NOTE PURCHASE AGREEMENT

 

This NOTE PURCHASE AGREEMENT (as it may be amended from time to time, the
“Agreement”) dated as of February 24, 2012 (the “Effective Date”) is entered
into by and among Kohlberg Capital Corporation, in its capacity as Junior
Noteholder (as defined herein), Kohlberg Capital Corporation, in its capacity as
portfolio manager under this agreement (the “Portfolio Manager”), Credit Suisse
AG, Cayman Islands Branch (“CS”), in its capacities as Senior Commitment Party
and Senior Noteholder (each, as defined herein), Credit Suisse Securities (USA)
LLC (the “Arranger”), KCAP Funding (the “Issuer”) and The Bank of New York
Mellon Trust Company, National Association (the “Bank”), in its capacities as
Collateral Administrator and Collateral Agent (each, as defined herein).

 

WHEREAS, it is intended that the Senior Commitment Party and the Junior
Noteholder will provide financing to the Issuer to purchase Collateral Debt
Obligations (as defined below);

 

WHEREAS, it is intended that the Issuer will refinance its obligations under the
Senior Notes and Junior Notes (each, as defined below) with proceeds of a
Refinancing Transaction (as defined below); and

 

WHEREAS, it is intended that the Issuer pledge the Collateral (as defined below)
to the Collateral Agent for the benefit of the Senior Noteholder and the Junior
Noteholder in accordance with the priorities set forth herein;

 

NOW, THEREFORE, the parties hereto agree as follows:

 

ARTICLE I

INTERPRETATION

 

Section 1.1.          Definitions.

 

The following terms have the respective meanings set forth below:

 

“Account”: Each account established by the Collateral Administrator under the
Collateral Administration Agreement, including the Interest Account, the
Principal Account and the CLO Asset Management Fees Account.

 

“Additional Junior Notes”: The meaning specified in Section 2.1(c).

 

“Advisers Act”: The Investment Advisers Act of 1940, as amended.

 

“Agreement”: The meaning specified in the recitals.

 

“Applicable Interest Period”: With respect to the Senior Notes and each loan or
portion thereof represented thereby, the period beginning on and including the
date such loan was funded and ending on but excluding the date on which such
loan (or portion thereof) has been paid in full.

 

“Arranger”: The meaning specified in the recitals.

 

“Authenticating Agent”: The meaning specified in Section 2.1(d).

 

“Available Funds”: The aggregate amount of funds (a) in the Interest Account;
(b) in the Principal Account (other than amounts designated by the Portfolio
Manager for reinvestment pursuant to Section 3.1(e); (c) if applicable,
Refinancing Proceeds; (d) contributed by the Junior Noteholder or constituting
the purchase price of Additional Junior Notes; and (e) after the occurrence of a
Failure to Pay, funds in the CLO Asset Management Fees Account.

 

 

 

 

“Bank”: The meaning specified in the recitals.

 

“Business Day”: A day on which commercial banks and foreign exchange markets
settle payments in (a) New York, (b) the city in which the principal office of
the Collateral Administrator is located (initially Houston, Texas), (c) solely
in respect of the issuance of Additional Junior Notes, the Cayman Islands, and
(d) following a Failure to Pay, the city in which the principal office of the
Collateral Agent is located.

 

“Caa Obligation”: Any Collateral Debt Obligation other than a Defaulted
Collateral Debt Obligation with a Moody’s Default Probability Rating lower than
“B3.”

 

“CCC Obligation”: Any Collateral Debt Obligation other than a Defaulted
Collateral Debt Obligation with an S&P Rating lower than “B-.”

 

“Certificate”: Each physical certificate representing a Note.

 

“Clearing Corporation”: The meaning specified in Article 8 of the UCC.

 

“Clearing Corporation Security”: A security that is registered in the name of,
or endorsed to, a Clearing Corporation or its nominee or is in the possession of
the Clearing Corporation in bearer form or endorsed in blank by an appropriate
person.

 

“CLO Asset Management Fees”: The senior management fees and subordinated
management fees paid by Trimaran CLO IV Ltd., Trimaran CLO V Ltd., Trimaran CLO
VI Ltd. and Trimaran CLO VII Ltd. to the Portfolio Manager.

 

“CLO Asset Management Fees Account”: The meaning specified in the Collateral
Administration Agreement.

 

“Code”: The U.S. Internal Revenue Code of 1986, as amended.

 

“Collateral”: The meaning specified in Section 8.1(b).

 

“Collateral Agent”: The meaning specified in Section 8.1(e).

 

“Collateral Administrator”: The Collateral Administrator under the Collateral
Administration Agreement.

 

“Collateral Administration Agreement”: The collateral administration agreement
among the Collateral Administrator, the Senior Commitment Party, the Issuer and
the Portfolio Manager.

 

“Collateral Debt Obligation”: A U.S. senior secured leveraged loan, second lien
loan or mezzanine loan that in each case satisfies the Eligibility Criteria and
is purchased or committed to be purchased by the Issuer during the Loan Facility
Period.

 

“Collateral Report”: Each report containing the information set forth under
Content of Collateral Reports on Exhibit A (as the same may be modified and
amended by mutual agreement of the Senior Commitment Party, the Portfolio
Manager and the Collateral Administrator from time to time) that is delivered
pursuant to Section 6.1(a).

 

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“Concentration Limits”: Limits that are satisfied if the aggregate amount of
Collateral Debt Obligations described under the related “Collateral Type” does
not exceed the maximum limitations listed in the table below:

 

Collateral Type 

Maximum (amount or % 

of the aggregate amount of 

Collateral Debt Obligations)

        (a)        obligations of any one obligor (together with affiliated
obligors  $2,000,000         (b)        obligations issued by obligors in any
one industry determined by the S&P’s CDO Monitor Asset Classifications; provided
that the limit in this clause (b) will not apply to the Issuer’s commitment to
purchase Collateral Debt Obligations that are part of the Initial Portfolio 
 20.0%

 

“Conditions of Accumulation”: The meaning specified in Section 2.4.

 

“Controlling Party”: The Senior Commitment Party until the Senior Note is paid
in full, and thereafter, the Junior Noteholder.

 

“Credit Suisse Party”: The Arranger, the Senior Commitment Party and their
respective affiliates.

 

“Custody Account”: The meaning specified in the Collateral Administration
Agreement.

 

“Defaulted Collateral Debt Obligation”: Any Collateral Debt Obligation with
respect to which:

 

(i)          there has occurred and is continuing a payment default by the
obligor (without giving effect to any applicable grace period or waiver set
forth in the relevant Underlying Instruments); provided, however, that in the
case of a default that the Portfolio Manager certifies to the Collateral
Administrator that it is solely for administrative reasons that are not
credit-related, such default will not constitute a default under this clause (i)
unless it has continued for the lesser of five Business Days and the applicable
grace period in the related underlying instrument;

 

(ii)         there has occurred a default (other than a payment default) that
has resulted in an acceleration of the maturity of all or a portion of the
principal amount of such obligation, but only until such default has been cured
or waived;

 

(iii)        any bankruptcy, insolvency or receivership proceeding has been
initiated in connection with the obligor of such Collateral Debt Obligation and
in the case of an involuntary petition, such petition has not been dismissed or
stayed within 60 days of filing; provided, however, that a Collateral Debt
Obligation shall not be treated as a Defaulted Collateral Debt Obligation under
this clause (iii) if it is a “Debtor-In-Possession” loan; provided, further,
that in the case of such a proceeding with respect to a synthetic security
counterparty or a selling institution (or their respective guarantors), the
related synthetic security or participation, respectively, shall constitute a
Defaulted Collateral Debt Obligation under this clause (iii);

 

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(iv)        the Portfolio Manager knows the obligor thereof is (or is reasonably
expected by the Portfolio Manager to be, as of the next scheduled payment
distribution date) in default as to payment of principal and/or interest on
another obligation that is senior or pari passu in right of payment to such
Collateral Debt Obligation (without giving effect to any applicable grace period
or waiver) and such default has not been cured or waived and the holders thereof
have accelerated the maturity of all or a portion of the principal amount of
such obligation; or

 

(v)         the obligor of such Collateral Debt Obligation has (A) a Moody’s
probability of default rating of “Ca” or lower, “D” or “LD” if in the Moody’s
press release assigning the “LD” specifies such Collateral Debt Obligation as
the cause or (B) an issuer credit rating from S&P of “CC” or lower, “D” or “SD”;
provided, however, that a Collateral Debt Obligation will not be treated as a
Defaulted Obligation under this clause (v) if it is a “Debtor-In-Possession”
loan.

 

Notwithstanding the foregoing, the Portfolio Manager may declare any Collateral
Debt Obligation to be a Defaulted Collateral Debt Obligation.

 

“Deliver”: For purposes of this definition, all capitalized terms not otherwise
defined herein have the meaning specified under the UCC. The taking of the
following steps:

 

(a)          in the case of each Certificated Security or Instrument (other than
a Clearing Corporation Security or an Instrument evidencing debt underlying a
participation), (A) causing the delivery of such Certificated Security or
Instrument to the Intermediary registered in the name of the Intermediary or its
affiliated nominee or endorsed to the Intermediary or in blank, (B) causing the
Intermediary to continuously identify on its books and records that such
Certificated Security or Instrument is credited to the relevant Account and
(C) causing the Intermediary to maintain continuous possession of such
Certificated Security or Instrument;

 

(b)          in the case of each Uncertificated Security (other than a Clearing
Corporation Security), (A) causing such Uncertificated Security to be
continuously registered on the books of the obligor thereof to the Intermediary
and (B) causing the Intermediary to continuously identify on its books and
records that such Uncertificated Security is credited to the relevant Account;

 

(c)          in the case of each Clearing Corporation Security, causing (A) the
relevant Clearing Corporation to continuously credit such Clearing Corporation
Security to the securities account of the Intermediary at such Clearing
Corporation and (B) the Intermediary to continuously identify on its books and
records that such Clearing Corporation Security is credited to the relevant
Account;

 

(d)          in the case of any Financial Asset that is maintained in book-entry
form on the records of an FRB, causing (A) the continuous crediting of such
Financial Asset to a securities account of the Intermediary at any FRB and
(B) the Intermediary to continuously identify on its books and records that such
Financial Asset is credited to the relevant Account;

 

(e)          in the case of CLO Asset Management Fees, causing the deposit of
such CLO Asset Management Fees with the Intermediary and, until any such CLO
Asset Management Fees are applied in accordance with the terms and conditions of
this Agreement, causing the Intermediary to continuously identify on its books
and records that such CLO Asset Management Fees are credited to the CLO Asset
Management Fees Account;

 

(f)          in the case of cash, causing the deposit of such cash with the
Intermediary and causing the Intermediary to continuously identify on its books
and records that such cash is credited to the relevant Account;

 

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(g)          in the case of each Financial Asset not covered by the foregoing
clauses (a) through (e), causing the transfer of such Financial Asset to the
Intermediary in accordance with applicable law and regulation and causing the
Intermediary to continuously credit such Financial Asset to the relevant
Account; and

 

(h)          in all cases, the filing of an appropriate financing statement in
the appropriate filing office in accordance with the Uniform Commercial Code as
in effect in any relevant jurisdiction.

 

“Draw Date”: The date specified in the Notice of Borrowing as the date on which
the Senior Note Required Draw Down Amount is to be funded.

 

“Effective Date”: The meaning specified in the recitals.

 

“Effective Date Expenses”: Legal and collateral administration fees to be paid
on the Effective Date by the Junior Noteholder in an amount not to exceed
$100,000.

 

“Effective Date Fee”: $300,000 to be paid on the Effective Date by the Junior
Noteholder to the Arranger.

 

“Eligibility Criteria”: The meaning specified on Annex I.

 

“ERISA”: The United States Employee Retirement Income Security Act of 1974, as
amended.

 

“Excepted Property”: $500 (comprised of $250 received in connection with the
issuance of the ordinary shares of the Issuer and $250 payable to the Issuer as
a fee for acquiring the Collateral and issuing the Notes), together with the
bank account of the Issuer in the Cayman Islands in which such funds are
deposited and any interest earned thereon.

 

“Failure to Pay”: With respect to any Payment Date, the failure to pay to the
Senior Noteholder, the full amount of Senior Note Interest and the Senior Note
Quarterly Partial Redemption Amount due and payable on such Payment Date.

 

“Final Settlement Date”: The Business Day mutually agreed upon by the Junior
Noteholder and the Senior Commitment Party, which day will be five Business Days
after the Maturity Date or, in the event that the reconciliation of one or more
Accounts has not been completed, a date that is as soon as practicable after the
Maturity Date.

 

“Gross Loss”: The sum of all Realized Losses on Collateral Debt Obligations and
all Unrealized Losses on, without duplication, Ineligible Collateral Debt
Obligations, Defaulted Collateral Debt Obligations, Caa Obligations and CCC
Obligations held by the Issuer.

 

For purposes of this definition:

 

“Gross Purchase Price” means the sum of the Original Purchase Prices of the
Collateral Debt Obligations currently held by the Issuer.

 

“Realized Losses” means the excess, if any, of (a) the Original Purchase Price
of any Collateral Obligation over (b) the sale proceeds (net of any expenses
related to the sale) of such Collateral Debt Obligations determined as of the
date of sale of such Collateral Debt Obligation.

 

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“Unrealized Losses” means the Gross Purchase Price less the current Portfolio
Mark to Market.

 

“Portfolio Mark to Market” means the aggregate market value using the lower of
the bid side levels as reported by Markit and Loan Pricing Corporation (“LPC”)
of the Collateral Debt Obligations currently held by the Issuer. In the event
there is no reported price by either Markit or LPC, then the market value of the
Collateral Debt Obligations held by the Issuer will be determined by the
Arranger. At all times, the market value of the Collateral Debt Obligations held
by the Issuer may be the bid side levels as provided by the Arranger provided
reasonable market-based evidence exists for such values.

 

“Ineligible Collateral Debt Obligation”: A Collateral Debt Obligation that fails
to satisfy the Eligibility Criteria at any time during the Loan Facility Period.

 

“Initial Portfolio”: The loans that are mutually agreed to by the Senior
Commitment Party and the Portfolio Manager prior to the Effective Date that
comprise Collateral Debt Obligations, as set forth on Annex VI.

 

“Interest”: Any interest (including paid and unpaid accrued interest), premiums
and fees accrued on and other items of income on the Collateral Debt
Obligations.

 

“Interest Account”: The meaning specified in the Collateral Administration
Agreement.

 

“Investment Company Act”: The U.S. Investment Company Act of 1940, as amended.

 

“Issuer”: The meaning specified in the recitals.

 

“Junior Note Commitment Amount”: $12,500,000

 

“Junior Noteholder”: The meaning specified in the recitals, which will be the
registered holder of the Junior Notes appearing in the Note Register.

 

“Junior Notes”: The Junior Notes issued pursuant to Section 2.1(c).

 

“Loan Facility Interest”: An amount equal to the aggregate amount of Interest
during the Loan Facility Period, and any earnings thereon minus all accrued and
unpaid Interest that was included in the purchase price of the Collateral Debt
Obligations.

 

“Loan Facility Period”: The period (a) commencing on the Effective Date and
(b) ending on the Maturity Date.

 

“Liabilities”: The meaning specified in Section 9.1(b).

 

“LIBOR”: The three-month London interbank offered rate (reset daily) as
calculated by the British Bankers’ Association (or any successor thereto) and
reported on Bloomberg Financial Markets Commodities News (or any successor
thereto), as of 11:00 a.m. (London Time) on the Effective Date and on each
Business Day thereafter.

 

“Liquidation Event”: The occurrence of either (a) a Termination Event or (b) the
Scheduled Maturity Date.

 

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“Maturity Date”: The earlier of (i) the Refinancing Date or (ii) the date on
which all Collateral Debt Obligations have been liquidated or otherwise disposed
of following the occurrence of a Liquidation Event.

 

“Moody’s”: Moody’s Investors Service and any successor thereto.

 

“Moody’s Default Probability Rating”: The meaning specified on Annex III.

 

“Moody’s Rating”: The meaning specified on Annex III.

 

“Note”: Each Senior Note and Junior Note.

 

“Note Register”: The register of Senior Notes and Junior Notes maintained on
behalf of the Issuer.

 

“Note Registrar”: The Bank, acting in its capacity as Note Registrar.

 

“Notice of Borrowing”: A notice substantially in the form of Exhibit B.

 

“Original Purchase Price”: The clean price paid by the Issuer for each
Collateral Debt Obligation adjusted for any payments of principal received by
the Issuer on such Collateral Debt Obligation. For purposes of this definition,
a “clean” purchase price with respect to a Collateral Debt Obligation means a
price that does not include any accrued and unpaid interest on such Collateral
Debt Obligation.

 

“Outstanding Junior Note Amount”: As of any date of determination, the amount of
the Junior Notes, including Additional Junior Notes, that have not been repaid
by the Issuer.

 

“Outstanding Senior Note Amount”: With respect to the Senior Notes, as of any
date of determination, the amount of the Senior Note Commitment Amount that has
been drawn down (and not repaid) by the Issuer for purchases of Collateral Debt
Obligations from time to time pursuant to this Agreement; provided that, at any
time that more than one Senior Note is outstanding, the Outstanding Senior Note
Amount with respect to each such Senior Note will be the portion of the drawn
amount represented by such Senior Note.

 

“Payment Date”: The 20th day of March, June, September and December of each
year, commencing in June 2012 (or, if such day is not a Business Day, the next
Business Day); provided, that the last Payment Date will be the Final Settlement
Date.

 

“Portfolio Manager”: The meaning specified in the recitals.

 

“Portfolio Manager Breach”: The occurrence of any of the following: (a) an act
of gross negligence, bad faith or willful misconduct by the Portfolio Manager in
the performance of any of its duties under this Agreement; (b) a breach by the
Portfolio Manager of this Agreement or any representation or warranty by the
Portfolio Manager in this Agreement fails to be true and correct, (c) failure to
offer the Arranger a right of first refusal on any Refinancing Transaction prior
to the Maturity Date or (d) failure to pay the Senior Notes in full upon a
Refinancing Transaction.

