Exhibit 10.3

 
NEITHER THIS CONVERTIBLE SUBORDINATED DEBENTURE NOR THE SECURITIES INTO WHICH
THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THIS CONVERTIBLE
SUBORDINATED DEBENTURE HAS BEEN SOLD IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, TRANSFERRED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
 
BLUEKNIGHT ENERGY PARTNERS, L.P.
 
Convertible Subordinated Debenture
 
Issuance Date:   October 25, 2010
Original Principal Amount:        $25,000,000
No. A-1
 

 
    FOR VALUE RECEIVED, BLUEKNIGHT ENERGY PARTNERS, L.P., a Delaware limited
partnership (the “Partnership”), hereby promises to pay to the order of
Blueknight Energy Holding, Inc., a Delaware corporation, or its permitted
registered assigns (the “Holder”) the amount set out above as the Original
Principal Amount (the “Original Principal Amount” and, such amount as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise,
the “Principal”) when due, whether upon the Maturity Date (as defined below),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at the
Initial Interest Rate (as defined below), the Interest Rate (as defined below)
or the Default Rate (as defined below), as applicable, from the date set out
above as the Issuance Date (the “Issuance Date”) until the same becomes due and
payable, whether upon the Maturity Date or acceleration, redemption, conversion
or otherwise (in each case in accordance with the terms hereof).  This
Convertible Subordinated Debenture (this “Debenture”) is issued pursuant to the
Global Transaction Agreement (as defined in Section 13 of this
Debenture).  Certain capitalized terms used herein are defined in Section 13 of
this Debenture.
 
    SECTION 1 GENERAL TERMS
 
       (a) Payment of Principal.  Subject to the terms of this Debenture,
including the mandatory conversion provisions set forth in Section 3 of this
Debenture and the subordination provisions set forth in Section 4 of this
Debenture, the Partnership shall pay to the Holder, in lawful money of the
United States of America and in immediately available funds, all outstanding
Principal and any accrued and unpaid Interest on December 31, 2011 (the
“Maturity Date”).
 

 
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       (b) Interest. Except as otherwise specified in Section 5(b)(i) of this
Debenture, the outstanding Principal amount of this Debenture shall bear simple
interest on the entire unpaid Principal amount thereof (i) at the per annum rate
of ten percent (10.0%) (the “Initial Interest Rate”) from the Issuance Date
until the one-year anniversary of the Issuance Date and (ii) at the per annum
rate of twelve percent (12.0%) (the “Interest Rate”) from and after the one-year
anniversary of the Issuance Date until the entire Principal amount of this
Debenture shall have been paid in full.  Interest shall be computed on a daily
basis using a year of 365 or 366 days, as the case may be, and assessed for the
actual number of days elapsed.  Except as otherwise specified in this Debenture,
Interest shall be payable in arrears on the Maturity Date.  Upon any redemption
of all or any portion of this Debenture, accrued and unpaid Interest on the
Principal amount of this Debenture redeemed shall be due and payable on the date
of such redemption.  Upon any conversion of all or any portion of this Debenture
into Preferred Units, accrued and unpaid Interest on the Principal amount of
this Debenture being converted shall also be converted into Preferred Units in
accordance with Section 3 of this Debenture.
 
       (c) Payments Generally.  If any payment on this Debenture becomes due on
a day that is not a Business Day, such payment will be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of Interest on such payment date.  Both the Principal
of and Interest on this Debenture are payable in lawful money of the United
States of America to the Holder.  Any payment to be made hereunder will be made
at the direction of the Holder by wire transfer of immediately available funds
to an account designated by the Holder.  All payments to be made by the
Partnership hereunder shall be non-refundable and be made without condition or
deduction for any counterclaim, defense, recoupment or setoff.
 
    SECTION 2 PARTNERSHIP’S REDEMPTION.  Subject to the subordination provisions
set forth in Section 4 of this Debenture, at any time or times the Partnership
shall have the right to redeem all or any portion of the Principal amount
outstanding under this Debenture prior to the Maturity Date.  In order to make a
redemption pursuant to this Section 2, the Partnership shall provide written
notice to the Holder of its intention to make a redemption (the “Redemption
Notice”), setting forth the amount of Principal it desires to redeem and the
date of the proposed redemption.  On the redemption date set forth in the
Redemption Notice, the Partnership shall pay to the Holder, in lawful money of
the United States of America and in immediately available funds, an amount equal
to the par value of the Principal amount of this Debenture that is being
redeemed (the “Partnership Redemption Amount”), together with any accrued and
unpaid Interest on the Partnership Redemption Amount.
 
