as shall be specified by Financial
Security in such Redemption Request on a date designated by Financial
Security not earlier than 15 days after the giving of such Redemption
Request or such longer period as may be required by applicable law, provided
that in the case of a Surety Assets Coverage Event of Default, Financial
Security shall, within one Business Day, deliver a Redemption Request and
the redemption date for such Redemption Request shall not be later than 35
days following the giving of such Redemption Request; however, the maximum
number of shares of Preferred Stock that the Fund shall be required to
redeem shall be the least number of whole shares of Preferred Stock the
redemption of which, if deemed to have occurred on the Valuation Date as of
which the Fund had failed to maintain such Surety Assets Coverage, could
have been effected using the deemed proceeds (i.e., assuming sale at the
Market Value) from the deemed sale of "Special Redemption Assets." For
purposes hereof, Special Redemption Assets shall mean such portfolio
holdings as are identified by the Fund in its sole discretion, the deemed
sale of which for cash on the applicable Valuation Date on which the Surety
Assets Coverage was not met would have caused the Surety Assets Coverage on
a pro forma basis to have been met on such Valuation Date. The Fund need not
liquidate the Special Redemption Assets; however, assets liquidated to
effect the redemption must have the same Discount Factor or Factors as the
Special Redemption Assets identified by the Fund. Any Redemption Request
(other than a Redemption Request given pursuant to a Surety Assets Coverage
Event of Default), once delivered, may be withdrawn by Financial Security at
any time prior to the mailing of the related Notice of Redemption. Financial
Security may deliver one or more Redemption Requests with respect to a
single Event of Default.
(c) Unless otherwise expressly provided, no remedy herein conferred upon
or reserved is intended to be exclusive of any other available remedy, but
each remedy shall be cumulative and shall be in addition to other remedies
given under the Fund Documents or existing at law or in equity. No delay or
omission to exercise any right or power accruing under the Fund Documents
upon the happening of any event set forth in Section 5.01 hereof shall
impair any such right or power or shall be construed to be a waiver thereof,
but any such right and power may be exercised from time to time and as often
as may be deemed expedient. In order to entitle Financial Security to
exercise any remedy reserved to Financial Security in this Article, it shall
not be necessary to give any notice, other than such notice as may be
required in this Article.
Section 5.03. Waivers.
(a) No failure by Financial Security to exercise, and no delay by
Financial Security in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by Financial Security of any right hereunder
shall not preclude the exercise of any other right, and the remedies
provided herein to Financial Security are declared in every case to be
cumulative and not exclusive of any remedies provided by law or equity.
(b) Financial Security shall have the right, to be exercised in its
complete discretion, to waive any Event of Default hereunder, by a writing
setting forth the terms, conditions and extent of such waiver signed by
Financial Security and delivered to the Fund. Unless such writing expressly
provides to the contrary, any waiver so granted shall extend only to the
specific event or occurrence which gave rise to the Event of Default so
waived and not to any other similar event or occurrence which occurs
subsequent to the date of such waiver.
Section 5.04. Agreement To Pay Fees and Expenses of Enforcement. Upon
the occurrence of an Event of Default hereunder, the Fund agrees that it will
pay or reimburse Financial Security on demand for all costs and expenses,
including, without limitation, the reasonable fees and expenses of attorneys for
the enforcement of performance or observance of any obligation or agreement on
the part of the Fund herein contained.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Amendments, Changes and Modifications. This Agreement may
be amended, changed, modified, altered or terminated only by written instrument
or written instruments signed by Financial Security and the Fund. A copy of each
amendment, change, modification or alteration shall be provided to the Rating
Agencies.
Section 6.02. Notices. All demands, notices and other communications to
be given hereunder shall be in writing (except as otherwise specifically
provided herein) and shall be mailed or personally delivered or telexed or
telecopied to the recipient as follows:
(a) To Financial Security: Financial Security Assurance Inc.
000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Surveillance Department
Telex No.: (000) 000-0000
Confirmation: (000) 000-0000
Telecopy No.: (000) 000-0000
(In each case in which notice or other
communication to Financial Security
refers to an Event of Default, a Surety
Assets Coverage Event of Default, a
claim on the Surety Bond or with respect
to which failure on the part of
Financial Security to respond shall be
deemed to constitute consent or
acceptance, then a copy of such notice
or other communication should also be
sent to the attention of Senior Vice
President-Surveillance.)
(b) To the Fund: Prospect Street(SM) High Income
Portfolio Inc.
Xxx Xxxxxxxxx Xxxxxx
Xxxxxx, XX 00000
Attention: President
Telephone No.: (000) 000-0000
Telecopy No.: (000) 000-0000
(c) To the Custodian: Bankers Trust Company
Corporate Trust and Agency Group
0 Xxxxxx Xxxxxx
Xxx Xxxx, XX 00000
A party may specify an additional or different address or addresses by
writing mailed or delivered to the other parties as aforesaid. All such notices
and other communications shall be effective upon delivery, except when telexed
or telecopied, in which case they shall be effective upon telex or telecopy
against receipt of answerback or written confirmation.
Section 6.03. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
the parties hereto agree that such holding shall not invalidate or render
unenforceable any other provision hereof. The parties hereto further agree that
the holding by any court of competent jurisdiction that any remedy pursued by
Financial Security hereunder is unavailable or unenforceable shall not affect in
any way the ability of Financial Security to pursue any other remedy available
to it.
Section 6.04. Governing Law. This Agreement shall be construed and governed
by, and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with, the laws of the State of New York.
Section 6.05. Consent of Financial Security. In the event that Financial
Security's consent is required under the terms hereof or any other Fund
Document, it is understood and agreed that, except as otherwise provided
expressly herein, the determination whether to grant or withhold such consent
shall be made solely by Financial Security in its absolute discretion. Without
intending to limit any other bases for withholding consent, it shall not be
unreasonable for Financial Security to withhold any consent or approval required
pursuant to the Agreement if the proposed change would result in the downgrading
of a Shadow Rating. Financial Security shall inform the Rating Agencies of any
proposed change or alternate procedures for which consent or approval of
Financial Security is required in the investment guidelines described in the
Preferred Stock Prospectus or the definitions.
Section 6.06. Counterparts. This Agreement may be executed in counterparts
by the parties hereto, and each such counterpart shall be considered an original
and all such counterparts shall constitute one and the same instrument.
Section 6.07. Recitals. All of the recitals hereinabove set forth are
incorporated in this Agreement by reference.
Section 6.08. Headings. The headings of articles, sections and subsections
contained in this Agreement are provided for convenience only. They form no part
of this Agreement and shall not affect its construction or interpretation. All
references to articles, sections or subsections of this Agreement refer to the
corresponding sections or subsections of this Agreement.
Section 6.09. Custody Receipts. For all purposes hereof, a holder of a
Custody Receipt with respect to any Preferred Stock shall be deemed to be the
holder of such Preferred Stock.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all as
of the day and year first above mentioned.
FINANCIAL SECURITY: FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Xxxxxx X. Xxxxxxx
--------------------
Senior Vice President
FUND: PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
By: Xxxxxxx X. Xxxxxxxxx, Xx.
---------------------------
Title President
----------------------------
APPENDIX I
DEFINITIONS
General Definitions. The terms defined in this Article I shall have the
meanings provided herein for all purposes of this Agreement, unless the context
clearly requires otherwise, in both singular and plural form, as appropriate.
"Additional Indebtedness" shall have the meaning provided in the Premium
Side Letter.
"Agreement" means the Insurance Agreement dated as of December 1, 1988,
between the Fund and Financial Security to which this Appendix I is attached,
including any amendments or any supplements hereto as herein permitted.
"Auction Agent" shall have the meaning provided in the Certificate.
"Auction Agent Agreement" shall have the meaning provided in the
Certificate.
"Auction Date" shall have the meaning provided in the Certificate.
"Auction Procedures" shall have the meaning provided in the Certificate.
"Bankers' Acceptances" means U.S. dollar-denominated bankers' acceptances
issued by foreign or domestic banks having (or being the principal operating
subsidiary of a bank holding company having) a long-term unsecured debt rating
of "AA" or better by S&P and "Aa" or better by Xxxxx'x and having a short-term
unsecured debt rating of "A-1+" by S&P and "P-1" by Xxxxx'x and having a
maturity when delivered of less than six months.
