exv10w12





Exhibit 10.12

 

 






REVOLVING CREDIT AND SECURITY AGREEMENT




among




HIGHLAND DISTRESSED OPPORTUNITIES, INC.,

as Borrower




LIBERTY STREET FUNDING LLC,

as Conduit Lender




THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Secondary Lender




and




THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Agent




Dated as of June 27, 2008




 

 











 









 








TABLE OF CONTENTS




	 	 	 	 	 	 	 
	 	 	 	 	Page
	 
	 	 	 	 	 	 
	ARTICLE I       DEFINITIONS AND RULES OF CONSTRUCTION	 	 	1	 
	 
	 	 	 	 	 	 
	SECTION 1.01.

	 	Definitions
	 	 	1	 
	SECTION 1.02.

	 	Rules of Construction
	 	 	30	 
	SECTION 1.03.

	 	Computation of Time Periods
	 	 	31	 
	 
	 	 	 	 	 	 
	ARTICLE II      ADVANCES TO THE BORROWER	 	 	31	 
	 
	 	 	 	 	 	 
	SECTION 2.01.

	 	Advance Facility
	 	 	31	 
	SECTION 2.02.

	 	Making of Advances
	 	 	31	 
	SECTION 2.03.

	 	Noteless Agreement; Evidence of Indebtedness
	 	 	32	 
	SECTION 2.04.

	 	Maturity of the Advances
	 	 	33	 
	SECTION 2.05.

	 	Prepayment of the Advances
	 	 	33	 
	SECTION 2.06.

	 	Yield
	 	 	34	 
	SECTION 2.07.

	 	Increased Costs
	 	 	34	 
	SECTION 2.08.

	 	Compensation
	 	 	35	 
	SECTION 2.09.

	 	Additional Yield on Eurodollar Rate Advances
	 	 	36	 
	SECTION 2.10.

	 	Termination or Reduction of the Total Commitment
	 	 	36	 
	SECTION 2.11.

	 	Rescission or Return of Payment
	 	 	36	 
	SECTION 2.12.

	 	Fees Payable by Borrower
	 	 	37	 
	SECTION 2.13.

	 	Post Default Interest
	 	 	37	 
	SECTION 2.14.

	 	Payments
	 	 	37	 
	SECTION 2.15.

	 	Ratable Payments
	 	 	38	 
	SECTION 2.16.

	 	Borrower’s Obligations Absolute
	 	 	38	 
	 
	 	 	 	 	 	 
	ARTICLE III      CONDITIONS PRECEDENT	 	 	38	 
	 
	 	 	 	 	 	 
	SECTION 3.01.

	 	Conditions Precedent to the Effectiveness of this Agreement
	 	 	38	 
	SECTION 3.02.

	 	Conditions Precedent to All Advances
	 	 	40	 
	 
	 	 	 	 	 	 
	ARTICLE IV       REPRESENTATIONS AND WARRANTIES	 	 	41	 
	 
	 	 	 	 	 	 
	SECTION 4.01.

	 	Representations and Warranties of the Borrower
	 	 	41	 
	 
	 	 	 	 	 	 
	ARTICLE V       COVENANTS	 	 	44	 
	 
	 	 	 	 	 	 
	SECTION 5.01.

	 	Affirmative Covenants of the Borrower
	 	 	44	 
	SECTION 5.02.

	 	Negative Covenants of the Borrower
	 	 	49	 
	 
	 	 	 	 	 	 
	ARTICLE VI       EVENTS OF DEFAULT	 	 	52	 
	 
	 	 	 	 	 	 
	SECTION 6.01.

	 	Events of Default
	 	 	52	 






i









 






	 	 	 	 	 	 	 
	 	 	 	 	Page
	 
	 	 	 	 	 	 
	ARTICLE VII       PLEDGE OF PLEDGED COLLATERAL; RIGHTS OF THE AGENT	 	 	54	 
	 
	 	 	 	 	 	 
	SECTION 7.01.

	 	Security Interests
	 	 	54	 
	SECTION 7.02.

	 	Substitution of Collateral and Release of Security Interest
	 	 	55	 
	SECTION 7.03.

	 	Application of Proceeds
	 	 	56	 
	SECTION 7.04.

	 	Rights and Remedies upon Event of Default
	 	 	57	 
	SECTION 7.05.

	 	Remedies Cumulative
	 	 	58	 
	SECTION 7.06.

	 	Enforcement of Remedies under the Custodial Agreement and Loan Documents
	 	 	 58	 
	SECTION 7.07.

	 	
Authorization to File Financing Statements
	 	 	59	 
	 
	 	 	 	 	 	 
	ARTICLE VIII       THE AGENT	 	 	59	 
	 
	 	 	 	 	 	 
	SECTION 8.01.

	 	Authorization and Action
	 	 	59	 
	SECTION 8.02.

	 	Delegation of Duties
	 	 	59	 
	SECTION 8.03.

	 	Agent’s Reliance, Etc.
	 	 	59	 
	SECTION 8.04.

	 	Indemnification
	 	 	60	 
	SECTION 8.05.

	 	Successor Agent
	 	 	60	 
	SECTION 8.06.

	 	Notice of Name Change
	 	 	61	 
	 
	 	 	 	 	 	 
	ARTICLE IX       MISCELLANEOUS	 	 	61	 
	 
	 	 	 	 	 	 
	SECTION 9.01.

	 	No Waiver; Modifications in Writing
	 	 	61	 
	SECTION 9.02.

	 	Notices, Etc.
	 	 	61	 
	SECTION 9.03.

	 	Taxes
	 	 	62	 
	SECTION 9.04.

	 	Costs and Expenses; Indemnification
	 	 	65	 
	SECTION 9.05.

	 	Execution in Counterparts
	 	 	66	 
	SECTION 9.06.

	 	Assignability
	 	 	66	 
	SECTION 9.07.

	 	Governing Law
	 	 	67	 
	SECTION 9.08.

	 	Severability of Provisions
	 	 	68	 
	SECTION 9.09.

	 	Confidentiality
	 	 	68	 
	SECTION 9.10.

	 	Merger
	 	 	68	 
	SECTION 9.11.

	 	No Proceedings; No Recourse
	 	 	69	 
	SECTION 9.12.

	 	Survival of Representations and Warranties
	 	 	69	 
	SECTION 9.13.

	 	Loan Documents
	 	 	69	 
	SECTION 9.14.

	 	Submission to Jurisdiction; Waivers; Etc.
	 	 	70	 
	SECTION 9.15.

	 	E-Mail Reports
	 	 	70	 
	SECTION 9.16.

	 	Waiver of Jury Trial
	 	 	71	 
	SECTION 9.17.

	 	Several Obligations
	 	 	71	 






ii









 






SCHEDULES




	 	 	 
	Schedule I

	 	Certain Borrowing Base Advance Rates
	Schedule II

	 	Form of Investor Report
	Schedule III

	 	Form of Weekly Portfolio Report
	Schedule IV

	 	Industry Classification Criteria
	Schedule V

	 	Scope of Audit
	Schedule VI

	 	[Reserved]
	Schedule VII

	 	Principal Office
	Schedule VIII

	 	Foreign Currency Borrowing Base Advance Rates
	Schedule IX

	 	Closing Date TRS Eligible Assets






EXHIBITS




	 	 	 
	EXHIBIT A

	 	Form of Advance Note (if requested)
	EXHIBIT B

	 	Form of Notice of Borrowing
	EXHIBIT C

	 	Form of Assignment and Acceptance
	EXHIBIT D

	 	Form of Notice of Prepayment
	EXHIBIT E

	 	Perfection Representations, Warranties and Covenants







iii











 





REVOLVING CREDIT AND SECURITY AGREEMENT




          REVOLVING CREDIT AND SECURITY AGREEMENT, dated as of June 27, 2008, among LIBERTY STREET
FUNDING LLC, as the Conduit Lender, THE BANK OF NOVA SCOTIA, ACTING THROUGH ITS NEW YORK AGENCY and
the other Secondary Lenders (as hereinafter defined) from time to time parties hereto, THE BANK OF
NOVA SCOTIA, ACTING THROUGH ITS NEW YORK AGENCY, as agent for the Secured Parties (as hereinafter
defined) (in such capacity, together with its successors and assigns, the “Agent”), and
HIGHLAND DISTRESSED OPPORTUNITIES, INC., a Delaware corporation (together with its permitted
successors and assigns, the “Borrower”).




WITNESSETH:




          WHEREAS, the Borrower desires that the Conduit Lender (as hereinafter defined) and the
Secondary Lenders from time to time make advances to the Borrower on the terms and subject to the
conditions set forth in this Agreement; and




          WHEREAS, the Conduit Lender and the Secondary Lenders are willing to make such advances to the
Borrower for such purposes on the terms and subject to the conditions set forth in this Agreement;




          NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained,
the parties hereto agree as follows:




ARTICLE I

DEFINITIONS AND RULES OF CONSTRUCTION




          SECTION 1.01. Definitions.




          As used in this Agreement, the following terms shall have the meanings indicated:




          “Advance” means each borrowing by the Borrower pursuant to Article II,
provided that if the Conduit Lender assigns a portion of any Advance made by it pursuant to
an Asset Purchase Agreement or otherwise or any Secondary Lender assigns a portion of any
outstanding Advance made by it pursuant to an Assignment and Acceptance, the portion of such
Advance retained by such Conduit Lender or Secondary Lender, as the case may be, and the portion of
such Advance acquired by such assignee shall each be deemed to constitute separate Advances which
were made on the same Borrowing Date for purposes of this Agreement.




          “Advance Note” means each promissory note, if any, issued by the Borrower to the
Conduit Lender or a Secondary Lender in accordance with the provisions of Section 2.03,
substantially in the form of Exhibit A hereto, as the same may from time to time be amended,
supplemented, waived or modified.




          “Advantage Data” means the secondary market bond pricing service maintained by
Advantage Data Inc.




 









 








          “Adverse Claim” means any Lien or other right, claim, encumbrance or any other type of
preferential arrangement in, of or on any Person’s assets or properties in favor of any other
Person, other than in the case of the Borrower, Permitted Liens.




          “Adviser” means Highland Capital or any replacement investment adviser appointed for
the Borrower in accordance with this Agreement.




          “Advisory Agreement” means the Investment Advisory and Management Agreement, dated as
of February 21, 2007, between Highland Capital and the Borrower, as the same may be amended,
supplemented, waived or modified as permitted under this Agreement.




          “Affected Person” means each Lender, each Secondary Lender, any other entity which
enters into a commitment to make or purchase any Advance or any interest therein or to provide any
liquidity or credit enhancement to the Conduit Lender, and any of their respective Affiliates, any
corporation controlling any Lender or any Secondary Lender and any permitted assignee or
participant of any Lender or any Secondary Lender.




          “Affiliate” means, in respect of a referenced Person, (a) another Person controlling,
controlled by or under common control with such referenced Person (which in the case of the Conduit
Lender and the Agent shall also include any entity which is a special purpose entity that issues
promissory notes and has a relationship to the Agent comparable to that of the Conduit Lender) or
(b) any officer (exclusive of a “ministerial officer” with no authority to bind a Person), director
of or partner in the referenced Person. The terms “control,” “controlling,” “controlled” and the
like mean the direct or indirect possession of the power to direct or cause the direction of the
management or policies of a Person or the disposition of its assets or properties, whether through
ownership, by contract, arrangement or understanding, or otherwise.




          “Agent” shall have the meaning assigned to such term in the introduction to this
Agreement.