 

“Portfolio Manager Party”: The Portfolio Manager, its affiliates and any fund or
portfolio managed by the Portfolio Manager or any of its affiliates.

 

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“Positive Carry”: With respect to each Payment Date, all Loan Facility Interest
received by the Issuer since the preceding Payment Date in excess of (a) the
Senior Note Interest due and payable on that Payment Date, (b) all other amounts
senior in right of payment to the Junior Notes under clause (a)(v) of the
Priority of Payments on that Payment Date.

 

“Principal Account”: The meaning specified in the Collateral Administration
Agreement.

 

“Priority of Payments”: The meaning specified in Section 4.1.

 

“Qualified Institutional Buyer”: Any person that, at the time of its
acquisition, purported acquisition or proposed acquisition of Notes, is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act.

 

“Qualified Purchaser”: Any person that, at the time of its acquisition,
purported acquisition or proposed acquisition of Notes, is a qualified purchaser
within the meaning of the Investment Company Act.

 

“Refinancing Date”: The date (if any) on which a Refinancing Transaction occurs.

 

“Refinancing Proceeds”: The proceeds of any Refinancing Transaction available to
the Issuer for payments on the Notes on the Final Settlement Date.

 

“Refinancing Transaction”: Any collateralized loan obligation transaction or any
issuance of equity and/or debt securities, in each case by the Issuer or a
Portfolio Manager Party for which the Arranger acts as placement agent or
initial purchaser for a fee no less than the customary fee for such services in
similar transactions.

 

“Reinvestment Period”: The period beginning on the Effective Date and ending on
the earliest to occur of (a) the first anniversary of the Effective Date, (b)
the date on which a Termination Event occurs or (c) the Maturity Date.

 

“Scheduled Maturity Date”: The date that is the three year anniversary of the
earlier of (i) December 20, 2011 or (ii) the date of the first purchase of a
Collateral Debt Obligation hereunder except that if a Refinancing Transaction
has priced but not closed by the Scheduled Maturity, then the Scheduled Maturity
Date will be deemed to be the Refinancing Date.

 

“S&P”: Standard & Poor’s Ratings Services, a Standard & Poor’s Financial
Services LLC business, and any successor or successors thereto.

 

“S&P CDO Monitor Asset Classifications”: The meaning specified in Annex V.

 

“S&P Rating”: The meaning specified on Annex IV.

 

“Secured Obligations”: The obligation of the Issuer to make payments (a) under
the Senior Note and the Junior Note, in accordance with the Priority of
Payments, and (b) to the Collateral Agent and the Collateral Administrator, in
accordance with this Agreement and the Collateral Administration Agreement.

 

“Secured Parties”: Each of the Senior Noteholder, the Junior Noteholder, the
Collateral Agent and the Collateral Administrator.

 

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“Securities Act”: The U.S. Securities Act of 1933, as amended.

 

“Senior Commitment Party”: CS.

 

“Senior Note Applicable Interest Rate”: The Senior Note Applicable Interest
Rate, as of any date of determination:

 

(a)          from and including the Effective Date to but excluding the first
anniversary of the Effective Date, LIBOR + 300 bps;

 

(b)          from and including the first anniversary of the Effective Date to
but excluding the second anniversary of the Effective Date, LIBOR + 350 bps; and

 

(c)          from and including the second anniversary of the Effective Date to
but excluding the third anniversary of the Effective Date, LIBOR + 400 bps.

 

“Senior Note Commitment Amount”: As of any date of determination, the Senior
Note Initial Commitment Amount minus the sum of (x) the Outstanding Senior Note
Amount and (y) the aggregate amount of principal that had been repaid on the
Senior Notes on or prior to that date.

 

“Senior Note Initial Commitment Amount”: $30,000,000.

 

“Senior Note Interest”: The aggregate amount of interest accrued on the Senior
Notes at the Senior Note Interest Rate during the related Senior Note Interest
Period.

 

“Senior Note Interest Period”: The period beginning on and including the
Effective Date and ending on, but excluding, the first Payment Date, and each
successive period beginning on and including a Payment Date and ending on, but
excluding, the next Payment Date.

 

“Senior Note Interest Rate”: A per annum rate equal to the Senior Note
Applicable Interest Rate accrued on a daily basis on the then Outstanding Senior
Note Amount.

 

“Senior Note Quarterly Partial Redemption Amount”: $1,000,000.

 

“Senior Note Required Draw Down Amount”: The meaning specified in Section 2.3.

 

“Senior Noteholder”: Each registered holder of the Senior Notes appearing in the
Note Register.

 

“Senior Notes”: The Senior Notes issued pursuant to Section 2.1(b).

 

“Tax Operating Guidelines”: The guidelines set forth on Annex II.

 

“Termination Event”: The occurrence of any of the following events, as
determined by the Arranger in its sole discretion:

 

(a)          a Portfolio Manager Breach;

 

(b)          failure to satisfy the requirements of Section 7.2;

 

(c)          a Failure to Pay; or

 

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(d)          if at any time the Gross Loss exceeds 65% of the Outstanding Junior
Note Amount for more than one Business Day unless the Portfolio Manager has
posted cash collateral to the Senior Commitment Party equal to the amount of
such excess.

 

“Trading Gains”: The amount (if positive) equal to the clean sale price minus
the clean purchase price upon the sale of a Collateral Debt Obligation (each
expressed as a percentage of par) multiplied by the notional amount of such
Collateral Debt Obligation at the time of sale. For the avoidance of doubt,
Trading Gains will be applied to offset any Trading Losses. For purposes of this
definition, a “clean” price with respect to a Collateral Debt Obligation means a
price that does not include any accrued and unpaid interest on such Collateral
Debt Obligation.

 

“Trading Losses”: The amount (if positive) equal to the clean purchase price
minus the clean sale price upon the sale of a Collateral Debt Obligation (each
expressed as a percentage of par) (the “Loss”) multiplied by the notional amount
of such Collateral Debt Obligation at the time of sale minus (a) first, any
Trading Gains up to the amount of the Loss, and (b) second, if the application
of the Trading Gains does not completely offset the Loss, then minus any
Positive Carry up to the amount needed to completely offset the Loss. For
purposes of this definition, a “clean” price with respect to a Collateral Debt
Obligation means a price that does not include any accrued and unpaid interest
on such Collateral Debt Obligation.

 

“Transfer Certificate”: A certificate in the form of Exhibit E executed by a
transferee of Senior Notes.

 

“UCC”: The Uniform Commercial Code, as in effect from time to time in the State
of New York.

 

Section 1.2.          Calculations.

 

(a)          The calculation of Gross Loss and related determinations will be
performed by the Arranger.

 

(b)          All calculations required to be performed by the Collateral
Administrator pursuant to this Agreement shall be performed by the Collateral
Administrator in consultation with the Arranger and the Portfolio Manager. To
the extent the Arranger and the Portfolio Manager disagree with respect to any
calculation, the Arranger and the Portfolio Manager each agree to work
diligently to reach an agreement with respect thereto.

 

ARTICLE II

COMMITMENTS; NOTES; FUNDING

 

Section 2.1.          Commitment; Notes.

 

(a)          The Senior Commitment Party hereby agrees to hold available to the
Issuer a line of credit in an amount equal to the Senior Note Commitment Amount,
subject to the terms and conditions herein.

 

(b)          On the Effective Date, upon payment of the Effective Date Fee and
Effective Date Expenses, the Issuer agrees to issue a Senior Note in fully
registered form having a face amount equal to the Senior Note Initial Commitment
Amount and registered in the name of Credit Suisse AG, Cayman Islands Branch, in
the Note Register. During each Senior Note Interest Period, the Outstanding
Senior Note Amount will accrue interest which will be calculated on a daily
basis based on the Outstanding Senior Note Amount and the Senior Note Applicable
Interest Rate and accrued interest will be payable in arrears on each Payment
Date.

 

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Certificates representing such Senior Notes will be issued substantially in the
form of Exhibit C and duly executed by the Issuer and authenticated by the
Collateral Administrator as described in clause (d) below.

 

The Issuer will redeem the Senior Note on the Final Settlement Date at a
redemption price equal to the Outstanding Senior Note Amount. All payments on
the Senior Note shall be subject to the Priority of Payments. All or a portion
of the Outstanding Senior Note Amount of any Senior Note may be prepaid at the
discretion of the Issuer. If more than one Senior Note is outstanding at the
time of a prepayment, such prepayment will be allocated to each outstanding
Senior Note pro rata based upon the Outstanding Senior Note Amount of such
Senior Note. Any prepayment of principal will reduce the Outstanding Senior Note
Amount of the Senior Note to which such payments are applied.

 

All or a portion of the Outstanding Senior Note Amount may be transferred to a
person that is either (i) a Qualified Institutional Buyer and a Qualified
Purchaser or (ii) a non-U.S. person (as defined in Regulation S under the
Securities Act) that in each case is acquiring such Senior Notes for its own
account and provides a Transfer Certificate to the Note Registrar. Upon receipt
by the Note Registrar of the Transfer Certificate, the Note Registrar shall
record the transfer in the Note Register with an Outstanding Senior Note equal
to the transferred principal amount. Any purported transfer in violation of the
foregoing requirements shall be null and void ab initio, and the Note Registrar
shall not register any such purported transfer. For the avoidance of doubt, a
transfer of an interest in the Senior Note will not reduce the Senior Note
Commitment Amount.

 

(c)          On the Effective Date, the Issuer agrees to issue a Junior Note in
uncertificated, fully registered form having a face amount equal to the Junior
Note Commitment Amount and registered in the name of Kohlberg Capital
Corporation in the Note Register. The Junior Note does not have a stated coupon
but will receive, as interest, any Positive Carry not applied to reduce Losses
as set forth in the definition of Trading Loss. Certificates representing such
Junior Notes will be issued only upon request of the Junior Noteholder and, if
issued, will be substantially in the form of Exhibit D and duly executed by the
Issuer and authenticated by the Collateral Administrator as described in clause
(d) below.

 

Upon two Business Days notice, the Issuer will issue additional Junior Notes
(“Additional Junior Notes”) at the request of the Junior Noteholder having a
face amount equal to the amount of funds deposited by the Junior Noteholder into
the Principal Account for use as Available Funds on the following Payment Date.
Certificates representing such Additional Junior Notes will be issued only upon
request of the Junior Noteholder and, if issued, will be substantially in the
form of Exhibit D and duly executed by the Issuer and authenticated by the
Collateral Administrator as described in clause (d) below. The Additional Junior
Notes will be registered in the Note Register.

 

The Issuer shall redeem the Junior Notes on the Final Settlement Date at the
redemption price specified in the Priority of Payments. All payments on the
Junior Notes shall be subject to the Priority of Payments. At any time that the
Outstanding Senior Note Amount equals zero, the Outstanding Junior Note Amount
may be prepaid at the discretion of the Portfolio Manager. The Junior Notes may
not be transferred.

 

(d)          The Issuer hereby appoints the Collateral Administrator as the
“Authenticating Agent” to authenticate the Notes. If a Certificate is issued
with respect to a Note, no such Note will be entitled to any benefit under this
Agreement or be valid or obligatory for any purpose, unless there appears on the
related Certificate, a certificate of authentication, substantially in the form
provided for in Exhibit C or D, as applicable, executed by the Authenticating
Agent at the direction of the Issuer by the manual signature of one of its
authorized signatories, and such certificate of authentication upon any such
Certificate shall be conclusive evidence, and the only evidence, that such
Certificate has been duly authenticated and delivered hereunder.

 

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(e)          The Issuer shall cause to be kept the Note Register in which,
subject to such reasonable regulations as it may prescribe, the Issuer shall
provide for (i) the registration of Notes, (ii) the recording of any increases
(pursuant to Section 2.2) or decreases (as a result of principal payments) in
the Outstanding Senior Note Amount, (iii) the recording of any increases (as a
result of the issuance of Additional Junior Notes) or decreases (as a result of
principal payments) in the Outstanding Junior Note Amount and (iv) the
registration of any transfers of Senior Notes pursuant to Section 2.1(b). The
Issuer hereby appoints the Bank as the Note Registrar to maintain the Note
Register.

 

(f)          On the Effective Date, (i) each of the initial Senior Noteholder
and Junior Noteholder hereby makes the representations, warranties,
acknowledgements and covenants set forth in Section 7.1(a) through (d), as
applicable, (ii) the Issuer hereby makes the representations and warranties set
forth in Section 7.1(e) and (iii) the Portfolio Manager hereby makes the
covenants set forth in Section 7.2.

 

(g)          Notwithstanding anything in this Agreement or the Notes to the
contrary, the Issuer and the Junior Noteholder agree for the benefit of the
Senior Noteholder that the Junior Note and the Issuer’s rights in and to the
Collateral shall be subordinate and junior to the Senior Notes to the extent and
in the manner set forth in this Agreement including, without limitation, as set
forth in the Priority of Payments.

 

Section 2.2.          Credit Extensions.

 

Subject to the terms and conditions of this Agreement, the Issuer may draw upon
the Senior Note Commitment Amount as follows. The Issuer may, in a Notice of
Borrowing delivered no later than two Business Days prior to the Draw Date
request the Senior Commitment Party to make, and the Senior Commitment Party
shall make, one or more loans, subject to the terms of this Agreement; provided,
that the aggregate Outstanding Senior Note Amount (after giving effect to the
request set forth in the Notice of Borrowing) will not exceed the amount of the
Senior Note Commitment Amount. Each loan will be funded by wire to the account
specified on the Notice of Borrowing no later than 10 a.m. (New York time) on
the applicable Draw Date. Upon funding, the Note Registrar will record a
corresponding increase in the Outstanding Senior Note Amount of the Senior Note
registered in the name of the Senior Commitment Party or, if no Senior Note is
registered in the name of the Senior Commitment Party at that time, will
register in the Note Register a new uncertificated Senior Note in the name of CS
with an Outstanding Senior Amount equal to the amount of such funding.

 

Section 2.3.          Conditions Precedent to Credit Extensions.

 

(a)          The obligation of the Senior Commitment Party to make a loan
hereunder shall be subject to the following conditions precedent:

 

(i)          the aggregate amount requested for funding by the Senior Commitment
Party (such amount, the “Senior Note Required Draw Down Amount”) does not exceed
the amount the Portfolio Manager reasonably expects will be required to purchase
all Collateral Debt Obligations that the Issuer has entered into commitments to
purchase (but which have not yet settled);

 

(ii)         the Senior Note Required Draw Down Amount does not exceed the
Senior Note Commitment Amount;

 

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(iii)        the Notice of Borrowing includes a certification by the Portfolio
Manager that the Conditions of Accumulation have been satisfied with respect to
the purchased (but unsettled) Collateral Debt Obligations to which the proceeds
of the borrowing will be applied; and

 

(iv)        the Draw Date is at least two Business Days following the date on
which the Notice of Borrowing is delivered to the Senior Commitment Party.

 

Section 2.4.          Conditions of Accumulation.

 

The Issuer may purchase a Collateral Debt Obligation as directed by the
Portfolio Manager, so long as the following conditions are satisfied as of the
date of the commitment to purchase such Collateral Debt Obligation (the
“Conditions of Accumulation”):

 

(a)          a certification (a trade confirmation delivered to the Collateral
Administrator will be deemed to be such certification) from the Portfolio
Manager that the Collateral Debt Obligation satisfies the Eligibility Criteria
and that such purchase will not result in a violation of the Tax Operating
Guidelines;

 

(b)          the Arranger has given its approval in writing to the Issuer for a
purchase of such Collateral Debt Obligation within the last 30 days and has not
withdrawn such approval; and

 

(c)          no Termination Event has occurred.

 

ARTICLE III

COLLATERAL DEBT OBLIGATIONS

 

Section 3.1.          Purchases and Sales.

 

This Section 3.1 shall apply to all purchases and to sales other than sales
pursuant to Section 3.2.

 

(a)          The Issuer will purchase and sell Collateral Debt Obligations upon
the instruction of the Portfolio Manager and approval of the Senior Commitment
Party; provided that after giving effect to such purchase, the Concentration
Limits are satisfied. The Senior Commitment Party will, in its sole discretion,
approve or decline to approve the purchase or sale of any Collateral Debt
Obligation.

 

(b)          The Portfolio Manager will select Collateral Debt Obligations for
acquisition or disposition, subject to the Eligibility Criteria set forth in
Annex I.

 

(c)          The Issuer will sell any Defaulted Collateral Debt Obligation
within five Business Days of becoming aware that such Collateral Debt Obligation
has become a Defaulted Collateral Debt Obligation, subject to approval of the
Senior Commitment Party.

 

(d)          The Issuer may sell any Collateral Debt Obligation at any time that
the Gross Loss Amount exceeds 40% of the Outstanding Junior Note Amount, subject
to approval of the Senior Commitment Party.

 

(e)          During the Reinvestment Period, the Issuer, at the discretion of
the Portfolio Manager, will reinvest the proceeds of any prepayment or sale of
Collateral Debt Obligations, subject to the Conditions of Accumulation. After
the Reinvestment Period, no reinvestment will be permitted.

 

13

 

 

(f)          Except as provided in clause (e), the proceeds of any sale of
Collateral Debt Obligations will be deposited in the Principal Account and will
be Available Funds on the next Payment Date unless the Senior Commitment Party
agrees otherwise.

 

Section 3.2.          Liquidation.

 

(a)          Upon a Liquidation Event, the Issuer will liquidate Collateral Debt
Obligations as follows. The Issuer at the direction of the Arranger, will
promptly (and in any case within five Business Days) either liquidate or
instruct the Portfolio Manager to liquidate all of the Collateral Debt
Obligations held by the Issuer based on the highest bid prices received by the
Arranger (which bid may, in compliance with Article 9 of the UCC, be from the
Arranger or a Portfolio Manager Party) for each Collateral Debt Obligation.
Notwithstanding the foregoing, the Senior Commitment Party will have approval
rights on all sales and sales prices if the aggregate sales are not expected to
be sufficient to repay the Outstanding Senior Note Amount and all accrued and
unpaid interest on the Senior Note in the sole determination of the Arranger.