"Business Day" means any day excluding Saturday, Sunday and a day on which
commercial banks in New York City or Boston, Massachusetts are authorized or
required by law to close under the laws of the State of New York or the
Commonwealth of Massachusetts, as the case may be, or a day on which the New
York Stock Exchange is closed for trading.
"Bylaws" means the Bylaws of the Fund as approved by its board of directors,
including any amendments or any supplements thereto as herein provided.
"Cash" means such coin or currency of the United States of America as at the
time shall be legal tender for payment of public and private debts.
"Certificate" means the Fund's Articles of Amendment and Restatement as in
effect on the date hereof and as subsequently amended, changed or modified with
the prior written consent of Financial Security.
"Collateral Evaluator" means a broker-dealer, government securities dealer,
municipal securities dealer, investment advisor or a bank regularly making a
market in the Eligible Portfolio Property being valued, or a Person regularly
engaged in evaluating the same or similar collateral, who is selected by
Financial Security with respect to each type of Eligible Portfolio Property.
"Commercial Paper" means dollar-denominated commercial paper of a foreign or
domestic issuer rated "A-1+" by S&P and "P-1" by Xxxxx'x (if only one of such
agencies has issued a rating for such commercial paper, then only the rating of
such agency will be required), having a maturity of not more than 270 days.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, $.01 par value, of the Fund.
"Common Stock Prospectus" means the Prospectus dated November 28, 1988 with
respect to the Common Stock, as supplemented or amended from time to time, filed
on behalf of the Fund under the Securities Act and the Investment Company Act.
"Conventional Mortgage Pass-Through Certificates" means an instrument issued
in bearer or registered form, that is one of a class or series or by its terms
is divisible into a class or series, and that is of a type commonly dealt in
upon securities exchanges or markets or commonly recognized in any area in which
it is issued or dealt in as a medium for investment, evidencing (directly or
indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one- to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, two- to four-unit primary residences,
condominiums, second/vacation homes and nonowner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments have been rated "AA" or
higher by S&P and "Aa" or higher by Xxxxx'x (if only one of such agencies has
issued a rating for such instrument, then only the rating of such agency will be
required), provided that a Conventional Mortgage Pass-Through Certificate shall
be eligible for inclusion as Eligible Portfolio Property only so long as it
meets the above requirements, as the Fund shall confirm in writing, or by
reference to publications of Xxxxx'x and S&P, by confirmation from a nationally
recognized securities dealer having a minimum capitalization of $25 million or
by such other means as Financial Security shall approve.
"Corporate Bonds" means (a) Rated Public Corporate Bonds, (b) Other
Corporate Bonds and (c) World Bank Securities.
"Custodian" means Bankers Trust Company, a New York banking corporation,
until a successor replaces it pursuant to the Custody Agreement and, thereafter,
means the successor.
"Custody Agreement" means the Custody Agreement dated as of December 1, 1988
between Bankers Trust Company, as custodian, and Financial Security relating to
the Preferred Stock.
"Date of Issuance" means the date on which the Surety Bond is issued.
"Default" means any fact or event which results or which, with notice or the
passage of time, or both, would result in an Event of Default.
"Demand Deposit" means a demand deposit account (i) with a depositary
institution having an unsecured short-term debt rating of "A-1+" by S&P and
"P-1" by Xxxxx'x payable to, or at the direction of, the account holder without
the requirement to give, or the right of the depositary to demand, notice and
the expiration of a period of time prior to honoring any direction of the
account holder or (ii) fully insured as to principal and interest with an FDIC-
or FSLIC-insured depositary institution, provided that the Fund at any time has
no more than $100,000 in such an account and any other FDIC- or FSLIC-insured
account or certificate of such institution, and provided further that, if the
depositary institution, to the best of knowledge of the Fund, is at any time
insolvent, such demand deposit account shall cease to be Eligible Portfolio
Property for all purposes herein.
"Deposit Securities" means Cash and U.S. Government Securities (having a
remaining term to maturity that is not more than 30 days) and Short Term Money
Market Instruments (which Short Term Money Market Instruments are issued by an
entity having an unsecured long-term debt rating of: "A2" or higher by Xxxxx'x
and "A" or higher by S&P) which mature prior to the time the payment is due for
which such Deposit Securities have been deposited.
"Discount Factor" means, for any Eligible Portfolio Property (other than
World Bank Securities, which shall have a number assigned as a Discount Factor
as shall be agreed to by Financial Security), the number set forth below
opposite such type of Eligible Portfolio Property (it being understood that any
asset held as Eligible Portfolio Property and not listed below shall have a
Surety Assets Value of zero):
Type of Property(l) Discount Factor
------------------ ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
Other Corporate Bonds: 2.25
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustableb interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: 1.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: 1.65
GNMA Multifamily Securities: (2)
GNMA Graduated Payment Securities(3): 1.55
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Securities having a remaining
term to maturity of one day: 1.00
U.S. Government Securities having a remaining
term to maturity of 90 days or less but more than one day: 1.10
U.S. Government Securities having a remaining term to maturity
of more than 90 days but not more than five years: 1.28
U.S. Government Securities having a remaining term to maturity
of more than five years but not more than 10 years: 1.35
U.S. Government Securities having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Securities having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.50
Cash and Short Term Money Market Instruments with a term
of one day: 1.00
Short Term Money Market Instruments with a term of more
than one day: 1.10
Commercial Paper rated "A-1+" by S&P and "P-1" by Xxxxx'x
with a term of one day: 1.00
Commercial Paper rated "A-1+" by S&P and "P-1" by Xxxxx'x
with a term of more than one day: 1.10
Commercial Paper rated "A-1" by S&P and "P-1" by Xxxxx'x 1.60
Commercial Paper rated "A-2" by S&P and "P-2" by Moody's 1.65
----------
(1) If a security is rated by only one of Moody's and S&P, then only the
rating of such agency shall be used to determine the Discount Factor; provided,
however, that the Discount Factor shall be increased by adding .10 to the
Discount Factor shown above. A security with a "split" rating by S&P and Moody's
shall be deemed to fall under the lower of the two ratings for purposes of
determining the Discount Factor.
(2) The Discount Factor shall be that which is agreed to by Financial
Security.
(3) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Collateral Evaluator that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Collateral Evaluator that
scheduled principal payments are not being made to holders, the Discount Factor
shall be that which is agreed to by Financial Security.
"Dividend Payment Date" shall have the meaning provided in the Certificate.
"DTC Letter" means the Letter Agreement dated December 5, 1988 to the
Depository Trust Company from the Fund and the Auction Agent, as amended and
supplemented.