          “Agent’s Account” means the special account (account number 2308363CORBK77, ABA No.
02-002-532, Reference: Highland Distressed Opportunities, Inc. Revolving Credit Facility,
Attention: Loan Operations) of the Agent maintained at the office of BNS at its Principal Office or
to such other account as the Agent shall designate in writing to the Borrower.




          “Aggregate Custodian’s Advance Amount” means the sum of (i) the aggregate unpaid
Dollar amount of all outstanding Custodian’s Overdraft Advances of cash, (ii) the aggregate
Borrowing Base Asset Value of all Custodian’s Overdraft Advances of securities to the extent not
reimbursed by the Borrower, in the case of clauses (i) and (ii) above, to the
extent not incurred to pay any fee or expense owing to the Custodian (as securities intermediary,
collateral agent, Custodian or otherwise), and (iii) the accrued and unpaid interest, if any, on
the amounts set forth in clauses (i) and (ii) above.




          “Agreement” means this Revolving Credit and Security Agreement, as the same may from
time to time be amended, supplemented, waived or modified.




2









 








          “Alternate Base Rate” means in respect of any Advance for any Settlement Period, a
fluctuating interest rate per annum as shall be in effect from time to time, which rate shall be at
all times equal to the sum of (i) the Applicable Margin plus (ii) the highest of (a) the
Base Rate for such Advance and (b) one-half of one percent (0.5%) per annum above the Federal Funds
Rate.




          “Applicable Account” means (i) with respect to amounts owing and payable to the
Conduit Lender under the Program Documents, the special account (account number 2158-13, ABA No.
026-002532, Reference: Highland Distressed Opportunities, Inc.) of the Conduit Lender maintained at
BNS or to such other account as the Agent shall designate in writing to the Borrower, and (ii) with
respect to all other amounts owing and payable to any other Secured Party, any Affected Person or
any Indemnified Party under the Program Documents, the Agent’s Account.




          “Applicable Law” means any Law of any Authority, including, without limitation, all
Federal and state banking or securities laws, to which the Person in question is subject or by
which it or any of its property is bound.




          “Applicable Margin” means, with respect to the Eurodollar Rate, 1.50% per annum and
with respect to the Alternate Base Rate, 1.00% per annum.




          “Asset Coverage Test” means, as of any date of determination, the Borrower’s “senior
securities representing indebtedness” (as defined in Sections 18(g) and 61(a)(4) of the Investment
Company Act) have “asset coverage” (as defined in Section 18(h) of the Investment Company Act) of
at least 300%, computed on such date of determination regardless of whether or not dividends or
distributions are being made on such date, or whether Debt is being incurred on such date, as if
each outstanding Advance constituted a “senior security” without regard to whether such Advance is
a loan for “temporary purposes” or otherwise excludable from the definition of “senior securities”
under Section 18(g) of the Investment Company Act.




          “Asset Purchase Agreement” means the Asset Purchase Agreement or similar agreement
entered into by a Secondary Lender (other than BNS) concurrently with an Assignment and Acceptance.




          “Assets” means a collective reference to all items which would be classified as an
“asset” on the balance sheet of the Borrower in accordance with GAAP.




          “Assignee Rate” means, in respect of any Advance made by a Secondary Lender, acquired
by a Lender (other than the Conduit Lender) or funded by the Conduit Lender through participations,
an interest rate per annum equal to the sum of the Applicable Margin plus the Eurodollar
Rate for the applicable Settlement Period; provided, however, that in case of:





          (i) any Advance with respect to which, on or prior to the first day of the related
Settlement Period, a Lender (other than the Conduit Lender) or Secondary Lender shall have
notified the Agent that the introduction of or any change in or in the interpretation of any
law or regulation makes it unlawful, or any central bank or other governmental authority
asserts that it is unlawful, for such Lender or Secondary Lender to fund such Advance at the
Assignee Rate set forth above, the “Assignee Rate”



3









 







applicable to such Advance shall be an interest rate per annum equal to the Alternate
Base Rate until the date two Business Days after such Lender or such Secondary Lender shall
have subsequently notified the Agent that such circumstances no longer exist;




          (ii) any Advance previously funded by the Conduit Lender through the issuance of
promissory notes and with respect to which the Agent receives notice that such Advance has
ceased to be so funded by the Conduit Lender, for a period of two Business Days following
receipt of such notice the “Assignee Rate” applicable to such Advance shall be an interest
rate per annum equal to the Alternate Base Rate; and




          (iii) any Advance that is less than $500,000, the “Assignee Rate” applicable to such
Advance shall be an interest rate per annum equal to the Alternate Base Rate.



          “Assignment and Acceptance” means the Assignment and Acceptance, in substantially the
form of Exhibit C hereto, entered into by a Secondary Lender, an Eligible Assignee, the Agent and,
if required by the terms of Section 9.06(b), the Borrower, pursuant to which such Eligible
Assignee became a party to this Agreement.




          “Authority” means any governmental or quasi-governmental authority (including the
National Association of Securities Dealers, the stock exchanges, the SEC and any accounting board
or authority (whether or not a part of government) which is responsible for the establishment or
interpretation of national or international accounting principles, in each case whether foreign or
domestic), whether executive, legislative, judicial, administrative or other, or any combination
thereof, including, without limitation, any Federal, state, territorial, county, municipal or other
government or governmental or quasi-governmental agency, arbitrator, board, body, branch, bureau,
commission, corporation, court, department, instrumentality, master, mediator, panel, referee,
system or other political unit or subdivision or other entity of any of the foregoing, whether
domestic or foreign.




          “Base Rate” means, for any day, the rate of interest in effect for such day as
publicly announced from time to time by BNS at its Principal Office as its “reference rate.” Such
“reference rate” is set by BNS based upon various factors, including BNS’s costs and desired
return, general economic conditions and other factors, and is used as a reference point for pricing
some loans, which may be priced at, above or below such announced rate.




          “Benefit Arrangement” means an employee benefit plan within the meaning of Section
3(3) of ERISA which is subject to the provisions of Title I of ERISA and is not a Plan or a
Multiemployer Plan.




          “BNS” means The Bank of Nova Scotia, acting through its New York Agency, and its
successors.




          “Bond Asset” means any Asset that is a direct interest in a corporate bond obligation.




          “Borrower” shall have the meaning assigned to such term in the introduction to this
Agreement.




4









 








          “Borrower Obligations” means all indebtedness, whether absolute, fixed or contingent,
at any time or from time to time owing by the Borrower to any Secured Party or any Affected Person
under or in connection with this Agreement or any other Program Document, including without
limitation, all amounts payable by the Borrower in respect of the Advances, with interest thereon,
and the amounts payable under Sections 2.05, 2.06, 2.07, 2.08, 2.09, 2.11, 2.12, 2.13, 7.04(b),
9.03 and 9.04 of this Agreement.




          “Borrower’s Account” means the account designated Account No. 340120848373 and ABA No.
031000053 maintained with PFPC or such other account as the Borrower shall designate in writing to
the Agent.




          “Borrowing Base” means on the date any determination thereof is made, an amount equal
to (i) the aggregate Borrowing Base Adjusted Asset Value of all Borrowing Base Eligible Assets as
of such date of determination in which the Agent has a valid and perfected first priority security
interest free and clear of Adverse Claims, minus (ii) the Borrowing Base Excess Amount as
of such date of determination.




          “Borrowing Base Adjusted Asset Value” means in respect of any Borrowing Base Eligible
Asset, as of any date of determination, an amount equal to the product of (i) the Borrowing Base
Asset Value of such Borrowing Base Eligible Asset as of such date, and (ii) the applicable
Borrowing Base Advance Rate for such Borrowing Base Eligible Asset.




          “Borrowing Base Advance Rate” means (a) in respect of Cash, 100%, (b) in respect of
Eligible Government Securities, Eligible Money Market Investments and Eligible Repurchase
Agreements, (i) if such Asset has a next-day maturity, 100% and (ii) otherwise, (A) if such Asset
is rated by S&P, 90% or (B) if such Asset is not rated by S&P, 89%, (c) in respect of Eligible
Commercial Paper, 96.6%, (d) in respect of Class A Loan Assets, 82.7%, (e) in respect of Class B
Loan Assets, 76.6%, (f) in respect of Class C Loan Assets, 60.3%,(g) in respect of Class D Loan
Assets, 50.5%, (h) in respect of any Bond Asset, Second Lien Loan Asset or Senior Unsecured Loan
Asset, the Borrowing Base Advance Rate determined according to Schedule I hereto, (i) in respect of
Large Cap Equity Securities, 37.0%, (j) in respect of Mid-Cap Equity Securities, 30.2%, (k) in
respect of Small Cap Equity Securities, 15.3% and (l) in respect of Eligible Convertible
Securities, the rate set forth in the foregoing clauses (j)-(l) for the Eligible Equity Security
into which such security is convertible; provided, that (i) in the case of any Foreign
Currency Asset, the Borrowing Base Advance Rate with respect to such Asset shall be the product of
(A)(1) the rate determined in accordance with the foregoing sentence minus (2) 5.0% multiplied by
(B)(1) if such Foreign Currency Asset is subject to a currency hedge reasonably satisfactory to the
Agent, 1.00, (2) if such Foreign Currency Asset is not subject to such a currency hedge but is
denominated or payable in a currency specified on Schedule VIII hereto, the foreign currency
Borrowing Base Advance Rate specified with respect to such currency on Schedule VIII hereto and (3)
otherwise, zero and (ii) in the case of any Emerging Market Equity Security or any Convertible
Security convertible into an Emerging Market Equity Security, the Borrowing Base Advance Rate with
respect thereto shall be 15%.




          “Borrowing Base Asset Value” means, as of any day of determination (a) in respect of
Cash, the amount of such Cash, and (b) in respect of any other Asset, the Value of such Asset
computed in the manner as such Value is required to be computed by the Borrower in



5









 






accordance with valuation procedures adopted by Borrower’s Board of Directors, as from time to
time in effect, and in accordance with Applicable Law, including without limitation, the rules,
regulations and interpretations of the SEC under the Investment Company Act; provided, that
(i) in respect of any Asset that constitutes an Equity Security in respect of which a Permitted
Call Option has been sold by the Borrower, the Borrowing Base Asset Value of such Asset shall be
the lesser of (A) the Value of such Asset as computed in accordance with clause (b) of this
definition, and (B) the amount that the holder of such Permitted Call Option is required to pay to
exercise such Permitted Call Option and purchase such Equity Security, (ii) the Borrowing Base
Asset Value of any Asset shall be net of the Borrower’s liabilities relating thereto, including
without limitation all of the Borrower’s obligations to pay any unpaid portion of the purchase
price thereof, (iii) the Borrowing Base Asset Value of any Eligible Repurchase Agreement shall be
determined by the cost plus accrued interest and (iv) when calculating the “Borrowing Base Asset
Value” of any Asset the Borrower shall calculate such value in good faith using one of the
following procedures: (A) a quotation received from a Pricing Service, (B) the average of three
quotations received from independent dealers making a market in such security (or, if only two such
quotes are available, the lower of such quotes) (at least one of which quotations must be in
writing) or (C) the last closing price thereof established on a public trading market; provided,
further, that for any Asset for which independent reliable market quotations (which may consist of
only an independent dealer quotation) are not available (or which is not otherwise valued for the
Borrower by a Pricing Service), the Borrowing Base Asset Value of such Asset shall be deemed zero
for purposes of this definition.