    SECTION 3 MANDATORY CONVERSION OF DEBENTURE.  This Debenture shall be
convertible into Preferred Units (as defined in Section 13 of this Debenture),
on the terms and conditions set forth in this Section 3.
 

 
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       (a) Mandatory Conversion.  On the Maturity Date, all outstanding
Principal, together with any accrued and unpaid Interest, shall automatically
convert into fully paid and nonassessable Preferred Units as set forth in this
Section 3(a).  The number of Preferred Units issuable upon conversion pursuant
to this Section 3(a) shall be determined by dividing (x) such outstanding
Principal and accrued and unpaid Interest at the Maturity Date by (y) the Series
A Conversion Price (as defined in the Third Amended and Restated Partnership
Agreement) as of the Maturity Date.  The Partnership shall not issue any
fraction of a Preferred Unit upon any conversion pursuant to this Section
3(a).  If the issuance would result in the issuance of a fraction of a Preferred
Unit, the Partnership shall round such fraction of a Preferred Unit to the
nearest whole share.  The Partnership shall pay any and all transfer, stamp and
similar taxes that may be payable with respect to the issuance and delivery of
Preferred Units upon conversion pursuant to this Section 3(a).  On or before the
third (3rd) Business Day following the Maturity Date, the Partnership shall
issue and deliver to the address as specified in this Debenture, a certificate,
registered in the name of the Holder, for the number of Preferred Units to which
the Holder shall be entitled pursuant to this Section 3(a).  The Person or
Persons entitled to receive the Preferred Units shall be treated for all
purposes as the record holder or holders of such Preferred Units upon the
Maturity Date.
 
       (b) Other Provisions.
 
           (i) The Partnership covenants that all Preferred Units that shall be
issued pursuant to this Section 3 shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable.
 
           (ii) Nothing herein shall limit a Holder’s right to pursue actual
damages or declare an Event of Default pursuant to Section 5 of this Debenture
for the Partnership’s failure to deliver certificates representing Preferred
Units upon conversion within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief, in each case without the need to post a bond or provide other
security. The exercise of any such rights shall not prohibit the Holder from
seeking to enforce damages pursuant to any other Section of this Debenture or
under applicable law.
 

 
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    SECTION 4 SUBORDINATION.
 
       (a) Reference is made to the Credit Agreement dated as of October 25,
2010 (such agreement, as it may hereafter be amended, modified, restated,
refinanced or supplemented from time to time, the “Credit Agreement”), among the
Partnership, the banks, financial institutions and other entities from time to
time party thereto as lenders (the “Lenders”) and as issuing lenders (the
“Issuing Lenders”), JPMorgan Chase Bank, N.A., as administrative agent for the
Lenders and Issuing Lenders (in such capacity, and together with its successors
and assigns in such capacity, the “Administrative Agent”), and the other agents
party thereto.  The Holder hereby agrees for the benefit of the Administrative
Agent and the holders of the Senior Debt (as hereinafter defined) (the “Secured
Parties”) that all obligations of the Partnership to the Holder now or hereafter
existing under this Debenture (including interest accruing after the filing of a
petition initiating any bankruptcy proceeding described in the definition of
Senior Debt, whether or not such interest accrues after the filing of such
petition or is an allowed claim in such proceeding, but excluding any Preferred
Units issued upon conversion of this Debenture and any other Equity Interests
held by the Holder) (the “Subordinated Debt”) are and shall be subordinate, to
the extent and in the manner set forth in this Section 4, in right of payment to
the prior payment in full of all Obligations (as defined in the Credit
Agreement), whether for principal, interest (including interest payable in
respect of any such obligations subsequent to the commencement of any proceeding
against or with respect to the Partnership under any chapter of the Bankruptcy
Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”), or any provision of a
state bankruptcy law, whether or not such interest is an allowed claim
enforceable against the debtor, and whether or not the holder of such obligation
would be otherwise entitled to receive dividends or payments with respect to any
such interest or any such proceeding), fees, expenses, obligations under
guaranties, indemnity payments, reimbursement obligations under letters of
credit, or otherwise (all such obligations being the “Senior Debt”).
 