 

If the Refinancing Date has occurred, and there are any Collateral Debt
Obligations that will not be pledged by the Issuer as collateral to secure the
Refinancing Transaction, such Collateral Debt Obligations will be liquidated as
set forth in the first paragraph of this Section 3.2(a), but in no event will
such liquidation occur after the Final Settlement Date.

 

(b)          Upon a Termination Event, the Arranger will promptly notify the
Issuer, the Senior Commitment Party, the Portfolio Manager and the Bank, in its
capacities as Collateral Administrator and Collateral Agent.

 

(c)          On the Maturity Date (other than where the occurrence of the
Maturity Date is due to a Termination Event), one or more Portfolio Manager
Parties may purchase all (but not less than all) of the Collateral Debt
Obligations in full for their own account within a five Business Day period
provided that as a result of such purchase the Senior Notes would be redeemed in
full and all amounts senior to the Senior Notes under the Priority of Payments
would be paid in full.

 

Section 3.3.          Tax Operating Guidelines.

 

The Issuer (and the Portfolio Manager on its behalf) shall comply with the Tax
Operating Guidelines at all times during the Loan Facility Period.

 

ARTICLE IV

PRIORITY OF PAYMENTS

 

Section 4.1.          Priority of Payments.

 

Funds will be distributed in accordance with the following payment priorities
(collectively, the “Priority of Payments”):

 

(a)          On each Payment Date (other than as provided in Section 4.1(b)),
Available Funds, in the following order of priority:

 

(i)          to the payment of any accrued and unpaid taxes, costs and expenses
of the Issuer relating to this Agreement or the Collateral Administration
Agreement (including any indemnities payable by the Issuer);

 

14

 

 

(ii)         to the Senior Noteholder, the Senior Note Interest due and payable
on the Senior Notes;

 

(iii)        to the Senior Noteholder, to the payment of the Senior Note
Quarterly Partial Redemption Amount;

 

(iv)        to the Senior Noteholder, to the payment of principal on the Senior
Notes (A) unless a Failure to Pay has occurred, at the discretion of the
Portfolio Manager, an amount equal to the lesser of (x) the amount designated by
the Portfolio Manager and (y) funds in the Principal Account or (B) if a Failure
to Pay has occurred, all funds in the Interest Account, the Principal Account
and the CLO Asset Management Fees Account, in each case until the Outstanding
Senior Note Amount has been reduced to zero;

 

(v)         to the Junior Noteholder, the Positive Carry due and payable to the
Junior Notes (to the extent not applied to offset Trading Losses); and

 

(vi)        all remaining Available Funds will be retained by the Issuer.

 

(b)          If the Refinancing Date or the Liquidation Date occurs, on the
Final Settlement Date, Available Funds and, until the Outstanding Senior Note
Amount has been reduced to zero, the CLO Asset Management Fees, in the following
order of priority:

 

(i)          to the payment of any taxes, costs and expenses of the Issuer
relating to this Agreement or the Collateral Administration Agreement accrued
and unpaid as of such date (including any indemnities payable by the Issuer);

 

(ii)         to the Senior Noteholder, the Senior Note Interest due and payable
on the Senior Notes;

 

(iii)        to the Senior Noteholder, the Outstanding Senior Note Amount as the
redemption price of the Senior Notes;

 

(iv)        to the Junior Noteholder, the Positive Carry due and payable to the
Junior Notes (which amount will be determined after giving effect to the offset
of Losses pursuant to the definition of Trading Loss);

 

(v)         to the Junior Noteholder, the Outstanding Junior Note Amount
(reduced by the sum of all remaining Trading Losses) as the redemption price of
the Junior Notes; and

 

(vi)        to the Junior Noteholder, all remaining proceeds.

 

Section 4.2.          Loan Facility Interest.

 

To the extent that there is accrued and unpaid Loan Facility Interest on (a) the
Refinancing Date, such amounts will be paid from the proceeds of the Refinancing
Transaction, or (b) the Final Settlement Date after a Liquidation Event occurs,
the Arranger will direct the Collateral Administrator to distribute such amounts
no later than the next Business Day after their receipt from the Collateral
Administrator in accordance with Section 4.1 (b).

 

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ARTICLE V

NOTICES

 

Section 5.1.          Notices.

 

Except as otherwise expressly provided herein, any request, demand,
authorization, direction, notice, consent or waiver or other documents provided
or permitted by this Agreement to be made upon, given or furnished to, or filed
with any of the parties indicated below shall be sufficient for every purpose
hereunder if made, given, furnished or filed in writing to and mailed, by
certified mail, return receipt requested, hand delivered, sent by overnight
courier service guaranteeing next day delivery or by facsimile in legible form
or by electronic mail with delivery confirmed at the address set forth on
Schedule 1 (or at any other address provided in writing by the relevant party).

 

ARTICLE VI

REPORTING; CONFIDENTIALITY

 

Section 6.1.          Reporting.

 

(a)          On each Business Day during the Loan Facility Period, the
Collateral Administrator shall provide to the Senior Commitment Party, the
Arranger and the Portfolio Manager a Collateral Report with the information set
forth in paragraph (a) of the Content of Collateral Reports on Exhibit A. As
soon as practicable after the last Business Day of each month, the Collateral
Administrator shall provide to the Senior Commitment Party, the Arranger and the
Portfolio Manager a Collateral Report with the information set forth in
paragraph (b) of the Content of Collateral Reports on Exhibit A.

 

(b)          Not later than the third Business Day prior to the Final Settlement
Date (provided that the Collateral Administrator has been given notice of such
Final Settlement Date at least four Business Days prior to the occurrence
thereof), the Collateral Administrator shall provide the Senior Commitment
Party, the Arranger and the Portfolio Manager a draft of a final report with a
calculation in reasonable detail specifying the information set forth in
paragraph (c) of the Content of Collateral Reports on Exhibit A. The Collateral
Administrator shall provide the Senior Commitment Party, the Arranger and the
Portfolio Manager, in addition to the Collateral Reports, on the Final
Settlement Date, the final version of such final report as approved by the
Senior Commitment Party and the Portfolio Manager prior to any distributions on
that date.

 

Each of the Senior Commitment Party, the Arranger and the Portfolio Manager
agrees and acknowledges that failure of the Collateral Administrator to give any
information hereunder (including Collateral Reports) or any defect therein,
shall not impair or affect the obligations of such parties hereunder (including
under Article III and Article IV).

 

Each of the Senior Commitment Party, the Arranger and the Portfolio Manager
agrees and acknowledges that certain material delivered hereunder may be
provided by third parties and is intended for informational purposes only and
has not been independently verified by the Collateral Administrator or any of
their respective affiliates.

 

Section 6.2.          Confidentiality.

 

(a)          The parties hereto agree that the terms and substance of this
Agreement and any term sheet setting forth the terms embodied herein shall be
kept confidential and shall not be disclosed, directly or indirectly, to any
other person except on a need-to-know basis to the respective employees,
directors, auditors, accountants, counsel and other advisors of the parties
hereto that are directly involved in the considerations of the matters set forth
herein and to the extent required or compelled in a judicial or administrative
proceeding or as otherwise required by relevant law or relevant regulatory
authority, including without limitation, U.S. federal securities laws, rules or
regulations.

 

16

 

 

(b)          The Junior Noteholder agrees to maintain the confidentiality of any
information relating to the Collateral Debt Obligations that it may obtain from
any Credit Suisse Party, and to the extent that any such information is subject
to a confidentiality agreement, the Junior Noteholder will be deemed to have
executed such agreement as of the date it receives confidential information.

 

ARTICLE VII

REPRESENTATIONS; COVENANTS

 

Section 7.1.          Representations of the Parties.

 

(a)          Each of the Junior Noteholder and CS (in its capacities as initial
Senior Noteholder and Senior Commitment Party) represents and warrants to the
other that:

 

(i)          it is duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is organized;

 

(ii)         it has full power and authority and has taken all action necessary
to execute and deliver this Agreement and to fulfill its obligations hereunder
and to consummate the transactions hereby;

 

(iii)        the making and performance by it of this Agreement does not and
will not violate any law or regulation of the jurisdiction under which it
exists, any other law or regulation applicable to it, any other agreement to
which it is a party or by which it is bound or to which any of its assets is
subject, or any provisions of its charter or by-laws;

 

(iv)        this Agreement has been duly executed and delivered by it and, when
duly executed by the other party, constitutes the legal, valid and binding
obligation, enforceable against it in accordance with its terms (except to the
extent that the enforceability thereof may be limited by bankruptcy, insolvency
or other similar laws of general applicability affecting the enforcement of
creditors’ rights generally and by a court’s discretion in relation to equitable
remedies);

 

(v)         all approvals, authorizations and other actions by, or filings with,
any governmental authority necessary for, the validity or enforceability of its
obligations under this Agreement have been obtained; and

 

(vi)        it is not, nor shall it be deemed to be, a fiduciary of, or
otherwise have a trust relationship with, any other party in connection with
this Agreement or any transaction contemplated herein and, except as expressly
set forth herein, shall have no obligation, duty or responsibility to such other
party.

 

(b)          Each of the Junior Noteholder and the Senior Commitment Party
represents and warrants as of the date of this Agreement and as of each Draw
Date and the initial Senior Noteholder represents and warrants as of the date of
this Agreement, in each case to the Issuer and to each Credit Suisse Party that:

 

(i)          it is a Qualified Institutional Buyer that is also a Qualified
Purchaser and is acquiring the Notes for its own account;

 

17

 

 

(ii)         it understands that: (A) subject to the terms of this Agreement,
proceeds from the issuance of the Notes will be invested in Collateral Debt
Obligations; (B) if the Collateral is liquidated pursuant to this Agreement,
such liquidation may take place under market conditions that are not
advantageous to the Issuer, and as a result of any such liquidation, the
Noteholders may suffer a loss, which loss could equal its entire investment in
the applicable Notes; (C) all payments to the Junior Noteholder are subordinate
to payments to the Senior Noteholder pursuant to the Priority of Payments and
(D) all payments to it and any payments upon redemption of the Notes are
subordinated to all other obligations of the Issuer, and will be payable only in
accordance with the Priority of Payments to the extent the Issuer has sufficient
Available Funds;

 

(iii)        it has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its investment in
the Collateral Debt Obligations and is able to bear the economic risk of such
investment;

 

(iv)        it understands that an investment in the Collateral Debt Obligations
involves certain risks, including the risk that a Refinancing Transaction will
not be completed and the risk of loss of all or a substantial part of its
investment; and it has had access to such financial and other information
concerning the Issuer, the Portfolio Manager, the Collateral Debt Obligations
and the credit markets as it deemed necessary or appropriate in order to make an
informed decision with respect to its entering into this Agreement;

 

(v)         it has made its own independent investigation in connection with its
decision to purchase Notes and is not relying on any advice, counsel or
representations (whether written or oral) of the Issuer, any Credit Suisse Party
(in the case of the Junior Noteholder), any Portfolio Manager Party (in the case
of the Senior Commitment Party and initial Senior Noteholder) or any other
person in connection therewith;

 

(vi)        it is not a member of the public in the Cayman Islands;

 

(vii)       it is not purchasing the Notes with a view to the resale,
distribution or other disposition thereof in violation of the Securities Act.

 

(viii)      with respect to the Junior Noteholder only, the funds that it is
using or will use to fund any Junior Notes are not assets of a person who is or
at any time prior to the Maturity Date will be (A) an “employee benefit plan” as
defined in Section 3(3) of ERISA, subject to Title I of ERISA, (B) a “plan”
described in Section 4975(e)(1) of the Code to which Section 4975 of the Code
applies or (C) an entity whose underlying assets could be deemed to include
“plan assets” by reason of an employee benefit plan’s or a plan’s investment in
the entity within the meaning of 29 C.F.R. Section 2510.3-101 (as modified by
Section 3(42) of ERISA) or otherwise;

 

(ix)         in the case of the Senior Commitment Party and the initial Senior
Noteholder, it understands that the Senior Notes are not transferable except to
a transferee that makes all of the representations and warranties contained in a
Transfer Certificate or following receipt by the Issuer of an opinion of
nationally recognized counsel acceptable to the Issuer to the effect that,
following such transfer, the Senior Notes will continue to be exempt from the
registration requirements of the Securities Act and that neither the Issuer nor
the pool of assets owned by the Issuer will be required to register as an
investment company under the Investment Company Act; and

 

18

 

 

(x)          in the case of the Junior Noteholder, it understands that the
Junior Notes may not be transferred.

 

(c)          The Junior Noteholder represents and warrants to the Issuer and
each Credit Suisse Party, and CS (in its capacities as Senior Commitment Party
and initial Senior Noteholder) represents and warrants to the Issuer, as of the
date of this Agreement and as of each Draw Date that:

 

(i)          no Credit Suisse Party has given the Junior Noteholder, and no
Portfolio Manager Party has given CS (directly or indirectly through any other
person) any assurance, guarantee or representation whatsoever as to the expected
or projected success, profitability, return, performance, result, effect,
consequence or benefit (including legal, regulatory, tax, financial, accounting
or otherwise) of the Notes;

 

(ii)         it acknowledges that, other than as expressly set forth herein, it
has no rights or recourse with respect to the Collateral Debt Obligations or
against any Credit Suisse Party, the Portfolio Manager or the Issuer;

 

(iii)        sales of Collateral Debt Obligations may result in Trading Losses
that may reduce the amount payable on the Notes under the Priority of Payments;

 

(iv)        in the case of the Junior Noteholder, none of the Credit Suisse
Parties has a fiduciary, advisory or agency relationship with the Junior
Noteholder or its affiliates in respect of any of the transactions contemplated
by this Agreement, irrespective of whether any Credit Suisse Party has advised
or is advising the Junior Noteholder (or its affiliates) on other matters and it
waives, to the fullest extent permitted by law, any claims it may have against
the Credit Suisse Parties for breach of fiduciary duty or alleged breach of
fiduciary duty in respect of any of the transactions contemplated by this
Agreement and agrees that the Credit Suisse Parties shall have no liability
(whether direct or indirect) to the Junior Noteholder (or its affiliates) in
respect of any such fiduciary duty claim or to any person asserting a fiduciary
duty claim on behalf of or in right of the Junior Noteholder (or its
affiliates), including directors, partners, equity holders, employees or
creditors of the Junior Noteholder (or its affiliates);

 

(v)         in the case of each Credit Suisse Party, the Portfolio Manager does
not have a fiduciary, advisory or agency relationship with any Credit Suisse
Party in respect of any of the transactions contemplated by this Agreement,
irrespective of whether the Portfolio Manager has advised or is advising any
Credit Suisse Party on other matters and it waives, to the fullest extent
permitted by law, any claims it may have against the Portfolio Manager for
breach of fiduciary duty or alleged breach of fiduciary duty in respect of any
of the transactions contemplated by this Agreement and agrees that the Portfolio
Manager shall have no liability (whether direct or indirect) to any Credit
Suisse Party in respect of any such fiduciary duty claim or to any person
asserting a fiduciary duty claim on behalf of or in right of any Credit Suisse
Party, including directors, partners, equity holders, employees or creditors of
any Credit Suisse Party;

 

(vi)        in the case of the Junior Noteholder, it has been advised that the
Credit Suisse Parties are engaged in a broad range of transactions which may
involve interests that differ from those of the Junior Noteholder (or its
affiliates) and agrees that the Credit Suisse Parties have no obligation to
disclose such interests and transactions to the Junior Noteholder (or its
affiliates) by virtue of any fiduciary, advisory or agency relationship or
otherwise; and

 

19

 

 

(vii)       in the case of each Credit Suisse Party, it has been advised that
the Portfolio Manager is engaged in a broad range of transactions which may
involve interests that differ from those of any Credit Suisse Party and agrees
that the Portfolio Manager has no obligation to disclose such interests and
transactions to any Credit Suisse Party by virtue of any fiduciary, advisory or
agency relationship or otherwise.

 

(d)          The Junior Noteholder represents and warrants to each Credit Suisse
Party as of the date of this Agreement and as of each Draw Date that:

 

(i)          the Senior Commitment Party may, in its sole discretion, decline to
purchase or finance any Collateral Debt Obligations selected by the Portfolio
Manager, and will be free, in its sole discretion, to follow or decline to
follow any recommendations made by the Portfolio Manager, the Junior Noteholder
or any other entity with respect to the Collateral Debt Obligations;

 

(ii)         the Credit Suisse Parties are full service securities firms engaged
in securities trading and brokerage activities, as well as the provision of
investment banking and structuring services. In the ordinary course of their
business, the Credit Suisse Parties may from time to time effect transactions
for their own accounts or for the accounts of customers, and underwrite, act as
placement agent for or hold positions in, securities or options on securities of
the Portfolio Manager, its affiliates and obligors of the Collateral Debt
Obligations, may act as selling institution with respect to participations that
are Collateral Debt Obligations and may sell certain Collateral Debt Obligations
to the Issuer;

 

(e)          The Issuer represents to each Credit Suisse Party, the Junior
Noteholder and the Bank as of the date of this Agreement and as of each Draw
Date that:

 

(i)          It (A) has not incurred any material liability or contingent
obligation except under this Agreement and the Collateral Administration
Agreement and as may be satisfied or terminated as of the date hereof and (B)
has no subsidiaries. The Issuer has issued no shares or other equity interests
other than its ordinary shares and no securities other than the Senior Notes and
Junior Notes. All payments that the Issuer may make in respect of debt other
than the Senior Notes or the Junior Notes hereunder are expressly subordinated
to the Senior Notes and the Junior Notes hereunder.

 

(ii)         It is the sole owner of and has full power, authority and legal
right to pledge and transfer all assets pledged by it hereunder free and clear
of, and such pledge and transfer will not create, any lien thereon (other than
the lien created by this Agreement), and upon filing of a financing statement
under the Uniform Commercial Code with the Recorder of Deeds of the District of
Columbia with respect thereto naming the Issuer as debtor and the Collateral
Agent as secured party, the Collateral Agent will have a first priority
perfected security interest in such assets. The Issuer acquired ownership of
such assets for value in good faith without notice of any adverse claim and has
not assigned, pledged or otherwise encumbered any interest in such assets other
than hereunder.