          “Borrowing Base Eligible Asset” means Cash, any Eligible Money Market Investment, any
Eligible Loan Asset, any Eligible Commercial Paper Note, any Eligible Repurchase Agreement, any
Eligible Bond Asset, any Eligible Government Security, any Eligible Convertible Security and any
Eligible Equity Security (including, without limitation, any such Asset constituting a Foreign
Asset) which the Borrower is permitted to purchase in accordance with the Investment Policies and
Restrictions which are free and clear of all Adverse Claims; provided, that such Asset (a)
does not constitute (i) a Derivatives Transaction, an Illiquid Asset or a Foreign Security System
Asset or (ii) an Asset which is the subject of a reverse repurchase agreement, dollar roll, short
sale, call option, securities lending transaction or other Derivatives Transaction (other than (A)
Permitted Call Options or (B) Derivatives Transactions entered into solely to protect against
interest rate or currency risk which have not been entered into for speculative purposes),
including, without limitation, any cash or other Asset maintained in a segregated account with the
Custodian relating to any outstanding reverse repurchase agreement, put option or other Derivatives
Transaction entered into by the Borrower or any cash or Asset subject to a Lien described in clause
(viii) of the definition of Permitted Lien and (b) except with respect to Eligible Loan Assets and
Cash, has an industry CUSIP, SEDOL or ISIN number that has been provided to the Custodian.




          “Borrowing Base Excess Amount” means as of any date any determination thereof is made,
an amount equal to the sum (without duplication) of:





     (i) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets (other than Cash and Eligible
Government Securities) issued or Guaranteed or owing from by any Person
(together with all Affiliates of such Person), exceeds five



6









 







percent (5%) of the aggregate Borrowing Base Adjusted Asset Value of all
Borrowing Base Eligible Assets;




     (ii) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets issued or Guaranteed by or owing
from one or more Persons in a single Industry Class, exceeds twenty percent
(20%) of the aggregate Borrowing Base Adjusted Asset Value of all Borrowing
Base Eligible Assets;




     (iii) [Intentionally Omitted];




     (iv) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets which constitute Foreign Assets
exceeds twenty percent (20%) of the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets;




     (v) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets which constitute Foreign Assets
relating to Obligors in any single Developed Market (other than the United
States of America) exceeds twenty percent (20%) of the aggregate Borrowing
Base Adjusted Asset Value of all Borrowing Base Eligible Assets;




     (vi) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets which constitute Emerging Market
Assets exceeds ten percent (10%) of the aggregate Borrowing Base Adjusted
Asset Value of all Borrowing Base Eligible Assets;




     (vii) the amount by which the Borrowing Base Adjusted Asset Value of all
Borrowing Base Eligible Assets which constitutes Distressed Loan Assets or
Distressed Bond Assets, in the aggregate, exceeds thirty-five percent (35%)
of the aggregate Borrowing Base Adjusted Asset Value of all Borrowing Base
Eligible Assets; and




     (viii) the amount by which the aggregate Borrowing Base Adjusted Asset
Value of all Borrowing Base Eligible Assets which constitutes participations
in Loan Assets from individual Selling Institutions exceeds ten percent (10%)
of the aggregate Borrowing Base Adjusted Asset Value of all Borrowing Base
Eligible Assets.



          “Borrowing Base Test” means as of any date of determination that the Borrowing Base
shall be equal to or greater than Credits Outstanding.




          “Borrowing Date” shall have the meaning assigned to such term in Section 2.02.




          “Business Day” means any day on which (i) banks are not authorized or required to
close in New York, New York or Philadelphia, Pennsylvania or the New York Stock



7









 






Exchange is not authorized or required to close, and (ii) if this definition of “Business Day”
is utilized in connection with a Eurodollar Rate Advance, dealings in dollar deposits are carried
out in the London interbank market.




          “Cash” means United States Dollars immediately available on the day in question and
credited to the Collateral Account.




          “Class A Loan Asset” means as of any date of determination, a Borrowing Base Eligible
Asset which (i) is a Senior Secured Loan Asset, (ii) is not a Distressed Loan Asset, and (iii) has
a Borrowing Base Asset Value which is greater than ninety percent (90%) of its par value as of such
date of determination.




          “Class B Loan Asset” means as of any date of determination, a Borrowing Base Eligible
Asset which (i) is a Senior Secured Loan Asset, (ii) is not a Distressed Loan Asset, and (iii) has
a Borrowing Base Asset Value which is equal to or less than ninety percent (90%) of its par value
as of such date of determination.




          “Class C Loan Asset” means as of any date of determination, a Borrowing Base Eligible
Asset which (i) is a Senior Secured Loan Asset, (ii) is a Distressed Loan Asset, and (iii) has a
Borrowing Base Asset Value which is greater than eighty-five percent (85%) of its par value as of
such date of determination.




          “Class D Loan Asset” means as of any date of determination, a Borrowing Base Eligible
Asset which (i) is a Senior Secured Loan Asset, (ii) is a Distressed Loan Asset, and (iii) has a
Borrowing Base Asset Value which is equal to or less than eighty-five percent (85%) of its par
value as of such date of determination.




          “Closing Date” means the first date on which the conditions precedent specified in
Section 3.01 shall have been fully satisfied.




          “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any
successor statute.




          “Collateral Account” shall have the meaning assigned to such term in the Control
Agreement.




          “Conduit Lender” means Liberty Street Funding LLC, together with its permitted
successors and assigns that constitute special purpose entities that issue promissory notes or
other debt securities.




          “Control Agreement” means the Control Agreement dated as of the date hereof among the
Borrower, the Agent and PFPC, as the same may from time to time be amended, supplemented, waived or
modified.




          “Controlling Jurisdiction” means, with respect to any Asset, (a) the jurisdiction
under the laws of which the Borrower is organized, and (b) any other jurisdiction recourse to the
courts of which may be necessary for Agent on behalf of the Secured Parties to enforce their



8









 






rights as creditors with a first priority perfected security interest the assets which
constitute Pledged Collateral.




          “Convertible Security” means a security that is convertible or exchangeable into an
Equity Security.




          “CP Rate” for each day during a Settlement Period for any Advance means to the extent
the Conduit Lender funds such Advance on such day by issuing promissory notes, the per annum rate
equivalent to the weighted average of the per annum rates paid or payable by the Conduit Lender
from time to time as interest on or otherwise (by means of interest rate hedges or otherwise) in
respect of those promissory notes issued by the Conduit Lender that are allocated, in whole or in
part, by the Agent (on behalf of the Conduit Lender) to fund the making or maintenance of such
Advance on such day during such Settlement Period as determined by the Agent (on behalf of the
Conduit Lender) and reported to the Borrower, which rates shall reflect and give effect to the
commissions of placement agents and dealers in respect of such promissory notes, to the extent such
commissions are allocated, in whole or in part, to such promissory notes by the Agent on behalf of
the Conduit Lender; provided, however, that if any component of such rate is a
discount rate, in calculating the “CP Rate” for such day the Agent shall for such component use the
rate resulting from converting such discount rate to an interest bearing equivalent rate per annum.




          “Credits Outstanding” means at any time a determination thereof is made, an amount
equal to the sum of (i) the outstanding principal amount of all Advances, plus (ii) any
unpaid and past due Yield accrued on the outstanding advances, plus (iii) the Yield that would
accrue on the aggregate outstanding principal amount of the Advances through the sixty (60) day
period following such date of determination, computed by reference to the Assignee Rate based upon
the applicable Eurodollar Rates plus the Applicable Margin for a thirty (30) day period in
effect as of the time of determination, plus (iv) the Aggregate Custodian’s Advance Amount
plus (v) $150,000 plus (vi) an amount equal to the obligations of the Borrower described in
clauses (ii), (iii), (iv), (v), (vi) and
(vii) of the definition of “Permitted Debt” (including, without limitation, amounts owing
to the Adviser under the Advisory Agreement and Permitted Expenses) reasonably expected to be
incurred by the Borrower during the thirty (30) day period following such date of determination.




          “Custodial Agreement” means the Custodian Services Agreement, dated as of January 18,
2007, between the Borrower and PFPC, as the same may from time to time be amended, restated,
supplemented, waived or modified as permitted under the Program Documents.




          “Custodian” means PFPC, as custodian under the Custodial Agreement and as securities
intermediary under the Control Agreement, and its permitted successors and assigns in such
capacities.




          “Custodian’s Overdraft Advances” means any advance of cash, assets or securities by
the Custodian pursuant to or in connection with the Custodial Agreement.




9









 








          “Debt” means with respect to any Person, at any date, without duplication, (i) all
“senior securities representing indebtedness” (as defined in Sections 18(g) and 61(a)(4) of the
Investment Company Act), (ii) all obligations of such Person for borrowed money, including without
limitation, all obligations of such Person which are evidenced by letters of credit or letter of
credit reimbursement arrangements, (iii) all obligations of such Person evidenced by bonds,
debentures, notes, acceptances or other similar instruments, (iv) all obligations of such Person to
pay the deferred purchase price of property or services, (v) all obligations of such Person as
lessee which are capitalized in accordance with GAAP, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person, (vii) payment
obligations, fixed or contingent, under investment, financial derivative or similar contracts
(other than covered short sales), (viii) all Debt of others Guaranteed by such Person, and (ix) to
the extent not otherwise included, all items which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of such Person’s balance sheet.




          “Default” means any event which, with the passage of time, the giving of notice, or
both, would constitute an Event of Default.




          “Derivatives Transaction” means any financial futures contract, option, forward
contract, warrant, swap, swaption, collar, floor, cap, synthetic security and any other agreement,
instrument and derivative and other transactions of a similar nature (whether currency linked,
index linked, insurance risk linked, credit linked or otherwise) or any other financial instrument,
traded on or off an exchange, the price of which is directly dependent upon the value of one or
more underlying securities, equity indices, debt instruments (including Loan Assets), commodities,
other derivative instruments, or any agreed upon pricing index or arrangement; provided,
that a Structured Finance Asset shall not constitute a Derivatives Transaction.




          “Developed Market” means any country which is a member of the Organization for
Economic Cooperation and Development and which has a sovereign credit rating for “foreign currency”
of at least “AA-” and “Aa3” from S&P and Moody’s, respectively.




          “Developed Market Asset” means any Foreign Asset issued or Guaranteed by any Person
organized under the laws of a Developed Market, and, in the case of any Loan Asset or Bond Asset,
the Obligor of which is organized under the laws of a Developed Market.




          “DIP Loan Asset” means a Loan Asset with respect to which (i) the Obligor is a debtor
in possession under the Bankruptcy Code and (ii) the related loan was incurred by such Obligor and
secured by assets of such Obligor pursuant to Section 364(d) of the Bankruptcy Code.




          “Distressed Bond Asset” means, as of any date of determination, a Bond Asset (a) the
Obligor of which is the subject of a bankruptcy, insolvency, liquidation or other similar
proceeding, (b) which is in default beyond the applicable grace period, if any, as to payment of
principal or interest, or (c) which is rated less than “Ca2” by Moody’s or less than “CC” by S&P or
which, if unrated, is in the reasonable judgment of the Adviser, of equivalent credit quality;
provided, that any such Bond Asset that (i) has a Borrowing Base Asset Value which is greater than
eighty percent (80%) of its par value as of such date of determination and (ii) is not in default
beyond any applicable grace period as to payment of interest shall not constitute a



10









 






Defaulted Bond Asset and (A) if such Bond Asset is secured, such Bond Asset shall constitute a
Class B Loan Asset for all purposes hereunder and (B) is such Bond Asset is unsecured, such Bond
Asset shall constitute a Bond Asset for all purposes hereunder having ratings from S&P and Moody’s
that correspond to ratings provided on bonds trading at a price relative to par similar to such
Bond Asset.