       (b) Notwithstanding the provisions of Section 1(a) above or any provision
herein to the contrary, until such time as the Senior Debt shall have been paid
in full, the Holder shall not ask, demand, sue for, take or receive from the
Partnership, directly or indirectly, in cash or other property or by set-off or
in any other manner (including, without limitation, from or by way of
collateral), and the Partnership shall not make, payment of all or any of the
Subordinated Debt; provided that:
 
           (i) so long as no Default (as defined in the Credit Agreement) exists
under the Credit Agreement, the Partnership may pay, and the Holder may take and
receive, Interest as provided in Section 1(b) of this Debenture;
 
           (ii) the subordination provisions of this Section 4 shall not
prohibit any conversion of all or any portion of this Debenture into Preferred
Units (or any subsequent conversion of Preferred Units into Common Units); and
 

 
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           (iii) the subordination provisions of this Section 4 shall not
prohibit any redemption of all or any portion of the Principal amount of this
Debenture nor the payment of Interest thereon solely with the proceeds of one or
more offerings or issuances of Equity Interests by the Partnership.
 
For the purposes of these provisions, the Senior Debt shall not be deemed to
have been paid in full until the Secured Parties shall have received payment in
full of the Senior Debt in cash and all commitments of the Lenders under the
Credit Agreement shall have been terminated.
 
       (c) Upon any distribution of all or any of the assets of the Partnership
to creditors of the Partnership upon the dissolution, winding up, liquidation,
arrangement, reorganization or composition of the Partnership, whether in any
bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceeding or upon an assignment for the benefit of creditors or any other
marshalling of the assets and liabilities of the Partnership or otherwise, any
payment or distribution of any kind (whether in cash, property or securities)
which otherwise would be payable or deliverable upon or with respect to the
Subordinated Debt shall be paid or delivered directly to the Administrative
Agent for the benefit of the Secured Parties for application (in the case of
cash) to or as collateral (in the case of non-cash property or securities) for
the payment or prepayment of the Senior Debt until the Senior Debt shall have
been paid in full.
 
       (d) Until such time as the Senior Debt shall have been paid in full, if
any proceeding referred to in Section 4(c) of this Debenture is commenced by or
against the Partnership, the Administrative Agent is hereby irrevocably
authorized and empowered (in its own name, on behalf of the Secured Parties, in
the name of the Holder, or otherwise), but shall have no obligation, to demand,
sue for, collect and receive every payment or distribution referred to in
Section 4(c) of this Debenture and give acquittance therefor and to file claims
and proofs of claim and take such other action (including, without limitation,
voting the Subordinated Debt or enforcing any security interest or other lien
securing payment of the Subordinated Debt) as it may deem necessary or advisable
for the exercise or enforcement of any of the rights or interests of the Secured
Parties hereunder.
 
       (e) All payments or distributions upon or with respect to the
Subordinated Debt which are received by the Holder contrary to the provisions
hereof shall be received in trust for the benefit of the Secured Parties, shall
be segregated from other funds and property held by the Holder and shall be
forthwith paid over to the Administrative Agent for the benefit of the Secured
Parties in the same form as so received (with any necessary endorsement) to be
applied (in the case of cash) to or held as collateral (in the case of non-cash
property or securities) for the payment or prepayment of the Senior Debt in
accordance with the terms of the Credit Agreement.
 
       (f) The Administrative Agent is hereby authorized to demand specific
performance of these terms of subordination, whether or not the Partnership
shall have complied with any of the provisions hereof applicable to it, at any
time when the Holder shall have failed to comply with any of such provisions
applicable to it.  The Holder hereby irrevocably waives any defense based on the
adequacy of a remedy at law which might be asserted as a bar to such remedy of
specific performance.
 

