Exhibit 10.55

EXECUTION COPY

EXCHANGE AGREEMENT

BY AND AMONG

NOVASTAR MORTGAGE, INC.,

NOVASTAR FINANCIAL, INC.,

NOVASTAR CAPITAL TRUST I/B,

NOVASTAR CAPITAL TRUST II/B,

AND

THE HOLDERS LISTED ON SCHEDULES I AND II HERETO

 

 

Dated as of February 18, 2009

 

 

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EXCHANGE AGREEMENT

THIS EXCHANGE AGREEMENT (this “Exchange Agreement” or “Agreement”), dated as of
February 18, 2009 (the “Effective Date”), is entered into by and among, NOVASTAR
MORTGAGE, INC., a Virginia corporation (the “Company”), NOVASTAR FINANCIAL,
INC., a Maryland corporation (the “Guarantor”), NOVASTAR CAPITAL TRUST I/B, a
Delaware statutory trust (the “NovaStar Trust I/B”), NOVASTAR CAPITAL TRUST
II/B, a Delaware statutory trust (the “NovaStar Trust II/B”, together with
NovaStar Trust I/B, the “Trusts” and, together with the Company, the Guarantor
and the NovaStar Trust I/B, the “Exchangors”) and the beneficial owners of the
preferred securities of the Existing Trusts (as defined below) whose names
appear on the signature pages hereto (the “Holders”).

WITNESSETH:

WHEREAS, the Holders listed on Schedule I hereto are the beneficial owners of
all of the trust preferred securities currently outstanding which were issued by
the NovaStar Capital Trust I, a Delaware statutory trust (the “NovaStar Trust
I”), in the stated liquidation amounts set forth next to their names on such
Schedule I (the “2005 Preferred Securities”);

WHEREAS, the Holders listed on Schedule II hereto are the beneficial owners of
all of the trust preferred securities currently outstanding (other than such
trust preferred securities owned by the Company) which were issued by the
NovaStar Capital Trust II, a Delaware statutory trust (the “NovaStar Trust II”
and, together with the NovaStar Trust I, the “Existing Trusts”), in the stated
liquidation amounts set forth next to their names on such Schedule II (the “2006
Preferred Securities” and, together with the 2005 Preferred Securities, the
“Existing Preferred Securities”);

WHEREAS, the NovaStar Trust I is the holder and beneficial owner of all of the
outstanding unsecured junior subordinated notes issued by the Company in the
aggregate principal amount of $51,550,000 (the “2005 Junior Subordinated
Notes”);

WHEREAS, the NovaStar Trust II is the holder and beneficial owner of all of the
outstanding unsecured junior subordinated notes issued by the Company in the
aggregate principal amount of $28,995,000 (the “2006 Junior Subordinated Notes”
and, together with the 2005 Junior Subordinated Notes, the “Existing
Subordinated Notes”);

WHEREAS, the Company proposes to issue to the NovaStar Trust I/B $51,550,000 in
aggregate principal amount of the unsecured junior subordinated notes of the
Company (the “2009 I/B Junior Subordinated Notes”) and to cause the NovaStar
Trust I/B to issue (a) 50,000 Preferred Securities of the NovaStar Trust I/B,
having an aggregate liquidation amount of $50,000,000 (the “2009 I/B Preferred
Securities”), to the applicable Holders in exchange for the transfer by the
applicable Holders to the Company of all of the outstanding 2005 Preferred
Securities and (b) 1,550 Common Securities of the NovaStar Trust I/B, having an
aggregate liquidation amount of $1,550,000 (the “2009 I/B Common Securities”),
to the Company;

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WHEREAS, the Company proposes to issue to the NovaStar Trust II/B $28,995,000 in
aggregate principal amount of the unsecured junior subordinated notes of the
Company (the “2009 II/B Junior Subordinated Notes” and, together with the 2009
I/B Junior Subordinated Notes, the “Junior Subordinated Notes”) and to cause the
NovaStar Trust II/B to issue (a) 28,125 Preferred Securities of the NovaStar
Trust II/B, having an aggregate liquidation amount of $28,125,000 (the “2009
II/B Preferred Securities” and, together with the 2009 I/B Preferred Securities,
the “Preferred Securities”), to the applicable Holders in exchange for the
transfer by the applicable Holders to the Company of all of the outstanding 2006
Preferred Securities and (b) 870 Common Securities of the NovaStar Trust II/B,
having an aggregate liquidation amount of $870,000 (the “2009 II/B Common
Securities” and, together with the 2009 I/B Common Securities, the “Common
Securities”), to the Company;

WHEREAS, upon receipt of the Existing Preferred Securities from the applicable
Holders, the Company proposes to (a) surrender the Existing Preferred Securities
and all of the outstanding common securities which were issued by the Existing
Trusts (collectively, the “Existing Common Securities”) to the applicable
property trustee of the Existing Trusts for cancellation thereof, (b) direct the
property trustees and administrative trustees of the Existing Trusts to dissolve
the Existing Trusts and to surrender the Existing Subordinated Notes to the
applicable indenture trustees for cancellation thereof and (c) cause the
indentures pursuant to which the Existing Subordinated Notes were issued to be
discharged (the “Existing Indentures”);

WHEREAS, the 2009 I/B Preferred Securities and the 2009 I/B Common Securities of
the NovaStar Trust I/B will be issued pursuant to the Amended and Restated Trust
Agreement (the “2009 I/B Trust Agreement”), dated as of the Effective Date,
among the Company, as depositor, The Bank of New York Mellon Trust Company,
National Association, a national banking association (“BNYM”), as property
trustee (in such capacity, the “2009 I/B Property Trustee”), BNY Mellon Trust of
Delaware (“BNYM Delaware”), as Delaware trustee (in such capacity, the “2009 I/B
Delaware Trustee”) and the administrative trustees named therein;

WHEREAS, the 2009 II/B Preferred Securities and the 2009 II/B Common Securities
of the NovaStar Trust II/B will be issued pursuant to the Amended and Restated
Trust Agreement (the “2009 II/B Trust Agreement” and, together with the 2009 I/B
Trust Agreement, the “Trust Agreements”), dated as of the Effective Date, among
the Company, as depositor, BNYM, as property trustee (in such capacity, the
“2009 II/B Property Trustee”), BNYM Delaware, as Delaware trustee (in such
capacity, the “2009 II/B Delaware Trustee”) and the administrative trustees
named therein (together with the administrative trustees named in the 2009 I/B
Trust Agreement, the “Administrative Trustees”);

WHEREAS, the 2009 I/B Preferred Securities will be guaranteed on a subordinated
basis by the Guarantor as to the payment of distributions, and as to payments on
liquidation and redemption, to the extent set forth in the Parent Guarantee
Agreement (the “2009 I/B Guarantee”), dated as of the Effective Date, between
the Guarantor and BNYM, as guarantee trustee (in such capacity, the “2009 I/B
Guarantee Trustee”);

WHEREAS, the 2009 II/B Preferred Securities will be guaranteed on a subordinated
basis by the Guarantor as to the payment of distributions, and as to payments on
liquidation and redemption, to the extent set forth in the Parent Guarantee
Agreement

 

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(the “2009 II/B Guarantee” and, together with the 2009 I/B Guarantee, the
“Guarantees”), dated as of the Effective Date, between the Guarantor and BNYM,
as guarantee trustee (in such capacity, the “2009 II/B Guarantee Trustee”);

WHEREAS, the 2009 I/B Junior Subordinated Notes will be issued pursuant to a
Junior Subordinated Indenture, dated as of the Effective Date (the “2009 I/B
Indenture”), between the Company and BNYM, as indenture trustee (in such
capacity, the “2009 I/B Indenture Trustee”);

WHEREAS, the 2009 II/B Junior Subordinated Notes will be issued pursuant to a
Junior Subordinated Indenture, dated as of the Effective Date (the “2009 II/B
Indenture” and, together with the 2009 I/B Indenture, the “Indentures”), between
the Company and BNYM, as indenture trustee (in such capacity, the “2009 II/B
Indenture Trustee”); and

WHEREAS, WolfBlock LLP, not in its individual capacity, but solely as escrow
agent (the “Escrow Agent”), will, pursuant to an Escrow Agreement, dated as of
the Effective Date, between the Escrow Agent, the Exchangors and the Holders
(the “Escrow Agreement”), facilitate the exchange upon satisfaction of the
conditions precedent set forth herein.