          “Distressed Loan Asset” means, as of any date of determination, a Loan Asset (a) the
Obligor of which is the subject of a bankruptcy, insolvency, liquidation or other similar
proceedings, (b) which is in default beyond the applicable grace period, if any, as to payment of
principal or interest, (c) which is otherwise classified by the Adviser or the Borrower as
“distressed” or “non-performing,” (d) in respect of which the related Obligor is rated less than
“Ca2” by Moody’s or less than “CC” by S&P or which, if unrated, is in the reasonable judgment of
the Adviser of equivalent credit quality or (e) in respect of which there is a default or a breach
of a material provision under the related Loan Documents or a “default” or “event of default” has
occurred and is continuing under the related Loan Documents; provided, that any such Loan Asset
that (i) has a Borrowing Base Asset Value which is greater than eighty percent (80%) of its par
value as of such date of determination and (ii) is not in default beyond any applicable grace
period as to payment of interest shall not constitute a Distressed Loan Asset and shall constitute
a Class B Loan Asset for all purposes hereunder.




          “Dollars” and “$” mean lawful money of the United States of America.




          “Eligible Assignee” means any financial or other institution acceptable to the Agent.




          “Eligible Bond Asset” at any time means a Bond Asset (i) with respect to which the
interest payable on the principal amount thereof by the related Obligor is payable in cash; (ii)
which is part of an issuance of corporate debt securities with an original aggregate principal
amount as of the Origination Date of such Bond Asset which is at least equal to $50,000,000; and
(iii) which has a scheduled final maturity date no later than the thirtieth (30th) anniversary
after the related Origination Date.




          “EJV” means the secondary market fixed income securities pricing service database
maintained by Reuters.




          “Eligible Commercial Paper Note” means a promissory note (i) issued in the commercial
paper market by an obligor having its principal office in the United States of America, having a
maturity of not more than 270 days and which (a) is rated at least “A-1” by S&P and at least “P-1”
by Moody’s, (ii) custodied with the Custodian or a sub-custodian pursuant to the Custodial
Agreement, (iii) subject to the Custodian’s control in accordance with the Control Agreement, (iv)
credited to the Collateral Account, and (v) in respect of which all actions have been taken under
this Agreement and the Control Agreement to create and perfect in the Agent, for the benefit of the
Secured Parties, a first priority perfected security interest.




          “Eligible Convertible Security” means a Convertible Security which is convertible or
exchangeable into an Eligible Equity Security.




11









 








          “Eligible Equity Security” means an Equity Security (other than Preferred Stock) that
(a) is currently listed on, and has been listed for at least the past fifteen (15) months on, an
Eligible Stock Exchange, (b) has a per share trading price of at least $1.00 (c) was issued by an
issuer having an equity market capitalization of at least $100,000,000 and (d) is not Restricted
Stock.




          “Eligible Government Securities” means direct obligations of the United States of
America or of its agencies or instrumentalities that are entitled to the full faith and credit of
the United States of America and that, other than treasury bills, provide for the periodic payment
of interest and the full payment of principal at maturity or call for redemption and are held in an
account maintained by the Custodian and in respect of which all actions have been taken under this
Agreement and the Control Agreement to create and perfect in the Agent, for the benefit of the
Secured Parties, a first priority perfected security interest.




          “Eligible Loan Asset” at any time means a Loan Asset:





     (i) with respect to which the interest payable on the principal amount thereof by the
related Obligor is payable in cash;




     (ii) in respect of which the Borrower’s interest is not a subparticipation;




     (iii) which has a scheduled final maturity date no later than the tenth
(10th) anniversary after the related Origination Date;




     (iv) constitutes a Senior Secured Loan Asset, Second Lien Loan Asset or Senior
Unsecured Loan Asset;




     (v) which is part of a syndicated credit facility with an aggregate outstanding
principal amount of all loans under such facility on the Origination Date of such Loan Asset
which is at least equal to $50,000,000;




     (vi) which relates to Loan Documents in which the Borrower’s interest (direct or
participating) in the aggregate outstanding principal amount of all loans thereunder is no
greater than thirty-three and one-third percent (33.33%);




     (vii) in respect of which the related Loan Documents are not subject to any
confidentiality arrangement which would preclude the Agent from reviewing such Loan
Documents;




     (viii) in which the Borrower’s interest in all collateral security therefor and
principal and interest payments thereunder is no less than pro rata and pari
passu with all other lenders under (or participants in) the related credit facility
or, to the extent such Loan Assets constitutes an interest in a second-lien facility, is no
less than pro rata and pari passu with all other lenders under (or
participants in) such second-lien facility;




     (ix) in respect of which, if the Borrower’s interest therein is that of a participant,
the credit rating of the related Selling Institution is no less than “A-” from S&P and “A3”
from Moody’s;



12









 






     (x) the pledge of which under Article VII of this Agreement, would not conflict with or
constitute a default under or be prohibited by any anti assignment or other provisions
contained in the related Loan Documents, except for anti-assignment provisions rendered
ineffective by applicable law; and




     (xi) in respect of which the credit rating of the related Transaction Agent or its
controlling Affiliate is no less than “A-” from S&P or “A3” from Moody’s.



          “Eligible Money Market Investment” means an investment in a money market fund having a
rating of “AAAm” or “AAAm-g” from S&P and a rating of “P-1” from Moody’s and held in an account
maintained by the Custodian and in respect of which all actions have been taken under this
Agreement and the Control Agreement to create and perfect in the Agent, for the benefit of the
Secured Parties, a first priority perfected security interest.




          “Eligible Repurchase Agreement” means a repurchase agreement with a maturity of less
than five (5) days with respect to which the Borrower has purchased the investment which is the
subject of such repurchase agreement for cash, entered into by the Borrower with a third party
whose short term debt instruments are rated “A-1” or “A-1+” by S&P and “P-1” by Moody’s and held in
an account maintained by the Custodian and in respect of which all actions have been taken under
this Agreement and the Control Agreement to create and perfect in the Agent, for the benefit of the
Secured Parties, a first priority perfected security interest.




          “Eligible Stock Exchange” means any of the New York Stock Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange, the Boston Stock Exchange, the Washington Stock
Exchange, the Midwest Stock Exchange, NASDAQ, and National Market Quotations.




          “E-Mail Report” shall have the meaning assigned to such term in Section 9.15.




          “Equity Securities” means common stock, Preferred Stock, warrants, trust certificates,
real estate investment trusts, membership interests or partnership interests; provided,
that any Asset that otherwise constitutes a Structured Finance Asset shall be deemed not to
constitute an Equity Security.




          “Emerging Market Asset” means any Foreign Asset that is not a Developed Market Asset.




          “Emerging Market Bond Asset” means any Bond Asset that is an Emerging Market Asset.




          “Emerging Market Equity Security” means any Equity Security that is an Emerging Market
Asset.




          “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.




13









 








          “ERISA Affiliate” means, with respect to any Person, any other Person under common
control with such Person within the meaning of Section 414(b), (c), (m) or (o) of the Code.




          “Eurocurrency Liabilities” shall have the meaning assigned to such term in Regulation
D of the Board of Governors of the Federal Reserve System, as in effect from time to time.




          “Eurodollar Additional Yield” means additional Yield on the outstanding principal of
each Advance during the Settlement Period in respect of such Advance in respect of which Yield is
computed by reference to the Eurodollar Rate, for such Settlement Period, at a rate per annum equal
at all times during such Settlement Period to the remainder obtained by subtracting (i) the
Eurodollar Rate for such Settlement Period from (ii) the rate obtained by dividing such Eurodollar
Rate referred to in clause (i) above by that percentage equal to one-hundred percent (100%) minus
the Eurodollar Rate Reserve Percentage of the applicable Lender or Secondary Lender, as the case
may be, for such Settlement Period.




          “Eurodollar Rate” means, for any Eurodollar Rate Advance for any Settlement Period, an
interest rate per annum equal to the rate per annum at which deposits in Dollars are offered by the
principal office of BNS in London, England to prime banks in the London interbank market at 11:00
A.M. (London time) two (2) Business Days before the first day of such Settlement Period in an
amount substantially equal to the outstanding principal amount of such Eurodollar Rate Advance on
such first day and for a period substantially equal to such Settlement Period.




          “Eurodollar Rate Advance” means an Advance the Yield on which is computed with
reference to the Eurodollar Rate.




          “Eurodollar Rate Reserve Percentage” for any Settlement Period for any Eurodollar Rate
Advance means the reserve percentage applicable during such Settlement Period under regulations
issued from time to time by the Board of Governors of the Federal Reserve System (or any successor)
(or if more than one such percentage shall be applicable, the daily average of such percentages for
those days in such Settlement Period during which any such percentage shall be so applicable) for
determining the maximum reserve requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for a Lender or any Secondary Lender with
respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or any other
category of liabilities that includes deposits by reference to which the interest rate on
Eurocurrency Liabilities is determined) having a term comparable to such Settlement Period.




          “Event of Default” means any of the events, acts or occurrences set forth in Section
6.01.




          “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the SEC thereunder, all as from time to time in effect, or any successor law,
rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to
be a reference to any successor statutory or regulatory provision.




14









 








          “Excluded Taxes” means with respect to any Person (a) income, franchise or similar
Taxes imposed on (or measured by) its net income or net profits by the United States of America, or
by the jurisdiction under the laws of which such recipient is organized, in which its principal
office is located or in which it is otherwise doing business or, in the case of any Secured Party,
in which its applicable lending office is located, (b) any branch profits Taxes imposed by the
United States of America or any similar Tax imposed by any other jurisdiction in which the Borrower
is located, (c) any withholding Tax that is imposed on amounts payable to such Person at the time
such Person becomes a party to this Agreement (or designates a new lending office), except to the
extent that such Person (or its assignor, if any) was entitled, at the time of designation of a new
lending office (or assignment), to receive additional amounts from the Borrower pursuant to Section
9.03(a) and (d) Taxes, to the extent the imposition of such Taxes is attributable to such Person’s
failure to comply with Section 9.03(e) or any Taxes imposed as a result of such Person’s gross
negligence or willful misconduct.




          “Federal Funds Rate” means, for any period, a fluctuating interest rate per annum
equal for each day during such period to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is
a Business Day, the average of the quotations for such day on such transactions received by BNS
from three Federal funds brokers of recognized standing selected by it.




          “Fee Letter” means that certain letter agreement dated the date hereof between the
Borrower and the Agent, as the same may from time to time be amended, supplemented, waived or
modified.




          “Floating Rate” means an interest rate calculated by reference to the prime rate, the
London interbank offered rate, the certificate of deposit rate, the federal funds rate or any other
per annum rate commonly referred to in the United States of America banking industry as a “floating
rate”.




          “Foreign Asset” means any Asset issued or Guaranteed by any Person organized under the
laws of any country other than the United States of America and, in the case of any Loan Asset or
Bond Asset, the Obligor of which is organized under the laws of any country other than the United
States of America.




          “Foreign Currency Asset” means any Asset which is denominated or payable in a currency
other than Dollars.




          “Foreign Security System Asset” means an Asset held by a sub-custodian of the
Custodian which is not located in the United States of America.




          “GAAP” means generally accepted accounting principles in the United States of America,
in effect from time to time, consistently applied.




          “Governmental Authorizations” means all franchises, permits, licenses, approvals,
consents and other authorizations of all Authorities.




15









 








          “Governmental Filings” means all filings, including franchise and similar tax filings,
and the payment of all fees, assessments, interests and penalties associated with such filing with
all Authorities.