 
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       (g) So long as any of the Senior Debt shall remain unpaid, the Holder, in
its capacity as such, shall not (i) commence, or join with any creditor other
than the Secured Parties in commencing, any proceeding referred to in Section
4(c) of this Debenture, or (ii) declare any default in payment due hereunder or
sue for breach of the terms hereof.
 
       (h) No payment or distribution to the Secured Parties pursuant to the
above provisions shall entitle the Holder to exercise any rights of subrogation
in respect thereof until the Senior Debt shall have been paid in full.
 
       (i) Neither any Administrative Agent, nor any of the Secured Parties,
shall have any liability whatsoever to the Holder with respect to, and the
Holder waives any claim or defense which the Holder may now or hereafter have
against the Administrative Agent or any of the Secured Parties arising from
(i) any and all actions which the Administrative Agent or the Secured Parties
take or omit to take (including, without limitation, actions with respect to the
creation, perfection or continuation of liens in any collateral for the Senior
Debt, actions with respect to the occurrence of any default, actions with
respect to the foreclosure upon, sale, release of, depreciation of or failure to
realize upon any of such collateral, and actions with respect to the collection
of any claim for all or any part of the Senior Debt from any account debtor,
guarantor or any other Person) with respect to the Senior Debt or the valuation,
use, protection or release of any collateral for the Senior Debt now or
hereafter securing same; (ii) any right, now or hereafter existing, to require
the Administrative Agent or the Secured Parties to proceed against or exhaust
any collateral for the Senior Debt or to marshal any assets in favor of the
Holder; (iii) any notice of the incurrence or increase of Senior Debt, it being
understood that the Secured Parties may make advances now or hereafter relating
to the Senior Debt, without notice to or authorization from the Holder, in
reliance upon the agreements set forth in this Debenture, (iv) any defense based
upon or arising by reason of (A) any disability or other defense of the
Partnership or any other Person or entity; or (B) any lack of authority of any
agent or any other Person or entity acting or purporting to act on behalf of the
Partnership or the Holder; or (C) any failure by the Administrative Agent or the
Secured Parties to properly perfect any lien in any asset of any of the
Partnership or any other Person; (v) the Administrative Agent’s or any Secured
Party’s election, in any proceeding instituted under the Bankruptcy Code, of the
application of Section 1111(b)(2) of the Bankruptcy Code; and/or (vi) any
borrowing or grant of a security interest under Section 364 of the Bankruptcy
Code.
 
       (j) The holders of the Senior Debt may, at any time and from time to
time, without any consent of or notice to the Holder or any other holder of the
Subordinated Debt and without impairing or releasing the obligations of the
Holder under these terms of subordination:  (i) change the amount, manner, place
or terms of payment or change or extend the time of payment of, or renew or
alter, the Senior Debt in any manner, or enter into or amend in any manner any
other agreement related to the Senior Debt (including any change in the rate
under which any of the Senior Debt is outstanding); (ii) sell, exchange,
release, not perfect and otherwise deal with any property at any time pledged,
assigned or mortgaged to secure the Senior Debt; (iii) release anyone liable in
any manner under or in respect of the Senior Debt; (iv) exercise or refrain from
exercising any rights against Partnership and others (including the Holder); and
(v) apply any sums, by whomsoever paid or however realized, from time to time
received to the Senior Debt.
 

 
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       (k) The Holder agrees to execute and deliver such further documents and
to do such other acts and things as the Administrative Agent may reasonably
request in order fully to effect the purposes of these subordination
provisions.  The Holder authorizes and directs the Administrative Agent on its
behalf to take such further action as may be necessary to effectuate the
subordination as provided herein and irrevocably appoints the Administrative
Agent as its attorney-in-fact for any and all such purposes.
 
       (l) These terms of subordination shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Debt is rescinded or must otherwise be returned by the Administrative Agent or
any Secured Party upon the insolvency, bankruptcy or reorganization of the
Partnership or otherwise, all as though such payment had not been made.
 