"Eligible Portfolio Property" means Corporate Bonds, Cash, Government
Securities, Short Term Money Market Instruments and Conventional Mortgage
Pass-Through Certificates owned by the Fund, provided that Deposit Securities
irrevocably deposited by the Fund with the Trustee for the payment of principal
of, or interest on, the Notes or with the Paying Agent for redemption of or
dividend payments with respect to the Preferred Stock shall not be included as
Eligible Portfolio Property and, provided further, that a Corporate Bond shall
not be included as Eligible Portfolio Property (i) if it fails to meet the
criteria in column (1) below or (ii) it has a remaining term to maturity of more
than 30 years or (iii) to the extent (and only to the proportionate extent) the
acquisition or holding thereof by the Fund as Eligible Portfolio Property causes
any applicable limitation set forth in column (2) or (3) below to be exceeded as
of any relevant date of determination (provided that in the event that any such
limitation or any other percentage limitation set forth in this definition of
Eligible Portfolio Property is exceeded, the Fund (or, if the Fund shall fail to
do so, Financial Security) shall designate, in its sole discretion, the
particular Corporate Bond(s) and/or portions thereof which shall be deemed to
have caused such limitation to be exceeded) or (iv) such Corporate Bond is
subject to a covered call option:
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum percent
Maximum percent of Market Value of
of Market Value of Eligible Portfolio
Minimum original Eligible Portfolio Property invested
Standard & Poor's/ issue size of Property invested in in any one Industry
Xxxxx'x Rating (1) each issue any one issuer(2) Category(2)
------------------- --------------- -------------------- -------------------
($ in millions)
AAA/Aaa $100 10.0% 50.0%
AA/Aa 100 10.0 33.3
A/A 100 10.0 33.3
BBB/Baa 100 5.0 20.0
BB/Ba 100(3) 4.0 12.0
B/B1 or B2 100(3) 3.0 8.0
CCC(4)/B3 100(3) 3.0 8.0
Other Corporate Bonds 50(5) 3.0 8.0
A-1+/P1(6) N/A 10.0 N/A
A-l/Pl(6) N/A 10.0 33.3
A-2/P2(6) N/A 5.0 20.0
----------
(1) Rating designations include (+) or (-) modifiers to the S&P rating and (1), (2) or (3) modifiers to the Xxxxx'x
rating where appropriate except that corporate debt obligations rated "CCC-" by S&P shall not constitute Eligible
Portfolio Property. An issue with a "split" rating by S&P and Moody's shall be deemed to fall under the lower of
the two ratings for purposes hereof. If only one of such agencies has issued a rating for such instrument, then
only the rating of such agency is required; provided, however, that not more than 15% of the aggregate value of the
Rated Corporate Bonds shall be comprised of Corporate Bonds having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each lower
rating category, except that the calculations with respect to commercial paper investments constituting Corporate
Bonds shall be made separately and independently of but on the same basis as the cumulative total guidelines
applicable to other types of Corporate Bonds.
(3) 20% of the aggregate value of all Corporate Bonds in these rating categories may be from issues with an original
issue size of greater than or equal to $50 million and less than $100 million.
(4) To constitute Corporate Bonds, corporate debt obligations in this rating category that are rated by S&P must be
subordinated debt of the issuer and the issuer must have an implied senior debt rating of "B-" or better. The
aggregate Market Value of corporate debt obligations in this rating category may not constitute more than 20% of
the aggregate Market Value of Eligible Portfolio Property.
(5) Other Corporate Bonds may not constitute more than 30% of the aggregate Market Value of the Eligible Portfolio
Property. Not more than 18% of the aggregate value of the Eligible Portfolio Property may consist of Other
Corporate Bonds having an original issue size of $50 million or more but less than $100 million, provided that not
more than 9% of the aggregate value of the Eligible Portfolio Property may consist of Other Corporate Bonds having
an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
Other assets may be specified as Eligible Portfolio Property with the written
consent of Financial Security.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time, and, unless the context otherwise
requires, the regulations thereunder.
"Event of Default" means any event of default set forth in Section 5.01
hereof.
"FDIC" means the Federal Deposit Insurance Corporation, and includes any
successor thereto.
"Federal Funds" means a transfer of funds in accordance with Subpart B of
Regulation J of the Board of Governors of the Federal Reserve System and
Operating Circular No. 8 of the Federal Reserve Bank of New York, as both are in
effect from time to time.
"FHLMC" means the Federal Home Loan Mortgage Corporation or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Federal Home Loan Mortgage Corporation have been transferred.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, level pay, fully amortizing
mortgage loans secured by first-priority mortgages on one- to four-family
residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Financial Security" means Financial Security Assurance Inc., a New York
stock insurance company, its successors and assigns.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"FSLIC" means the Federal Savings and Loan Insurance Corporation and
includes any successor thereto.
"Fund" means Prospect Street(SM) High Income Portfolio Inc., a Maryland
corporation.
"Fund Documents" means the Indenture, the Certificate, the Auction Agent
Agreement, the Indemnification Agreement, the DTC Letter and this Agreement.
"GNMA" means the Government National Mortgage Association or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Government National Mortgage Association have been transferred.
"GNMA Certificate" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable- or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or 10 years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specified pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Government Securities" means U.S. Government Securities, GNMA Certificates,
GNMA Graduated Payment Securities, GNMA Multifamily Securities, FNMA
Certificates, FHLMC Certificates and FHLMC Multifamily Securities.
"Holders" shall have the meaning provided in the Certificate.
"Indebtedness" means (i) indebtedness or liability for borrowed money, or
for the deferred purchase price of property or services (including trade
obligations); (ii) obligations as lessee under leases which should have been or
should be, in accordance with generally accepted accounting principles, recorded
as capital leases; (iii) current liabilities in respect of unfunded vested
benefits under plans covered by Title IV of ERISA; (iv) obligations issued for
the account of any Person; (v) all obligations arising under acceptance
facilities; (vi) all guarantees, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any Person
or otherwise to assure a creditor against loss; and (vii) obligations secured by
any Lien on property of the Fund, whether or not the obligations have been
assumed.
"Indemnification Agreement" means the Indemnification Agreement dated
December 5, 1988 among the Fund, Financial Security and Xxxxxx Xxxxxxx Xxxxxxx
Incorporated.
"Indenture" means the Indenture dated as of December 1, 1988 between the
Fund and Shawmut Bank, N.A., as Trustee, as amended or supplemented from time to
time in accordance with this Agreement.
"Industry Category" means, as to any Corporate Bond, any of the industry
categories set forth in the following table:
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services-Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/Construction
6. Broadcasting--TV, Cable and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation/Airlines
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Period" means the period beginning on the Date of Issuance
and ending on but not including January 19, 1989.
"Insured Certificate of Deposit" means a U.S. dollar-denominated
current-interest-paying negotiable certificate of deposit fully insured as to
principal and interest by the FDIC or FSLIC, provided that no more than 25% of
the face amount of Pledged Property shall be comprised of such certificates, and
provided, further, that (i) the Fund at any time owns no more than $100,000 of
such certificates and other FDIC- or FSLIC-insured accounts of such issuing
institution and (ii) such insured institution is not, to the best knowledge of
the Fund, at any time, insolvent or being liquidated under the auspices of the
FDIC or FSLIC.
"Investment Adviser" means the investment adviser under contract with the
Fund to provide investment management services, initially Prospect Street
Investment Management Co., Inc.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Late Payment Rate" means a per annum rate equal to 3% in excess of the
prime or reference lending rate publicly announced by Xxxxxx Guaranty Trust
Company of New York, as in effect from time to time, but in no event shall the
Late Payment Rate be greater than the maximum rate permitted by law or the
Maximum Applicable Rate as defined in the Certificate.
"Lien" means any lien, mortgage, security interest, pledge, charge or other
encumbrance of any kind whatsoever.
"Liquidation Period" shall have the meaning set forth in Section 2.04(f)
hereof.