          “Guarantee” by any Person means any obligation, contingent or otherwise, of such
Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements,
or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part); provided that the
term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of
business. The term “Guarantee” used as a verb has a corresponding meaning.




          “Highland Capital” means Highland Capital Management, L.P., a Delaware limited
partnership, and its successors.




          “Illiquid Asset” means as of any date, any Asset (i) for which there is no established
public or private institutional trading market, such that such Asset may be reasonably expected to
be sold in such market within fourteen (14) days in the ordinary course of business at a price
approximating the Borrowing Base Asset Value of such Asset on such date subject only to
fluctuations in the market price therefor, (ii) the fair market value of which is not readily
ascertainable from recognized independent sources in the market for such Assets or (iii) otherwise
classified as an “illiquid security” by the Borrower or the Adviser.




          “Indemnified Taxes” means all Taxes other than Excluded Taxes and Other Taxes.




          “Industry Class” means each industry class determined by the Adviser based upon the
criteria set forth on Schedule IV hereto, as such Schedule IV may be amended and supplemented from
time to time with the prior written consent of the Agent.




          “Investment Company Act” means the Investment Company Act of 1940, as amended, and the
rules and regulations of the SEC thereunder, as modified or interpreted by orders of the SEC, or
other interpretative releases or letters issued by the SEC or its staff, all as from time to time
in effect, or any successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor statutory or regulatory
provision.




          “Investment Policies and Restrictions” means the provisions dealing with investment
objectives, policies, distributions, investment restrictions, tender offers, repurchases, leverage
and non-diversified status as set forth in the Borrower’s Prospectus in effect on the Closing Date
as modified as permitted under this Agreement.




16









 








          “Investor Report” means the Investor Report of the Borrower substantially in the form
of Schedule II hereto.




          “Large Cap Equity Security” means any Borrowing Base Eligible Asset that constitutes
an Eligible Equity Security issued by an issuer having equity market capitalization of at least
$10,000,000,000.




          “Law” means any action, code, consent decree, constitution, decree, directive,
enactment, finding, guideline, law, injunction, interpretation, judgment, order, ordinance, policy
statement, proclamation, promulgation, regulation, requirement, rule, rule of law, rule of public
policy, settlement agreement, statute, or writ, of any Authority, or any particular section, part
or provision thereof.




          “Lender” means the Conduit Lender, together with all Persons which acquire or are
obligated to acquire any interest in any Advance from the Conduit Lender under the Asset Purchase
Agreement or in the case of BNS, under any similar arrangement, or otherwise.




          “Lender Termination Date” means the date which is the earlier to occur of (i) the
Secondary Lender Stated Expiration Date, and (ii) the date on which the Total Commitment is reduced
to zero or terminated pursuant to the terms hereof, including, without limitation, pursuant to
Section 2.10 or Section 6.01.




          “Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement,
encumbrance, lien or security interest (statutory or other), or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing of any financing
statement under the UCC or comparable law of any jurisdiction).




          “Liquidation Fee” means, in respect of any Advance for any Settlement Period which is
funded by the Conduit Lender during which the principal on such Advance is repaid by the Borrower
in whole or in part prior to the end of said Settlement Period, the amount, if any, by which (i)
the additional Yield (calculated without taking into account any Liquidation Fee or any shortened
duration of such Settlement Period) which would have accrued during such Settlement Period on the
reduction of the outstanding principal amount of such Advance relating to such Settlement Period
had such reductions remained as outstanding principal, exceeds (ii) that income, if any, received
by the Conduit Lender’s investing the proceeds of such reductions of principal.




          “Loan Asset” means any Asset that is a direct or participation or subparticipation
interest in or assignment or novation of a loan or other extension of credit (other than a Bond
Asset).




          “Loan Documents” means with respect to any Loan Asset, each loan agreement, promissory
note, collateral security agreement, participation certificate, guarantee and any other agreement
or document evidencing, securing, governing or executed in connection with such Loan Asset,
including without limitation, the agreements and instruments in respect of which the Borrower
acquired such Loan Asset.




17









 








          “Loan X Service” means the secondary market loan pricing service maintained by Markit
Group Limited.




          “LSTA/LPC Mark-to-Market Pricing Service” means the secondary market pricing service
for bank loan assets sponsored by The Loan Syndications and Trading Association, Inc. in
association with the Loan Pricing Corporation.




          “Margin Stock” shall have the meaning assigned to such term in Regulation U.




          “Margin Stock Percentage” means, as of any date of determination, the then current
percentage of market value assigned by the Board of Governors of the Federal Reserve System under
Section 221.7 of Regulation U to Margin Stock (which percentage, as of the Closing Date, is fifty
percent (50%)).




          “Market Maker” means, with respect to any TRS Eligible Asset, a dealer that is (a)
independent of, and unaffiliated with, the Borrower and the Adviser and (b)(i) in the case of an
Asset with respect to which the related Obligor is domiciled in the United States of America, a
leading dealer in the United States of America secondary loan or bond trading market or (ii) in the
case of any other Asset, a leading dealer in the European secondary loan or bond trading market.




          “Material Adverse Effect” means (i) a material adverse effect on the ability of the
Borrower to fully perform its material obligations under this Agreement or any other Program
Document, (ii) a material adverse effect on any Secured Party’s right, title and interest in any
material amount of Pledged Collateral or on the rights and remedies of any Secured Party under any
Program Document, (iii) a material adverse effect on the validity or enforceability of this
Agreement or any other Program Document or (iv) a material adverse effect on the business,
financial position, operations, Assets or properties of the Borrower or the Adviser.




          “Maturity Date” means (i) with respect to any Advance funded by a Lender, the Lender
Termination Date (or if such day is not a Business Day, the Business Day immediately preceding such
date), and (ii) with respect to any Advance made by a Secondary Lender, the Secondary Lender
Termination Date (or if such day is not a Business Day, the Business Day immediately preceding such
date).




          “Mid-Cap Equity Security” means any Borrowing Base Eligible Asset that constitutes an
Eligible Equity Security issued by an issuer having equity market capitalization that is (i) less
than $10,000,000,000 and (ii) equal to or greater than $2,000,000,000.




          “Moody’s” means Moody’s Investors Service, Inc., together with its successors.




          “Moody’s Rating” means, at any time with respect to any Bond Asset, Second Lien Loan
Asset or Senior Unsecured Loan Asset, the rating issued by Moody’s and then in effect with respect
to such Asset or, if no such rating is available with respect to such Asset, the rating issued by
Moody’s and then in effect with respect to the Obligor thereof; provided, that, with
respect to any Emerging Market Bond Asset, the Moody’s Rating shall be the lower of (i) the rating
determined in accordance with the foregoing sentence and (ii) the sovereign credit



18









 






rating for “foreign currency” assigned by Moody’s to the country in which the related Obligor
is organized.




          “Multiemployer Plan” means an employee pension benefit plan within the meaning of
Section 4001(a)(3) of ERISA.




          “Municipal Authority” means any state, territorial, county, municipal or other local
government or any governmental agency, corporation, department, instrumentality or other political
unit or subdivision or other entity of any of the foregoing.




          “New York UCC” means the UCC as in effect from time to time in the State of New York.




          “Notice of Borrowing” shall have the meaning assigned to such term in Section 2.02.




          “Notice of Exclusive Control” shall have the meaning assigned to such term in the
Control Agreement.




          “Obligor” means (i) in respect of any Loan Asset, the Person primarily obligated under
the related Loan Documents to repay the loan or extension of credit which is the subject of such
Loan Asset and (ii) in respect of any Bond Asset, the issuer thereof and any other Person primarily
obligated to repay the obligations thereunder.




          “Origination Date” means (i) in respect of any Loan Asset the initial date on which
the proceeds of the loan or other extension of credit which is the subject of such Loan Asset was
advanced to the Obligor under the related Loan Documents and (ii) in respect of any Bond Asset, the
initial date on which the proceeds of the issuance of such Asset was advanced to the Obligor
thereof.




          “Other Taxes” has the meaning assigned to such term in Section 9.03(b).




          “Percentage” of any Secondary Lender means, (i) with respect to BNS, the percentage
set forth on the signature page to this Agreement, or such amount as reduced by any Assignment and
Acceptance entered into with an Eligible Assignee, or (ii) with respect to a Secondary Lender that
has entered into an Assignment and Acceptance, the percentage set forth therein as such Secondary
Lender’s Percentage, or such amount as reduced by an Assignment and Acceptance entered into between
such Secondary Lender and an Eligible Assignee.




          “Perfection Representations, Warranties and Covenants” means those perfection
representations, warranties and covenants set forth in Exhibit E, attached hereto.




          “Permitted Call Option” means a call option in respect of common stock which grants to
the buyer of such call option the right to purchase such common stock at a fixed price before a
specified date.




          “Permitted Debt” means (i) Debt arising under this Agreement or the other Program
Documents to the Secured Parties, (ii) accrued expenses and current trade accounts



19









 






payable incurred in the ordinary course of the Borrower’s business which are not overdue for a
period of more than thirty (30) days or which are being contested in good faith by appropriate
proceedings, (iii) Debt in favor of the Custodian relating to Custodian’s Overdraft Advances
incurred in the ordinary course of the Borrower’s business, which are not overdue and which do not
exceed the amount permitted by Section 5.02(m), (iv) fee and expense obligations to the
Custodian and other similar agents which are providing services in respect of the Borrower’s Assets
in each case which have arisen in the ordinary course of the Borrower’s business which are not
overdue for a period in excess of thirty (30) days, (v) Debt (other than Debt for borrowed money)
arising in connection with transactions in the ordinary course of the Borrower’s business in
connection with its purchasing of Assets, Derivatives Transactions, reverse repurchase agreements
or dollar rolls to the extent such transactions are permitted under the Investment Company Act and
the Borrower’s Investment Policies and Restrictions, (vi) obligations of the Borrower to fund
future extensions of credit under the Loan Documents relating to its Loan Assets which do not
exceed five percent (5%) of the aggregate Borrowing Base Asset Value of the Borrower’s Assets,
which are not overdue, and (vii) Debt in respect of judgments or awards that have been in force for
less than the applicable period for taking an appeal so long as such judgments or awards do not
constitute an Event of Default and so long as execution is not levied thereunder or in respect of
which the Borrower (A) shall at the time in good faith be diligently prosecuting an appeal or
proceeding for review and in respect of which a stay of execution shall have been obtained pending
such appeal or review, or (B) shall have obtained an unsecured performance bond in respect of such
judgment or award.




          “Permitted Expenses” shall mean fees, compensation, costs and expenses owing to PFPC
secured by a prior security interest ahead of the security interest of Agent in the Pledged
Collateral to the extent permitted under Section 10 of the Control Agreement.