       (m) The provisions of these terms of subordination constitute a
continuing agreement and shall (i) remain in full force and effect until the
payment in full of the Senior Debt, (ii) be binding upon the Holder and the
Partnership and their respective successors, transferees and assignees and
(iii) inure to the benefit of, and be enforceable by, the Administrative
Agent.  Without limiting the generality of the foregoing clause (iii), the
Administrative Agent and any Secured Party may assign or otherwise transfer all
or any portion of its rights and obligations under all or any of the Loan
Documents (as defined in the Credit Agreement) to any other Person (to the
extent permitted by the Loan Documents), and such other Person shall thereupon
become vested with all the rights in respect granted to the Administrative Agent
or such Secured Party herein or otherwise.
 
       (n) The foregoing provisions regarding subordination are for the benefit
of the holders of the Senior Debt and shall be enforceable by them directly
against the holders of any Subordinated Debt, and no holder of the Senior Debt
shall be prejudiced in its right to enforce subordination of any of the
Subordinated Debt by any act or failure to act by Partnership or anyone in
custody of its assets or property.
 
    SECTION 5 EVENTS OF DEFAULT.
 
       (a) An “Event of Default”, wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
 
           (i) the Partnership fails to pay when due any amount payable under
this Debenture and such non-payment continues for a period of five (5) Business
Days;
 
           (ii) the Partnership fails to cure a Conversion Failure by delivery
of the required number of Preferred Units within five (5) Business Days after
the Maturity Date;
 
           (iii) any representation or warranty made by or on behalf of the
Partnership in or in connection with this Debenture or any amendment or
modification hereof or waiver hereunder, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with this Debenture or any amendment or modification hereof or waiver hereunder,
shall prove to have been incorrect or misleading in any material respect when
made or deemed made;
 

 
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           (iv) the Partnership fails to observe or perform any covenant,
condition or agreement contained in, or otherwise commit any breach or default
of any provision of, this Debenture (other than non-payment and Conversion
Failures, which are covered by subclauses (i) and (ii) above), and such failure
shall continue unremedied for a period of thirty (30) days after the earlier to
occur of (A) notice thereof from the Holder to the Partnership and (B) an
officer of the Partnership otherwise becoming aware of such default;
 
           (v) the Partnership fails to make any payment (whether of principal
or interest and regardless of amount) in respect of any indebtedness for
borrowed money with an aggregate outstanding principal amount in excess of
$10,000,000, when and as the same shall become due and payable (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
beyond the end of any grace period therefor set forth in the documentation
governing such indebtedness;
 
           (vi) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (A) liquidation, reorganization or other relief
in respect of the Partnership or any Significant Subsidiary of the Partnership
or its debts, or of a substantial part of its assets, under any  Federal, state
or foreign bankruptcy, insolvency, receivership or similar law now or hereafter
in effect or (B) the appointment of a receiver, administrator, trustee,
custodian, sequestrator, conservator or similar official for the Partnership or
any Significant Subsidiary of the Partnership or for a substantial part of its
assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of the
foregoing shall be entered;
 
           (vii) the Partnership or any Significant Subsidiary of the
Partnership shall (A) voluntarily commence any proceeding or file any petition
seeking liquidation, reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or hereafter in
effect, (B) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in Section 5(a)(vi) of
this Debenture, (C) apply for or consent to the appointment of a receiver,
administrator, trustee, custodian, sequestrator, conservator or similar official
for the Partnership or any Significant Subsidiary of the Partnership or for a
substantial part of its assets, (D) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (E) make a
general assignment for the benefit of creditors or (F) take any action for the
purpose of effecting any of the foregoing; or
 
           (viii) this Debenture shall for any reason cease to be enforceable or
in full force and effect or any action shall be taken to discontinue or to
assert the invalidity or unenforceability of any provision of this Debenture, or
the Partnership shall deny that it has any further liability under any provision
of this Debenture, or shall give notice to such effect.
 