NOW, THEREFORE, in consideration of the mutual agreements and subject to the
terms and conditions set forth herein, the parties hereto agree as follows:

Section 1. Definitions. The Preferred Securities, the Common Securities and the
Junior Subordinated Notes are collectively referred to herein as the
“Securities.” The Existing Preferred Securities, the Existing Common Securities
and the Existing Subordinated Notes are collectively referred to herein as the
“Existing Securities.” This Exchange Agreement, the Indentures, the Trust
Agreements, the Guarantees and the Securities are collectively referred to
herein as the “Operative Documents.”

Section 2. Exchange of the Existing Preferred Securities.

2.1 On the Exchange Date, the Company hereby agrees to issue the 2009 I/B Junior
Subordinated Notes to the NovaStar Trust I/B and to cause the NovaStar Trust I/B
to issue (a) the 2009 I/B Preferred Securities to the applicable Holders in
exchange for the transfer by the applicable Holders to the Company of all of the
outstanding 2005 Preferred Securities and (b) the 2009 I/B Common Securities to
the Company. On the Exchange Date, the NovaStar Trust I/B hereby agrees to
accept the 2009 I/B Junior Subordinated Notes and to issue the 2009 I/B
Preferred Securities and the 2009 I/B Common Securities. On the Exchange Date,
the applicable Holders hereby agree to accept the 2009 I/B Preferred Securities
in exchange for the 2005 Preferred Securities.

2.2 On the Exchange Date, the Company hereby agrees to issue the 2009 II/B
Junior Subordinated Notes to the NovaStar Trust II/B and to cause the NovaStar
Trust II/B to issue (a) the 2009 II/B Preferred Securities to the applicable
Holders in exchange for the transfer by the applicable Holders to the Company of
all of the outstanding 2006 Preferred Securities and (b) the 2009 II/B Common
Securities to the Company. On the Exchange Date, the NovaStar Trust II/B hereby
agrees to accept the 2009 II/B Junior Subordinated Notes and to issue the 2009
II/B Preferred Securities and the 2009 II/B Common Securities. On the Exchange
Date, the applicable Holders hereby agree to accept the 2009 II/B Preferred
Securities in exchange for the 2006 Preferred Securities.

 

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2.3 Prior to or on the Exchange Date, the Company hereby agrees to deliver to
the 2009 I/B Indenture Trustee all of its 2009 I/B Junior Subordinated Notes and
to the 2009 II/B Indenture Trustee all of its 2009 II/B Junior Subordinated
Notes, in each case together with a request for authentication and delivery on
the Exchange Date, and may not withdraw such delivery and request unless and
until this Agreement is terminated in accordance with Section 9. Prior to or on
the Exchange Date, the Company hereby agrees to cause the Administrative
Trustees to deliver to the 2009 I/B Property Trustee all of the 2009 I/B
Preferred Securities and to the 2009 II/B Property Trustee all of the 2009 II/B
Preferred Securities, in each case together with a request for authentication
and delivery on the Exchange Date, and may not withdraw such delivery and
request unless and until this Agreement is terminated in accordance with
Section 9. Prior to or on the Exchange Date, each Holder hereby agrees to
deliver an issuer order (an “Issuer Order”) instructing each trustee (in each
such capacity, a “CDO Trustee”) under the applicable indenture pursuant to which
such CDO Trustee serves as trustee for such Holder to exchange the Existing
Preferred Securities for the Preferred Securities on the Exchange Date and to
deliver to the 2009 I/B Property Trustee or the 2009 II/B Property Trustee, as
applicable, all of its Existing Preferred Securities on or before the Exchange
Date and may not withdraw such Issuer Order or delivery unless and until this
Agreement is terminated in accordance with Section 9.

2.4 If the applicable Holders elect to have the Preferred Securities rated, each
Holder shall be responsible for its pro rata portion of any rating agency costs
for the Preferred Securities of the applicable Trust that such Holder will
acquire upon the Exchange Date (defined below). In no event shall any Holder be
responsible for any rating agency costs of any other Holder or the fees and
expenses set forth in Section 7, and, each Holder is solely responsible for its
own expenses to the extent not reimbursed by the Company or the Guarantor
pursuant to the Settlement Agreement (defined below). Outstanding as of the
Effective Date are:

 

  (i) $50,000,000 aggregate liquidation amount of Existing Preferred Securities
of the NovaStar Capital Trust I; and

 

  (ii) $28,125,000 aggregate liquidation amount of Existing Preferred Securities
of the NovaStar Capital Trust II.

None of the Company, the Company’s Board of Directors, the Guarantor, the
Guarantor’s Board of Directors, nor any trustee of any of the Trusts or the
Existing Trusts makes or has made any recommendation to any Holder as to whether
to exchange or refrain from exchanging all or any portion of the Existing
Preferred Securities for Preferred Securities pursuant to this Exchange
Agreement. In addition, no one has been authorized to make any such
recommendation. Each Holder has made its own decision whether to exchange all of
such Holder’s Existing Preferred Securities pursuant to this Agreement based
upon such Holder’s own financial positions and requirements and upon such due
diligence and advice as it has deemed necessary.

 

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2.5 On the Exchange Date, upon the direction of the applicable Administrative
Trustees, the 2009 I/B Property Trustee and the 2009 II/B Property Trustee shall
authenticate and deliver the respective Preferred Securities in accordance with
the terms of the respective Trust Agreements. On the Exchange Date, upon the
direction of the Company, the 2009 I/B Indenture Trustee and the 2009 II/B
Indenture Trustee shall authenticate and deliver the respective Junior
Subordinated Notes in accordance with the terms of the respective Indentures.

2.6 On the Exchange Date, immediately following the satisfaction of the
conditions set forth in Section 3: (a) the 2009 I/B Property Trustee shall
deliver the 2009 I/B Preferred Securities, in the amounts set forth on Schedule
I, to the applicable Holders according to the delivery instructions provided by
each such Holder to the 2009 I/B Property Trustee, (b) the 2009 II/B Property
Trustee shall deliver the 2009 II/B Preferred Securities, in the amounts set
forth on Schedule II, to the applicable Holders according to the delivery
instructions provided by each such Holder to the 2009 II/B Property Trustee,
(c) the Administrative Trustees shall deliver the Common Securities to the
Company according to the delivery instructions provided by the Company to the
Administrative Trustees, (d) the 2009 I/B Indenture Trustee shall deliver the
2009 I/B Junior Subordinated Notes to the NovaStar Trust I/B according to the
delivery instructions provided by such Trust to the 2009 I/B Indenture Trustee,
(e) the 2009 II/B Indenture Trustee shall deliver the 2009 II/B Junior
Subordinated Notes to the NovaStar Trust II/B according to the delivery
instructions provided by such Trust to the 2009 II/B Indenture Trustee, and
(f) the 2009 I/B Property Trustee and the 2009 II/B Property Trustee shall
deliver all of the Existing Preferred Securities to the Company according to the
delivery instructions provided by the Company to the 2009 I/B Property Trustee
and the 2009 II/B Property Trustee, respectively. Upon receipt of the Existing
Preferred Securities from the 2009 I/B Property Trustee and the 2009 II/B
Property Trustee, the Company shall (i) surrender the Existing Preferred
Securities and the Existing Common Securities to the applicable Existing Trusts
for cancellation thereof, (ii) direct the appropriate trustees of the Existing
Trusts to dissolve the Existing Trusts and to surrender the Existing
Subordinated Notes to the applicable indenture trustees for cancellation thereof
and (iii) cause the Existing Indentures to be discharged.