 

(iii)        Its full and correct legal name as of the date hereof is as set
forth in the preamble hereof. It is an exempted limited liability company
incorporated under the laws of the Cayman Islands. Its location (as defined in
Section 9-307 of the Uniform Commercial Code), place of business and chief
executive office is: P.O. Box 1093, Boundary Hall, Cricket Square, Grand Cayman,
KY1-1102, Cayman Islands.

 

20

 

 

Section 7.2.          Covenants of the Portfolio Manager.

 

(a)          The Portfolio Manager agrees that a Portfolio Manager Breach shall
be deemed to have occurred unless on or before March 15, 2012, the Portfolio
Manager:

 

(i)          has completed the acquisition of the rights to receive the CLO
Asset Management Fees;

 

(ii)         has an unencumbered right to grant a security interest in such CLO
Asset Management Fees to the Issuer;

 

(iii)        has granted to the Issuer a security interest in the CLO Asset
Management Fees, which security interest is perfected and senior to the rights
of any creditor of the Portfolio Manager other than the Issuer; and

 

(iv)        has arranged for the CLO Asset Management Fees to be paid to the CLO
Asset Management Fees Account until such time as the Outstanding Senior Note
Amount has been reduced to zero and has taken such other measures as the Issuer
may reasonably request for the perfection of such security interest.

 

(b)          Upon the occurrence of a Portfolio Manager Breach, the Portfolio
Manager will promptly notify the Issuer, the Senior Commitment Party, the
Arranger and the Bank, in its capacities as Collateral Administrator and
Collateral Agent.

 

Section 7.3.          Covenants of the Issuer.

 

(a)          At least one of the directors of the Issuer will be a person who
(i) does not have and is not committed to acquire any material direct or
indirect financial interest in the Issuer or in an portfolio manager of the
foregoing, and (ii) is not connected with the Issuer or the portfolio manager of
the Issuer as an officer, employee, promoter, underwriter, voting trustee,
partner, director (except as in the capacity of an independent director) or
person performing similar functions.

 

(b)          The Issuer will not enter into any agreements that provide for a
future financial obligation on the part of the Issuer, except for any agreements
that contain customary “no petition” and limited recourse provisions or where a
reserve has been established solely for the payment such future financial
obligations.

 

(c)          The Issuer will at all times:

 

(i)          maintain its books, accounting records and other corporate
documents and records separate from those of its affiliates or any other entity;

 

(ii)         not commingle its assets with those of any affiliate or any other
entity, and not hold itself out as being liable for the debts of another;

 

(iii)        maintain its books of account separate from those of any affiliate;

 

(iv)        act solely in its corporate name and through its own authorised
Directors, officers and agents (including attorneys-in-fact appointed for and on
behalf of the Issuer);

 

(v)         not send out any correspondence or any written communication in the
name of the Issuer on the letterhead of any affiliate or other entity;

 

21

 

 

(vi)        separately manage its liabilities from those of any of its
affiliates and pay its own liabilities from its own separate assets;

 

(vii)       pay from its assets all obligations and indebtedness of any kind
incurred by the Issuer;

 

(viii)      operate in such a manner that it would not be substantively
consolidated with any other entity

 

(ix)         maintain an arm’s-length relationship with its affiliates;

 

(x)          not acquire any obligations, securities of any partner, member or
shareholder;

 

(xi)         not pledge its assets for the benefit of any other entity or make
any loans or advances to any entity (except as provided in the transaction
documents);

 

(xii)        maintain separate financial statements, if any;

 

(xiii)       hold itself out as a separate entity;

 

(xiv)      correct any known misunderstanding regarding its separate identity;

 

(xv)       maintain adequate capital in light of its contemplated business
operations; and

 

(xvi)      not engage in any business or activity other than as permitted in
this Agreement (or incidental thereto), or with the consent of the Senior
Commitment Party.

 

(d)          The Issuer will abide by all corporate formalities, including the
maintenance of current minute books, and the Issuer will keep books and records
in a manner that indicates the separate existence of the Issuer and its assets
and liabilities.

 

(e)          The Issuer will not assume the liabilities of any other, and will
not guarantee the liabilities of any other.

 

(f)          The officers of the Issuer and the Directors will make decisions
with respect to the business and daily operations of the Issuer independent of
and not dictated by any affiliate of the Issuer.

 

(g)          The Issuer will not have any employees (other than its directors).

 

(h)          The Issuer will not establish any subsidiaries without consent of
the Senior Commitment Party except to the extent such subsidiary is established
to prevent the Issuer from being subject to withholding taxes or from being
engaged, or deemed to be engaged, in the conduct of a trade or business in the
United States for U.S. federal income tax purposes or otherwise subject to tax
on a net basis in any jurisdiction. Any subsidiary of the Issuer will be subject
to restrictions and limitations comparable to those set forth herein, including
those set forth in this Section 7.3.

 

22

 

 

ARTICLE VIII

THE COLLATERAL

 

Section 8.1.          Collateral.

 

(a)          As collateral security for the performance of its obligations
hereunder, the Portfolio Manager hereby (i) pledges to the Issuer and grants to
the Issuer a security interest in all of the Portfolio Manager’s right, title
and interest in, to and under the CLO Asset Management Fees and all proceeds of
the foregoing, in each case whether now owned or hereafter acquired and whether
now existing or hereafter coming into existence and (ii) acknowledges and agrees
that the Issuer will pledge its rights therein to the Collateral Agent as
provided in Section 8.1(b).

 

(b)          As collateral security for the prompt payment in full and
performance when due (whether at stated maturity, by acceleration, by
liquidation or otherwise) of the Secured Obligations to the Collateral Agent on
behalf of the Secured Parties in accordance with the Priority of Payments, the
Issuer hereby pledges to the Collateral Agent and grants to the Secured Parties
a security interest in all of the Issuer’s right, title and interest in, to and
under (i) each Collateral Debt Obligation, (ii) all underlying instruments with
respect to Collateral Debt Obligations, (iii) the Collateral Administration
Agreement, (iv) the Administration Agreement by and between the Issuer and
MaplesFS Limited, as amended from time to time in accordance with its terms, (v)
the Registered Office Agreement dated as of September 26, 2011 by and between
the Issuer and MaplesFS Limited, as amended from time to time in accordance with
its terms, (vi) each Account and all assets credited to and funds on deposit
therein, (vii) the CLO Asset Management Fees and (viii) all proceeds of the
foregoing, in each case whether now owned or hereafter acquired and whether now
existing or hereafter coming into existence, other than Excepted Property
(collectively, the “Collateral”).

 

(c)          The Issuer will:

 

(i)          Deliver to the Collateral Administrator any and all securities and
instruments evidencing or otherwise relating to Collateral, endorsed and/or
accompanied by such instruments of assignment and transfer in such form and
substance as the Secured Parties may reasonably request, including by taking all
steps necessary to ensure that all Collateral Debt Obligations are credited to
the applicable Account and the CLO Asset Management Fees are credited to the CLO
Asset Management Fees Account by the Collateral Administrator and held in
accordance with the Collateral Administration Agreement;

 

(ii)         give, execute, deliver, file and/or record any financing statement,
notice, instrument, document, agreement or other papers that may be necessary or
desirable (in the reasonable judgment of either Secured Party) to create,
preserve, perfect or validate the security interest granted hereunder or to
enable the Senior Noteholder to exercise and enforce its rights hereunder with
respect to such pledge and security interest;

 

(iii)        promptly furnish or cause to be furnished to the Senior Noteholder
or Junior Noteholder any information that it may reasonably request concerning
the Collateral; and

 

(iv)        preserve and protect (with respect to the Collateral) the Secured
Parties’ perfected, first priority security interest in the Collateral, and take
or cause any action requested by a Secured Party and necessary to preserve,
defend, protect or perfect such first priority security interest.

 

23

 

 

(d)          Except as expressly permitted hereunder and under the Collateral
Administration Agreement, the Portfolio Manager (with respect to the CLO Asset
Management Fees) and the Issuer (with respect to the Collateral) will not sell,
assign, pledge, grant any security interest in, exchange, transfer, hypothecate
or otherwise dispose of or grant any option with respect to such CLO Asset
Management Fees or Collateral, respectively, or agree to do any of the
foregoing, without the prior written consent of Senior Commitment Party.

 

(e)          The Secured Parties hereby appoint the Bank as “Collateral Agent”
to act on their behalf in accordance with this Agreement. If a Liquidation Event
occurs, the liquidation shall be effected as set forth in Section 3.2. The Bank
in each of its capacities under this Agreement shall have the same indemnities
and immunities provided to the Bank as Collateral Administrator under the
Collateral Administration Agreement. In connection with a resignation of the
Bank as Collateral Administrator, the Bank may resign from its other capacities
pursuant to this Agreement.

 

(f)          The Issuer hereby irrevocably appoints the Collateral Agent as its
attorney-in-fact with full power of substitution and authorizes the Collateral
Agent to take any action and execute any instruments with respect to the
Collateral that the Controlling Party may deem necessary or advisable in
connection with (i) the Issuer’s grant of a security interest in the Collateral
to the Secured Parties and any rights and remedies that the Collateral Agent may
exercise in respect thereof upon the occurrence a Liquidation Event, (ii) the
filing of one or more financing or continuation statements with respect to the
Collateral, (iii) the sale, termination or other disposition of any Collateral
Debt Obligations as provided herein or (iv) accomplishing any other purposes of
this Agreement. The Issuer agrees that the powers granted by this paragraph are
exercisable at the direction of the Controlling Party and are not intended to
impose the obligations of Issuer on the Collateral Agent. This power of attorney
shall be binding upon, and enforceable against, all beneficiaries, successors,
assigns, transferees and legal representatives of the Issuer.

 

(g)          The security interest granted to secure the Secured Obligations
hereunder shall be terminated and released and all rights in the Collateral will
revert to the Issuer on the Refinancing Date upon application of the Available
Funds in accordance with the Priority of Payments. In connection with such
termination and release, the Collateral Agent shall execute and deliver such
documents, instruments and certificates as the Issuer shall reasonably require
at the Issuer’s expense.

 

ARTICLE IX

PORTFOLIO MANAGER

 

Section 9.1.          Portfolio Manager.

 

(a)          The Issuer hereby appoints the Portfolio Manager to be the Issuer’s
portfolio manager for purposes of the transactions contemplated by this
Agreement for so long as this Agreement shall be in effect, and the Portfolio
Manager hereby accepts such appointment. Such appointment shall terminate
automatically (x) upon the execution of an investment management agreement among
the Issuer, the Portfolio Manager and any other third parties on the Refinancing
Date or (y) if a Liquidation Event occurs, on the Final Settlement Date.
Pursuant to this Agreement, the Portfolio Manager shall provide the following
services to the Issuer: selecting, supervising, managing, monitoring and
directing on behalf of the Issuer the investment, reinvestment and disposition
of Collateral Debt Obligations and assisting the Issuer in fulfilling its
obligations, and exercising the rights and obtaining the benefits to which it is
entitled, hereunder and under and in connection with Collateral Debt
Obligations. Without limiting the foregoing:

 

24

 

 

(i)          the Portfolio Manager shall, except as otherwise expressly required
hereunder, perform its obligations hereunder with reasonable care and in a
manner that the Portfolio Manager reasonably believes is consistent with those
policies and procedures as are customarily used by institutional managers of
recognized standing in connection with the management of assets of the nature
and the character of the Collateral Debt Obligations (and to the extent not
inconsistent with the foregoing, the Portfolio Manager shall follow its
customary standards, policies and procedures in performing its duties
hereunder);

 

(ii)         the Portfolio Manager shall exercise reasonable care to avoid
taking any action that would (i) not be permitted under the organizational
documents of the Issuer, (ii) cause the Issuer to violate any law, rule or
regulation of any governmental body or agency having jurisdiction over the
Issuer, (iii) require registration of the Issuer as an “investment company”
under the Investment Company Act, (iv) cause the Issuer to be engaged in a trade
or business in the United States, or (v) cause the Issuer to violate the terms
hereof;

 

(iii)        the Portfolio Manager shall comply in all material respects with
all laws and regulations applicable to it in connection with the performance of
its duties hereunder; and

 

(iv)        to the extent it is necessary or appropriate in the judgment of the
Portfolio Manager to perform any services to be performed by it as portfolio
manager hereunder and in connection with any related documents and Collateral
Debt Obligations, the Portfolio Manager shall have the power to execute and
deliver documents and instruments and take actions in the name of or on behalf
of the Issuer with respect thereto (and the Issuer agrees to follow the lawful
instructions and directions of the Portfolio Manager in performing its services
hereunder).

 

(b)          The Portfolio Manager assumes no responsibility or liability
hereunder other than to render the services required to be performed hereunder
in good faith and (subject to the standard of conduct described in above) shall
not be responsible for and shall have no liability for any action or inaction of
the Issuer, the Arranger, the Senior Commitment Party, the Collateral
Administrator or any other person in following or declining to follow any
advice, recommendation or direction of the Portfolio Manager. None of the
Portfolio Manager, its affiliates and any of their respective members, managers,
directors, officers, stockholders, agents, partners or employees shall be liable
to the Issuer, the Lender or any other person for any expenses, losses, claims,
damages, judgments, assessments, charges, demands, costs or other liabilities
(collectively, “Liabilities”) incurred by the Issuer, the Lender or such other
person that arise out of or in connection with the performance by the Portfolio
Manager of the services required to be performed hereunder or for any decrease
in the value of the Collateral Debt Obligations, except for Liabilities arising
from (i) a failure of the Portfolio Manager to adhere to the standards of
conduct described in clause (a) above or (ii) a failure of the Portfolio Manager
to render the services required to be performed hereunder in good faith.

 

(c)          The Portfolio Manager shall devote such part of its time as is
reasonably needed for the performance of the services contemplated by this
Agreement; provided that this Agreement shall not prevent the Portfolio Manager
from rendering similar services to other persons. Nothing in this Agreement
shall limit or restrict the Portfolio Manager or any of its officers, affiliates
or employees from, as permitted by law, buying, selling or trading in any
securities for its own or their own accounts. The Arranger, CS and the Issuer
acknowledge that the Portfolio Manager and its officers, affiliates and
employees, and the Portfolio Manager’s other clients may as permitted by law at
any time have, acquire, increase, decrease, or dispose of positions in
investments which are at the same time being acquired or disposed of by the
Issuer.

 

25

 

 

(d)          The Portfolio Manager shall not purchase any Collateral Debt
Obligation for inclusion in the Collateral directly from itself or any of its
affiliates as principal or any account or portfolio for which Portfolio Manager
or any of its affiliates serve as investment advisor, or sell directly any
Collateral Debt Obligation to itself or any of its affiliates as principal or
any account or portfolio for which the Portfolio Manager or any of its
affiliates serve as investment advisor, unless the Portfolio Manager shall have
certified to the Issuer with respect to each such transaction that (i) such
transaction is exempt from the prohibited transaction rules of ERISA and the
Code, if applicable, and will be consummated on terms prevailing in the market,
(ii) the terms of such transaction are substantially as advantageous to the
Issuer as the terms the Issuer would obtain in a comparable arm’s length
transaction with a non-affiliate and (iii) such transaction complies with the
Advisers Act, to the extent applicable. In accordance with the foregoing, the
Portfolio Manager may effect client cross-transactions where the Portfolio
Manager causes a transaction to be effected between the Issuer and another fund
or another account managed or advised by it or one or more of its affiliates,
but neither it nor the affiliate will receive any commission or similar fee in
connection with such cross-transaction.

 

(e)           The Portfolio Manager is responsible for the investment decisions
made on behalf of other advisory clients, including certain discretionary
accounts. The Portfolio Manager may determine that the Issuer and one or more
other clients should purchase or sell the same loans at the same time. In
addition, from time to time, the Portfolio Manager may aggregate purchase or
sale orders for loans in the secondary market for clients. In either case, the
Portfolio Manager will follow its customary practices and policies. Under some
circumstances, such aggregation or allocation may adversely affect the Issuer
with respect to the price or size or the loan positions obtainable or salable.
Moreover, it is possible, due to differing investment objectives or other
reasons, that the Portfolio Manager or its affiliates may purchase loans of an
issuer for one client and sell such loans for another client, including the
Issuer. Therefore, the Issuer may not participate in gains or losses that were
experienced by other client accounts (and the Issuer’s portfolio yield may be
higher or lower than that of other client accounts) with similar investment
objectives.

 

(f)          The Portfolio Manager will not (i) sell, assign or transfer the
management agreements under which the CLO Asset Management Fees are paid to the
Portfolio Manager, (ii) amend or modify such management agreements with regard
to the payment of CLO Asset Management Fees (other than an amendment to increase
such fees) or (iii) otherwise take or permit any action to be taken that would
impair or encumber the right of the Portfolio Manager to receive the CLO Asset
Management Fees, in each case until the Outstanding Senior Note Amount and the
Senior Note Commitment Amount have been reduced to zero.

 

ARTICLE X

MISCELLANEOUS

 

Section 10.1.          This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.

 

Section 10.2.          This Agreement shall remain in full force and effect
until the Final Settlement Date. Upon the application of all Available Funds in
accordance with the Priority of Payments, on the Final Settlement Date, this
Agreement shall automatically terminate without any further action by the
parties hereto. The parties hereto shall not be bound by any modification,
amendment, termination, cancellation, rescission or supersession of this
Agreement unless the same shall be in writing and signed by each party.

 

Section 10.3.          No assignment of this Agreement shall be made by the
Junior Noteholder without the prior written consent of the Senior Commitment
Party. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.

 

26

 

 

Section 10.4.          References in this Agreement to “$” refer to United
States Dollars.

 

Section 10.5.          This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.