 
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       (b) Consequences of Events of Default. Upon the occurrence and during the
continuance of an Event of Default:
 
           (i) the outstanding Principal amount of this Debenture and all past
due Interest, if any, owed hereunder shall bear interest at the lesser of (i)
the per annum rate of fourteen percent (14.0%) and (ii) the Highest Lawful Rate
(as hereinafter defined) (the “Default Rate”), in each case from and after the
date of such Event of Default until the entire Principal amount of this
Debenture and all Interest accrued thereon (including Interest on such past due
Interest) shall have been paid in full, which Interest accruing at the Default
Rate shall be payable on demand;
 
           (ii) the Holder may, at its option, by notice in writing to the
Partnership, declare the entire Principal amount outstanding under this
Debenture (plus all accrued but unpaid Interest on the amounts outstanding under
this Debenture) to be, and such Principal amount of this Debenture shall
thereupon be and become, immediately due and payable (together with all accrued
but unpaid Interest thereon) without presentment, demand, protest or notice of
any kind (including, without limitation, notice of acceleration and notice of
intent to accelerate), all of which are hereby waived by the Partnership, or
other action of any kind by the Holder; provided, that, if an Event of Default
under Section 5(a)(vi) or Section 5(a)(vii) of this Debenture has occurred, such
acceleration shall be automatic and no notice to the Partnership shall be
required hereunder;
 
           (iii) the Holder shall have the right (but not the obligation) to
convert this Debenture into Preferred Units in the manner set forth in Section
3(a); provided that, for purposes of this Section 5(a)(iii), any reference in
Section 3(a) to the Maturity Date shall mean and be the date that the Holder
elects to so convert this Debenture into Preferred Units; and
 
           (iv) subject to Section 4 of this Debenture, the Holder may, at its
option, exercise all of its rights and remedies under applicable law and under
this Debenture.
 
The rights and remedies of the Holder under this Debenture shall be cumulative,
and not exclusive.

    SECTION 6 REISSUANCE OF THIS DEBENTURE.
 
       (a) Transfer.  If this Debenture is to be transferred, the Holder shall
surrender this Debenture to the Partnership, whereupon the Partnership will,
forthwith issue and deliver upon the order of the Holder a new Debenture (in
accordance with Section 6(d) of this Debenture), registered in the name of the
registered transferee or assignee, representing the outstanding Principal being
transferred by the Holder and, if less than the entire outstanding Principal is
being transferred, a new Debenture (in accordance with Section 6(d) of this
Debenture) to the Holder representing the outstanding Principal not being
transferred.
 

 
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       (b) Lost, Stolen or Mutilated Debenture.  Upon receipt by the Partnership
of evidence reasonably satisfactory to the Partnership of the loss, theft,
destruction or mutilation of this Debenture, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Partnership
in customary form and, in the case of mutilation, upon surrender and
cancellation of this Debenture, the Partnership shall execute and deliver to the
Holder a new Debenture (in accordance with Section 6(d) of this Debenture)
representing the outstanding Principal.
 
       (c) Debenture Exchangeable for Different Denominations.  This Debenture
is exchangeable, upon the surrender hereof by the Holder at the principal office
of the Partnership, for a new Debenture or Debentures (in accordance with
Section 6(d) of this Debenture) representing in the aggregate the outstanding
Principal of this Debenture, and each such new Debenture will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
 
       (d) Issuance of New Debentures.  Whenever the Partnership is required to
issue a new Debenture pursuant to the terms of this Debenture, such new
Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent,
as indicated on the face of such new Debenture, the Principal remaining
outstanding (or in the case of a new Debenture being issued pursuant to Section
6(a) or Section 6(c) of this Debenture, the Principal designated by the Holder
which, when added to the Principal represented by the other new Debentures
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Debenture immediately prior to such issuance of new
Debentures), (iii) shall have an issuance date, as indicated on the face of such
new Debenture, which is the same as the Issuance Date of this Debenture, (iv)
shall have the same rights and conditions as this Debenture and (v) shall
represent accrued and unpaid Interest from the Issuance Date.
 
    SECTION 7 NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms hereof must be in writing and
will be deemed to have been delivered:  (i) upon receipt, when delivered
personally, (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party) or (iii) one (1) Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same.  The addresses and facsimile numbers for such
communications shall be:
 

 
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If to the Partnership:
 
Blueknight Energy Partners, L.P.
Two Warren Place
6120 South Yale Avenue, Suite 500
Tulsa, Oklahoma 74136
Fax: (918) 237-4001
Attn: Alex Stallings
 
With copies to (which shall not constitute notice):
 