2.7 Each Holder and each Exchangor agrees that, on and as of the Exchange Date,
(a) all obligations under the Existing Securities shall be deemed to be fully
discharged and satisfied, and (b) all right, title and interest in and to any
payments of principal, interest or any other amounts under or with respect to
the Existing Securities, whether or not any of such payments are due or accrued
and unpaid, shall be deemed surrendered and forfeited.

2.8 The exchange date shall be the date upon which all of the conditions
precedent set forth in Section 3 shall have been satisfied (the “Exchange
Date”). If the Exchange Date has not occurred on or before April 30, 2009 (the
“Expiry Date”), (a) the 2009 I/B Property Trustee and the 2009 II/B Property
Trustee shall return the Existing Preferred Securities to the applicable Holders
and the Preferred Securities to the Administrative Trustees of the applicable
Trusts, (b) the 2009 I/B Indenture Trustee and the 2009 II/B Indenture Trustee
shall return the Junior Subordinated Notes to the Company, (c) the Company shall
return the Common Securities to the applicable Trusts, (d) no exchange shall
take place pursuant to this Agreement, (e) the Escrow Agent shall return the
full amount of the Settlement Amount (as defined in the Escrow Agreement) to the
Company, and (f) this Agreement and the Operative Documents shall be terminated
in accordance with Section 9.

 

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2.9 The Preferred Securities shall be delivered by each of the Trusts, directly
or indirectly, to each Holder without registration of any of the Securities
under the Securities Act of 1933, as amended (the “Securities Act”), or any
other applicable securities laws in reliance upon exemptions from the
registration requirements of the Securities Act and other applicable securities
laws.

Section 3. Closing Conditions. The exchange of the Securities pursuant to this
Agreement is subject to the timely satisfaction of the following conditions
precedent:

3.1 Conditions to be Satisfied prior to or on Effective Date.

(a) Escrow Agreement. Prior to or on the Effective Date, the Exchangors, the
Holders and the Escrow Agent shall have executed and delivered the Escrow
Agreement, in form and substance acceptable to each Holder and each Exchangor
(acceptance of such form and substance to be evidenced by such Holder’s or such
Exchangor’s execution and delivery thereof).

(b) Settlement Agreement. Prior to or on the Effective Date, the parties to that
certain Settlement Agreement (the “Settlement Agreement”) shall have executed
and delivered such Settlement Agreement, in form and substance acceptable to
each Holder and each Exchangor (acceptance of such form and substance to be
evidenced by such Holder’s or such Exchangor’s execution and delivery thereof),
and the Company shall have deposited the Settlement Amount (as defined therein)
with the Escrow Agent pursuant to the Escrow Agreement and the Settlement
Agreement.

(c) Operative Documents. On the Effective Date, the parties to this Exchange
Agreement, the Indentures, the Trust Agreements and the Guarantees shall have
executed and delivered such Operative Documents to the other parties thereto and
in form and substance acceptable to each Holder and each Exchangor (acceptance
of such form and substance to be evidenced by such Holder’s or such Exchangor’s
execution and delivery thereof).

3.2 Conditions to be Satisfied prior to or on the Exchange Date.

(a) Accuracy of Representations and Warranties. The representations and
warranties contained in this Agreement, and the statements of the Exchangors and
the Holders made in any certificates pursuant to this Agreement, shall be
accurate as of the Exchange Date.

(b) Opinions of Counsel.

(i) The Holders shall have received an opinion of Husch Blackwell Sanders LLP,
special counsel for the Company and the Guarantor, dated as of the Exchange Date
and in form and substance acceptable to each Holder.

 

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(ii) The Holders shall have received an opinion of Husch Blackwell Sanders LLP,
special tax counsel for the Guarantor, dated as of the Exchange Date and in form
and substance acceptable to each Holder.

(iii) The Holders, the Company and the Guarantor shall have received an opinion
of Richards, Layton & Finger, P.A., special counsel for the Trusts and the 2009
I/B Delaware Trustee and the 2009 II/B Delaware Trustee, dated as of the
Exchange Date and in form and substance acceptable to each Holder, the Company
and the Guarantor.

(iv) The Holders and the Exchangors shall have received an opinion of Gardere
Wynne Sewell LLP, special counsel for the 2009 I/B Property Trustee, 2009 II/B
Property Trustee, 2009 I/B Indenture Trustee and 2009 II/B Indenture Trustee,
dated as of the Exchange Date and in form and substance acceptable to each
Holder and each Exchangor.

(v) The Exchangors shall have received an opinion of Winston & Strawn LLP,
special counsel for the Holders, dated as of the Exchange Date and in form and
substance acceptable to each Exchangor.

(vi) The Holders shall have received an opinion of Winston & Strawn, LLP,
special tax counsel for the Holders, dated as of the Exchange Date and in form
and substance acceptable to each Holder.

(c) Dismissal Order. On or before the Expiry Date, the Holders shall have
obtained entry of the Dismissal Order (as defined in the Settlement Agreement)
(the “Dismissal Order”).

(d) Officer’s Certificate of the Company and the Guarantor. Each of the Company
and the Guarantor shall have furnished to each Holder a certificate of the
Company and the Guarantor, as applicable, in form and substance acceptable to
each Holder, signed by the Chief Executive Officer, President or a Vice
President and by the Chief Financial Officer, Treasurer or Assistant Treasurer
of the Company and the Guarantor, as applicable, and each Trust shall have
furnished to the Holders of the Preferred Securities issued by such Trust a
certificate of the Trust signed by an Administrative Trustee of such Trust, in
each case dated the Exchange Date, and, in the case of the Company, the
Guarantor and each Trust, that the representations and warranties in this
Agreement are true and correct on and as of the Exchange Date with the same
effect as if made on and at such time, and the Company, the Guarantor and the
Trusts have complied in all material respects with all the agreements and
satisfied all the conditions on each of their part to be performed or satisfied
at or prior to the Exchange Date.

(e) Officer’s Certificate of each Holder. Each Holder shall have furnished to
the Company and the Guarantor a certificate of the applicable Holder, in form
and substance acceptable to the Company and the Guarantor, signed by an
authorized signatory of such Holder, in each case dated the Exchange Date, and,
stating that the representations and warranties in this Agreement are true and
correct on and as of the Exchange Date with the same effect as if made on and at
such time, and that such Holder has complied in all material respects with all
the agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Exchange Date.

 

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(f) No Subsequent Change. Subsequent to the execution of this Agreement but
prior to the Exchange Date, there shall not have been any change, or any
development involving a prospective change, in, or affecting the condition
(financial or other), earnings, business or assets of the Guarantor and its
subsidiaries taken as a whole, whether or not occurring in the ordinary course
of business, the effect of which is, in each Holder’s or the Company’s
reasonable judgment, so material and adverse as to make it impractical or
inadvisable to proceed with the transactions contemplated hereby.