 

Section 10.6.          Notwithstanding any other provision of this Agreement,
the parties hereto may not, prior to the date that is one year (or, if longer,
the then applicable preference period) plus one day after termination of this
Agreement or, in the event securities of the Issuer are issued pursuant to any
Refinancing Transaction, the payment in full of all such notes institute
against, or join any other individual or entity in instituting against the
Issuer, any bankruptcy, reorganization, arrangement, insolvency, moratorium or
liquidation proceedings, or other proceedings under Cayman Islands bankruptcy
laws, United States federal or state bankruptcy laws, or any similar laws.

 

None of the directors, officers, incorporators, shareholders, partners, agents
or employees of the Issuer shall be personally liable for any of the obligations
of the Issuer under this Agreement. Notwithstanding anything to the contrary
contained herein, the Issuer’s sole source of funds for payment of all amounts
due hereunder shall be the Collateral, and, upon application of the proceeds of
the Collateral in accordance with the terms and under the circumstances
described herein (including the Priority of Payments), no recourse shall be had
against the Issuer for any amounts still outstanding by the Issuer and all
obligations of, and any claims against, the Issuer arising from this Agreement
or any transactions contemplated hereby shall be extinguished and shall not
thereafter revive.

 

The provisions of this Section 10.6 shall survive the termination of this
Agreement.

 

Section 10.7.          The parties hereto irrevocably submit to the
non-exclusive jurisdiction of the United States District Court for the Southern
District of New York and any court of the State of New York located in the City
and County of New York, and any appellate court from any court thereof, in any
action, suit or proceeding brought against it, arising out of or relating to
this Agreement or the transactions contemplated hereunder or for recognition or
enforcement of any judgment, and the parties hereto hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard or determined in such New York State court or, to the
extent permitted by law, in such federal court. The parties hereto agree that a
final judgment in any such action, suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. To the extent permitted by applicable law, the parties
hereto hereby waive and agree not to assert by way of motion, as a defense or
otherwise in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that the related documents or the subject
matter thereof may not be litigated in or by such courts.

 

Section 10.8.          THE PARTIES HERETO VOLUNTARILY AND INTENTIONALLY WAIVE
ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR THE
COLLATERAL ADMINISTRATION AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THE PARTIES
HERETO AND THERETO. THE PARTIES HERETO HEREBY AGREE THAT THEY WILL NOT SEEK TO
CONSOLIDATE ANY SUCH LITIGATION WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL
HAS NOT OR CANNOT BE WAIVED. THE PROVISIONS OF THIS SECTION 10.8 HAVE BEEN FULLY
NEGOTIATED BY THE PARTIES HERETO AND SHALL BE SUBJECT TO NO EXCEPTIONS. EACH
PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR EACH PARTY ENTERING INTO THIS AGREEMENT AND THE COLLATERAL
ADMINISTRATION AGREEMENT.

 

27

 

 

Section 10.9.          The Bank, in its capacities as Collateral Agent and
Collateral Administrator, agrees to accept and act upon instructions or
directions pursuant to this Agreement sent by unsecured email, facsimile
transmission or other similar unsecured electronic methods; provided, however,
that each party providing such instructions or directions shall provide to the
Bank an incumbency certificate listing persons designated to provide such
instructions or directions, which incumbency certificate shall be amended
whenever a person is added or deleted from the listing. If such party elects to
give the Bank email or facsimile instructions (or instructions by a similar
electronic method) and the Bank in its discretion elects to act upon such
instructions, the Bank’s reasonable understanding of such instructions shall be
deemed controlling. The Bank shall not be liable for any losses, costs or
expenses arising directly or indirectly from the Bank’s reliance upon and
compliance with such instructions notwithstanding such instructions conflicting
with or being inconsistent with a subsequent written instruction received by the
Bank after such action taken by the Bank in reliance upon or in compliance with
such earlier instructions. Each party hereto agrees to assume all risks arising
out of the use of such electronic methods to submit instructions and directions
to the Bank, including without limitation the risk of the Bank acting on
unauthorized instructions, and the risk of interception and misuse by third
parties. Any party providing such instructions acknowledges and agrees that
there may be more secure methods of transmitting such instructions than the
method(s) selected by it and agrees that the security procedures (if any) to be
followed in connection with its transmission of such instructions provide to it
a commercially reasonable degree of protection in light of its particular needs
and circumstances.

 

Section 10.10.         Notwithstanding anything to the contrary, (a) the Issuer
and each holder and each beneficial owner of a Senior Note, by acceptance of its
Senior Note, or its interest in a Senior Note, will be deemed to have agreed to
treat, and will treat, such Senior Note (or interest therein) as debt of the
Issuer for U.S. federal, state and local income tax purposes, and will be deemed
to acknowledge that the Issuer will treat the Senior Notes as debt of the Issuer
for U.S. federal income tax purposes and (b) the Issuer and each holder and each
beneficial owner of a Junior Note, by acceptance of its Junior Note or its
interest therein will be deemed to have agreed to treat, and will treat, such
Junior Note (or interest therein) as equity in the Issuer for U.S. federal
income tax purposes.

 

28

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Note Purchase
Agreement as of the date first written above.

 

CREDIT SUISSE SECURITIES (USA) LLC,   CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH,
as Arranger   as Senior Commitment Party and Senior Noteholder           By: /s/
Brad Larson       Name:   Brad Larson        Title: Director   By:  /s/ Bik Kwan
Chung        Name:    Bik Kwan Chung        Title:  Authorized Signatory       
                    By: /s/ Louis J. Impellizeri       Name: Louis J.
Impellizeri       Title: Authorized Signatory           KOHLBERG CAPITAL
CORPORATION,   KCAP FUNDING, as Portfolio Manager and Junior Noteholder   as
Issuer           By: /s/ Dayl W. Pearson   By: /s/ Cleveland Stewart Name:  
Dayl W. Pearson   Name:   Cleveland Stewart Title: Chief Executive Officer  
Title:  Director   Kohlberg Capital Corporation                 THE BANK OF NEW
YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION,       as Collateral
Administrator and Collateral Agent                 By: /s/ MARIA D. CALZADO    
  Name: MARIA D. CALZADO       Title: Vice President      

 

 

 

 

SCHEDULE 1

 

NOTICE ADDRESSES

 

Arranger:   Credit Suisse Securities (USA) LLC     11 Madison Avenue     New
York, New York  10010     Attention:  Brad Larson; Sandeep Hoshing          
telephone number:  (212) 325-9207; (212) 325-1819     fax number:  (212)
743-5484           email: brad.larson@credit-suisse.com;    
sandeep.hoshing@credit-suisse.com       Senior Commitment Party:   Credit Suisse
AG, Cayman Islands Branch     11 Madison Avenue     New York, New York  10010  
  Attention:  Brad Larson; Sandeep Hoshing           telephone number:  (212)
325-9207; (212) 325-1819     fax number:  (212) 743-5484           email:
brad.larson@credit-suisse.com;     sandeep.hoshing@credit-suisse.com      
Senior Noteholder:   as specified in the Note Register, which shall initially be
          Credit Suisse AG, Cayman Islands Branch     11 Madison Avenue     New
York, New York  10010     Attention:  Brad Larson; Sandeep Hoshing          
telephone number:  (212) 325-9207; (212) 325-1819     fax number:  (212)
743-5484           email: brad.larson@credit-suisse.com;    
sandeep.hoshing@credit-suisse.com       Portfolio Manager:   Kohlberg Capital
Corporation     295 Madison Avenue, Floor 6     New York, New York  10017    
Attention:  Dan Gilligan           telephone number:  (212) 455-8333     fax
number:  (212) 983-7654           email: gilligan@kohlbergcap.com

 

Schedule 11 

 

 

Junior Noteholder:   as specified in the Note Register, which shall initially be
          Kohlberg Capital Corporation     295 Madison Avenue, Floor 6     New
York, New York  10017     Attention:  Dan Gilligan           telephone number: 
(212) 455-8333     fax number:  (212) 983-7654           email:
gilligan@kohlbergcap.com       Issuer   KCAP Funding     c/o MaplesFS Limited  
  P.O. Box 1093     Boundary Hall, Cricket Square     Grand Cayman, KY1-1102    
Cayman Islands     Attention:  Directors – KCAP Funding           telephone
number:  (345) 945-7099     fax number:  (345) 945-7100 (with a copy to +1 (345)
949-8080)           email: cayman@maplesfs.com       Collateral Administrator:  
The Bank of New York Mellon Trust Company, National Association     601 Travis
Street, 16th Floor     Houston, Texas 77002     Attention:  Global Corporate
Trust – KCAP Funding           telephone number: (713) 483-6000     fax number: 
(713) 483-6001           email: maria.calzado@bnymellon.com;    
brian.j.kapko@bnymellon.com

 

Schedule 12 

 

 

EXHIBIT A

 

REPORTING

 

I.           Content of Collateral Reports

 

Each Collateral Report will include, to the extent such information is
available:

 

(a)          Daily

 

For each Collateral Debt Obligation:

 

·Identification number (e.g., CUSIP, LoanX ID);

·Issuer name;

·Asset name;

·Asset type;

·Spread;

·Maturity Date;

·Principal amount (par balance);

·Purchase Price (expressed as a percentage of par);

·Settlement date;

·LIBOR setting

·Accrued interest, amount of interest paid;

·The amount of any principal proceeds (including any sale proceeds or principal
prepayments);

·Date of any principal prepayment;

·Moody’s Rating, S&P Rating (if available); and

·Moody’s industry category (if available).

 

(b)          Monthly

 

Based on information in (a) and with respect to all Collateral Debt Obligations
a calculation of the following determined as of the last Business Day of the
preceding month:

 

·the aggregate principal proceeds (including any sale proceeds or principal
prepayments) received since the prior reporting period;

 

·the amount on deposit in each Account;

 

·the Gross Purchase Price; and

 

·the aggregate Loan Facility Interest.

 

Exhibit A1 

 

 

(c)          Payment Date

 

·the information set forth in (b) determined as of the third Business Day prior
to such Payment Date;

 

·the amount of Available Funds to be distributed on such Payment Date;

 

·the amount of CLO Asset Management Fees (if any) to be distributed on such
Payment Date; and

 

·a detailed accounting of the amounts to be distributed on such Payment Date
under each level of the Priority of Payments.

 

Final Settlement Date

 

Each Collateral Report will include the information set forth in (b) determined
as of the dates set forth in Section 6.1(b).

 

Exhibit A2 

 

 

II.          Wire instructions

 

The Bank of New York Mellon

ABA # [  ]

For Credit to GLA: [  ]

For Final Credit to: [  ]

Account Name: KCAP Funding

Attention: Brian Kapko

Reference: Borrower Name, Type of Payment/Description

 

Exhibit A3 

 

 

EXHIBIT B

 

FORM OF NOTICE OF BORROWING

 

NOTICE OF BORROWING

[Date]

 

Credit Suisse AG, Cayman Islands Branch

 

[                                         ]

 

We refer to the Note Purchase Agreement dated as of February 24, 2012 (the
“Agreement”) providing for a loan to KCAP Funding (the “Issuer”). Capitalized
terms defined in the Agreement and used but not defined herein have the meanings
given to them in the Agreement.

 

Pursuant to Section 2.3 of the Agreement, the Issuer hereby gives the Senior
Commitment Party and the Junior Noteholder notice that the Issuer requests to
borrow under the Agreement:

 

the Senior Note Required Draw Down Amount equal to $ _______________

 

No later than 10 a.m. (New York time) on draw date specified below (the “Draw
Date”), the proceeds of the borrowing are to be credited to the following
account:

 

Account Number: [                         ]

Account Name: [                         ]

Attention: [                         ]

Reference: Borrower Name, Type of Payment/Description

 

Draw Date: ________________

 

  [                                                     ]         By:       
Name:        Title:

 

Portfolio Manager Certification:

 

The Portfolio Manager certifies that the conditions precedent set forth in
Section 2.3 have been satisfied and that the Conditions of Accumulation have
been satisfied with respect to the purchased (but unsettled) Collateral Debt
Obligations to which the proceeds of the borrowing will be applied.

 

[                                         ]

 

By:   Name:     Title:   

 

cc: Collateral Administrator

 

Exhibit B1 

 

 

EXHIBIT C

 

FORM OF SENIOR NOTE

 

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THE ISSUER HAS
NOT BEEN REGISTERED UNDER THE UNITED STATES INVESTMENT COMPANY ACT OF 1940, AS
AMENDED (THE “INVESTMENT COMPANY ACT”). THIS SECURITY AND INTERESTS HEREIN MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT (A)(1) TO A
QUALIFIED PURCHASER (FOR PURPOSES OF THE INVESTMENT COMPANY ACT) THAT THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT THAT IS NOT A BROKER-DEALER WHICH OWNS AND
INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25 MILLION IN SECURITIES OF
ISSUERS THAT ARE NOT AFFILIATED PERSONS OF THE DEALER AND IS NOT A PLAN REFERRED
TO IN PARAGRAPH (a)(1)(i)(D) OR (a)(1)(i)(E) OF RULE 144A OR A TRUST FUND
REFERRED TO IN PARAGRAPH (a)(1)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH
A PLAN, IF INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE
BENEFICIARIES OF THE PLAN, PURCHASING FOR ITS OWN ACCOUNT, IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, OR (2) TO A NON-U.S. PERSON
IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS
APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO
THE SATISFACTION OF CERTAIN CONDITIONS SPECIFIED IN THE AGREEMENT REFERRED TO
BELOW, AND IN EACH CASE WHICH MAY BE EFFECTED WITHOUT LOSS OF ANY APPLICABLE
INVESTMENT COMPANY ACT EXEMPTION, AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE
JURISDICTION.

 

THIS NOTE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SECTION 2.1 OF THE
AGREEMENT REFERENCED BELOW. ANY PURPORTED TRANSFER IN VIOLATION OF THE
REQUIREMENTS SET FORTH THEREIN SHALL BE NULL AND VOID AB INITIO.

 

Senior Note Initial Commitment Amount:  $[                ]   [DATE]
Registration Number:  S-[  ]    

 

FOR VALUE RECEIVED, KCAP Funding (the “Issuer”) promises to pay to the order of
[insert registered owner name] (the “Senior Noteholder”) in lawful money of the
United States of America and in immediately available funds the principal amount
of [                    ] Million United States Dollars (U.S.$[               ])
or, if less, the Outstanding Senior Note Amount on the Final Settlement Date as
required under the Note Purchase Agreement dated as of February 24, 2012 (the
“Effective Date”) by and among Kohlberg Capital Corporation, in its capacity as
Junior Noteholder (as defined herein), Kohlberg Capital Corporation, in its
capacity as portfolio manager (the “Portfolio Manager”), Credit Suisse AG,
Cayman Islands Branch (“CS”), in its capacities as Senior Commitment Party and
Senior Noteholder (each, as defined herein), Credit Suisse Securities (USA) LLC
(the “Arranger”), KCAP Funding (the “Issuer”) and The Bank of New York Mellon
Trust Company, National Association (the “Bank”), in its capacities as
Collateral Administrator and Collateral Agent (as it may be amended or modified
from time to time, the “Agreement”). Capitalized terms not defined herein will
have the meaning specified in the Agreement.

 

Exhibit C1 

 

 

The Issuer hereby promises to pay the Senior Noteholder interest on the
Outstanding Senior Note Amount at the Senior Note Interest Rate for the
Applicable Interest Period. Although the stated amount hereof may be higher,
this Note shall be enforceable, with respect to the Issuer’s obligation to pay
the principal amount hereof, and interest hereon, only to the extent of the
Outstanding Senior Note Amount. Increases and decreases in the principal amount
of this Note will be recorded in the Note Register and the books and records of
the Collateral Administrator.

 

Notwithstanding anything to the contrary contained in this Note or the
Agreement, the Issuer’s sole source of funds for payment of all amounts due
under this Note and the Agreement shall be the Collateral, and, upon application
of the proceeds of the Collateral in accordance with the terms and under the
circumstances described in the Agreement (including the Priority of Payments),
no recourse shall be had against the Issuer for any amounts still outstanding by
the Issuer and all obligations of, and any claims against, the Issuer arising
from this Note or the Agreement or any transactions contemplated hereby shall be
extinguished and shall not thereafter revive.

 

Notwithstanding anything to the contrary contained in this Note or the
Agreement, the Senior Noteholder may not, prior to the date that is one year
(or, if longer, the then applicable preference period) plus one day after
termination of the Agreement or, in the event securities of the Issuer are
issued pursuant to any Refinancing Transaction, the payment in full of all such
notes institute against, or join any other individual or entity in instituting
against the Issuer, any bankruptcy, reorganization, arrangement, winding-up,
insolvency, moratorium or liquidation proceedings, or other proceedings under
Cayman Islands bankruptcy laws, United States federal or state bankruptcy laws,
or any similar laws.

 

No delay on the part of the Senior Noteholder in exercising any of its options,
powers or rights, or partial or single exercise thereof, shall constitute a
waiver thereof. The options, powers and rights of the Senior Noteholder
specified herein are in addition to those otherwise created.

 

Exhibit C2 

 

 

This Note is the Senior Note referred to in, and is entitled to, the benefits of
the Agreement.

 

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.

 

KCAP FUNDING   By:       Name:    Title:  Director

 

CERTIFICATE OF AUTHENTICATION

 

This is one of the Notes referred to in the within-mentioned Agreement.

 

  THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, as Collateral
Administrator       By:         Authorized Signatory

 

Exhibit C3 

 

 

ASSIGNMENT FORM

 

For value received _____________________________________________________does
hereby sell, assign and transfer unto _______________________________

 

Social security or other identifying number of assignee:

 

Name and address, including zip code, of assignee:

 

the within Note and does hereby irrevocably constitute and appoint ____________
Attorney to transfer the Note on the books of the Issuer with full power of
substitution in the premises.