          “Permitted Liens” means in respect of any Asset of the Borrower, (i) Liens of any
Secured Party created by or pursuant to this Agreement or the Control Agreement, (ii) Liens of the
Custodian securing the Custodian’s Overdraft Advances to the extent such Custodian’s Overdraft
Advances do not exceed the amount permitted by Section 5.02(m), (iii) Liens of the Custodian
securing indemnification payments owing by the Borrower in favor of the Custodian in an amount not
to exceed $100,000, (iv) Liens of the Custodian for Permitted Expenses which are not overdue for a
period of thirty (30) days, (v) Liens of the Custodian which are by the terms of the Control
Agreement expressly subordinated to the payment of the Borrower Obligations, (vi) Liens (other than
non-possessory Liens which pursuant to Applicable Law are, or may be, entitled to take priority (in
whole or in part) over prior, perfected liens and security interests) for taxes, assessments or
other governmental charges or levies not at the time delinquent or being diligently contested in
good faith by appropriate actions diligently conducted and for which adequate reserves in
accordance with GAAP shall have been set aside on the Borrower’s books, (vii) Liens in respect of
judgments or awards that have been in force for less than the applicable period for taking an
appeal so long as such judgments or awards do not constitute an Event of Default and so long as the
Borrower shall at the time in good faith be diligently prosecuting an appeal or proceeding for
review and in respect of which a stay of execution shall have been obtained pending such appeal or
review, (viii) Liens in respect of Debt permitted under clause (iv) of the definition of Permitted
Debt and (ix) Liens on cash or Assets posted as collateral for short sales, trades of credit
default swaps and other Derivatives Transactions in the ordinary course of business in accordance
with the Investment Policies and Restrictions (including,



20









 






without limitation, cash or Assets (x) commingled in a pooled account with cash or Assets
deposited therein as collateral for Derivatives Transactions by other Persons administered or
managed by the Advisor and (y) subject to a Lien securing obligations of the Borrower and such
other Persons with respect to Derivatives Transactions).




          “Permitted Senior Securities” means “senior securities” within the meaning of the
Investment Company Act which constitute Advances under this Agreement, Derivatives Transactions,
repurchase transactions, reverse repurchase transactions or commitments of the Borrower to fund
future advances or other extensions of credit under any Loan Document, to the extent the issuance
of any such senior security by the Borrower is not in contravention of the Investment Company Act
or the Borrower’s Investment Policies and Restrictions.




          “Person” means an individual or a corporation (including a business trust),
partnership, trust, incorporated or unincorporated association, joint stock company, limited
liability company, government (or an agency or political subdivision thereof) or other entity of
any kind.




          “PFPC” means PFPC Trust Company, a Delaware limited purpose trust company, and its
successors.




          “Plan” means an employee pension benefit plan (other than a Multiemployer Plan) which
is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of
the Code.




          “Pledged Collateral” shall have the meaning assigned to such term in Section 7.01.




          “Post-Default Rate” means a rate per annum equal to the Alternate Base Rate as in
effect from time to time plus two percent (2.00%).




          “Preferred Stock” means a security, including a trust preferred security, which
represents an equity interest in an issuer that entitles the holder to receive, in preference to
holders of other equity interests (other than other classes of preferred stock) such as common
stock, dividends and a fixed share of the proceeds resulting from the liquidation of such issuer.




          “Pricing Service” means Advantage Data, EJV, Loan X Service and LSTA/LPC
Mark-to-Market Pricing Service.




          “Principal Office” means the principal office of BNS presently located at New York,
New York or at such other location as the Agent shall designate in writing to the Borrower.




          “Private Authorizations” means all franchises, permits, licenses, approvals, consents
and other authorizations of all Persons (other than Authorities) including, without limitation,
those with respect to trademarks, service marks, trade names, copyrights, computer software
programs, technical and other know-how.





21












 





          “Proceeds” shall have, with reference to any asset or property, the meaning assigned
to it under the UCC and, in any event, shall include, but not be limited to, any and all amounts
from time to time paid or payable under or in connection with such asset or property.




          “Program Documents” means this Agreement, the Advance Notes, the Asset Purchase
Agreement, the Control Agreement, the Custodial Agreement, the Advisory Agreement, the Fee Letter
and the other agreements, documents and instruments entered into or delivered in connection
herewith or therewith.




          “Program Termination Date” means the later to occur of (i) the Secondary Lender
Termination Date, and (ii) the date that all Borrower Obligations have been finally paid in full;
provided, however, that if any payment in respect of any Borrower Obligation made
to any Secured Party must be rescinded or returned for any reason whatsoever (including the
insolvency or bankruptcy of the Borrower) such Borrower Obligation shall be deemed to be reinstated
as though such payment had not been made and the Program Termination Date shall be deemed to have
not occurred.




          “Prospectus” means with respect to the Borrower the prospectus dated February 21, 2007
filed with the SEC as a part of the Borrower’s registration statement on Form N-2, as amended (or
any successor SEC form), and all supplements, amendments and modifications thereto as of the
Closing Date, and as further supplemented, amended or modified in accordance with Applicable Law,
including, without limitation, the Securities Act and the Investment Company Act.




          “Rating Agencies” shall have the meaning assigned to such term in Section 9.09(a).




          “Rating Agency Condition” means, with respect to any amendment, modification,
supplement, termination or waiver of this Agreement, that prior confirmation has been obtained from
each Rating Agency that such action will not result in the reduction, withdrawal or suspension of
such Rating Agency’s rating of the Advances.




          “Rating Termination Event” means that the Conduit Lender shall not have received a
“credit estimate” from Moody’s with respect to this Agreement and the interests of the Conduit
Lender hereunder, in form and substance acceptable to the Conduit Lender in its sole discretion, on
or prior to August 22, 2008.




          “Regulation U” means Regulation U of the Board of Governors of the Federal Reserve
System, as in effect from time to time.




          “Regulation X” means Regulation X of the Board of Governors of the Federal Reserve
System, as in effect from time to time.




          “Requested Amount” shall have the meaning assigned to such term in Section 2.02.




          “Responsible Officer” means in respect of any Person, the president, the executive
vice president, the senior vice president, any vice president, the treasurer, general



22









 






counsel or any other duly authorized officer of such Person; provided that the Agent
shall have received a manually signed certificate of the Secretary or Assistant Secretary of such
Person as to the incumbency of, and bearing a manual specimen signature of, such duly authorized
officer.




          “Restricted Payments” means (i) the declaration of any distribution or dividends
(other than distributions payable solely in shares of beneficial interest in the Borrower) on, or
the payment on account of, or the setting apart of assets for a sinking or other analogous fund
for, or the purchase, redemption, retirement or other acquisition of any class of stock of the
Borrower or of any warrants, options or other rights to acquire the same (or to make any payment to
any Person, such as “phantom stock” payments), whether now or hereafter outstanding, either
directly or indirectly, whether in cash, property or in obligations of the Borrower, and (ii) the
payment of fees and expenses to the Adviser or the Administrator or any Affiliate of the Adviser or
the Administrator, as applicable, as compensation for the provision of managerial, administrative
services or otherwise.




          “Restricted Stock” means any Equity Security that (i) constitutes a “Restricted
Security” (as defined in Rule 144(a)(e) under the Securities Act) or (ii) is traded on Pink Sheets
or a similar quotation system for over-the-counter securities.




          “Revolving Credit Facility” means any credit facility in respect of which the Borrower
has or may have any direct or indirect obligation to fund any additional loans or extensions of
credit.




          “RIC/BDC Requirement” means each requirement (including, without limitation, Code
requirements pertaining to asset diversification) the Borrower must satisfy to maintain its status
as a “business development company,” within the meaning of the Investment Company Act and its
status as a “regulated investment company” under the Code.




          “S&P” means Standard & Poor’s, a division of The McGraw Hill Companies, Inc., together
with its successors.




          “S&P Rating” means, at any time with respect to any Bond Asset, Second Lien Loan Asset
or Senior Unsecured Loan Asset, the rating issued by S&P and then in effect with respect to such
Asset or, if no such rating is available with respect to such Asset, the rating issued by S&P and
then in effect with respect to the Obligor thereof; provided, that, with respect to any
Emerging Market Bond Asset, the S&P Rating shall be the lower of (i) the rating determined in
accordance with the foregoing sentence and (ii) the sovereign credit rating for “foreign currency”
assigned by S&P to the country in which the related Obligor is organized.




          “SEC” means the Securities and Exchange Commission or any other governmental authority
of the United States of America at the time administrating the Securities Act, the Investment
Company Act or the Exchange Act.




          “Secondary Lender Commitment” means (i) with respect to BNS, an amount equal to the
Total Commitment, as such amount shall be adjusted by any Assignment and Acceptance entered into
between BNS and an Eligible Assignee in accordance with and subject to Section 9.06(b), or
(ii) with respect to a Secondary Lender that has entered into an Assignment and Acceptance, the
amount set forth therein as such Secondary Lender’s “Secondary Lender



23









 






Commitment” in each case as such amount may be reduced by an Assignment and Acceptance entered
into between such Secondary Lender and an Eligible Assignee in accordance with and subject to
Section 9.06(b), and as may be further reduced (or terminated) pursuant to the next
sentence. Any reduction (or termination) of the Total Commitment pursuant to the terms of this
Agreement shall reduce ratably (or terminate) each Secondary Lender’s Secondary Lender Commitment.
References to the unused portion of any Secondary Lender’s Secondary Lender Commitment shall mean,
at any time, such Secondary Lender’s Secondary Lender Commitment then in effect, minus the
outstanding principal amount of the Advances funded by such Secondary Lender.




          “Secondary Lender Stated Expiration Date” means December 1, 2008; provided that prior
to such date (or the date so extended pursuant to this proviso), upon the Borrower’s written
request to the Agent, which request shall be received by the Agent, not more than sixty (60) days
nor less than thirty (30) days prior to the then current Secondary Lender Stated Expiration Date,
one or more Secondary Lenders having in the aggregate 100% of the Total Commitment may, in their
sole discretion, consent, which consent shall be given not less than twenty (20) days after the
date the Agent receives such request to extend the Secondary Lender Stated Expiration Date (the
date any such consent is given, the “Extension Date”), to the extension of the Secondary
Lender Stated Expiration Date to the date occurring 364 days after such Extension Date;
provided, however, that any failure of any Secondary Lender to respond to the
Borrower’s request for such extension shall be deemed a denial of such request by such Secondary
Lender.




          “Secondary Lender Termination Date” means the earlier of (i) the Secondary Lender
Stated Expiration Date or (ii) the date the Total Commitment shall terminate pursuant to
Section 2.10 or Section 6.01.




          “Secondary Lenders” means BNS and each Eligible Assignee that becomes a party to this
Agreement pursuant to Section 9.06(b).




          “Second Lien Loan Asset” means a Secured Loan Asset (other than a Senior Secured Loan
Asset) that (a) is only subordinated in right of payment to a Senior Secured Loan Asset and (b) is
secured by a valid second priority perfected security interest in or lien on specified collateral
securing the applicable Obligor’s obligation under such Secured Loan Asset that in the opinion of
the Adviser has value at least equal to the amount of such Secured Loan Asset, which specified
collateral does not consist solely of common stock or shares issued by such Obligor or any
Affiliates or intangible assets.




          “Secured Loan Asset” means a Loan Asset that is secured by a valid and perfected
security interest in specified collateral.




          “Senior Secured Loan Asset” means a Secured Loan Asset that is not subordinated by its
terms to indebtedness of the applicable Obligor for borrowed money, trade claims, capitalized
leases, or other similar obligations, with a first priority security interest in collateral, with a
valid and perfected first security interest in collateral that in the opinion of the Adviser has
value at least equal to the amount of such Secured Loan Asset and is not a DIP Loan Asset.




24









 








          “Senior Unsecured Loan Asset” means a Loan Asset that is not (i) subordinated by its
terms to indebtedness of the borrower for borrowed money or (ii) secured by a valid and perfected
security interest in collateral.




          “Secured Parties” means the Agent, the Lenders, the Secondary Lenders and their
respective successors and assigns.




          “Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules
or regulations, and any reference to any statutory or regulatory provisions shall be deemed to be a
reference to any successor statutory or regulatory provision.




          “Security Entitlement” shall have the meaning assigned to such term in Section
8-102(a)(17) of the UCC.




          “Selling Institution” means in respect of any Loan Asset which constitutes a
participation interest, the Person which has granted or sold to the Borrower a participation
interest in the loan or other extension of credit which is the subject of such Loan Asset.