(g) Purchase Permitted by Applicable Laws; Legal Investment. The exchange of the
Existing Preferred Securities for the Preferred Securities as described in this
Agreement shall (a) not be prohibited by any applicable law or governmental
regulation, (b) not subject the Holders or the Exchangors to any material
penalty under or pursuant to any applicable law or governmental regulation and
(c) be permitted by the laws and regulations of the jurisdictions to which the
Holders and the Exchangors are subject.

(h) Cancellation of Certain Existing Preferred Securities, Existing Common
Securities and Corresponding Like Amount of Notes. On or before the Expiry Date,
(i) the Company shall have surrendered to the BNYM as property trustee for the
NovaStar Trust II (the “2006 Property Trustee”) the trust preferred securities
currently outstanding and owned by the Company which were issued by the NovaStar
Trust II and a proportionate amount of the common securities issued by NovaStar
Trust II (the “Surrendered Securities”) for cancellation thereof, (ii) the 2006
Property Trustee shall have cancelled the Surrendered Securities, (iii) the 2006
Property Trustee shall have caused the NovaStar Trust II to have surrendered to
BNYM, as trustee pursuant to that certain Junior Subordinated Indenture, dated
as of April 18, 2006 (the “2006 Indenture Trustee”), an amount of 2006 Junior
Subordinated Notes with an outstanding principal amount equal to the stated
liquidation amount of the Surrendered Securities (the “Surrendered Notes”) for
cancellation thereof and (iv) the 2006 Indenture Trustee shall have cancelled
the Surrendered Notes.

(i) Acknowledgment of Trustees. On or before the Expiry Date, the Holders, the
Company and the Guarantor shall have received the Acknowledgment of Trustees (as
defined in the Settlement Agreement).

Section 4. Representations and Warranties of the Exchangors. The Exchangors
jointly and severally represent and warrant to the Holders as of the Effective
Date and as of the Exchange Date (except as otherwise noted herein) as follows
(it being understood that each Trust is hereby making the following
representations and warranties only as to itself and not the other Trusts);
provided, however, that none of the following representations or warranties
apply or relate to any acts or omissions by the Holders or their Affiliates, and
provided, further, that the representations and warranties made in Section 4.15
are made as of the respective closing dates of the agreements therein referenced
or as of such earlier dates as noted otherwise therein:

4.1 Securities Laws Matters:

(a) None of the Exchangors, nor any of their “Affiliates” (as defined in Rule
501(b) of Regulation D under the Securities Act (“Regulation D”)), nor any
person acting on any of their behalf (except for the Holders, as to which no
representation or warranty is made) has, directly or indirectly, made offers or
sales of any security, or solicited offers to buy any security, under
circumstances that would require the registration under the Securities Act of
any of the Securities.

 

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(b) None of the Exchangors, nor any of their Affiliates, nor any person acting
on any of their behalf (except for the Holders, as to which no representation or
warranty is made) has (i) offered for sale or solicited offers to purchase the
Securities, (ii) engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with any offer or
sale of any of the Securities, or (iii) engaged in any “directed selling
efforts” within the meaning of Regulation S under the Securities Act
(“Regulation S”) with respect to the Securities.

(c) The Securities (i) are not and have not been listed on a national securities
exchange registered under Section 6 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), or quoted on a U.S. automated interdealer
quotation system and (ii) are not of an open-end investment company, unit
investment trust or face-amount certificate company that are, or are required to
be, registered under Section 8 of the Investment Company Act of 1940, as amended
(the “Investment Company Act”), and the Securities otherwise satisfy the
eligibility requirements of Rule 144A(d)(3) promulgated pursuant to the
Securities Act (“Rule 144A(d)(3)”).

(d) None of the Exchangors is, and, immediately following consummation of the
transactions contemplated hereby, none of the Exchangors will be, an “investment
company” or an entity “controlled” by an “investment company,” in each case
within the meaning of Section 3(a) of the Investment Company Act.

(e) None of the Exchangors have paid or agreed to pay to any person or entity,
directly or indirectly, any fees or other compensation for soliciting another to
purchase any of the Securities.

4.2 Standing and Qualification of the Trusts. Each Trust has been duly formed
and is validly existing in good standing as a statutory trust under the Delaware
Statutory Trust Act, 12 Del. C. §3801, et seq. (the “Statutory Trust Act”), with
all requisite power and authority to own property and to conduct the business it
transacts and proposes to transact and to enter into and perform its obligations
under the Operative Documents to which it is a party. Each Trust is duly
qualified to transact business as a foreign entity and is in good standing in
each jurisdiction in which such qualification is necessary, except where the
failure to so qualify or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, business or assets
of the Trusts, whether or not occurring in the ordinary course of business. None
of the Trusts is a party to, or otherwise bound by, any agreement other than the
Operative Documents to which they are a party and the other agreements
contemplated by the Operative Documents. Each of the Trusts is, and under
current law will continue to be, classified for federal income tax purposes as
grantor trusts and not as a business entity or an association or publicly traded
partnership taxable as a corporation.

 

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4.3 Trust Agreements. Upon approval of the Trust Agreements and the other
Operative Documents by the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”), the Trust Agreements shall have each been
duly authorized, executed and delivered by the Company and the Administrative
Trustees of each of the respective Trusts and, assuming due authorization,
execution and delivery by the 2009 I/B Property Trustee, the 2009 II/B Property
Trustee, the 2009 I/B Delaware Trustee and the 2009 II/B Delaware Trustee,
respectively, will be a legal, valid and binding obligation of the Company and
the respective Administrative Trustees, enforceable against them in accordance
with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors’ rights generally and to general principles of equity. Each
of the Administrative Trustees of the Trusts is an employee of the Company and
has been duly authorized by the Company to execute and deliver each of the Trust
Agreements. To the knowledge of the respective Administrative Trustees, no Trust
is in violation of any provision of the Statutory Trust Act.

4.4 Indenture. Upon approval of the Indentures and the other Operative Documents
by the Bankruptcy Court, each Indenture shall have been duly authorized,
executed and delivered by the Company and, assuming due authorization, execution
and delivery by the 2009 I/B Indenture Trustee and the 2009 II/B Indenture
Trustee, respectively, will be a legal, valid and binding obligation of the
Company enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors’ rights
generally and to general principles of equity.

4.5 Preferred Securities and Common Securities. Upon approval of the Operative
Documents by the Bankruptcy Court, the Preferred Securities and the Common
Securities shall have been duly authorized by the respective Trusts and, in the
case of the Preferred Securities, when issued, authenticated and delivered on
the Exchange Date by the 2009 I/B Property Trustee or the 2009 II/B Property
Trustee, as applicable, to the Holders in exchange for the Existing Preferred
Securities in accordance with this Agreement and, in the case of the Common
Securities, when issued and delivered to the Company in accordance with this
Agreement, will be validly issued, fully paid and nonassessable and will
represent undivided beneficial interests in the assets of the respective Trusts
entitled to the benefits of the respective Trust Agreements, enforceable against
the respective Trusts in accordance with their terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors’ rights generally
and to general principles of equity. The issuance of the Securities is not
subject to preemptive or other similar rights. On the Exchange Date, all of the
issued and outstanding Common Securities will be directly owned by the Company
free and clear of any pledge, security interest, claim, lien or other
encumbrance (each, a “Lien”).

4.6 Junior Subordinated Notes. Upon approval of the Indentures and the other
Operative Documents by the Bankruptcy Court, the Junior Subordinated Notes shall
have been duly authorized by the Company and, when executed by the Company and
authenticated and delivered on the Exchange Date by the 2009 I/B Indenture
Trustee or the 2009 II/B Indenture Trustee, as applicable, in exchange for the
issuance of the Preferred Securities and the Common Securities in accordance
with this Agreement, will constitute legal, valid and binding obligations of the
Company entitled to the benefits of the respective Indentures enforceable

 

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against the Company in accordance with their terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors’ rights generally
and to general principles of equity, and each respective Trust will acquire
good, marketable and unencumbered title to the Junior Subordinated Notes.