"Market Value" means the amount determined by the Collateral Evaluator with
respect to Eligible Portfolio Property in the manner set forth below, provided
that any property (i) that does not constitute Eligible Portfolio Property or
(ii) that is in default shall be deemed to have a Market Value of zero:
(a) as to any Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the lower
of two bid prices for such Corporate Bond provided by two nationally
recognized securities dealers with a minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the custodian of the Fund's assets, at
least one of which shall be provided in writing or by telecopy, telex,
other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Collateral
Evaluator by any such means by the custodian of the Fund's assets, plus
(iii) accrued and unpaid interest on such Corporate Bond if such interest
is not included in the above prices; provided, however, that if two bid
prices cannot be obtained, such Corporate Bond shall have a Market Value of
zero;
(b) as to any Other Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the
average bid price on such Other Corporate Bond, as quoted to the Fund as of
such Reporting Date during normal trading hours on the New York Stock
Exchange, Inc. by two nationally recognized securities dealers with a
minimum capitalization of $25 million regularly making a market in such
Other Corporate Bond selected by the Collateral Evaluator; provided,
however, that, if the lower of the two bids is not within 5% of the higher
bid, the lower bid shall be used; provided, however, that if the Collateral
Evaluator is able to obtain only one bid quotation in accordance with
clause (ii) above, the Collateral Evaluator may request from Financial
Security a second bid price obtained by Financial Security at its own
expense from any nationally recognized securities dealer with a minimum
capitalization of $25 million, which bid quotation obtained shall be
averaged with the bid quotation obtained by the Collateral Evaluator in
clause (ii) above; provided, further, however, that, if such second bid
quotation is obtained but the lower of the two bids is not within 5% of the
higher bid, the lower bid shall be used; and provided, further, that, if no
second bid quotation can be or is obtained from Financial Security as
provided herein, the single bid quotation shall be used to determine Market
Value of such Other Corporate Bond; plus (iii) accrued interest on such
Other Corporate Bond (if such interest is not included in the above price);
(c) as to any U.S. Government Securities having a remaining term to
maturity of more than 30 days, GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the lower of (i) the face
amount or aggregate principal amount of such U.S. Government Security or
the aggregate unpaid principal amount of the mortgage loans evidenced by
each such certificate or security, as the case may be, as determined by the
Collateral Evaluator by any method which the Collateral Evaluator believes
reliable (unless Financial Security shall otherwise require), which may
include amounts shown on the most recent report related to the Certificate
or security received by the Fund prior to the Reporting Date, and (ii) the
lower of the bid prices for the same kind of certificates, securities or
instruments, as the case may be, having, as nearly as practicable,
comparable interest rates and maturities provided by two nationally
recognized securities dealers having minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the Fund, at least one of which shall be
provided in writing or by telecopy, telex, other electronic transcription,
computer obtained quotation reducible to written form or similar means, and
in turn provided to the Collateral Evaluator by any such means by the Fund;
plus (iii) accrued and unpaid interest thereon if such interest is not
included in the above prices; provided, however, that if two bid prices
cannot be obtained, such item will have a Market Value of zero;
(d) as to any U.S. Government Securities having a remaining term to
maturity of 30 days or less and Short Term Money Market Instruments (other
than Demand Deposits, federal funds, Bankers' Acceptances and next Business
Day's Repurchase Agreements), the face amount or aggregate principal amount
of such U.S. Government Securities or Short Term Money Market Instruments,
as the case may be, plus accrued and unpaid interest thereon;
(e) as to Conventional Mortgage Pass-Through Certificates, the lower
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the certificates as determined by the Collateral Evaluator by
any method which the Collateral Evaluator believes reliable, which may
include amounts based on verbal reports of the servicers of the related
mortgage loans to the Collateral Evaluator, as of the applicable Reporting
Date and (ii) the dollar value of the lower of two bid prices per dollar of
outstanding principal amount as of such applicable Reporting Date for such
certificates, provided by two nationally recognized securities dealers
having minimum capitalization of $25 million or by one such securities
dealer and any other source consented to in writing by Financial Security
to the Fund, at least one of which shall be provided in writing or by
telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Collateral Evaluator by any such means by the Fund; plus (iii)
accrued and unpaid interest thereon if such interest is not included in the
above prices; provided, however, that if two bid prices cannot be obtained,
such item shall have a Market Value of zero; and
(f) as to Cash, Demand Deposits, Federal Funds, Bankers' Acceptances
and next Business Day's Repurchase Agreements included in Short Term Money
Market Instruments, the face value thereof.
"Maximum Applicable Rate" means such term as defined in the Certificate.
"Moody's" means Xxxxx'x Investors Service, Inc., a corporation organized
and existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "Moody's" shall be deemed to refer to
any other nationally recognized rating agency designated by Financial Security.
"Note Prospectus" means the Prospectus dated November 28, 1988 with respect
to the Notes, as supplemented or amended from time to time, filed on behalf of
the Fund under the Securities Act and the Investment Company Act.
"Notes" means the Fund's Series A Senior Notes issued pursuant to the
Indenture on the Date of Issuance and any additional debt securities issued
under the Indenture and qualifying as Additional Indebtedness.
"Notice of Redemption" shall have the meaning provided in the Certificate.
"Other Corporate Bonds" means corporate debt obligations (other than (a)
Short-Term Money Market Instruments, (b) U.S. Government Securities, (c)
Commercial Paper, (d) corporate debt obligations that are both registered under
the Securities Act and rated by S&P and/or Moody's, (e) corporate debt
obligations rated lower than "CCC" by S&P or lower than "B3" by Moody's, (f)
corporate debt obligations rated "CCC" by S&P that are not subordinated debt of
the issuer of such obligations and (g) World Bank Securities), which corporate
debt obligations (i) were issued by a Person whose financial statements were the
subject of an opinion prepared by a nationally recognized independent public
accounting firm at the time of purchase of the applicable corporate debt
obligation; (ii) have been registered under the Securities Act or, if a security
exempt from registration under Section 3 of the Securities Act or a security
issued in a transaction exempt from the registration requirements of Section 5
of the Securities Act, are not a Restricted Security in the hands of the Fund,
as of the relevant date of determination, as applicable; (iii) are
interest-paying obligations which provide for the regularly scheduled payment of
interest thereon and the payment of principal thereof at a stated date or dates
in Cash and were issued in the United States; and (iv) do not provide for
conversion or exchange into equity capital at any time over its life.
Notwithstanding the foregoing, any corporate debt obligation (or portion
thereof, if applicable) otherwise within the provisions of the preceding
sentence shall not be deemed an Other Corporate Bond if (and, if applicable,
only to the extent that) (i) as of the relevant date of determination (A) it has
an unpaid principal balance of less than $100,000; (B) it has had notice given
to the holders thereof which has not expired or been rescinded (of which notice
the Fund shall have reasonable knowledge) that such corporate debt obligation is
the subject of an offer by the issuer of such corporate debt obligation of
exchange or tender for cash, securities or any other type of consideration
(except that corporate debt obligations in an amount not exceeding 10% of the
aggregate value of the Eligible Portfolio Property (including Rated Public
Corporate Bonds) shall not be subject to the provisions of this clause (B)); (C)
to the reasonable knowledge of the Fund, the Fund owns, directly or indirectly,
more than 10% of the aggregate principal amount of the issue of which such
corporate debt obligation is a part at the time out-standing; or (D) to the
reasonable knowledge of the Fund, such corporate debt obligation is in default
under the terms of its governing instruments; or (ii) at the time of purchase,
the Fund owned, directly or indirectly, more than 10% of the aggregate principal
amount of the issue of which such corporate debt obligation is a part. In the
event that the Fund shall exceed any percentage limitation set forth in this
definition of Other Corporate Bonds, the Fund (or, if the Fund shall fail to do
so, Financial Security) shall designate, in its sole discretion, the particular
Other Corporate Bonds) and/or portions thereof which shall be deemed to have
caused the Fund to exceed such limitation and therefore shall not be deemed
within the definition of Other Corporate Bonds.
"Paying Agent" means Bankers Trust Company, a New York banking corporation.
"Permitted Indebtedness" means (i) the Notes, (ii) any Indebtedness
(including, without limitation, reverse repurchase agreements) in any case where
such Indebtedness is for temporary purposes (within the meaning of Section 18 of
the Investment Company Act) only and in an amount not exceeding five per centum
of the Market Value of the total assets of the Fund at the time when the
Indebtedness is incurred and with a banking institution that agrees not to
institute bankruptcy proceedings against the Fund for a period of one year and a
day after the repayment of such indebtedness, (iii) Additional Indebtedness and
any other Indebtedness approved by Financial Security, (iv) Indebtedness
incurred in the ordinary course of business and which is represented by fees for
services, taxes, directors' fees or similar expenses, provided that such other
similar expenses shall not exceed $75,000 at any one time in the aggregate or
(v) Indebtedness during a customary settlement period for the deferred purchase
price for securities purchased.
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, joint stock company, trust, unincorporated
association, joint venture, corporation, business or owner trust, partnership or
other organization or entity (whether governmental or private).
"Plan" means a pension plan maintained for employees of the Fund which is
subject to Title IV of ERISA.
"Preferred Stock" means the 300 shares of Taxable Auction Rate Preferred
Stock, aggregate liquidation preference of $30,000,000, issued by the Fund on
the Date of Issuance and any additional shares of Taxable Auction Rate Preferred
Stock issued thereafter up to 45 shares, with an aggregate liquidation
preference of not more than $4,500,000, and covered by the Surety Bond pursuant
to the terms of this Agreement or such lesser number of shares as may be
outstanding at any time.