 

Date:  ______________ Your Signature:           (Sign exactly as your name
appears on the Note)

 

Exhibit C4 

 

 

EXHIBIT D

 

FORM OF JUNIOR NOTE

 

THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THE ISSUER HAS
NOT BEEN REGISTERED UNDER THE UNITED STATES INVESTMENT COMPANY ACT OF 1940, AS
AMENDED (THE “INVESTMENT COMPANY ACT”). THIS SECURITY AND INTERESTS HEREIN MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT (A)(1) TO A
QUALIFIED PURCHASER (FOR PURPOSES OF THE INVESTMENT COMPANY ACT) THAT THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT THAT IS NOT A BROKER-DEALER WHICH OWNS AND
INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25 MILLION IN SECURITIES OF
ISSUERS THAT ARE NOT AFFILIATED PERSONS OF THE DEALER AND IS NOT A PLAN REFERRED
TO IN PARAGRAPH (a)(1)(i)(D) OR (a)(1)(i)(E) OF RULE 144A OR A TRUST FUND
REFERRED TO IN PARAGRAPH (a)(1)(i)(F) OF RULE 144A THAT HOLDS THE ASSETS OF SUCH
A PLAN, IF INVESTMENT DECISIONS WITH RESPECT TO THE PLAN ARE MADE BY THE
BENEFICIARIES OF THE PLAN, PURCHASING FOR ITS OWN ACCOUNT, IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT, OR (2) TO A NON-U.S. PERSON
IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS
APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO
THE SATISFACTION OF CERTAIN CONDITIONS SPECIFIED IN THE AGREEMENT REFERRED TO
BELOW, AND IN EACH CASE WHICH MAY BE EFFECTED WITHOUT LOSS OF ANY APPLICABLE
INVESTMENT COMPANY ACT EXEMPTION, AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE
JURISDICTION.

 

THIS NOTE MAY NOT BE TRANSFERRED.

 

Principal Amount:  $[                ]   [DATE] Registration Number: J-[  ]    

 

FOR VALUE RECEIVED, KCAP Funding (the “Issuer”) promises to pay to the order of
[insert registered owner name] (the “Junior Noteholder”) in lawful money of the
United States of America and in immediately available funds the principal amount
of [                    ] United States Dollars (U.S.$[               ]) or, if
greater or less, the Outstanding Junior Note Amount on the Final Settlement Date
as required under the Note Purchase Agreement dated as of February 24, 2012 (the
“Effective Date”) by and among Kohlberg Capital Corporation, in its capacity as
Junior Noteholder (as defined herein), Kohlberg Capital Corporation, in its
capacity as portfolio manager (the “Portfolio Manager”), Credit Suisse AG,
Cayman Islands Branch (“CS”), in its capacities as Senior Commitment Party and
Senior Noteholder (each, as defined herein), Credit Suisse Securities (USA) LLC
(the “Arranger”), KCAP Funding (the “Issuer”) and The Bank of New York Mellon
Trust Company, National Association (the “Bank”), in its capacities as
Collateral Administrator and Collateral Agent (as it may be amended or modified
from time to time, the “Agreement”). Capitalized terms not defined herein will
have the meaning specified in the Agreement.

 

The Issuer hereby promises to pay the Junior Noteholder interest in the amount
(if any) equal to the Positive Carry due and payable on the Junior Note in
accordance with the Priority of Payments. Although the stated amount hereof may
be higher, this Note shall be enforceable, with respect to the Issuer’s
obligation to pay the principal amount hereof, and interest hereon, only to the
extent of the Outstanding Junior Note Amount. Increases and decreases in the
principal amount of this Note will be recorded in the Note Register and the
books and records of the Collateral Administrator.

 

Exhibit D1 

 

 

The Junior Noteholder agrees for the benefit of the Senior Noteholder that the
Junior Note’s rights in and to the Collateral shall be subordinate and junior to
the Senior Notes to the extent and in the manner set forth in the Agreement
including, without limitation, as set forth in the Priority of Payments

 

Notwithstanding anything to the contrary contained in this Note or the
Agreement, the Issuer’s sole source of funds for payment of all amounts due
under this Note and the Agreement shall be the Collateral, and, upon application
of the proceeds of the Collateral in accordance with the terms and under the
circumstances described in the Agreement (including the Priority of Payments),
no recourse shall be had against the Issuer for any amounts still outstanding by
the Issuer and all obligations of, and any claims against, the Issuer arising
from this Note or the Agreement or any transactions contemplated hereby shall be
extinguished and shall not thereafter revive.

 

Notwithstanding anything to the contrary contained in this Note or the
Agreement, the Junior Noteholder may not, prior to the date that is one year
(or, if longer, the then applicable preference period) plus one day after
termination of the Agreement or, in the event securities of the Issuer are
issued pursuant to any Refinancing Transaction, the payment in full of all such
notes institute against, or join any other individual or entity in instituting
against the Issuer, any bankruptcy, reorganization, arrangement, winding-up,
insolvency, moratorium or liquidation proceedings, or other proceedings under
Cayman Islands bankruptcy laws, United States federal or state bankruptcy laws,
or any similar laws.

 

No delay on the part of the Junior Noteholder in exercising any of its options,
powers or rights, or partial or single exercise thereof, shall constitute a
waiver thereof. The options, powers and rights of the Junior Noteholder
specified herein are in addition to those otherwise created.

 

Exhibit D2 

 

 

This Note is the Junior Note referred to in, and is entitled to, the benefits of
the Agreement.

 

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.

 

KCAP FUNDING   By:       Name:    Title:  Director

 

CERTIFICATE OF AUTHENTICATION

 

This is one of the Notes referred to in the within-mentioned Agreement.

 

  THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, as Collateral
Administrator       By:         Authorized Signatory

 

Exhibit D3 

 

 

EXHIBIT E

 

TRANSFER CERTIFICATE

 

Reference is hereby made to the Note Purchase Agreement dated as of February 24,
2012 by and among Kohlberg Capital Corporation, in its capacity as Junior
Noteholder (as defined herein), Kohlberg Capital Corporation, in its capacity as
portfolio manager under the Note Purchase Agreement (the “Portfolio Manager”),
Credit Suisse AG, Cayman Islands Branch (“CS”), in its capacities as Senior
Commitment Party and Senior Noteholder (each, as defined herein), Credit Suisse
Securities (USA) LLC (the “Arranger”), KCAP Funding (the “Issuer”) and The Bank
of New York Mellon Trust Company, National Association (the “Bank”), in its
capacities as Collateral Administrator and Collateral Agent (as it may be
amended or modified from time to time, the “Note Purchase Agreement”).
Capitalized terms not defined herein will have the meaning specified in the Note
Purchase Agreement.

 

The undersigned (the “Transferee”) wishes to purchase U.S. $__________ in
principal amount of Senior Notes (the “Notes”) to be registered in the name of
_________________________________.

 

In connection with such transfer, and in respect of such Senior Notes, the
Transferee does hereby certify that such Senior Notes are being transferred (i)
pursuant to an exemption from registration under the Securities Act and (ii) in
accordance with any applicable securities laws of any state of the United States
or any other jurisdiction. In addition, the Transferee hereby represents,
warrants and covenants for the benefit of the Issuer, the Arranger, the Bank and
their respective counsel that:

 

(a)          it is either (i) a “qualified institutional buyer” (as defined in
Rule 144A under the Securities Act) that is also a “qualified purchaser” for
purposes of the Investment Company Act), or (ii) a non-U.S. person (as defined
in Regulation under the Securities Act) that in each case is acquiring the Notes
for its own account;

 

(b)          it understands that: (A) subject to the terms of the Note Purchase
Agreement, proceeds from the issuance of the Notes will be invested in
Collateral Debt Obligations; (B) if the Collateral is liquidated pursuant to the
Note Purchase Agreement, such liquidation may take place under market conditions
that are not advantageous to the Issuer, and as a result of any such
liquidation, the Noteholders may suffer a loss, which loss could equal its
entire investment in the applicable Notes; and (C) all payments to it and any
payments upon redemption of the Notes are subordinated to all other obligations
of the Issuer, and will be payable only in accordance with the Priority of
Payments to the extent the Issuer has sufficient Available Funds;

 

(c)          it has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its investment in
the Collateral Debt Obligations and is able to bear the economic risk of such
investment;

 

(d)          it understands that an investment in the Collateral Debt
Obligations involves certain risks, including the risk of loss of all or a
substantial part of its investment; and it has had access to such financial and
other information concerning the Issuer, the Portfolio Manager, the Collateral
Debt Obligations and the credit markets as it deemed necessary or appropriate in
order to make an informed decision with respect to its entering into the Note
Purchase Agreement;

 

(e)          it has made its own independent investigation in connection with
its decision to purchase Notes and is not relying on any advice, counsel or
representations (whether written or oral) of the Issuer, any Credit Suisse
Party, any Portfolio Manager Party or any other person in connection therewith;

 

Exhibit E1 

 

 

(f)          it is not a member of the public in the Cayman Islands;

 

(g)          it is not purchasing the Notes with a view to the resale,
distribution or other disposition thereof in violation of the Securities Act;

 

(h)          it understands that the Notes are not transferable except to a
transferee that makes all of the representations and warranties contained in a
Transfer Certificate or following receipt by the Issuer of an opinion of
nationally recognized counsel acceptable to the Issuer to the effect that,
following such transfer, the Notes will continue to be exempt from the
registration requirements of the Securities Act and that neither the Issuer nor
the pool of assets owned by the Issuer will be required to register as an
investment company under the Investment Company Act;

 

(i)           none of the Issuer, any Portfolio Manager Party or any Credit
Suisse Party has given it any assurance, guarantee or representation whatsoever
as to the expected or projected success, profitability, return, performance,
result, effect, consequence or benefit (including legal, regulatory, tax,
financial, accounting or otherwise) of the Notes;

 

(j)           it acknowledges that, other than as expressly set forth herein, it
has no rights or recourse with respect to the Collateral Debt Obligations or
against any Credit Suisse Party, any Portfolio Manager Party or the Issuer;

 

(k)          sales of Collateral Debt Obligations may result in Trading Losses
that may reduce the amount payable on the Notes under the Priority of Payments;

 

(l)           none of the Credit Suisse Parties or the Portfolio Manager Parties
has a fiduciary, advisory or agency relationship with it or its affiliates in
respect of any of the transactions contemplated by the Note Purchase Agreement,
irrespective of whether any Credit Suisse Party or Portfolio Manager Party has
advised or is advising it (or its affiliates) on other matters and it waives, to
the fullest extent permitted by law, any claims it may have against the Credit
Suisse Parties or Portfolio Manager Parties for breach of fiduciary duty or
alleged breach of fiduciary duty in respect of any of the transactions
contemplated by the Note Purchase Agreement and agrees that the Credit Suisse
Parties and the Portfolio Manager Parties will have no liability (whether direct
or indirect) to it (or its affiliates) in respect of any such fiduciary duty
claim or to any person asserting a fiduciary duty claim on behalf of or in right
of it (or its affiliates), including directors, partners, equity holders,
employees or creditors of it (or its affiliates);

 

(m)         it has been advised that the Credit Suisse Parties and the Portfolio
Manager Parties each are engaged in a broad range of transactions which may
involve interests that differ from those it (or its affiliates) and agrees that
none of the Credit Suisse Parties or the Portfolio Manager Parties has any
obligation to disclose such interests and transactions to it (or its affiliates)
by virtue of any fiduciary, advisory or agency relationship or otherwise;

 

(n)          the Senior Commitment Party may, in its sole discretion, decline to
purchase or finance any Collateral Debt Obligations selected by the Portfolio
Manager, and will be free, in its sole discretion, to follow or decline to
follow any recommendations made by the Portfolio Manager or any other entity
with respect to the Collateral Debt Obligations;

 

Exhibit E2 

 

 

(o)          the Credit Suisse Parties are full service securities firms engaged
in securities trading and brokerage activities, as well as the provision of
investment banking and structuring services. In the ordinary course of their
business, the Credit Suisse Parties may from time to time effect transactions
for their own accounts or for the accounts of customers, and underwrite, act as
placement agent for or hold positions in, securities or options on securities of
the Portfolio Manager, its affiliates and obligors of the Collateral Debt
Obligations, may act as selling institution with respect to participations that
are Collateral Debt Obligations and may sell certain Collateral Debt Obligations
to the Issuer;

 

(p)          it agrees not to cause the filing of a petition in bankruptcy
against the Issuer prior to the date which is one year (or if longer, the
applicable preference period then in effect) plus one day has elapsed since such
the payment in full of the Notes;

 

(q)          it agrees to treat its Senior Note as debt of the Issuer for U.S.
federal, state and local income tax purposes and acknowledges that the Issuer
will treat the Senior Notes as debt for U.S. federal income tax purposes; and

 

(r)          it understands and agrees that the Issuer’s sole source of funds
for payment of all amounts due under its Senior Note and the Note Purchase
Agreement shall be the Collateral, and, upon application of the proceeds of the
Collateral in accordance with the terms and under the circumstances described in
the Note Purchase Agreement (including the Priority of Payments), no recourse
shall be had against the Issuer for any amounts still outstanding by the Issuer
and all obligations of, and any claims against, the Issuer arising from its
Senior Note or the Note Purchase Agreement or any transactions contemplated
hereby shall be extinguished and shall not thereafter revive.

 

Exhibit E3 

 

 

IN WITNESS WHEREOF, the undersigned has executed this Transfer Certificate on
the date set forth below.

 

Dated:

 

        (Print Name of Entity)         By:        Title:

 

Transferee’s Registered
Name:                                                                          
    Transferee’s Permanent
Address:                                                                        
  Address for
notices:                                                                                         
 

 

  Telephone:                                                          
Facsimile:                                                           
Attention:                                                         

 

Transferee’s Taxpayer Identification Number   or Social Security
Number:                                                                             
 

 

Wire transfer information:
Bank:                                                                       
Address:                                                                Bank
ABA#:                                                                    Account
#:                                                            
FAO:                                                                     
Attention:                                                           

 

Exhibit E4 

 

 

ANNEX I

 

ELIGIBILITY CRITERIA

 

A Collateral Debt Obligation will be eligible for purchase by the Portfolio
Manager on behalf of the Issuer if, at the time it is purchased, it:

 

(i)          is U.S. Dollar denominated and is a senior secured loan, a second
lien loan or a mezzanine loan;

 

(ii)         is not a Defaulted Collateral Debt Obligation;

 

(iii)        is not a lease;

 

(iv)        is not a structured finance obligation or a synthetic security;

 

(v)         provides for a fixed amount of principal payable on scheduled
payment dates and/or at maturity and does not by its terms provide for earlier
amortization or prepayment at a price of less than par;

 

(vi)        does not constitute “margin stock” (as defined under Regulation U
issued by the Board of Governors of the United States Federal Reserve System);

 

(vii)       has payments that do not and will not subject the Issuer to
withholding tax or other similar tax unless (a) the related obligor is required
to make “gross-up” payments that ensure that the net amount actually received by
the Issuer (after payment of all taxes, whether imposed on such obligor or the
Issuer) will equal the full amount that the Issuer would have received had no
such taxes been imposed or (b) the withholding tax is imposed under Sections
1471, 1472, 1473 or 1474 of the Code;

 

(viii)      has an S&P Rating and a Moody’s Rating or is expected to achieve a
rating higher than or equal to “B-/B3” and is not on watch for downgrade;

 

(ix)         is not a debt obligation whose repayment is subject to substantial
non-credit related risk;

 

(x)          is not an obligation pursuant to which any future advances or
payments to the borrower or the obligor thereof may be required to be made by
the Issuer;

 

(xi)         does not have an “f,” “r,” “p,” “pi,” “q” or “t” subscript assigned
by S&P;

 

(xii)        will not require the Issuer or the pool of collateral to be
registered as an investment company under the Investment Company Act;

 

(xiii)       is not a debt obligation that pays scheduled interest less
frequently than semi-annually;

 

(xiv)      is not subject to a tender offer, voluntary redemption, exchange
offer, conversion or other similar action for a price less than its par amount
plus all accrued and unpaid interest;

 

(xv)       is not issued pursuant to an underlying instrument governing the
issuance of indebtedness having an aggregate principal amount (whether drawn or
undrawn) of less than U.S.$100,000,000 with no more than 25% issued pursuant to
an underlying instrument governing the issuance of indebtedness having an
aggregate principal amount (whether drawn or undrawn) of less than
U.S.$150,000,000;

 

Annex I1 

 

 

(xvi)      does not mature later than 2018 except as otherwise agreed by the
Senior Commitment Party; and

 

(xvii)      is capable of being sold legally and beneficially or assigned to or
participated in by the Issuer and any charge to be granted by the Issuer in
respect of the Collateral Debt Obligation will be legal, valid and binding and
will not conflict with any documentation with respect to the Collateral Debt
Obligation.

 

Annex I2 

 

 

ANNEX II

 

TAX OPERATING GUIDELINES

 

I.        Introduction.

 

This schedule sets forth guidelines (the “Operating Guidelines”) that, in
addition to the other guidelines and restrictions set forth in the note purchase
agreement dated as of February 24, 2012 (the “Note Purchase Agreement”), will be
followed in managing the Collateral in a transaction in which Kohlberg Capital
Corporation (the “Portfolio Manager”) will act on behalf of and will be the
portfolio manager for KCAP Funding, a Cayman Islands issuer (the “Issuer”),
under the Note Purchase Agreement. The Issuer and the Portfolio Manager will
follow these Operating Guidelines to help ensure that (i) the Issuer will not be
treated as engaged in a trade or business within the United States for U.S.
federal income tax purposes; and (ii) income earned by the Issuer will be exempt
from U.S. withholding and excise taxes; provided, however, that the Portfolio
Manager shall be permitted to take actions not permitted by the Operating
Guidelines if the Portfolio Manager has received a written opinion of nationally
recognized tax counsel in the United States to the effect that such actions,
when considered in light of the other activities of the Issuer, will not cause
the Issuer to be engaged in a U.S. trade or business for U.S. federal income tax
purposes. The Operating Guidelines do not apply to any securities lending
transactions, hedging transactions or purchase of synthetic securities, and if
the Portfolio Manager proposes to engage in any such activities, the Portfolio
Manager must amend the Operating Guidelines accordingly and, in connection with
such amendment, must receive a written opinion of nationally recognized tax
counsel in the United States to the effect that such activities, when considered
in light of the other activities of the Issuer, will not cause the Issuer to be
engaged in a U.S. trade or business for U.S. federal income tax purposes. The
Operating Guidelines are not a substitute for obtaining tax advice with respect
to particular investments or other tax issues that may arise in connection with
the Issuer’s activities, and the Issuer will consult with its tax counsel and
will receive written advice from such tax counsel as appropriate. Capitalized
terms used and not defined herein shall have the respective meanings given to
them in the Note Purchase Agreement.