4.7 Exchange Agreement. Upon approval of this Agreement and the other Operative
Documents by the Bankruptcy Court, this Agreement shall have been duly
authorized, executed and delivered by the Exchangors and will constitute the
legal, valid and binding obligation of the Exchangors, enforceable against the
Exchangors in accordance with its terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors’ rights generally and to general
principles of equity.

4.8 Guarantees. Each Guarantee has been duly authorized, executed and delivered
by the Guarantor and, assuming due authorization, execution and delivery by the
other parties thereto, will be a legal, valid and binding obligation of the
Guarantor enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors’ rights
generally and to general principles of equity.

4.9 Defaults. Upon approval of this Agreement and the other Operative Documents
by the Bankruptcy Court, none of the issue and exchange of the Securities by the
Exchangors, the execution and delivery of and compliance with the Operative
Documents by any of the Exchangors, and the consummation of the transactions
contemplated herein or in the Operative Documents, (i) will conflict with or
constitute a breach of, or a default under, any Trust Agreement or the charter
or bylaws or similar organizational documents of the Company, the Guarantor or
any subsidiary of the Company or the Guarantor or, to the Company’s or
Guarantor’s knowledge, any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, governmental authority, agency or
instrumentality or court, domestic or foreign, having jurisdiction over any
Trust, the Company, the Guarantor or any of their subsidiaries, or their
respective properties or assets (collectively, “Governmental Entities”) or any
arbitrator, (ii) will conflict with or constitute a violation or breach of, or a
default or Repayment Event (as defined below) under, or result in the creation
or imposition of any Lien upon any property or assets of the respective Trusts,
the Company, the Guarantor or any of the Company’s or Guarantor’s subsidiaries
pursuant to any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument to which (A) the respective Trusts, the Company,
the Guarantor or any of their subsidiaries is a party or by which it or any of
them may be bound, or (B) any of the property or assets of any of them is
subject, or any judgment, order or decree of any court, Governmental Entity or
arbitrator, except, in the case of this clause (ii), for such conflicts,
breaches, violations, defaults, Repayment Events (as defined below) or Liens
which (X) could not reasonably be expected to, singly or in the aggregate,
adversely affect the consummation of the transactions contemplated by the
Operative Documents and (Y) could not reasonably be expected to, singly or in
the aggregate, have a material adverse effect on the condition (financial or
otherwise), earnings, business, liabilities and assets of the Guarantor and its
subsidiaries taken as a whole, whether or not occurring in the ordinary course
of business (a “Material Adverse Effect”); or (iii) require the consent,
approval, authorization or order of any court or Governmental Entity other than
the Dismissal Order of the United States Bankruptcy Court for the District of
Delaware. As used herein, a “Repayment Event” means any event or

 

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condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder’s behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such indebtedness
by the respective Trusts or the Company, the Guarantor or any of their
subsidiaries prior to its scheduled maturity.

4.10 Organization, Standing and Qualification of the Company and the Guarantor.
Each of the Company and the Guarantor has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction in
which it is chartered or organized, with all requisite corporate power and
authority to own, lease and operate its properties and conduct the business it
transacts and proposes to transact, and is duly qualified to transact business
and is in good standing as a foreign corporation in each jurisdiction where the
nature of its activities requires such qualification, except where the failure
of the Company or the Guarantor, as the case may be, to be so qualified could
not reasonably be expected to, singly or in the aggregate, have a Material
Adverse Effect.

4.11 Government Licenses; Laws. Each Trust holds all necessary approvals,
authorizations, orders, licenses, consents, registrations, qualifications,
certificates and permits (collectively, “Government Licenses”) of and from
Governmental Entities necessary to conduct their respective businesses as now
being conducted, and neither Trust has received any notice of proceedings
relating to the revocation or modification of any such Government License,
except where the failure to be so licensed or approved or the receipt of an
unfavorable decision, ruling or finding, would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Government Licenses are valid and in
full force and effect, except where the invalidity or the failure of such
Government Licenses to be in full force and effect, would not, singly or in the
aggregate, have a Material Adverse Effect; and the Company, the Guarantor and
their subsidiaries are in compliance with all applicable laws, rules,
regulations, judgments, orders, decrees and consents, except where the failure
to be in compliance, would not, singly or in the aggregate, have a Material
Adverse Effect.

4.12 Taxes. Neither Trust is subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Notes, interest
payable by the Company on the Junior Subordinated Notes is deductible by the
Company for United States federal income tax purposes, and neither Trust is, or
will not be within ninety (90) days of the Effective Date, subject to more than
a de minimis amount of other taxes, duties or other governmental charges.

4.13 Conflicts, Authorizations and Approvals. No filing with, authorization,
approval, consent, license, order, registration, qualification or decree of, any
Governmental Entity, other than the Dismissal Order and those that have been
made or obtained, is necessary or required for the performance by any of the
Exchangors of their respective obligations under the Operative Documents, as
applicable, or the consummation by the Exchangors of the transactions
contemplated by the Operative Documents.

4.14 Litigation. There is no action, suit or proceeding before or by any
Governmental Entity, arbitrator or court, domestic or foreign, now pending or,
to the knowledge of the Exchangors after due inquiry, threatened against or
affecting any of the Exchangors or any of their subsidiaries, except for such
actions, suits or proceedings that, if adversely determined, would not, singly

 

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or in the aggregate, adversely affect the consummation of the transactions
contemplated by the Operative Documents, other than the proceedings pending
before the Bankruptcy Court on the date hereof.

4.15 Representations and Warranties Made in Certain Purchase Agreements. All of
the representations and warranties made by each of the Company and the
Guarantor, in its own capacity and in its capacity as sponsor of the Existing
Trusts, as applicable, in the Sections 4 of that certain Purchase Agreement
dated March 15, 2005 among the Company, the Guarantor, Nova Star Trust I,
Merrill Lynch International and Taberna Preferred Funding I, Ltd. and that
certain Purchase Agreement dated April 18, 2006 among the Company, the
Guarantor, the NovaStar Trust II and Kodiak Warehouse LLC, are hereby made to
each Holder, as applicable, as of the dates the Company made such
representations and warranties in such purchase agreements, or as of such
earlier dates as noted otherwise therein.

Section 5. Representations and Warranties of the Holders. Each Holder severally
represents and warrants, solely as to itself, to, and agrees with, the
Exchangors, as of the Effective Date and as of the Exchange Date (except as
otherwise noted herein) as follows, provided, however, that none of the
following representations or warranties apply or relate to any acts or omissions
by the Exchangors or their Affiliates:

5.1 The Holder understands and acknowledges that the Securities (i) have not and
will not be registered under the Securities Act, or any other applicable
securities law, and (ii) may not be offered, sold, pledged or otherwise
transferred by the Holder except in compliance with the registration
requirements of the Securities Act or any other applicable securities laws,
pursuant to an exemption therefrom or in a transaction not subject thereto.

5.2 The Holder is acquiring the Preferred Securities for its own account, for
investment and not with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act or other applicable
securities laws, subject to any requirement of law that the disposition of its
property be at all times within its control and subject to its ability to resell
such Preferred Securities pursuant to an effective registration statement under
the Securities Act or under Rule 144A promulgated pursuant to the Securities Act
(“Rule 144A”) or any other exemption from registration available under the
Securities Act or any other applicable securities law. The Holder agrees to the
legends and transfer restrictions applicable to the Securities contained in the
Trust Agreements. The Holder understands that no public market exists for any of
the Securities, and that it is unlikely that a public market will ever exist for
the Securities.