"Preferred Stock Prospectus" means the Prospectus dated
November 28, 1988 with respect to the Preferred Stock, as supplemented or
amended from time to time, filed on behalf of the Fund under the Securities Act
and the Investment Company Act.
"Premium" means the premium calculated as set forth in the Premium Side
Letter.
"Premium Side Letter" means the side letter between Financial Security and
the Fund dated the Date of Issuance setting forth the payment provisions with
respect to the premium payable by the Fund in consideration of the issuance of
the Surety Bond.
"Projected Dividend Amount" for the Preferred Stock means, if the date of
determination is a Valuation Date, the amount of dividends, based on the number
of shares of Preferred Stock outstanding on such Valuation Date, projected to
accumulate on such shares from such Valuation Date through the sixty-third day
after such Valuation Date, at the following dividend rates:
(a) If the Valuation Date is the Date of Issuance or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the sixty-second day following such Valuation Date, the product
of 1.95 and (x) the Maximum Applicable Rate on the Date of Issuance (in the
case of the Date of Issuance) or (y) the Maximum Applicable Rate as of the
last occurring Auction Date (in the case of any Dividend Payment Date); and
(b) If such Valuation Date is not the Date of Issuance or a Dividend
Payment Date, (i) for the period beginning on such Valuation Date and
ending on (but not including) the first following Dividend Payment Date,
the Applicable Rate in effect on such Valuation Date, and (ii) for the
period beginning on (and including) the first following Dividend Payment
Date and ending on (but not including) the sooner of the second following
Dividend Payment Date or the sixty-third day following such Valuation Date,
the product of 1.95 and (x) the Maximum Applicable Rate on the Date of
Issuance (in the case of a Valuation Date occurring prior to the first
Auction Date) or (y) the Maximum Applicable Rate on the last occurring
Auction Date (in the case of any other Valuation Date) and (iii) for the
period, if any, beginning on (and including) the second following Dividend
Payment Date and ending on (but not including) the sixty-third day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Prospectuses" means, collectively, the Common Stock Prospectus, the
Preferred Stock Prospectus and the Note Prospectus.
"Rated Public Corporate Bonds" means corporate debt obligations (other than
Short Term Money Market Instruments, U.S. Government Securities, Other Corporate
Bonds and World Bank Securities) rated from "CCC" to "AAA" by S&P and/or from
"B3" to "Aaa" by Xxxxx'x (or in the case of commercial paper rated as provided
in the definition of Eligible Portfolio Property) which corporate debt
obligations (i) provide for the periodic payment of interest thereon in Cash and
were issued in the United States, (ii) do not provide for conversion or exchange
into equity capital at any time over their respective lives, (iii) have been
registered under the Securities Act (such requirement shall not apply with
respect to commercial paper), and (iv) have not had notice given in respect
thereof that any such corporate debt obligations are the subject of an offer by
the issuer thereof of exchange or tender for cash, securities or other type of
consideration (except that corporate debt obligations including Other Corporate
Bonds in an amount not exceeding 10% of the aggregate value of the Eligible
Portfolio Property at any time shall not be subject to the provisions of this
clause (iv).
"Redemption Date" means the date specified in a Notice of Redemption given
by the Fund in respect of the Preferred Stock or a date on which the Preferred
Stock is required to be redeemed pursuant to Section 5(b)(i) of Article IV C of
the Certificate.
"Redemption Request" shall have the meaning provided in Section 5.02(b).
"Registration Rights" means a right in favor of the holders of a majority
or less than a majority of the principal amount of securities of a particular
issue of securities to require registration of such securities under the
Securities Act or an obligation of the issuer of such securities (subject to
customary limitations relating to the amount sold, market conditions and the
like) to file or cause to be filed a registration statement under the Securities
Act within a specified period of time not to exceed 12 months either from the
date of issuance of such securities or the date of such demand.
"Registration Statement" means the Registration Statement on Form N-2 filed
under the Securities Act and the Investment Company Act with respect to the
Preferred Stock, the Notes and the Common Stock as declared effective by the
Commission.
"Reporting Date" means, with respect to any price referred to in the
definition of "Market Value," the date as of which the Market Value of an item
of Eligible Portfolio Property is to be determined pursuant to this Agreement
or, if no such price is available as provided above for such date, the next
closest prior date as of which such price is so available, provided that if such
price is not available as of a date within five Business Days next preceding the
date as of which the determination of such Market Value is to be made, then the
Market Value shall be deemed to be zero as of the Reporting Date.
"Repurchase Agreement" means a repurchase obligation with respect to a U.S.
Government Security, FNMA Certificate, FHLMC Certificate or GNMA Certificate
entered into with a depository institution, the deposits of which are insured by
the FDIC or FSLIC, and that has an unsecured short-term debt rating of "A-1+" by
S&P and "P-1" by Xxxxx'x (if only one of such agencies has issued a rating for
such institution, then only the rating of such agency shall be required) which
obligation must be repurchased within one Business Day from the date such
repurchase obligation was executed.
"Required Documentation," with respect to a mortgage loan, means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof;
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individually nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies)
"Restricted Security" is a corporate debt obligation which (a) is a
"restricted security" as defined in Rule 144(a)(3) under the Securities Act or
any successor rule, law or interpretation; provided, however, that such meaning
shall not apply with respect to any corporate debt obligation if there exists
Registration Rights with respect to the issue of which such corporate debt
obligation is a part or (b) is subject to any further material condition to, or
restriction on, the ability of the Fund to sell, assign, transfer or otherwise
liquidate such corporate debt obligation in a commercially reasonable time and
manner or which would otherwise materially deprive the Fund of the benefits of
such corporate debt obligation intended to be provided hereunder; provided,
however, that, notwithstanding the foregoing limitations, any requirement of
registration or qualification applicable with respect to a corporate debt
obligation pursuant to federal and any applicable state or other securities laws
and any requirement of delivery of any certificate, consent, agreement,
approval, opinion of counsel, notice or any other document of any Person
reasonably necessary or appropriate in connection with the sale of such
corporate debt obligation pursuant to any exemption from registration or
qualification under federal and any applicable state or other securities laws
and/or the registration or qualification of such corporate debt obligation under
such federal and applicable state or other securities laws and the delivery of
any certificate or other document usual or customary in connection with the
transfer or registration of transfer of securities shall not be deemed to cause
such corporate debt obligations to be deemed a "Restricted Security" under the
foregoing clause (b).
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Shadow Rating" means the rating that would be assigned by Xxxxx'x or S&P
to the Preferred Stock if the Surety Bond were not in effect.
"Short Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Fund of such
instrument the remaining term to maturity thereof is not more than 30 days:
(a) Demand Deposits, Insured Certificates of Deposit or Bankers'
Acceptances or Federal Funds sold to any depositary institution, the
deposits of which are insured by the FDIC or the FSLIC, provided that, at
the time of the Fund's investment therein or on any Valuation Date, the
commercial paper or other unsecured short-term debt obligations of such
depositary institution are rated as least "A-1+" by S&P and "P-1" by
Xxxxx'x;
(b) Repurchase Agreements; and
(c) Commercial Paper.
"S&P" means Standard & Poor's Corporation, a corporation organized and
existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized rating agency designated by Financial Security.
"State" means the State of New York.
"Stated Termination Date" means December 5, 1993 or such later date as
indicated in an endorsement to the Surety Bond issued by Financial Security
extending the expiration date of the initial Surety Bond.
"Surety Assets Coverage Event of Default" means an Event of Default
specified in Section 5.01(d) hereof.
"Surety Assets Coverage" means, as of any date, the dollar amount equal to
(A) the sum of (i) 100% of the aggregate principal amount of the Notes then
outstanding; (ii) $100,250 times the number of shares of Preferred Stock then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Stock to such date, plus the Projected Dividend Amount
of the Preferred Stock then outstanding from such date until the sixty-third day
thereafter; (v) the aggregate principal amount of any then outstanding
indebtedness of the Fund for money borrowed (other than the Notes); and (vi) the
greater of $200,000 or the Fund's liabilities in existence as of such date to
the extent not otherwise reflected in any of (i) through (v) above, less (B) the
combined value of any Deposit Securities irrevocably deposited by the Fund with
the Trustee for the payment of principal of or interest on the Notes or with the
Paying Agent for redemptions of or dividend payments with respect to the
Preferred Stock.