 

II.       General Guidelines.

 

A.      General Restrictions on the Activities of the Issuer.

 

1.          The Issuer will not engage in any activities other than:1

 

 

1For purposes of these Operating Guidelines, all references to actions of the
Issuer shall include actions taken directly as well as actions taken indirectly
through any person acting on its behalf (including the Portfolio Manager or an
Affiliate of the Portfolio Manager acting on behalf of the Issuer). The term
“Affiliate” or “Affiliated” where used herein with respect to a person shall
include (i) any other person who, directly or indirectly, is in control of,
controlled by, or under common control with, such person or (ii) any other
person who is a director, officer or employee of (a) such person, or (b) any
such other person described in clause (i) above. For the purposes of this
definition, control of a person shall mean the power, direct or indirect, (x) to
vote more than 50% of the securities having ordinary voting power for the
election of directors of such person, or (y) to direct or cause the direction of
the management and policies of such person whether by contract or otherwise.
Notwithstanding the foregoing, the Issuer shall not be deemed to be an Affiliate
of (A) the Portfolio Manager or any of its Affiliates solely by reason of the
Note Purchase Agreement; or (B) the Collateral Administrator or any other
special purpose vehicle controlled by it solely by reason of services provided
in respect of any transaction contemplated under the Note Purchase Agreement,
and the Portfolio Manager and its Affiliates shall not be treated as an
Affiliate of any account or fund solely as a result of investment services
provided to such account or fund.

 

Annex II1 

 

 

(i)       purchasing and selling Collateral Debt Obligations (and, to the extent
permitted under the Note Purchase Agreement, certain short-term cash-equivalent
investments of Available Funds) for its own account, in arm’s length
transactions, for the sole purpose of realizing a profit from income earned on
them and/or any rise in their value during the period between purchase and sale;

 

(ii)      issuing the Notes;

 

(iii)     refinancing its obligations under the Notes with proceeds of a
Refinancing Transaction; and

 

(iv)     performing other actions in connection with the foregoing that are
merely incidental thereto (including, without limitation, contracting with the
Portfolio Manager, the Collateral Administrator, and other service providers and
preparing reports).

 

2.          The Issuer will not act as, hold itself out as, or represent to
others that it is:

 

(i)       a market maker or a dealer;2

 

(ii)      a person who provides structuring, origination, syndication, lending,
or other services for income;3

 

(iii)     a guarantor, insurer, or reinsurer; or

 

(iv)     a person that performs any similar function.

 

3.        The Issuer will not register as, or take any action that, when
considered in conjunction with its other activities, would cause it to be
supervised as, a bank, finance company, other lending institution, insurance or
reinsurance company, or broker/dealer.

 

 

2The term “dealer” where used herein shall mean a merchant of securities,
commodities, or other assets regularly engaged as a merchant in purchasing such
assets and selling them to customers with a view to the gains and profits that
may be derived therefrom, or a person that regularly offers to enter into,
assume, offset, assign, or otherwise terminate positions in derivatives with
customers in the ordinary course of a trade or business, including regularly
holding oneself out, in the ordinary course of one’s trade or business, as being
willing and able to enter into either side of a derivative transaction.    3To
the extent that an activity of the Issuer is addressed by Section III of these
Operating Guidelines, the Issuer will not be treated as providing services in
violation of clause (ii) as a result of such activity if the Issuer complies
with the requirements set forth in Section III.

 

Annex II2 

 

 

4.        The Issuer will in all events comply with the restrictions on its
activities set forth in the Note Purchase Agreement, the Issuer’s organizing
documents, and any related documents.

 

B.        Special Restrictions Relating to the Ownership of Certain Assets.

 

1.        The Issuer will not become the owner of any asset if a principal
purpose of acquiring the asset is to facilitate a securities lending agreement
with respect to the asset.

 

2.        The Issuer will not become the owner of any asset:

 

(i)      that is treated as an equity interest in a partnership, disregarded
entity, or other entity whose activities are attributable to an owner for U.S.
federal income tax purposes, unless:

 

(a)          the entity is not treated, at any time, as engaged in a trade or
business within the United States for U.S. federal income tax purposes; and

 

(b)          the assets of the entity consist solely of assets that the Issuer
could directly acquire consistent with the Note Purchase Agreement, the Issuer’s
organizing documents, and any related documents; or

 

(ii)     the gain from the disposition of which would be subject to U.S. federal
income or withholding tax under section 897 or section 1445, respectively, of
the Code.

 

3.          The Issuer will not become the owner of any asset if the ownership
of such asset (together with the Issuer’s other assets) would cause the Issuer
to be treated as a taxable mortgage pool within the meaning of section 7701(i)
of the Code.4

 

 

4A “taxable mortgage pool” is generally defined as any entity (or any pool of
assets that is part of an entity) that is not a REMIC and that meets: (i) an
asset test; (ii) a maturities test; and (iii) a relationship test. These tests
are applied on each date on which the entity in question issues a debt
obligation. Each of the tests is described briefly below:

(i)             The asset test is met if 80 percent or more of all of the
entity’s or pool’s assets consist of debt obligations and more than 50 percent
of those obligations are “real estate mortgages” (or interests therein). The
definition of “real estate mortgage” generally includes any debt obligation that
is principally secured by real estate or interests in real estate (including
other real estate mortgages). For this purpose, a debt obligation is
“principally secured” by real estate if the fair market value of the real estate
securing the debt obligation is at least 80 percent of the debt obligation’s
issue price at the time the obligation is issued.

(ii)            The maturities test is met if the entity or pool is the obligor
on two or more classes of debt with differing maturities (including notes with
differing rights to partial principal payments).

(iii)           The relationship test is met if the timing and amount of
payments on debt issued by the entity or pool bear a relationship to payments on
the debt assets it holds (whether or not mortgages).

 

Annex II3 

 

 

III.     Guidelines Relating to the Prohibition on Loan Origination Activities.

 

This Section III addresses the Issuer’s acquisitions of interests in loans. See
Section III.C, below, for additional rules applicable to deferred obligations.

 

A.        Definition of Loan.

 

1.       For purposes of these Operating Guidelines, the term “loan” shall,
except as provided below, include any instrument that is or will be treated as a
debt obligation for U.S. federal income tax purposes (including any deferred
obligation,5 whether funded or unfunded). For purposes of these Operating
Guidelines, each separate tranche or class of debt obligations that are part of
an issue or facility shall be treated as a separate loan.

 

2.       Notwithstanding the foregoing, a debt obligation shall not be treated
as a loan for purposes of these Operating Guidelines if it is (i) issued under a
trust indenture or similar agreement under which a trustee is appointed to act
on behalf of the holders of such debt obligation; and (ii) treated as a security
for purposes of the Securities Act of 1933, as amended, unless the Issuer
acquires at original issuance more than 25 percent (by value) of all of the debt
obligations of the particular tranche or class offered at that time by that
obligor, in which case all of such debt obligations will be treated as loans for
purposes of these Operating Guidelines.

 

B.      Guidelines Applicable to All Loans.

 

1.       The Issuer will acquire all interests in loans by assignment or
participation or, in the case of loans that are securities, by other customary
means of secondary market transfer (any of the foregoing, an “assignment”), and
will not sign a loan agreement as an original lender.

 

2.       The Issuer will not acquire an interest in any loan prior to 2 days
after the later of (x) the loan’s original closing; and (y) the most recent date
on which any of the principal terms of the loan were modified in a material
fashion;6 provided, however, that, subject to Section III.C, below, the Issuer
may, prior to 2 days after the later of (x) and (y), enter into a commitment
with a person that owns or will own such an interest to take an assignment or
purchase a participation in such interest on a forward basis,7 so long as:

 

 

5The term “deferred obligation” where used herein shall include (i) any
revolving loan facility; (ii) any delayed funding loan; and (iii) any other
obligation that commits the Issuer to provide funding, conditionally or
unconditionally, to the borrower on a future date.    6For purposes of these
Operating Guidelines, the “principal terms” of a loan shall include its
principal amount, interest rate, term, ranking compared with other liabilities,
security, obligor, exchange or conversion rights, required or permitted timing
of payments, fees or premiums, guarantees or other credit enhancements, and
conditions to advancing additional funds.

7The term “commitment” where used herein shall include any agreement or other
commitment to acquire or to participate in any risks or benefits of an interest
in a loan.

 

Annex II4 

 

 

(i)      the Issuer enters into the commitment with such person after the person
has entered into its own written commitment to acquire the interest;

 

(ii)     such person is not an obligor under the loan, the Portfolio Manager,
any Affiliate of the Portfolio Manager, or any person acting on behalf of the
foregoing;

 

(iii)    the Issuer’s commitment to take an assignment in such interest is
conditioned on there being no material adverse change in the condition of any
obligor under the loan, unless

 

(a)     the Issuer enters into such commitment no sooner than two weeks after
the person from whom the Issuer will acquire such interest (the “Original
Lender”) enters into its own commitment to acquire the interest or to use its
best efforts to syndicate the loan; and

 

(b)     the Issuer’s commitment is documented in an industry standard commitment
form for secondary market purchases, and is substantially similar to that given
by all other persons who will acquire an interest in the loan from the Original
Lender (including as to the lack of a material adverse change condition); and

 

(iv)    the Issuer does not take an assignment in such interest pursuant to such
commitment prior to 2 days after the later of (x) and (y).

 

3.       Prior to acquiring an interest in a loan, the Issuer will not engage in
any communications with any obligor under the loan or any person acting on
behalf of such an obligor, except for due diligence communications in which an
investor would customarily engage in order to decide whether to acquire such an
interest in the secondary market.

 

4.       Each acquisition of an interest in a loan by the Issuer will be a
separate, stand-alone transaction and will not be part of a program or other
arrangement pursuant to which the Issuer has a commitment (whether formal or
not) to acquire interests in loans on an on-going basis.

 

5.       The Issuer will not provide services in connection with a loan
origination or syndication, and will not directly or indirectly share in any fee
or discount paid or given in consideration for loan origination or syndication
services. The Issuer will not receive (for any reason) a fee or discount that is
calculated or described as a share of any fee or discount received by a loan
originator or syndicator. The Issuer may receive a discount to compensate it for
entering into a commitment to acquire a loan from a seller, provided that such
compensation is negotiated at arm’s length and the seller is acting for its own
account.

 

6.       The Issuer will not acquire an interest in a loan if the Issuer would
own more than 50 percent of such loan or more than 25 percent of all loans that
are part of an overall credit facility.

 

Annex II5 

 

 

7.       The Issuer will not negotiate the terms of any loan except, subject to
Section 3.1(c) of the Note Purchase Agreement, as may be necessary with respect
to a loan already owned by the Issuer that is in default or for which a default
is imminent,8 provided that such loan was acquired at a time when such default
was not reasonably expected or anticipated. Notwithstanding the foregoing, the
Issuer may exercise any voting or other rights available to a party,
participant, or assignee under the documents applicable to a loan, and may
accept or reject amendments or modifications proposed by an obligor under a
loan.

 

8.       The Issuer will not acquire an interest in any loan if the terms of
such loan were negotiated by the Portfolio Manager (whether or not on behalf of
the Issuer).

 

9.       The Issuer will also not acquire an interest in any loan if the terms
of such loan were negotiated by any Affiliate of the Portfolio Manager, unless:

 

(i)      the Issuer acquires the interest in an arm’s length, secondary market
transaction from a third party seller that is unrelated to the Affiliate, at
least 45 days after the later of (x) the loan’s original closing; and (y) the
most recent date on which any of the principal terms of the loan were modified
in a material fashion, and the Issuer does not enter into a commitment with
respect to such interest before such later date;

 

(ii)     the Issuer acquires the interest from the Affiliate, but the loan was
originated before the Issuer issued any notes, shares, or other securities, and
the Affiliate did not negotiate the terms of the loan in anticipation of a
transfer of all or a portion of such interest to the Issuer; or

 

(iii)    the Issuer acquires the interest from the Affiliate, and each of the
following conditions is satisfied:

 

(a)     immediately after the Issuer enters into a commitment to acquire such
interest, with respect to the portion of the Affiliate’s allocation of such loan
that is sold by the Affiliate, the amount acquired or committed to by third
party investors that are unrelated to such Affiliate and that are not entities
for which the Portfolio Manager or its Affiliates perform investment or
collateral management services is at least as much as the amount acquired or
committed to by other investors (including the Issuer);

 

 

8For purposes of these Operating Guidelines, any person that is an agent,
placement agent, structurer, or syndicator with respect to any loan shall be
deemed to have engaged in the negotiation of the terms of such loan. In the case
of a person other than the foregoing, however, a negotiation of terms shall not
include:

(i)               communications with a seller or an agent prior to purchase
stating the Issuer’s terms and conditions for purchasing an interest in a loan;

(ii)              comments on assignment provisions solely to permit assignment
to a Cayman entity or the pledge of an interest in a loan to an indenture
trustee;

(iii)             comments relating to the wiring of funds; or

(iv)             comments that the draft documents are inconsistent with an
approved term sheet or that the loan documents contain mistakes.

 

Annex II6 

 

 

(b)     the Issuer acquires the interest on terms and conditions substantially
identical to those applicable to the third party investors described in the
preceding paragraph; and

 

(c)     the Issuer does not acquire more than a 10 percent interest in such
loan.

 

10.     No bank or other lending institution that is a holder of a debt or
equity interest issued by the Issuer will control or direct the Portfolio
Manager’s or Issuer’s decision to invest in a particular asset except as
otherwise allowed to a holder of such debt or equity interest, acting in that
capacity, under the Note Purchase Agreement. In addition, the decision to invest
in a particular asset will not be conditioned upon a particular person or entity
holding debt or equity interests issued by the Issuer.

 

11.     The Issuer will not acquire an interest in any loan with the intent or
purpose of, or as part of a program of, entering into any transaction with a
bank or other lending institution the effect of which is to substantially shift
the economic benefits and burdens of ownership of an interest in the loan to
such bank or other lending institution (e.g., a total rate of return swap),
other than (x) issuing its Notes to banks or other lending institutions; and (y)
selling loans (or participations in loans) to banks or other lending
institutions in arm’s length transactions that comply with the terms of the Note
Purchase Agreement and these Operating Guidelines.

 

C.      Additional Guidelines Applicable to Deferred Obligations.9

 

1.       The Issuer will not acquire an interest in a deferred obligation
unless:

 

(i)      the deferred obligation is a part of an overall credit facility
consisting of such deferred obligation and one or more related loans that are
not deferred obligations, and the Issuer concurrently acquires (and intends to
own) an interest in such related loans in an amount at least equal to the
Issuer’s aggregate drawn and undrawn amounts under the deferred obligation; or

 

(ii)     the Issuer does not acquire such interest, or enter into any commitment
with respect to such interest, prior to 2 days after the later of (x) the
deferred obligation’s original closing; and (y) the most recent date on which
any of the principal terms of the deferred obligation were modified in a
material fashion.

 

2.       The Issuer will acquire an interest in a deferred obligation only if
any conditions to the Issuer’s obligation to advance funds to the borrower are
based on objective factors and are not subject to the exercise of discretion by
the Issuer.10

 

 

9For purposes of measuring the Issuer’s interest in a deferred obligation, both
drawn and undrawn amounts shall be counted. 10For this purpose, a condition to
the advance of funds that is based upon a determination that there has been no
event that has had or could have a “material adverse effect” with respect to the
borrower and any related entities or any similar provision shall be treated as
an objective factor and not subject to the exercise of discretion by the Issuer.

 

Annex II7 

 

 

3.       The Issuer’s aggregate interests in deferred obligations will at no
time exceed 15 percent of the Issuer’s aggregate amount of Collateral Debt
Obligations (counting undrawn amounts for this purpose).

 

Annex II8 

 

 

ANNEX III

 

MOODY’S RATING SCHEDULE

 

“Assigned Moody’s Rating”: The monitored publicly available rating or the
monitored estimated rating expressly assigned to a debt obligation (or facility)
by Moody’s that addresses the full amount of the principal and interest
promised; provided that so long as the Issuer applies for an estimated rating in
a timely manner and provides the information required to obtain such estimate,
pending receipt, such debt obligation (or facility) will have a Moody’s Rating
of “B3” for purposes of this definition if the Portfolio Manager certifies to
the Collateral Administrator that the Portfolio Manager believes that such
monitored estimated rating will be at least “B3.”

 

“Corporate Family Rating”: Moody’s corporate family rating, the successor
equivalent rating thereto (or the monitored estimated rating expressly assigned
to an obligor by Moody’s) or, if a corporate family rating has not yet been
assigned, the senior implied rating; provided that pending receipt from Moody’s
of any such estimate, the Corporate Family Rating will be “B3” so long as the
Portfolio Manager has certified to the Collateral Administrator in writing that
application for such estimate is pending and such estimate is expected to be at
least “B3.”

 

“Moody’s Default Probability Rating”: With respect to any Collateral Debt
Obligation, as of any date of determination, the rating determined in accordance
with the following, in the following order of priority:

 

(a)          any Collateral Debt Obligation (other than a Moody’s Non Senior
Secured Loan or a DIP loan):

 

(i)          if the Collateral Debt Obligation’s Obligor has a Corporate Family
Rating from Moody’s, such Corporate Family Rating; and

 

(ii)         if the preceding clause does not apply, the Moody’s Obligation
Rating of such Collateral Debt Obligation;

 

(b)          with respect to a Moody’s Non Senior Secured Loan:

 

(i)          if the Obligor has a senior unsecured obligation with an Assigned
Moody’s Rating, such rating; and

 

(ii)         if the preceding clause does not apply, the Moody’s Equivalent
Senior Unsecured Rating of the Collateral Debt Obligation, as applicable; and

 

(c)          with respect to a DIP loan, the rating that is one rating
subcategory below the Moody’s Obligation Rating thereof.