5.3 The Holder (a) has consulted with its own legal, regulatory, tax, business,
investment, financial and accounting advisers in connection herewith to the
extent they have deemed necessary; (b) has had a reasonable opportunity to ask
questions of and receive answers and request additional information from
officers and representatives of the Exchangors, any such questions have been
answered to its satisfaction, and any such additional information has been
provided to its satisfaction; (c) has had the opportunity to review all publicly
available records and filings concerning the Exchangors and it has carefully
reviewed such records and filings that it considers relevant to making an
investment decision; and (d) has made its own investment decisions based upon
its own judgment, due diligence and advice from such advisers as it has deemed
necessary and not upon any view expressed by the Exchangors.

 

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5.4 The Holder is (i) an institutional “accredited investor” within the meaning
of subparagraph (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under the
Securities Act, and (ii) a “qualified purchaser” (as determined in accordance
with Section 2(a)(51) of the Investment Company Act of 1940, as amended) not
formed solely for the purpose of owning the Preferred Securities or the Junior
Subordinated Notes.

5.5 The Holder has full power and authority to deliver, exchange, sell, assign
and transfer the Existing Preferred Securities; the Company will acquire good,
marketable and unencumbered title to the Existing Preferred Securities provided
for exchange, free and clear of all Liens, restrictions, charges and
encumbrances; and the Existing Preferred Securities provided for exchange are
not subject to any adverse claims or proxies. Such Holder will, upon request,
execute and deliver any additional documents reasonably deemed by any Exchangor
or the Escrow Agent to be necessary or desirable to complete the exchange of the
Existing Preferred Securities pursuant to this Agreement.

5.6 Neither any of the Holders, nor any of the Holders’ affiliates, nor any
person acting on the Holders’ or the Holders’ affiliates’ behalf have engaged,
or will engage, in any form of “general solicitation or general advertising”
(within the meaning of Regulation D) or in any “direct selling efforts” (within
the meaning of Regulation S) in connection with any offer or sale of the
Preferred Securities.

5.7 The Holder is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is organized with all
requisite (i) power and authority to execute, deliver and perform the Operative
Documents to which it is a party, to make the representations and warranties
specified herein and therein and to consummate the transactions contemplated
herein and (ii) right and power to exchange the Existing Preferred Securities
for the Preferred Securities.

5.8 This Agreement has been duly authorized, executed and delivered by the
Holder and no filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any governmental body, agency or court
having jurisdiction over the Holder, other than those that have been made or
obtained, is necessary or required for the performance by the Holder of its
obligations under this Exchange Agreement or to consummate the transactions
contemplated herein.

5.9 This Agreement constitutes the legal, valid and binding obligation of the
Holder, enforceable against the Holder, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors’ rights generally and to general
principles of equity.

5.10 Each Holder listed on Schedules I and II hereto currently holds legal and
beneficial interests in the aggregate liquidation amount of the Existing
Preferred Securities set forth next to their names on such Schedules I and II.

Section 6. Covenants. Each of the Exchangors and the Holders covenants and
agrees with the other parties hereto as follows:

6.1 Compliance with Representations and Warranties. During the period from the
date of this Agreement to the Exchange Date, the Exchangors and the Holders
shall use commercially reasonable efforts to cause their representations and
warranties contained in Sections 4 and 5, as applicable, to be true as of the
Exchange Date (except as otherwise noted therein), after giving effect to the
transactions contemplated by this Agreement, as if made on and as of the
Exchange Date.

 

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6.2 Sale and Registration of Securities. None of the Company, the Guarantor nor
the Trusts will, nor will any of them permit any of its Affiliates to, nor will
any of them permit any person acting on its or their behalf to, directly or
indirectly, (i) resell any Preferred Securities that have been acquired by any
of them, (ii) sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) that
would be integrated with the sale of the Preferred Securities in any manner that
would require the registration of the Securities under the Securities Act or
(iii) make offers or sales of any such Security, or solicit offers to buy any
such Security, under any circumstances that would require the registration of
any of such Securities under the Securities Act.

6.3 Clearing and Settlement. With respect to the 2009 II/B Preferred Securities
only, the Exchangors will cooperate with the Holders (or any holder of the 2009
II/B Preferred Securities) and use all commercially reasonable efforts to make
the 2009 II/B Preferred Securities eligible for clearance and settlement as
book-entry securities through the facilities of the DTC and listed for trading
through the PORTAL Market (“PORTAL”), and will execute, deliver and comply with
all material representations made to, and agreements with, DTC and PORTAL. This
Section 6.3 will survive delivery of the 2009 II/B Preferred Securities in
exchange for the 2006 Preferred Securities.

6.4 Integration. None of the Company, the Guarantor nor any Trust will, until
one hundred eighty (180) days following the Exchange Date, without the prior
written consent of each Holder, offer, sell, contract to sell, grant any option
to purchase or otherwise dispose of, directly or indirectly, (i) any Preferred
Securities or other securities of such Trust other than as contemplated by this
Agreement or (ii) any other securities convertible into, or exercisable or
exchangeable for, any Preferred Securities or other securities of such Trust.

6.5 Qualification of Securities. The Exchangors will arrange for the
qualification of the Preferred Securities for sale under the laws of such
jurisdictions as each of the Holders may designate and will maintain such
qualifications in effect so long as required for the sale of the Preferred
Securities. The Exchangors, as the case may be, will promptly advise each of the
Holders of the receipt by the Exchangors, as the case may be, of any
notification with respect to the suspension of the qualification of the
Preferred Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose.

6.6 Investment Company. So long as any of the Securities are outstanding,
(i) the Securities shall not be listed on a national securities exchange
registered under Section 6 of the Exchange Act or quoted in a U.S. automated
interdealer quotation system, (ii) neither the Company, the Guarantor nor any
Trust shall be an open-end investment company, unit investment trust or
face-amount certificate company that is, or is required to be, registered under
Section 8 of the Investment Company Act, and, the Securities shall otherwise
satisfy the eligibility requirements of Rule 144A(d)(3) and (iii) neither the
Company, the Guarantor nor any Trust shall

 

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engage, or permit any subsidiary to engage, in any activity which would cause it
or any subsidiary to be an “investment company” under the provisions of the
Investment Company Act.

6.7 Solicitation and Advertising. Neither the Company, the Guarantor nor any
Trust will, nor will any of them permit any of their Affiliates or any person
acting on their behalf to (i) engage in any “directed selling efforts” within
the meaning of Regulation S or (ii) engage in any form of “general solicitation
or general advertising” (within the meaning of Regulation D) in connection with
any offer or sale of any of the Securities.

6.8 Compliance with Rule 144A(d)(4) under the Securities Act. So long as any of
the Securities are outstanding and are “restricted securities” within the
meaning of Rule 144(a)(3) under the Securities Act, the Exchangors will, during
any period in which they are not subject to and in compliance with Section 13 or
15(d) of the Exchange Act, or the Exchangors are not exempt from such reporting
requirements pursuant to and in compliance with Rule 12g3-2(b) under the
Exchange Act, provide to each holder of such restricted securities and to each
prospective purchaser (as designated by such holder) of such restricted
securities, upon the request of such holder or prospective purchaser in
connection with any proposed transfer, any information required to be provided
by Rule 144A(d)(4) under the Securities Act, if applicable. The information
provided by the Exchangors pursuant to this Section 6.8 will not, at the date
thereof, contain any untrue statement of a material fact. If the Company, the
Guarantor or any of the Trusts are required to register under the Exchange Act,
such reports filed in compliance with Rule 12g3-2(b) shall be sufficient
information as required above. This covenant is intended to be for the benefit
of the Holders, the holders of the Securities, and the prospective purchasers
designated by such holders, from time to time, of the Securities.