Baker Botts L.L.P.
2001 Ross Avenue, Suite 600
Dallas, Texas 75201
Fax: (214) 661-4634
Attn: Doug Rayburn
 
and
 
Prickett, Jones & Elliott, P.A.
1319 King Street
P. O. Box 1328
Wilmington, Delaware 19899
Fax: (302) 658-8111
Attn: John Small
 
If to the Holder:
 
Blueknight Energy Holding, Inc.
1100 Louisiana
Suite 5500
Houston, Texas 77002
Fax: (713) 230-1111
Email: jcd@vitol.com
Attn: Mr. James C. Dyer, IV

With copies to (which shall not constitute notice)
 
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue NW
Washington, DC 20004-2415
Fax: (202) 637-3593
Email: james.darrow@sutherland.com
Attn: James D. Darrow

 
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or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) Business Days prior to the effectiveness of such
change.  Written confirmation of receipt (i) given by the recipient of such
notice, consent, waiver or other communication, (ii) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (iii) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
 
    SECTION 8 NO RIGHTS AS UNITHOLDER.  This Debenture shall not entitle the
Holder to any of the rights of a unitholder of the Partnership, including
without limitation, the right to vote, to receive dividends and other
distributions, or to receive any notice of, or to attend, meetings of
unitholders or any other proceedings of the Partnership, unless and to the
extent converted into Preferred Units in accordance with the terms hereof.
 
    SECTION 9 EXPENSES.  If the Partnership fails to strictly comply with the
terms of this Debenture, then the Partnership shall reimburse the Holder
promptly for all out-of-pocket costs and expenses, including, without
limitation, reasonable attorneys’ fees and expenses incurred by the Holder in
any action in connection with this Debenture, including, without limitation,
those incurred: (i) during any workout, attempted workout, and/or in connection
with the rendering of legal advice as to the Holder’s rights, remedies and
obligations hereunder, (ii) collecting any sums which become due to the Holder
hereunder, (iii) defending or prosecuting any proceeding or any counterclaim to
any proceeding or appeal related to this Debenture or (iv) the protection,
preservation or enforcement of any rights or remedies of the Holder hereunder.
 
    SECTION 10 AMENDMENTS AND WAIVERS.  The provisions of this Debenture may not
be amended or waived without the prior written consent of the Holder.  Any
waiver by the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Debenture.  The failure of the
Holder to insist upon strict adherence to any term of this Debenture on one or
more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Debenture.  Any waiver must be in writing.
 

 
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    SECTION 11 INTEREST RATE LIMITATION.  Notwithstanding anything to the
contrary contained in this Debenture, the Interest paid or agreed to be paid
under this Debenture shall not exceed the Highest Lawful Rate (as defined
below).  If the Holder shall receive Interest on this Debenture in an amount
that exceeds the Highest Lawful Rate, the excess Interest shall be applied to
the Principal of this Debenture or, if it exceeds such unpaid Principal,
refunded to the Partnership.  In determining whether the Interest contracted
for, charged, or received by the Holder exceeds the Highest Lawful Rate, the
Holder may, to the extent permitted by applicable law, (a) characterize any
payment that is not principal as an expense, fee, or premium rather than
interest, (b) exclude voluntary prepayments and the effects thereof, and
(c) amortize, prorate, allocate, and spread in equal or unequal parts the total
amount of Interest throughout the contemplated term of this Debenture.  For
purposes of this Debenture, “Highest Lawful Rate” means at the particular time
in question the maximum rate of interest which, under applicable law, the Holder
is then permitted to charge on this Debenture.  If the maximum rate of interest
which, under applicable law, the Holder is permitted to charge on this Debenture
shall change after the date hereof, the Highest Lawful Rate shall be
automatically increased or decreased, as the case may be, from time to time as
of the effective time of each change in the Highest Lawful Rate without notice
to the Partnership.
 
    SECTION 12 SEVERABILITY; WAIVER OF NOTICE; ASSIGNMENT. Whenever possible,
each provision of this Debenture will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Debenture
is held to be prohibited by or invalid under applicable law in any jurisdiction,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating any other provision of this Debenture.  To the
extent permitted by law, the Partnership, for itself and its successors and
assigns, hereby waives presentment, demand, notice of protest, notice of
acceleration, notice of intent to accelerate and all other demands and notices,
in connection with the delivery, acceptance, performance, default or enforcement
of this Debenture.  This Debenture shall not be assignable by the Partnership,
and any purported transfer or assignment of the Partnership’s obligations
hereunder shall be null and void.  This Debenture shall inure to the benefit of
the Holder and its successors and assigns.
 