 

Notwithstanding the foregoing, if the Moody’s rating or ratings used to
determine the Moody’s Default Probability Rating are on watch for downgrade or
upgrade by Moody’s, such rating or ratings will be adjusted down one subcategory
(if on watch for downgrade) or up one subcategory (if on watch for upgrade).

 

“Moody’s Equivalent Senior Unsecured Rating”: With respect to any Collateral
Debt Obligation and the Obligor thereof as of any date of determination, is the
rating determined in accordance with the following, in the following order of
priority:

 

Annex III1 

 

 

(a)          if the Obligor has a senior unsecured obligation with an Assigned
Moody’s Rating, such Assigned Moody’s Rating;

 

(b)          if the preceding clause does not apply, the Moody’s “Issuer Rating”
for the Obligor;

 

(c)          if the preceding clauses do not apply, but the Obligor has a
subordinated obligation with an Assigned Moody’s Rating, then

 

(i)          if such Assigned Moody’s Rating is at least “B3” (and, if rated
“B3,” not on watch for downgrade), the Moody’s Equivalent Senior Unsecured
Rating shall be the rating which is one rating subcategory higher than such
Assigned Moody’s Rating, or

 

(ii)         if such Assigned Moody’s Rating is less than “B3” (or rated “B3”
and on watch for downgrade), the Moody’s Equivalent Senior Unsecured Rating
shall be such Assigned Moody’s Rating;

 

(d)          if the preceding clauses do not apply, but the Obligor has a senior
secured obligation with an Assigned Moody’s Rating, then:

 

(i)          if such Assigned Moody’s Rating is at least “Caa3” (and, if rated
“Caa3,” not on watch for downgrade), the Moody’s Equivalent Senior Unsecured
Rating shall be the rating which is one subcategory below such Assigned Moody’s
Rating, or

 

(ii)         if such Assigned Moody’s Rating is less than “Caa3” (or rated
“Caa3” and on watch for downgrade), then the Moody’s Equivalent Senior Unsecured
Rating shall be “Ca”;

 

(e)          if the preceding clauses do not apply, but such Obligor has a
Corporate Family Rating from Moody’s, the Moody’s Equivalent Senior Unsecured
Rating shall be one rating subcategory below such Corporate Family Rating;

 

(f)          if the preceding clauses do not apply, but the Obligor has a senior
unsecured obligation (other than a loan) with a monitored public rating from S&P
(without any postscripts, asterisks or other qualifying notations, that
addresses the full amount of principal and interest promised), then the Moody’s
Equivalent Senior Unsecured Rating shall be:

 

(i)          one rating subcategory below the Moody’s equivalent of such S&P
rating if it is “BBB–” or higher, or

 

(ii)         two rating subcategories below the Moody’s equivalent of such S&P
rating if it is “BB+” or lower;

 

(g)          if the preceding clauses do not apply, but the Obligor has a
subordinated obligation (other than a loan) with a monitored public rating from
S&P (without any postscripts, asterisks or other qualifying notations, that
addresses the full amount of principal and interest promised), the Assigned
Moody’s Rating shall be deemed to be:

 

(i)          one rating subcategory below the Moody’s equivalent of such
S&P rating if it is “BBB–” or higher; or

 

(ii)         two rating subcategories below the Moody’s equivalent of such S&P
rating if it is “BB+” or lower,

 

Annex III2 

 

 

and the Moody’s Equivalent Senior Unsecured Rating shall be determined pursuant
to clause (c) above;

 

(h)          if the preceding clauses do not apply, but the Obligor has a senior
secured obligation with a monitored public rating from S&P (without any
postscripts, asterisks or other qualifying notations, that addresses the full
amount of principal and interest promised), the Assigned Moody’s Rating shall be
deemed to be:

 

(i)          one rating subcategory below the Moody’s equivalent of such S&P
rating if it is “BBB–” or higher; or

 

(ii)         two rating subcategories below the Moody’s equivalent of such S&P
rating if it is “BB+” or lower,

 

and the Moody’s Equivalent Senior Unsecured Rating shall be determined pursuant
to clause (d) above;

 

(i)          if the preceding clauses do not apply and each of the following
clauses (i) through (viii) do apply, the Moody’s Equivalent Senior Unsecured
Rating will be “Caa1”:

 

(i)          neither the Obligor nor any of its Affiliates is subject to
reorganization or bankruptcy proceedings,

 

(ii)         no debt securities or obligations of the Obligor are in default,

 

(iii)        neither the Obligor nor any of its Affiliates has defaulted on any
debt during the preceding two years,

 

(iv)        the Obligor has been in existence for the preceding five years,

 

(v)         the Obligor is current on any cumulative dividends,

 

(vi)        the fixed-charge ratio for the Obligor exceeds 125% for each of the
preceding two fiscal years and for the most recent quarter,

 

(vii)       the Obligor had a net profit before tax in the past fiscal year and
the most recent quarter, and

 

(viii)      the annual financial statements of such Obligor are unqualified and
certified by a firm of Independent accountants, and quarterly statements are
unaudited but signed by a corporate officer;

 

(j)          if the preceding clauses do not apply but each of the following
clause (i) and (ii) do apply, the Moody’s Equivalent Senior Unsecured Rating
will be “Caa3”:

 

(i)          neither the Obligor nor any of its Affiliates is subject to
reorganization or bankruptcy proceedings; and

 

(ii)         no debt security or obligation of such Obligor has been in default
during the past two years; and

 

(k)          if the preceding clauses do not apply and a debt security or
obligation of the Obligor has been in default during the past two years, the
Moody’s Equivalent Senior Unsecured Rating will be “Ca.”

 

Annex III3 

 

 

Notwithstanding the foregoing, no more than 10% of the Collateral Debt
Obligations, by aggregate principal balance, may be given a Moody’s Equivalent
Senior Unsecured Rating based on a rating given by S&P as provided in clauses
(f), (g) and (h) above.

 

“Moody’s Non Senior Secured Loan”: Any Loan (other than (a) a Senior Secured
Loan or (b) a Senior Secured Note or a Second Lien Loan that has an obligation
rating from Moody’s that is equal to or greater than its Obligor’s Corporate
Family Rating).

 

“Moody’s Obligation Rating”: With respect to any Collateral Debt Obligation as
of any date of determination, is the rating determined in accordance with the
following, in the following order of priority:

 

(a)          any Collateral Debt Obligation (other than a Moody’s Non Senior
Secured Loan or a DIP loan):

 

(i)          if it has an Assigned Moody’s Rating, such Assigned Moody’s Rating;

 

(ii)         if the preceding clause does not apply, its Corporate Family
Rating; or

 

(iii)        if the preceding clause does not apply, the rating that is one
rating subcategory above the Moody’s Equivalent Senior Unsecured Rating; and

 

(b)          with respect to a Moody’s Non Senior Secured Loan:

 

(i)          if it has an Assigned Moody’s Rating, such Assigned Moody’s Rating;
or

 

(ii)         if the preceding clause does not apply, the Moody’s Equivalent
Senior Unsecured Rating; and

 

(c)          with respect to a DIP loan:

 

(i)          if it has an Assigned Moody’s Rating, such Assigned Moody’s Rating;
or

 

(ii)         if the preceding clause does not apply, the Moody’s Equivalent
Senior Unsecured Rating.

 

Notwithstanding the foregoing, if the Moody’s rating or ratings used to
determine the Moody’s Obligation Rating are on watch for downgrade or upgrade by
Moody’s, such rating or ratings will be adjusted down one subcategory (if on
watch for downgrade) or up one subcategory (if on watch for upgrade).

 

“Moody’s Rating”: The Moody’s Default Probability Rating; provided, that, with
respect to the Pledged Collateral Debt Obligations generally, if at any time
Moody’s or any successor to it ceases to provide rating services, references to
rating categories of Moody’s shall be deemed instead to be references to the
equivalent categories of any other nationally recognized investment rating
agency designated in writing by the Portfolio Manager on behalf of the Issuer
(with a copy to the Collateral Administrator), as of the most recent date on
which such other rating agency and Moody’s published ratings for the type of
security in respect of which such alternative rating agency is used. To the
extent that the Issuer relies upon a credit estimate for purposes of the Moody’s
Rating of any Collateral Debt Obligation, the Portfolio Manager (on behalf of
the Issuer) will apply for renewal of such credit estimate on an annual basis.

 

Annex III4 

 

 

“Moody’s Rating Factor”: With respect to any Collateral Debt Obligation, the
number set forth in the table below opposite the Moody’s Rating of such
Collateral Debt Obligation.

 

Moody’s 

Rating

 

Moody’s

Rating

Factor

 

Moody’s

Rating

 

Moody’s

Rating

Factor

Aaa*   1   Ba1   940 Aa1   10   Ba2   1,350 Aa2   20   Ba3   1,766 Aa3   40   B1
  2,220 A1   70   B2   2,720 A2   120   B3   3,490 A3   180   Caa1   4,770 Baa1
  260   Caa2   6,500 Baa2   360   Caa3   8,070 Baa3   610   Ca, C or lower  
10,000

 

*  or any obligation issued or guaranteed as to the payment of principal and
interest by the United States of America or any agency or instrumentality
thereof the obligations of which are expressly backed by the full faith and
credit of the United States of America.

 

“Obligor”: The obligor under a Collateral Debt Obligation.

 

Annex III5 

 

 

ANNEX IV

 

S&P RATING SCHEDULE

 

“S&P Rating”: With respect to any Collateral Debt Obligation, the rating
determined as follows: provided, however, (a) if such Collateral Debt Obligation
is (x) on watch for upgrade by S&P it shall be treated as upgraded by one rating
subcategory or (y) on watch for downgrade by S&P it shall be treated as
downgraded by one rating subcategory, unless S&P has notified the Portfolio
Manager in writing that such treatment is no longer required, (b) if it is a DIP
loan with a rating by S&P as published by S&P, its S&P Rating shall be such
rating, (c) if it is a structured finance obligation, its S&P Rating shall be
determined based on clause (v) and (d) if it is a current pay obligation, its
S&P Rating shall be determined based on clause (vi):

 

(i)          if there is an issuer credit rating by S&P as published by S&P (or
rating on a guarantor that unconditionally and irrevocably guarantees such
Collateral Debt Obligation), then the S&P Rating of such Collateral Debt
Obligation shall be such rating;

 

(ii)         if there is not an issuer credit rating by S&P but there is a
rating by S&P on a senior unsecured obligation of the obligor, then the S&P
Rating of such Collateral Debt Obligation shall be such rating;

 

(iii)        if such Collateral Debt Obligation is a senior secured or senior
unsecured obligation of the obligor:

 

(A)         if there is not an issuer credit rating or a rating on a senior
unsecured obligation of the obligor by S&P, but there is a rating by S&P on a
senior secured obligation of the obligor, then the S&P Rating of such Collateral
Debt Obligation shall be one subcategory below such rating; and

 

(B)         if there is not an issuer credit rating or a rating on a senior
unsecured or senior secured obligation of the obligor by S&P, but there is a
rating by S&P on a subordinated obligation of the obligor, then the S&P Rating
of such Collateral Debt Obligation shall be one subcategory above such rating if
such rating is higher than “BB+” and will be two subcategories above such rating
if such rating is “BB+” or lower;

 

(iv)        if clauses (i) through (iii) do not apply, then the S&P Rating of
such Collateral Debt Obligation may be determined using any one of the methods
below:

 

(A)         if an obligation of the obligor has a published rating from Moody’s
then the S&P Rating will be determined in accordance with the methodologies for
establishing the Moody’s Rating, except that the S&P Rating of such Collateral
Debt Obligation shall be (1) one subcategory below the S&P equivalent of the
rating assigned by Moody’s if such Collateral Debt Obligation is rated “Baa3” or
higher by Moody’s and (2) two subcategories below the S&P equivalent of the
rating assigned by Moody’s if such Collateral Debt Obligation is rated “Ba1” or
lower by Moody’s; provided that no more than 15% of the Collateral Debt
Obligations, by aggregate principal balance, may be given an S&P Rating based on
a rating given by Moody’s as provided in this subclause (A); or

 

Annex IV1 

 

 

(B)         if no other security or obligation of the obligor is rated by S&P or
Moody’s, then the Issuer or the Portfolio Manager on behalf of the Issuer, shall
apply to S&P for a rating estimate, which shall be its S&P Rating; provided
that, pending receipt, its S&P Rating will be determined as set forth in clause
(vii) below;

 

(v)         if it is a structured finance obligation,

 

(A)         if such obligation has a published rating from S&P, then its S&P
Rating shall be such rating;

 

(B)         if such obligation does not have a published rating from S&P but has
a published rating from Moody’s, then the S&P Rating shall be determined in
accordance with the methodologies for establishing the Moody’s Rating, except
that the S&P Rating of such structured finance obligation shall be (1) two
subcategories below the S&P equivalent of the rating assigned by Moody’s if such
structured finance obligation is rated “Baa3” or higher by Moody’s and (2) three
subcategories below the S&P equivalent of the rating assigned by Moody’s if such
structured finance obligation is rated “Ba1” or lower by Moody’s; provided that
no more than 15% of the Collateral Debt Obligations, by aggregate principal
balance, may be given an S&P Rating based on a rating given by Moody’s as
provided in this subclause (B); or

 

(C)         if neither clause (A) nor (B) applies, then the Issuer or the
Portfolio Manager on behalf of the Issuer, shall apply to S&P for a rating
estimate, which shall be its S&P Rating; provided that, pending receipt, its S&P
Rating will be determined as set forth in clause (vii) below;

 

(vi)        if it is a current pay obligation, then its S&P Rating will be
determined as follows.

 

(A)         if the Issuer owns only one issue of debt obligation of an issuer
with a distressed exchange offer pending, then (1) with respect to a current pay
obligation ranking higher in priority (before and after the exchange) than the
obligation subject to the distressed exchange offer, the higher of (x) the
rating derived by adjusting such current pay obligation’s issue rating up or
down by the number of notches specified in Table 1 below for its related asset
specific recovery rating and (y) “CCC-,” and (ii) with respect to any other such
current pay obligation, “CCC-”, and

 

(B)         if the Issuer owns more than one issue of obligations of an issuer
with a distressed exchange offer pending, then with respect to each such current
pay obligation, the rating corresponding to the weighted average rating “points”
in Table 2 below calculated by dividing (1) the sum of the products of (x) the
outstanding par amount of each current pay obligation multiplied by (y) the
rating “points” in Table 2 below corresponding to the rating of such current pay
obligation as determined pursuant to clause (A) above by (2) the aggregate
outstanding par amount of all such current pay obligations issued by the issuer
with the distressed exchange offer pending.

 

Annex IV2 

 

 

(vii)       if the Issuer has applied for a credit estimate at the time of the
acquisition of a Collateral Debt Obligation, pending receipt from S&P of such
estimate, the S&P Rating of such Collateral Debt Obligation shall be the credit
estimate that the Portfolio Manager believes will be provided by S&P, in each
case for no more than 90 days (unless S&P grants an extension) after which the
S&P Rating will be “CCC-”; provided, that to the extent that the Issuer relies
upon a credit estimate, it must be renewed annually, and pending receipt of such
renewal, the S&P Rating shall be that of the expiring credit estimate for no
more than 90 days after the 12 month anniversary (unless S&P grants an
extension) after which the S&P Rating will be “CCC-.”

 

Table 1

 

Asset Specific Recovery Rating  

Notches to Derive Rating from

Issue Rating

1+   -3 1   -2 2   -1 3   0 4   0 5   +1 6   +2 None   Not available for
notching

 

Table 2

 

Rating   Rating “Points” AAA   1 AA+   2 AA   3 AA-   4 A+   5 A   6 A-   7 BBB+
  8 BBB   9 BBB-   10 BB+   11 BB   12 BB-   13 B+   14 B   15 B-   16 CCC+   17

 

With respect to the Collateral Debt Obligations generally, if at any time S&P
(or its successor) ceases to provide rating services, references to rating
categories of S&P shall be deemed instead to be references to the equivalent
categories of any other nationally recognized investment rating agency
designated in writing by the Portfolio Manager on behalf of the Issuer (with
written notice to the Collateral Administrator), as of the most recent date on
which such other rating agency and S&P published ratings for the type of
security in respect of which such alternative rating agency is used. The
Collateral Administrator, the Issuer and the Portfolio Manager shall not
disclose any such estimated rating received from S&P.

 

Annex IV3 

 

 

ANNEX V

 

S&P’S CDO MONITOR ASSET CLASSIFICATIONS

 

1   Aerospace & defense 2   Air transport 3   Automotive 4   Beverage & tobacco
5   Radio & television 6   [reserved] 7   Building & development 8   Business
equipment & services 9   Cable & satellite television 10   Chemicals & plastics
11   Clothing/textiles 12   Conglomerates 13   Containers & glass products 14  
Cosmetics/toiletries 15   Drugs 16   Ecological services & equipment 17  
Electronics/electrical 18   Equipment leasing 19   Farming/agriculture 20  
Financial intermediaries 21   Food/drug retailers 22   Food products 23   Food
service 24   Forest products 25   Health care 26   Home furnishings 27   Lodging
& casinos 28   Industrial equipment 29   [reserved] 30   Leisure
goods/activities/movies 31   Nonferrous metals/minerals 32   Oil & gas 33  
Publishing 34   Rail industries 35   Retailers (except food & drug) 36   Steel
37   Surface transport 38   Telecommunications 39   Utilities 40   Mortgage
REITs 41   Equity REITs and REOCs 42   [reserved] 43   Life insurance 44  
Health insurance 45   Property & casualty insurance 46   Diversified insurance

 

Annex V1 

 

 

ANNEX VI

 

INITIAL PORTFOLIO

 

TO BE PROVIDED

 

Annex VI1