          “Settlement Date” means the date which is two (2) Business Days after the end of each
Settlement Period; provided that (i) for purposes of the payment of Yield, with respect to any
Settlement Period for which Yield is computed by reference to the Eurodollar Rate, the Settlement
Date shall be the last day of the Settlement Period and (ii) for purposes of the payment of any
fees, the Settlement Date shall be the date which is two (2) Business Days after the end of each
calendar month.




          “Settlement Period” means in respect of any Advance:




          (a) in the case of any Advance in respect of which Yield is computed by reference to the CP
Rate, the period beginning on the date such Advance was made and ending on the last day of the
calendar month in which such Advance was made, and thereafter each successive period commencing on
the first day of each calendar month during the term of this Agreement and ending on the last day
of such calendar month during the term of this Agreement;




          (b) in the case of any Advance in respect of which Yield is computed by reference to the
Eurodollar Rate, the period beginning on either (i) the date such Advance was made as, or converted
to, a Eurodollar Rate Advance or (ii) as applicable, the date on which the previous Settlement
Period with respect thereto determined in accordance with this paragraph expired, and ending on the
numerically corresponding day in the following calendar month; provided, that (A) if any
such Settlement Period would end on a day other than a Business Day, such Settlement Period shall
be extended to the next succeeding Business Day unless such next succeeding Business Day would fall
in the next calendar month, in which case such Settlement Period shall end on the next preceding
Business Day and (B) any such Settlement Period that commences on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day in the following
calendar month) shall end on the last Business Day of the following calendar month;




25









 








          (c) in the case of any Advance in respect of which Yield is computed by reference to the
Alternate Base Rate, the period beginning on the date such Advance was made as, or converted to, an
Advance accruing Yield at such rate and ending on the last day of the calendar month in which such
Advance was made and, thereafter each successive period commencing on the first day of each
calendar month during the term of this Agreement and ending on the last day of such calendar month
during the term of this Agreement;



provided, however, that in the case of any Settlement Period for any Advance which
commences before the Maturity Date for such Advance and would otherwise end on a date occurring
after such Maturity Date, such Settlement Period shall end on such Maturity Date and the duration
of each Settlement Period which commences on or after the Maturity Date for such Advance may be any
period (including, without limitation, a period of one day) as shall be selected from time to time
by the Agent; provided, further, that if pursuant to the terms hereof the interest
rate applicable to any Advance shall change during the term of any Settlement Period, such
Settlement Period shall end on the date of such change of rate.




          “Small Cap Equity Security” means any Borrowing Base Eligible Asset that constitutes
an Eligible Equity Security issued by an issuer having equity market capitalization of less than
$2,000,000,000.




          “Specified Jurisdiction” means United States of America, United Kingdom, Germany,
France, Switzerland, Belgium, Sweden, Netherlands and Canada.




          “Structured Finance Asset” means any Asset that is a debt obligation or pass-through
security issued by a special purpose trust or other entity structured to be bankruptcy remote and
representing a direct or indirect participation in, or that is secured by, a diversified pool of
assets, including, without limitation, commercial or residential real property, commercial loans,
bonds, credit card receivables, leases or other financial assets.




          “Taxes” means any taxes, levies, imposts, duties, fees, assessments, deductions,
withholdings or other charges of whatever nature, including income, receipts, excise, property,
sales, use, transfer, license, payroll, withholding, social security, franchise, intangibles, stamp
or recording taxes imposed by any taxing Authority, and all interest, penalties and similar
liabilities relating thereto.




          “Termination Event” means the occurrence of any of the following:




          (a) the Borrower shall purchase any Asset not contemplated by the Prospectus or the Investment
Policies and Restrictions in effect on the Closing Date and shall not have sold such Asset within
ten (10) Business Days after the earlier of (i) the Borrower or the Adviser obtaining knowledge
that such Asset does not comply with the Prospectus or the Investment Policies and Restrictions or
(ii) receipt by the Borrower of notice from the Agent detailing such non-compliance;




          (b) the Borrower shall, without the prior written consent of the Agent, engage in any line of
business not contemplated by the Prospectus or the Investment Policies and Restrictions in effect
on the Closing Date; or




26









 








          (c) the Borrower shall, without the prior written consent of the Agent, permit any material
change in the Investment Policies and Restrictions in effect on the Closing Date or the fundamental
investment objectives, policies and restrictions (as such term is defined in the Investment Company
Act) of the Borrower (it being agreed that any such change requiring the consent or approval of the
shareholders of the Borrower shall be deemed material for purposes of this paragraph (c)).




          “Total Commitment” means $100,000,000, as such amount may be reduced pursuant to
Section 2.10.




          “Transaction Agent” means a commercial bank, insurance company, finance company or
other financial institution that is acting as agent or trustee under the Loan Documents relating to
any Loan Asset.




          “TRS Adjusted Asset Value” means, with respect to any TRS Eligible Asset as of any
date of determination, an amount equal to the product of (i) the TRS Asset Value of such TRS
Eligible Asset as of such date and (ii) the applicable TRS Advance Rate for such TRS Eligible
Asset.




          “TRS Advance Rate” means (i) in the case of any TRS Class I Asset, 80%, (ii) in the
case of any TRS Class II Asset, 70%, (iii) in the case of any TRS Class III Asset, 50%, (iv) in the
case of any TRS Class IV Asset, 25%, (v) in the case of any TRS Class V Asset, 25% and (vi) in the
case of any other TRS Eligible Asset, zero.




          “TRS Approved Index” means any of the following: AEX (Netherlands), ATX (Austria), ASX
All Ordinaries (Australia), BEL20 (Belgium), CAC 40 (France), DAX (Germany), Dow Jones Euro Stoxx
50 (Europe), Dow Jones Industrial Average (US), FTSE 100 (UK), Hang Seng (Hong Kong), IBEX 35
(Spain), IPC (Mexico), MIB 30 (Italy), Nasdaq Composite (US), Nikkei 225 (Japan), OMX Helsinki
(Finland), OMX Stockholm (Sweden), OBX (Norway), SMI (Switzerland) and S&P/TSX Composite Index.




          “TRS Asset Value” means, with respect to any TRS Eligible Asset, (a) with respect to
any Bond Asset or Loan Asset, the product of (i) the par amount of such Asset multiplied by (ii)(A)
if a TRS Price Quote for such TRS Eligible Asset is available from a Pricing Service, such TRS
Price Quote or (B) if a TRS Price Quote for such TRS Eligible Asset is not available from a Pricing
Service, (1) if a TRS Price Quote is available for such TRS Eligible Asset from one Market Maker,
such TRS Price Quote, (2) if a TRS Price Quote is available for such TRS Eligible Asset from two
Market Makers, the average of such TRS Price Quotes, (3) if a TRS Price Quote is available for such
TRS Eligible Asset from three Market Makers, the TRS Price Quote remaining after disregarding the
highest and lowest TRS Price Quotes and (4) if a TRS Price Quote is available for such TRS Eligible
Asset from more than three Market Makers, the arithmetic mean of such TRS Price Quotes and (b) in
the case of any Equity Security, the trading price of such Equity Security as quoted on the
applicable TRS Approved Index.




          “TRS Class I Asset” means any TRS Eligible Asset (a) that is a Bond Asset or Loan
Asset, (b) with respect to which the Obligor is organized under the laws of a Specified



27









 






Jurisdiction, (c) that (i) has a TRS Price Quote as of such date of not less than 75%
provided by a Pricing Service that reflects bid pricing provided by at least two Market Makers or
(ii) has at least two separate TRS Price Quotes provided by Market Makers each of which is not less
than 75%, (d)(i) in the case of a Loan Asset, that is part of a syndicated credit facility with an
aggregate outstanding principal amount of all loans under such facility on the Origination Date of
such Loan Asset which is at least equal to $100,000,000 or (ii) in the case of a Bond Asset, that
is part of an issuance of corporate debt securities with an original aggregate principal amount as
of the Origination Date of such Bond Asset which is at least equal to $100,000,000 and (e) that is
rated at least “B-” by S&P and at least “B3” by Moody’s (either though a public or private rating).




          “TRS Class II Asset” means any TRS Eligible Asset (a) that is a Bond Asset or Loan
Asset, (b) that is not a TRS Class I Asset, (c) with respect to which the Obligor is organized
under the laws of a Specified Jurisdiction, (d) that (i) has a TRS Price Quote as of such date of
not less than 65% provided by a Pricing Service that reflects bid pricing provided by at least two
Market Makers or (ii) has at least two separate TRS Price Quotes provided by Market Makers each of
which is not less than 65%, (e)(i) in the case of a Loan Asset, that is part of a syndicated credit
facility with an aggregate outstanding principal amount of all loans under such facility on the
Origination Date of such Loan Asset which is at least equal to $100,000,000 or (ii) in the case of
a Bond Asset, that is part of an issuance of corporate debt securities with an original aggregate
principal amount as of the Origination Date of such Bond Asset which is at least equal to
$100,000,000 and (f) that is rated at least “CCC” by S&P and at least “Caa2” by Moody’s (either
though a public or private rating).




          “TRS Class III Asset” means any TRS Eligible Asset (a) that is a Bond Asset or Loan
Asset, (b) that is not a TRS Class I Asset or TRS Class II Asset, (c) with respect to which the
Obligor is organized under the laws of a Specified Jurisdiction, (d) that (i) has a TRS Price Quote
as of such date of not less than 50% provided by a Pricing Service that reflects bid pricing
provided by at least one Market Maker or (ii) has at least one TRS Price Quote provided by a Market
Maker that is not less than 50%, (e)(i) in the case of a Loan Asset, that is part of a syndicated
credit facility with an aggregate outstanding principal amount of all loans under such facility on
the Origination Date of such Loan Asset which is at least equal to $75,000,000 or (ii) in the case
of a Bond Asset, that is part of an issuance of corporate debt securities with an original
aggregate principal amount as of the Origination Date of such Bond Asset which is at least equal to
$75,000,000 and (f) that is rated at least “CCC-” by S&P and at least “Caa3” by Moody’s (either
though a public or private rating).




          “TRS Class IV Asset” means any TRS Eligible Asset (a) that is a Bond Asset or Loan
Asset, (b) with respect to which the Obligor is organized under the laws of Japan or Italy, (c)
that (i) has a TRS Price Quote as of such date of not less than 75% provided by a Pricing Service
that reflects bid pricing provided by at least two Market Makers or (ii) has at least two separate
TRS Price Quotes provided by Market Makers each of which is not less than 75%, (d)(i) in the case
of a Loan Asset, that is part of a syndicated credit facility with an aggregate outstanding
principal amount of all loans under such facility on the Origination Date of such Loan Asset which
is at least equal to $100,000,000 or (ii) in the case of a Bond Asset, that is part of an issuance
of corporate debt securities with an original aggregate principal amount as of the



28









 






Origination Date of such Bond Asset which is at least equal to $100,000,000 and (e) that is
rated at least “B-” by S&P and at least “B3” by Moody’s (either though a public or private rating).




          “TRS Class V Asset” means any TRS Eligible Asset that is (i) an Equity Security and
(ii) quoted on at least one TRS Approved Index.




          “TRS Eligible Asset” means any Bond Asset, Loan Asset or Equity Security that has been
approved in writing by the Agent, in its sole discretion, as a TRS Eligible Asset, which approval
has not been withdrawn; provided, that each Asset set forth on Schedule IX hereto shall
constitute a TRS Eligible Asset as of the Closing Date.