6.9 Press Releases and Announcements. None of the Company, the Guarantor nor any
Trust will identify any of the Indemnified Parties (as defined below) in a press
release or any other public statement without the consent of such Indemnified
Party, except as otherwise required by applicable laws.

6.10 Replacement Notes. Each Holder shall have the right under this Agreement,
the Indentures and the Trust Agreements to request the substitution of new notes
for all or a portion of the Junior Subordinated Notes held by any of the Trusts,
as applicable. Each Trust shall be required under the terms of this Agreement,
the Indentures and the Trust Agreements to accept such newly issued notes (the
“Replacement Notes”) from the Company and surrender a like amount of Junior
Subordinated Notes to the Company. The Replacement Notes shall bear terms
identical to the Junior Subordinated Notes with the sole exception of interest
payment dates (and corresponding redemption date and maturity date), which will
be specified by the applicable Holders but shall be quarterly. In no event will
the interest payment dates (and corresponding redemption date and maturity date)
on the Replacement Notes vary by more than sixty (60) calendar days from the
original interest payment dates (and corresponding redemption date and maturity
date) under the Junior Subordinated Notes. Each Exchangor acknowledges and
agrees that, to the extent of the principal amount of the Replacement Notes
issued to such Trust under the applicable Indenture, the applicable Holders (and
each successor to such Holders’ interest in the Preferred Securities) will
require the applicable Trust to issue a new series of Preferred Securities
having a principal

 

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amount related to the principal amount of the Replacement Notes (the
“Replacement Securities”) to designated holders of Preferred Securities,
provided that any such Replacement Securities, and any distributions from such
Trust to the holders of Replacement Securities, must relate solely to such
Trust’s interest in the Replacement Notes and in no event will the Preferred
Securities other than the Replacement Securities share in the returns from any
Replacement Notes. The Replacement Securities shall have payment dates (and
corresponding redemption date and maturity date) that relate to the Replacement
Notes. Each Exchangor agrees to cooperate with all reasonable requests of the
Holders in connection with any of the foregoing; provided, that, except as set
forth herein, no action requested of any Exchangor in connection with such
cooperation shall otherwise modify the obligations or rights of the Company
pursuant to such documents. The Holders shall pay all reasonable expenses in
connection with the issuance of the Replacement Notes and the Replacement
Securities.

6.11 Reports. So long as any of the Securities are outstanding, the Company
shall furnish to (i) the Holders and any subsequent holder of the Securities
reasonably identified to the Company, and (ii) any beneficial owner of the
Securities reasonably identified to the Company (which identification may be
made by either such subsequent holder, beneficial owner or by the Holder, as
applicable), a duly completed and executed certificate in the form attached
hereto as Exhibit A, including the financial statements referenced in such
exhibit, which certificate and financial statements shall be so furnished by the
Company not later than forty-five (45) days after the end of each of the first
three fiscal quarters of each fiscal year of the Company and not later than
ninety (90) days after the end of each fiscal year of the Company.

6.12 Further Assurances. The Exchangors and the Holders covenant and agree to
execute and deliver (whether prior to or after the Exchange Date) such other
agreements, opinions and certificates as may be reasonably required in order
(i) to cancel the Existing Securities, (ii) terminate the Existing Trusts and
(iii) discharge the Existing Indentures, all on or after the Exchange Date and
in accordance with the terms and conditions set forth in the Existing Trusts and
the Existing Indentures.

Section 7. Payment of Expenses. The Company and the Guarantor, jointly and
severally, hereby covenant and agree that they shall pay (without duplication)
or cause to be paid (directly or by reimbursement) all costs and expenses
incident to the performance of the obligations of the Exchangors under this
Agreement, including (a) the Kodiak Restructuring Costs (as defined in the
Settlement Agreement); (b) the Taberna Restructuring Costs (as defined in the
Settlement Agreement); (c) the reasonable fees and reasonable expenses of the
counsel, the accountants and any other experts or advisors retained by the
Company, the Guarantor or the Trusts; (d) the reasonable fees and reasonable
expenses (including reasonable expenses of counsel) of the Trusts’ property
trustees, Delaware trustees, and administrative trustees and the Indentures’
indenture trustees and the reasonable fees of such trustees to administer the
Trusts; (e) CUSIP and PORTAL fees; and (f) all costs and expenses of the Company
and the Guarantor not otherwise included in this Section 7 incident to the
authorization, issuance, exchange and delivery of the Preferred Securities and
any taxes incurred by the Exchangors payable in connection therewith. All
amounts payable pursuant to clauses (a) and (b) above shall be paid solely from
the Settlement Amount deposited with the Escrow Agent pursuant to the terms of
the Escrow Agreement and the Settlement Agreement. Except as described in the
preceding sentence, neither the Company nor the Guarantor shall have any direct
or

 

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indirect obligation or liability with respect to the amounts payable pursuant to
clauses (a) and (b) above, even if such amounts, in the aggregate, exceed the
Settlement Amount.

Section 8. Indemnification.

8.1 Indemnification.  

8.1.1 The Company, the Guarantor and each Trust (each, an “Indemnifying Party,”
and collectively, the “Indemnifying Parties”) agree jointly and severally to
indemnify and hold harmless each Holder of each Preferred Security issued by
such Trust (collectively, the “Indemnified Parties”), each person, if any, who
controls any of the Indemnified Parties within the meaning of the Securities
Act, or the Exchange Act, and the Indemnified Parties’ respective directors,
officers, employees and agents and each person who “controls” the Indemnified
Parties within the meaning of either the Securities Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (a) any untrue
statement or alleged untrue statement of a material fact contained in any
information or documents furnished or made available to the Holders by or on
behalf of the Company, the Guarantor or any Trust by an Administrative Trustee,
(b) the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
(c) the breach or alleged breach of any representation, warranty or agreement of
any Exchangor contained herein or (d) the execution and delivery by the Company,
the Guarantor and/or any Trust of this Agreement or any of the other Operative
Documents and/or the consummation of the transactions contemplated hereby and
thereby; provided, however, that none of the Guarantor, the Company or any Trust
shall be liable to the extent that any such loss, claim, damage or liability
arises out of or is based on any statement, act or omission of the Indemnified
Parties, and agrees to reimburse the Indemnified Parties, as incurred, for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
This indemnity agreement will be in addition to any liability that the Company,
the Guarantor or the Trusts may otherwise have.

8.1.2 Promptly after receipt by an Indemnified Party under this Section 8 of
notice of the commencement of any action, such Indemnified Party will, if a
claim in respect thereof is to be made against the Indemnifying Party under this
Section 8, promptly notify the Indemnifying Party in writing of the commencement
thereof; but the failure so to notify the Indemnifying Party (i) will not
relieve the Indemnifying Party from liability under paragraph (a) above unless
and to the extent that such failure results in the forfeiture by the
Indemnifying Party of material rights and defenses and (ii) will not, in any
event, relieve the Indemnifying Party from any obligations to any Indemnified
Party other than the indemnification obligation provided in paragraph (a) above.
The Holders shall be entitled to appoint counsel to represent the Indemnified
Party in any action for which indemnification is sought. An Indemnifying Party
may participate at its own expense in the defense of any such action; provided,
that counsel to the Indemnifying Party shall not (except with the consent of the
Indemnified Party) also be counsel to the Indemnified Party. In no event shall
the Indemnifying Parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all

 

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Indemnified Parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. An Indemnifying Party will not, without the prior
written consent of the Indemnified Parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not the Indemnified Parties are actual or potential
parties to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of each Indemnified
Party from all liability arising out of such claim, action, suit or proceeding.