"Surety Assets Coverage Report" means a Surety Assets Coverage Report
delivered pursuant to Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D) hereof in
form attached hereto as Annex III.
"Surety Assets Value" means, with respect to any Eligible Portfolio
Property, the quotient of the Market Value of such Eligible Portfolio Property
divided by the applicable Discount Factor.
"Surety Bond" means the Surety Bond, including any endorsements thereto,
issued by Financial Security with respect to the Preferred Stock, substantially
in the form attached hereto as Annex I.
"Term of the Agreement" shall be determined as provided in Section 4.01 of
this Agreement.
"Transaction" means the issuance of the Preferred Stock, Common Stock and
Notes as described in the Prospectuses and the Registration Statement, the
issuance of the Surety Bond as described herein and the respective transactions
contemplated thereby.
"Trustee" means Shawmut Bank, N.A., a national banking association having
its principal place of business in Boston, Massachusetts, until a successor
replaces it pursuant to the Indenture and, thereafter, means the successor.
"Type I Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AAA"/"Aaa" by the Rating Agencies as of such date.
"Type II Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AA+"/"Aal" to "AA-"/"Aa3" by the Rating Agencies as of such date.
"Type III Corporate Bonds" as of any date means Corporate Bonds whose
rating is "A+"/"A1" to "A-"/"A3" by the Rating Agencies as of such date.
"Type IV Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BBB+"/"Baal" to "BBB-"/"Ba3" by the Rating Agencies as of such date.
"Type V Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BB+"/"Bal" to "BB-"/"Ba3" by the Rating Agencies as of such date.
"Type VI Corporate Bonds" as of any date means Corporate Bonds whose rating
is "B+"/"B1" to "B"/"B2" by the Rating Agencies as of such date.
"Type VII Corporate Bonds" as of any date means Corporate Bonds whose
rating is "B-"/"B3" by the Rating Agencies as of such date.
"Type VIII Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC+" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of "B" or higher.
"Type IX Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of B or higher.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in the relevant state, as the same may be amended from time to time.
"U.S. Government Securities" means a direct obligation of the United States
of America, provided that such direct obligation is entitled to the full faith
and credit of the United States and that any such obligation, other than a
United States Treasury xxxx, provides for the periodic payment of interest and
the full payment of principal at maturity or call for redemption.
"Valuation Date" means (a) the fifteenth day of each month, or if such day
is not a Business Day, the next succeeding Business Day and (b) the last
Business Day of such month and (c) the next Business Day following the Fund's
receipt of any written request from Financial Security that Surety Assets Value
be determined. For purposes of this definition, Business Day shall mean a day on
which the New York Stock Exchange is open for trading and which is not a day on
which banks in New York City or Boston, Massachusetts are authorized or
obligated by law or executive order to close.
"World Bank Securities" means securities issued by the International Bank
for Reconstruction and Development meeting the requirements of clauses (i), (ii)
and (iv) under the definition of Rated Public Corporate Bonds.
Generic Terms. All words used herein shall be construed to be of such
gender or number as the circumstances require. This "Agreement" shall mean this
Agreement as a whole and as the same may, from time to time hereafter, be
amended, supplemented or modified. The words "herein," "hereby," "hereof,"
"hereto," "hereinabove" and "hereinbelow," and words of similar import, refer to
this Agreement as a whole and not to any particular paragraph, clause or other
subdivision hereof, unless otherwise specifically noted.
ANNEX I
FORM OF SURETY BOND
OBLIGOR: Prospect Street(SM) High Surety Bond No.: 50074-N
Income Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock.
(Liquidation Preference $100,000 per Share)
FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), for consideration
received, hereby UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to each Holder,
subject only to the terms of this Surety Bond (which includes Endorsement 1
hereto), the full and complete payment by the Obligor of Scheduled Payments on
the Obligations.
For the further protection of each Holder, Financial Security irrevocably
and unconditionally guarantees:
(a) payment of the amount of any payment of Scheduled Payments on the
Obligations made during the Term of this Surety Bond to such Holder that is
subsequently avoided in whole or in part as a preference payment under
applicable federal bankruptcy law (such payment to be made by Financial
Security in accordance with Endorsement 1 hereto); and
(b) payment of any amount required to be paid under this Surety Bond
by Financial Security following Financial Security's receipt of notice as
described in Endorsement 1 hereto.
Financial Security shall be subrogated to the rights of each Holder to
receive payments under the Obligations to the extent of any payment by Financial
Security hereunder.
Except to the extent expressly modified by Endorsement 1 hereto, the
following terms shall have the meanings specified for all purposes of this
Surety Bond. "Certificate" means the Obligor's Articles of Amendment and
Restatement as amended and in effect on the Date of Issuance and as subsequently
amended from time to time with the written consent of Financial Security.
"Insurance Agreement" means the Insurance Agreement between Financial Security
and the Obligor dated as of December 1, 1988. "Scheduled Payments" means (i)
payments of dividends on the Obligations which Holders of the Obligations would
be entitled to receive on each Dividend Payment Date as defined in the
Certificate during the Term of this Surety Bond in accordance with the terms of
the Certificate, without regard to whether the Obligor has declared any such
dividend or such dividend could have been legally declared by the Obligor, (ii)
payment of the redemption price of Obligations without regard to whether such
redemption could have been legally made by the Obligor (a) on the last date upon
which the Obligor was to have redeemed the Obligations as specified in a
Redemption Request pursuant to Section 5.02(b) of the Insurance Agreement in the
event Financial Security has notified the Custodian that such redemption is to
be a Scheduled Payment and (b) on the date upon which the Obligor is required to
redeem the Obligations as a mandatory redemption pursuant to Section 5(b)(i) of
Article IV C of the Certificate and (iii) payment of the liquidation preference
on the Obligations in the event of a liquidation of the Obligor during the Term
of this Surety Bond on the date fixed for payment of such liquidation preference
pursuant to the Certificate, provided that Financial Security shall have
consented to such liquidation. For the purposes of making Scheduled Payments
hereunder in the event of a liquidation of the Obligor to which Financial
Security has not consented in which only a portion of the liquidation preference
on the Obligations is paid, a portion of the liquidation preference shall be
deemed to remain outstanding and shall be secured by this Surety Bond as to all
Scheduled Payments without regard to whether the Obligor has any obligation with
respect thereto. "Term of this Surety Bond" shall have the meaning set forth in
Endorsement 1 hereto. "Notice of Redemption" shall mean the term as defined in
the Certificate. "Redemption Request" shall mean the term as defined in the
Insurance Agreement.
This Surety Bond sets forth in full the undertaking of Financial Security,
and shall not be modified, altered or affected by any other agreement or
instrument, including any modification or amendment thereto, or by the merger,
consolidation or dissolution of the Obligor. The premiums paid in respect of
this Surety Bond are nonrefundable for any reason, including payment, or
provision being made for payment, of the Obligations. This Surety Bond may not
be cancelled or revoked during the Term of this Surety Bond.
In Witness Whereof, FINANCIAL SECURITY ASSURANCE INC. has caused this
Surety Bond to be executed on its behalf by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
ENDORSEMENT NO. 1
TO SURETY BOND
FINANCIAL SECURITY ASSURANCE INC.
OBLIGOR: Prospect Street(SM) High Income Surety Bond No.: 50074-N
Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock
(Liquidation Preference $100,000 per Share)
1. "Term of This Surety Bond." The phrase "Term of this Surety Bond" means
the period from and including the Date of Issuance to and including the earlier
of (i) the date on which the Obligations are paid in full, (ii) the date on
which all Scheduled Payments due on or prior to December 5, 1993 are paid in
full or (iii) the date on which the Surety Bond is delivered to Financial
Security pursuant to Section 3.03(e) of the Custody Agreement. This date may be
extended pursuant to the terms of the Insurance Agreement by means of an
endorsement to this Surety Bond.