    SECTION 13 CERTAIN DEFINITIONS.  For purposes of this Debenture, the
following terms shall have the following meanings:
 
       (a) “Business Day” means each day of the week except Saturdays, Sundays
and days on which banking institutions are authorized or required to close in
the State of New York.
 
       (b) “Capital Stock” means:
   
           (i) in the case of a corporation, corporate stock;
 
           (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
 

 
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           (iii) in the case of a partnership or limited liability company,
partnership interests (whether general or limited) or membership interests; and
 
           (iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
 
       (c) “Conversion Failure” means the Partnership’s failure to issue and
deliver a certificate to the Holder for the number of Preferred Units to which
the Holder is entitled upon the conversion of this Debenture pursuant to Section
3(a) by the third (3rd) Business Day after the Maturity Date.
 
       (d) “Common Units” means a common unit representing a limited partner
interest in the Partnership.
   
       (e) “Equity Interests” means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
 
       (f) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
       (g) “General Partner” means Blueknight Energy Partners G.P., L.L.C., a
Delaware limited liability company.
 
       (h) “Global Transaction Agreement” means the Global Transaction Agreement
dated as of October 25, 2010, by and among the Partnership, the General
Partner and the purchasers party thereto, as amended, restated, supplemented and
otherwise modified from time to time.
 
       (i) “Person” means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
   
       (j) “Preferred Units” means the Partnership’s Series A Preferred Units
(as defined in the Third Amended and Restated Partnership Agreement) with the
terms set forth in the Third Amended and Restated Partnership Agreement;
provided that, from and after the date that all of the Partnership’s issued and
outstanding Series A Preferred Units are converted into Common Units pursuant to
Section 5.12(c) of the Third Amended and Restated Partnership Agreement, all
references herein to Preferred Units shall mean Common Units.
 
       (k) “Significant Subsidiary” means any subsidiary that would be a
“significant subsidiary” as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date of this Debenture.
 
       (l) “Third Amended and Restated Partnership Agreement” means the Third
Amended and Restated Agreement of Limited Partnership of the Partnership dated
as of October 25, 2010, as amended, restated, supplemented and otherwise
modified from time to time.
 

 
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    SECTION 14 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
UNITHOLDERS.  Neither the General Partner nor any past, present or future
director, officer, partner, employee, incorporator, manager or unitholder or
other owner of Equity Interests of the Partnership or the General Partner, as
such, shall have any liability for any obligations of the Partnership under this
Debenture, or for any claim based on, in respect of, or by reason of, such
obligations or their creation.  The Holder by accepting this Debenture waives
and releases all such liability.  The waiver and release are part of the
consideration for issuance of this Debenture.
 
    SECTION 15 GOVERNING LAW; WAIVER OF JURY TRIAL.
 
       (a) THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF
THE STATE OF NEW YORK.
 
       (b) THE PARTNERSHIP HEREBY IRREVOCABLY WAIVES, AND BY ACCEPTANCE OF THIS
DEBENTURE THE HOLDER HEREBY IRREVOCABLY WAIVES, ALL RIGHT OF TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS
DEBENTURE OR ANY MATTER ARISING HEREUNDER.
 
    SECTION 16 NOTICE OF FINAL AGREEMENT.  THIS WRITTEN DEBENTURE REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
 
[Remainder of Page Intentionally Left Blank; Signature Page Follows]

 
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IN WITNESS WHEREOF, the Partnership has caused this Debenture to be duly
executed by a duly authorized officer as of the date set forth above.
 

BLUEKNIGHT ENERGY PARTNERS, L.P.
   
By:
BLUEKNIGHT ENERGY PARTNERS
 
G.P., L.L.C., its general partner,
       
By:
/s/ Alex G. Stallings
 
Alex G. Stallings
 
Chief Financial Officer and Secretary

 
 

 [Signature Page to Debenture - Vitol]