8.2 Additional Remedies. The indemnity agreements contained in this Section 8
are in addition to any liability that the Exchangors may otherwise have to any
Indemnified Party.

8.3 Additional Indemnification. The Company and the Guarantor shall indemnify
and hold harmless each Trust against all loss, liability, claim, damage and
expense whatsoever, as due from the respective Trusts under Sections 8.1 and
8.2.

Section 9. Termination. This Agreement and the other Operative Documents shall
terminate automatically, and without notice to any party thereof, if the
Exchange Date has not occurred on or before the Expiry Date. In the event that
this Agreement is terminated, the Escrow Agent shall return the Settlement
Amount to the Company as provided in the Escrow Agreement and the Settlement
Agreement, and the Existing Preferred Securities and the Securities shall be
returned to the applicable parties as provided in Section 2 hereof.

Section 10. Miscellaneous.

10.1 Notices. All communications hereunder will be in writing and effective only
on receipt, and will be mailed, delivered by hand or courier or sent by
facsimile and confirmed:

if to the Holders, to the addresses for notice set forth on Schedules I and II
hereto, with a copy to:

 

Winston & Strawn LLP

35 West Wacker Drive

Chicago, Illinois 60601

Telephone: (312) 558-5600

Facsimile: (312) 558-5700

Attention: Katherine A. McAvopy, Esq.

 

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if to the Exchangors, to:  

NovaStar Mortgage, Inc.

2114 Central Street, Suite 600

Kansas City, MO 64108

Telephone: (816) 237-7000

Facsimile: (816) 237-7515

Attention: Chief Executive Officer

with a copy to:  

Husch Blackwell Sanders LLP

1200 Main Street, Suite 2300

Kansas City, MO 64105

Telephone: (816) 421-4800

Facsimile: (816) 421-0596

Attention: Christopher Redmond

All such notices and communications shall be deemed to have been duly received
(i) at the time delivered by hand, if personally delivered, (ii) five business
days after being deposited in the mail, postage prepaid, if mailed, (iii) when
answered back, if telexed, (iv) the next business day after being telecopied, or
(v) the next business day after timely delivery to a courier, if sent by
overnight air courier guaranteeing next-day delivery. From and after the
Exchange Date, the foregoing notice provisions shall be superseded by any notice
provisions of the Operative Documents under which notice is given. The Holders,
the Exchangors and their respective counsel, may change their respective notice
addresses, from time to time, by written notice to all of the foregoing persons.

10.2 Parties in Interest, Successors and Assigns. This Agreement will inure to
the benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
parties hereto, their successors, assigns, heirs and legal representatives, any
right or obligation hereunder. None of the rights or obligations of the parties
under this Agreement may be assigned, whether by operation of law or otherwise,
without the prior written consent of each of the other parties hereto. The
rights and obligations of each Holder in connection with the transfer of the
Preferred Securities permitted pursuant to the terms of the applicable Trust
Agreement may be assigned without the Exchangors’ consent; provided that the
assignee assumes the obligations and makes the representations and warranties of
the respective Holders under this Agreement.

10.3 Amendments. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement by
each of the parties hereto.

10.4 Counterparts and Facsimile. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument. This Agreement may be executed by any one or more
of the parties hereto by facsimile which shall be effective as delivery of a
manually executed counterpart hereof.

 

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10.5 Headings. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.

10.6 Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW).

10.7 Submission to Jurisdiction. ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST
ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS AGREEMENT MAY BE
BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE
COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT
OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR
IN CONNECTION WITH THIS AGREEMENT.

10.8 Entire Agreement. This Agreement, together with the Operative Documents,
the Settlement Agreement and the other documents delivered in connection with
the transactions contemplated by this Agreement and the Settlement Agreement is
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, together with
the Operative Documents, the Settlement Agreement and the other documents
delivered in connection with the transactions contemplated by this Agreement,
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

10.9 Severability. In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the parties’ rights and privileges shall be
enforceable to the fullest extent permitted by law.

10.10 Survival. The respective agreements, representations, warranties,
covenants, indemnities and other statements of the Exchangors and the Holders
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any of the
Holders, the Company, the Guarantor or the Trusts or any of their respective
officers, directors, trustees or controlling persons, and will survive the
exchange of the Securities. The provisions of the first paragraph of Section 2.4
relating to the payment of rating agency costs and Sections 7 and 8 shall
survive the termination or cancellation of this Agreement.

Signatures appear on the following page

 

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IN WITNESS WHEREOF, this Exchange Agreement has been entered into as of the date
first written above.

 

NOVASTAR MORTGAGE, INC. By:  

 

Name:   Title:   NOVASTAR FINANCIAL, INC. By:  

 

Name:   Title:   NOVASTAR CAPITAL TRUST I/B By:   NovaStar Mortgage, Inc., as
Depositor By:  

 

Name:   Title:   NOVASTAR CAPITAL TRUST II/B By:   NovaStar Mortgage, Inc., as
Depositor By:  

 

Name:   Title:  

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KODIAK CDO I, LTD., as Holder By:   Kodiak CDO Management, LLC, as Collateral
Manager By:   Kodiak Funding, LP Its:   Sole Member By:   Kodiak Funding
Company, Inc. Its:   General Partner By:  

 

Name:   Robert M. Hurley Title:   Chief Financial Officer

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TABERNA PREFERRED FUNDING I, LTD.,

as Holder

By:   Taberna Capital Management, LLC, as Collateral Manager By:  

 

Name:   Raphael Licht Title:   Secretary

TABERNA PREFERRED FUNDING II, LTD.,

as Holder

By:   Taberna Capital Management, LLC, as Collateral Manager By:  

 

Name:   Raphael Licht Title:   Secretary

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Schedule I

NovaStar Capital Trust I and NovaStar Capital Trust I/B

 

Holder

   Stated Liquidation Amount of
2005 Preferred
Securities Held as of
the Effective Date    Liquidation Amount of
2009 I/B Preferred Securities
to be Received upon
Completion of the Exchange

Taberna Preferred Funding I, Ltd.

   $ 25,000,000    $ 25,000,000

Taberna Preferred Funding II, Ltd

   $ 25,000,000    $ 25,000,000              

Total

   $ 50,000,000    $ 50,000,000

Taberna Preferred Funding I, Ltd.

Taberna Capital Management, LLC

2929 Arch Street, 17th Floor

Philadelphia, PA 19104

Fax: (215) 243-9030

Taberna Preferred Funding II, Ltd.

Taberna Capital Management, LLC

2929 Arch Street, 17th Floor

Philadelphia, PA 19104

Fax: (215) 243-9030

Email: rlicht@raitft.com and mfralin@tabernasecurities.com

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Schedule II

NovaStar Capital Trust II and NovaStar Capital Trust II/B

 

Holder

   Stated Liquidation Amount of
2006 Preferred
Securities Held as of
the Effective Date    Liquidation Amount
of 2009 II/B Preferred Securities
to be Received upon
Completion of the Exchange

Kodiak CDO I, Ltd.

   $ 28,125,000    $ 28,125,000              

Total

   $ 28,125,000    $ 28,125,000

Kodiak CDO I, Ltd.

c/o Kodiak Capital Management Company, LLC

Attn: Chief Financial Officer

2107 Wilson Boulevard, Suite 400

Arlington, VA 22201

Email : rhurley@ejfcap.com and lkucera@ejfcap.com