2. "Paid in Full." For purposes of the first paragraph of this Endorsement,
any Obligation shall be "paid in full" when all Scheduled Payments (as defined
in the Surety Bond) have been paid and any period during which any such payment
could have been avoided in whole or in part as a preference payment under
applicable federal bankruptcy law shall have expired before any proceeding
requisite to such avoidance shall have been commenced.
3. "Holder." The term "Holder" as used in this Surety Bond means, with
respect to an Obligation, the person in whose name the Custody Receipt
evidencing such Obligation is registered on the registration books maintained by
the Custodian pursuant to the Custody Agreement but shall not include the Fund
or any affiliates or successors thereof.
4. "Obligations." The term "Obligations" as used in this Surety Bond means
the obligations identified on the face of the Surety Bond following the heading
"OBLIGATIONS" and held by the Custodian pursuant to the Custody Agreement. The
number of shares of preferred stock included in the Obligations may be increased
by means of an endorsement to this Surety Bond.
5. "Business Day." The term "Business Day," as used in this Surety Bond,
means a day on which banks are not authorized or required by law to be closed in
either the city in which the principal office of Financial Security is located
or the city in which the principal office of the Custodian is located.
6. The term "Custodian," as used in this Surety Bond, means Bankers Trust
Company, as Custodian pursuant to the Custody Agreement or any successor thereto
with respect to the Custody Receipts.
7. The term "Custody Agreement," as used in this Surety Bond, means the
Custody Agreement dated as of December 1, 1988 between the Custodian and
Financial Security as amended or supplemented from time to time.
8. The term "Custody Receipt," as used in this Surety Bond, means a receipt
issued by the Custodian pursuant to the Custody Agreement evidencing beneficial
ownership of an Obligation or Obligations.
9. Notices and Conditions to Payment in Respect of Scheduled Payments.
Financial Security will pay any amount payable hereunder in respect of Scheduled
Payments on the later to occur of (a) the second Business Day following receipt
on a Business Day by Financial Security of a notice and certificate from the
Custodian in the form set forth as Exhibit A to this Endorsement and (b) the
date on which such Scheduled Payment was due (or, if such day is not a Business
Day, then on the next succeeding Business Day). Payments due hereunder in
respect of Scheduled Payments will be disbursed by Financial Security to the
Custodian by wire transfer of immediately available funds. If any notice given
hereunder is not in materially proper form or is otherwise insufficient for the
purpose of making claim hereunder, it shall be deemed not to have been received
for purposes of this paragraph, and Financial Security or the Fiscal Agent, as
defined below, shall promptly so advise the Custodian, and the Custodian may
submit an amended notice. Financial Security's obligations hereunder in respect
of Scheduled Payments shall be discharged to the extent funds are transferred to
the Custodian as provided herein whether or not such funds are properly applied
by the Custodian; provided, however, that Financial Security shall act promptly,
reasonably and in good faith in obtaining from the Custodian, acting as
attorney-in-fact for the Holders, or from other Holders, as necessary, the
certificates and instrument of assignment required to be delivered to Financial
Security as contemplated herein and in the Custody Agreement as a condition to
the Custodian's release to Holders of funds drawn under the Surety Bond.
10. Notices and Conditions to Payment of Preferences. If payment of any
Scheduled Payment avoided in whole or in part as a preference payment under
applicable federal bankruptcy law is required to be made under the Surety Bond,
Financial Security will disburse such payment when due to be paid pursuant to
the Order referred to below and in any event no earlier than the first to occur
of (a) the fourth Business Day following receipt by Financial Security from the
Custodian of (i) a certified copy of the order of the court which exercised
jurisdiction to the effect that the Holder is required to return a payment of
redemption price, liquidation preference or dividend constituting a Scheduled
Payment and paid on the Obligation during the Term of this Surety Bond because
such payment was an avoidable preference under applicable federal bankruptcy law
(the "Order"), (ii) a certificate of the Holder that the Order has been entered
and is not subject to any stay and (iii) an assignment duly executed and
delivered by the Holder, in such form as is reasonably required by Financial
Security and provided to the Holder by Financial Security or the Custodian,
irrevocably assigning to Financial Security all rights and claims of the Holder
relating to or arising under the Obligation against the estate of Obligor or
otherwise (provided that if such certified copy, certificate and assignment are
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, Financial Security shall make such payment on the
fifth Business Day following such date), and (b) the date of receipt by
Financial Security from the Custodian of the items referred to in clauses (i),
(ii) and (iii) above if, at least four Business Days prior to such date of
receipt, Financial Security shall have received written notice from the
Custodian that such items were to be delivered on such date of receipt and such
date of receipt was specified in such notice (provided that if such notice is
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, such notice shall be deemed to have been received on
the next succeeding Business Day). Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession, trustee in bankruptcy or other
person named in the Order and not to the Custodian or any Holder directly unless
the Custodian or such Holder has been required previously to disgorge all or
part of such payment, as demonstrated to the satisfaction of Financial Security,
in which event such payment shall to such extent be paid directly to the
Custodian or the Holder, as the case may be. In connection with the foregoing,
Financial Security shall have the rights provided pursuant to Section 3.09 of
the Custody Agreement.
12. Governing Law. The Surety Bond is being issued under and pursuant to,
and shall be construed under and governed by, the laws of the State of New York.
13. Fiscal Agent. At any time during the Term of this Surety Bond,
Financial Security may appoint a fiscal agent (the "Fiscal Agent") for purposes
of this Surety Bond by written notice to the Custodian specifying the name and
notice address of the Fiscal Agent. From and after the date of receipt of such
notice by the Custodian, (i) copies of all notices and documents required to be
delivered to Financial Security pursuant to this Surety Bond shall be
simultaneously delivered to the Fiscal Agent and to Financial Security and shall
not be deemed received until received by both and (ii) all payments required to
be made by Financial Security under this Surety Bond may be made directly by
Financial Security or by the Fiscal Agent on behalf of Financial Security. The
Fiscal Agent is the agent of Financial Security only and the Fiscal Agent shall
in no event be liable to Holders for any acts of the Fiscal Agent or any failure
of Financial Security to deposit, or cause to be deposited, sufficient funds to
make payments due under the Surety Bond.
14. Waiver of Defenses. To the fullest extent permitted by applicable law,
Financial Security agrees not to assert, and hereby waives, for the benefit of
each Holder, all rights (whether by counterclaim, setoff or otherwise) and
defenses (including the defense of fraud, including fraud in the inducement),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to Financial Security to avoid payment
of its obligations under this Surety Bond in accordance with the express
provisions of this Surety Bond.
15. Increase in Coverage. Financial Security may, by endorsement to this
Surety Bond, increase the number of shares of Obligations to be covered by this
Surety Bond.
IN WITNESS WHEREOF, FINANCIAL SECURITY ASSURANCE INC. has caused this
Endorsement No. 1 to be executed by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
Exhibit A
To Endorsement No. 1
NOTICE FOR PAYMENT
UNDER THE SURETY BOND
Financial Security Assurance Inc.
000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
The undersigned, a duly authorized officer of Bankers Trust Company
(the "Custodian"), hereby certifies to Financial Security Assurance Inc.
("Financial Security"), with reference to Surety Xxxx Xx. 00000-X dated
December 5, 1988 (the "Surety Bond") issued by Financial Security in respect
of shares of Taxable Auction Rate Preferred Stock (Liquidation Preference
$100,000 per share) issued by Prospect Street(SM) High Income Portfolio Inc.
(the "Obligations"), that:
(i) the Custodian is the Custodian under the Custody Agreement dated
as of December 1, 1988 between the Surety and the Custodian, as amended or
supplemented from time to time;
(ii) either (a) the Custodian has not received by [insert due date of
Scheduled Payment] the full amount of the Scheduled Payment on the
Obligations due on such date and has been notified by the Paying Agent for
the Obligations (the "Paying Agent") that it will not receive such payment
or (b) the Custodian has been notified by the Paying Agent, prior to the
due date, that the Custodian will not receive the full amount of such
Scheduled Payment due on such date, and the additional amount necessary for
the Custodian to have an amount equal to the Scheduled Payment is (the
"Shortfall");
(iii) the Custodian is making a claim under the Surety Bond for the
Shortfall to be applied to the payment of the Scheduled Payment referred to
in (ii) above;
(iv) the Custodian (or its nominee or its agent's nominee) is the
registered owner of the Obligations and holds evidence of the Custodian's
right to receive payment of the Scheduled Payment and, upon delivery of the
appropriate instruments of assignment from Holders pursuant to (v) hereof,
will assign to Financial Security the Custodian's rights as registered
owner with respect to the Obligations to the same extent as provided in
such instruments of assignment from the Holders, such assignment to be
contingent upon Financial Security's continued performance of its
obligations under the Surety Bond; provided, however, that any assignment
of rights with respect to Shortfalls which have been paid by Financial
Security shall continue until such amounts have been recovered by Financial
Security; and
(v) the Custodian shall as to each Holder for whom the Custodian shall
act as attorney-in-fact pursuant to Section 3.03(b) of the Custody
Agreement, present to Financial Security (x) appropriate instruments of
assignment in a form satisfactory to and provided by Financial Security to
the effect provided in Section 3.03(b) of the Custody Agreement and (y)
appropriate instruments in a form satisfactory to and provided by Financial
Security to effect the appointment of Financial Security as agent for such
Holder to the extent set forth in the Surety Bond and in the Custody
Agreement in any legal proceeding with respect to the Obligations including
specifically the right to vote with respect to the Obligations.
Upon such disbursement, Financial Security shall be subrogated to the
extent of any payments made by it pursuant to the Surety Bond to all of the
Custodian's rights and the rights of the Holders with respect to the
Scheduled Payment to which such disbursement relates.
Any capitalized term used in this Notice for Payment under the Surety Bond
and not defined herein shall have the meaning assigned thereto in the Surety
Bond.
IN WITNESS WHEREOF, the Custodian has executed and delivered this Notice
for Payment under the Surety Bond as of the day of , .
_________________________________
By __________________________
Title __________________________
For Fiscal Agent Use Only
Wire transfer sent on ________________________by ______________________________
Confirmation Number ____________________________________-
ANNEX II
FORM OF SURETY ASSETS COVERAGE REPORT
Valuation as of , 19 ("Valuation Date")
This Surety Assets Coverage Report is delivered pursuant to [Section
2.02(iv)(B)] or [Section 2.02(iv)(D)] of that certain Insurance Agreement dated
as of December 1, 1988 (the "Agreement") between Financial Security Assurance
Inc. ("Financial Security") and Prospect Street(SM) High Income Portfolio Inc.
(the "Fund"). Capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed thereto in the Agreement Calculations of the Surety
Assets Value of Eligible Portfolio Property are based on such principal amounts
as of the Valuation Date. The undersigned, acting as a duly authorized
representative of the Fund, does hereby certify as follows:
(i) the Fund has calculated the Market Value of each item included as
Eligible Portfolio Property as of the Valuation Date, with the related
calculations being set forth in the attached report which schedule sets
forth separately the principal balance of each such item (each of which has
been determined pursuant to the definition of Market Value) and the
Discount Factor applied thereto (determined by the Fund in accordance with
the applicable definition of "Discount Factor");
(ii) the Fund has calculated the Discounted Value of each item of the
Eligible Portfolio Property as of the Valuation Date, the results of such
calculations being set forth in Schedule I attached hereto;
(iii) the Fund has calculated the Surety Assets Coverage as of the
Valuation Date, such calculation being set forth in the attached schedule;
(iv) the Fund has totaled the Surety Assets Values for all items
included as Eligible Portfolio Property, such total being set forth in the
attached schedule;
(v) the aggregate amount referred to in clause (iv) above is equal to
or in excess of the amount referred to in clause (iii) above, and
therefore, the Surety Assets Coverage has been met, or, in the event the
aggregate amount referred to in clause (v) above is less than the amount
referred to in clause (iv) above, set forth below is a statement to such
effect and the amount of any such deficiency;
(vi) as of , each item of the Eligible Portfolio Property
as set forth in Schedule I attached hereto, is Eligible Portfolio
Property and each such item of the Eligible Portfolio Property set forth in
Schedule I attached hereto conforms in all material respects to the
definition of such item contained in the Eligible Portfolio Property;
(vii) as of the Valuation Date, Deposit Securities are required by
Section 2.04(c) or 2.04(f) of the Agreement in the amount of $
and are identified in Schedule I hereto; and
(viii) as of the Valuation Date, the Fund knows of no Event of Default
or Default which has occurred. IN WITNESS WHEREOF, I have hereunto signed
my name this day of , 19.
______________________________________
Authorized Officer
ANNEX III
LETTER REVIEWING SURETY ASSETS COVERAGE REPORT
A letter reviewing the Surety Assets Coverage Report, as required to be
delivered by the Insurance Agreement (the "Agreement") dated as of December 1,
1988, between Financial Security Assurance Inc. and Prospect Street(SM) High
Income Portfolio Inc. (terms used herein and not defined shall have the meaning
set forth in the Agreement), shall be prepared by the independent public
accountants of the Fund, shall be addressed to the Fund and shall be
substantially to the effect that:
(i) the independent public accountants have read the Surety Assets
Coverage Report for the current Valuation Date (the "Report");
(ii) with respect to the issue size compliance, issuer diversification
and industry diversification calculations, such calculations and the
resulting eligible portfolio market value and discounted eligible portfolio
market value calculations are numerically correct;
(iii) with respect to the Surety Assets Coverage calculation, such
calculation has been compared with the definition of Surety Assets Coverage
in the Insurance Agreement and is calculated in accordance with such
definition, and the results of such calculation have been recalculated and
are numerically correct;
(iv) with respect to the S&P's rating on Corporate Bonds, issuer name,
issue size and coupon rate listed in the Report, that information has been
traced and agrees with the information listed in The Standard & Poor's Bond
Guide (in the event such information does not agree or such information is
not listed in The Standard & Poor's Bond Guide, the independent accountants
will inquire of S&P's what such information is, and provide a listing in
their letter of such differences, if any);
(v) with respect to the Xxxxx'x rating on Corporate Bonds, issuer
name, issue size and coupon rate listed in the Report, that information has
been traced and agrees with the information listed in the Moody's Bond
Survey (in the event such information does not agree or such information is
not listed in Moody's Bond Survey, the independent accountants will inquire
of Moody's what such information is, and provide a listing in their letter
of such differences, if any);
(vi) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value as provided in the
Agreement) provided by to the Fund for purposes of
valuing securities in the portfolio, the independent public accountants
have traced the price used in the Report to the lower of the two bid prices
listed in the report provided by and verified that
such information agrees with the bid prices contained in the report (in the
event such information does not agree, the independent public accountants
will provide a listing in their letter of such differences); and
(vii) with respect to the description of each security included in the
Report, the description of Eligible Portfolio Property has been compared to
the definition of Eligible Portfolio Property contained in the Agreement,
and the description as appearing in the Report agrees with the definition
of Eligible Portfolio Property as described in the Agreement.
Each such letter may state that: such independent public accountants have
made no independent verification of the accuracy of the description of the
investment securities listed in the Report or the market value of those
securities nor have they performed any procedures other than those specifically
outlined above for the purposes of issuing such letter; unless otherwise stated
in the letter, the procedures specified therein were limited to a comparison of
numbers or a verification of specified computations applicable to numbers
appearing in the Report and the schedule(s) thereto; the foregoing procedures do
not constitute an examination in accordance with generally accepted auditing
standards and the Report contained in the letter does not extend to any of the
Fund's financial statements taken as a whole; such independent accountants do
not express an opinion as to whether such procedures would enable such
independent accountants to determine that the methods followed in the
preparation of the Report would correctly determine the Market Value or Surety
Assets Value of the investment portfolio; accordingly, such independent
accountants express no opinion as to the information set forth in the Report or
in the schedule(s) thereto and make no representations as to the sufficiency of
the procedures performed for the purposes of the Agreement.
Such letter shall also state that the accountants are "independent public
accountants" with respect to the Fund within the meaning of Rule 101 of the
Rules of Conduct of the American Institute of Certified Public Accountants.