          “TRS Portfolio Excess Amount” means, as of any date any determination, an amount equal
to the sum (without duplication) of:





     (i) the amount by which the aggregate TRS Adjusted Asset Value of all
TRS Eligible Assets which constitute Bond Assets or Second Lien Loan Assets
exceeds forty percent (40%) of the aggregate TRS Adjusted Asset Value of all
TRS Eligible Assets; and




     (ii) the amount by which the aggregate TRS Adjusted Asset Value of all
TRS Eligible Assets which constitute Bond Assets or Loan Assets with respect
to which a TRS Price Quote is available from only one Market Maker exceeds
twenty-five percent (25%) of the aggregate TRS Adjusted Asset Value of all
TRS Eligible Assets.



          “TRS Portfolio Test” means, as of any date of determination, that the TRS Portfolio
Value shall be equal to or greater than the outstanding principal amount of all Advances.




          “TRS Portfolio Value” means, as of any date of determination, an amount equal to (i)
the aggregate TRS Adjusted Asset Value of all TRS Eligible Assets as of such date of determination
in which the Agent has a valid and perfected first priority security interest free and clear of
Adverse Claims minus (ii) the TRS Portfolio Excess Amount as of such date of determination
plus (iii) the aggregate value of all Cash maintained by the Borrower as of such date of
determination in which the Agent has a valid and perfected first priority security interest free
and clear of Adverse Claims,




          “TRS Price Quote” means, with respect to any Bond Asset or Loan Asset as of any date
of determination, a bid price therefor (expressed as a percentage of par value) (i) listed by a
Pricing Service on such date or (ii) quoted to the Borrower on such date by a Market Maker selected
by the Borrower in its reasonable discretion.




          “UCC” means the Uniform Commercial Code, as from time to time in effect in the
applicable jurisdictions.




          “Value” shall have the meaning assigned to such term in Section 2(a)(41) of the
Investment Company Act.




29









 








          “Weekly Portfolio Report” shall have the meaning assigned to such term in Section
5.01(e)(viii).




          “Yield” means for any Advance during any Settlement Period:





          (i) if such Advance will be funded or maintained by the Conduit Lender during such
Settlement Period through the issuance of promissory notes, for each day during such
Settlement Period,



	 	 	 	 	 	 	 
	 	 	CPR x P

	 	+
	 	LF
	 	 	 
	 	 	 	 
	 	 	360
	 	 	 	 







          (ii) if such Advance will be funded or maintained during such Settlement Period by the
Conduit Lender through the sale of a participation, or by a Secondary Lender or a Lender
(other than the Conduit Lender), for each day during such Settlement Period,



	 	 	 	 	 	 	 
	 	 	AR x P

	 	+
	 	LF
	 	 	 
	 	 	 	 
	 	 	360
	 	 	 	 






          where:




	 	 	 	 	 	 	 
	 	 	AR
	 	=
	 	the Assignee Rate for such Advance on such day

	 	 	 	 	 	 	 

	 	 	P
	 	=
	 	the outstanding principal amount of such Advance on such day

	 	 	 	 	 	 	 

	 	 	CPR
	 	=
	 	the CP Rate for such Advance on such day

	 	 	 	 	 	 	 

	 	 	LF
	 	=
	 	the Liquidation Fee, if any, for such Advance for such
Settlement Period (expressed as a daily amount);






provided, further, that Yield for any Advance shall not be considered paid by any
distribution to the extent that at any time all or a portion of such distribution is rescinded or
must otherwise be returned for any reason.




          SECTION 1.02. Rules of Construction.




          For all purposes of this Agreement, except as otherwise expressly provided or unless the
context otherwise requires (i) singular words shall connote the plural as well as the singular, and
vice versa (except as indicated), as may be appropriate, (ii) the words “herein,” “hereof” and
“hereunder” and other words of similar import used in this Agreement refer to this Agreement as a
whole and not to any particular appendix, article, schedule, section, paragraph, clause, exhibit or
other subdivision, (iii) the headings, subheadings and table of contents set forth in this
Agreement are solely for convenience of reference and shall not constitute a part of this Agreement
nor shall they affect the meaning, construction or effect of any provision hereof, (iv) references
in this Agreement to “including” shall mean including without limiting the generality



30









 






of any description preceding such term, and for purposes hereof the rule of ejusdem generis
shall not be applicable to limit a general statement, followed by or referable to an enumeration of
specific matters, to matters similar to those specifically mentioned, and (v) each of the parties
to this Agreement and its counsel have reviewed and revised, or requested revisions to, this
Agreement, and the usual rule of construction that any ambiguities are to be resolved against the
drafting party shall be inapplicable in the construction and interpretation of this Agreement.




          SECTION 1.03. Computation of Time Periods.




          Unless otherwise stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word “from” means “from and including” and the words
“to” and “until” both mean “to but excluding”.




ARTICLE II

ADVANCES TO THE BORROWER




          SECTION 2.01. Advance Facility.




          On the terms and conditions hereinafter set forth, including without limitation, Sections 3.01
and 3.02, the Conduit Lender may, in its sole discretion, make Advances to the Borrower on any
Borrowing Date from the date hereof to the Lender Termination Date. On the terms and conditions
hereinafter set forth, including without limitation, Sections 3.01 and 3.02 and during the period
from the date hereof to the Secondary Lender Termination Date, the Secondary Lenders shall make
Advances to the Borrower, ratably in accordance with their respective Secondary Lender Commitments,
to the extent the Conduit Lender has determined not to make such Advance. Under no circumstances
shall the Conduit Lender or any Secondary Lender make any such Advance, to the extent that after
giving effect to the making of such Advance the aggregate principal amount of all outstanding
Advances would exceed the Total Commitment; provided, that unless and until the Borrower
shall have received net proceeds with an aggregate value of at least $100,000,000 (with the value
of any such non-cash proceeds being determined by reference to the Borrowing Base Asset Value
thereof as of the date of receipt by the Borrower) from the issuance of additional common stock of
the Borrower after the Closing Date, the aggregate principal amount of all outstanding Advances
under this Agreement shall not exceed $80,000,000. Within the foregoing limits and subject to the
terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Advances.




          SECTION 2.02. Making of Advances.




          The Borrower shall give the Agent written notice (which notice shall be irrevocable and
effective only upon receipt by the Agent) of each request for an Advance (each such request a
“Notice of Borrowing”) not later than 12:00 noon (New York City time) on the day which is
two (2) Business Days prior to the proposed borrowing date, which notice shall specify (i) the
proposed borrowing date therefor (each such date, a “Borrowing Date”), and (ii) the
aggregate principal amount of the proposed borrowing (the “Requested Amount”). Any such
Notice of Borrowing shall be substantially in the form of Exhibit B hereto, dated the date such
request is being made, signed by a Responsible Officer of the Borrower and otherwise appropriately
completed. The Requested Amount specified in any Notice or Borrowing shall be



31









 






at least $1,000,000 and in integral multiples of $100,000 in excess thereof. During the
period prior to the Lender Termination Date, the Conduit Lender shall promptly notify the Agent
whether it has determined to make a proposed Advance and the Agent shall promptly thereafter notify
the Borrower whether the Conduit Lender has determined to make such Advance. If the Conduit Lender
has declined to make such proposed Advance, the Agent shall promptly send notice of the proposed
borrowing to all of the Secondary Lenders concurrently by telecopier, telex or cable specifying the
Borrowing Date for such borrowing, each Secondary Lender’s Percentage multiplied by the Requested
Amount and whether the Yield for such Advance is calculated based on the Eurodollar Rate or the
Alternate Base Rate. On each Borrowing Date, the Conduit Lender or the Secondary Lenders shall,
subject to the terms and conditions of this Agreement, make available to the Borrower at the
Borrower’s Account Advances in an amount equal to the Requested Amount in immediately available
funds. To the extent not covered by Section 2.08, the Borrower shall indemnify the Conduit Lender,
each Secondary Lender and the Agent against any loss or expense incurred by them as a result of any
failure by the Borrower to accept any Advance requested in a Notice of Borrowing or as a result of
the failure of the Borrower to receive any Advance requested in a Notice of Borrowing as a result
of the failure of any condition precedent to the making of such Advance to be satisfied, including,
without limitation, any loss or expense incurred by reason of the liquidation or reemployment of
funds acquired or requested to fund such Advance.




          SECTION 2.03. Noteless Agreement; Evidence of Indebtedness.




          (a) Each Lender and each Secondary Lender shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrower to such Lender or such Secondary
Lender, as applicable, resulting from each Advance made by such Lender or such Secondary Lender, as
applicable, from time to time, including the amounts of principal and Yield thereon and paid to
such Lender or Secondary Lender, as applicable, from time to time hereunder.




          (b) The Agent shall maintain accounts in which it will record (i) the amount of each Advance
made hereunder and the Settlement Period with respect thereto, (ii) the amount of any principal and
Yield due and payable or to become due and payable from the Borrower to each Lender and each
Secondary Lender hereunder, and (iii) the amount of any sum received by the Agent hereunder from
the Borrower and each Lender’s and each Secondary Lender’s share thereof.




          (c) The entries maintained in the accounts maintained pursuant to clauses (a) and (b) of this
Section 2.03 shall be rebuttable presumptive evidence of the existence and amounts of the Borrower
Obligations therein recorded; provided, however, that the failure of the Agent, any
Lender or any Secondary Lender to maintain such accounts or any error therein shall not in any
manner affect the obligation of the Borrower to repay the Borrower Obligations in accordance with
their terms.




          (d) The Conduit Lender or any Secondary Lender may request that its Advances be evidenced by
an Advance Note. In such event, the Borrower shall promptly prepare, execute and deliver to the
Conduit Lender or such Secondary Lender, as applicable, an Advance Note payable to the order of the
Conduit Lender or such Secondary Lender, as



32









 






applicable. Thereafter, the Advances evidenced by such Advance Note and interest thereon
shall at all times (including after any assignment pursuant to Section 9.06) be represented by one
or more Advance Notes payable to the order of the payee named therein or any assignee pursuant to
Section 9.06, except to the extent that the Conduit Lender, such Secondary Lender or assignee
subsequently returns to the Borrower any such Advance Note for cancellation and requests that such
Advance once again be evidenced as described in clauses (a) and (b) of this Section 2.03. In
connection with any assignment pursuant to Section 9.06, if the assigning Secondary Lender shall
have an Advance Note issued to it, the assigning Secondary Lender shall promptly return its Advance
Note to the Borrower marked “cancelled”.




          SECTION 2.04. Maturity of the Advances.




          The principal amount of and the accrued and unpaid Yield on each outstanding Advance shall be
due and payable by the Borrower on the Maturity Date for such Advance.




          SECTION 2.05. Prepayment of the Advances.




          (a) The Borrower shall have the right at any time and from time to time, upon not less than
one (1) Business Day’s prior written notice in the form of Exhibit D hereto or telephonic notice
(in the case of telephonic notice, promptly confirmed in writing in the form of Exhibit D hereto)
to the Agent specifying the date and amount of such prepayment, to prepay (without any premium or
penalty, except for any Liquidation Fee or amount payable under Section 2.08) all or a portion of
the outstanding Advances, together with unpaid Yield on all Advances that are paid in full on such
date of prepayment, on a Business Day; provided that any such prepayment, if a partial
prepayment, shall be at least $1,000,000 and in integral multiples of $100,000 in excess thereof.




          (b) If on any Business Day the Borrower is not in full compliance with the Borrowing Base
Test, the Borrower shall on such date of date of determination (a “Determination Date”) (I)
notify the Agent of such failure to comply, and (II) on the Business Day next succeeding such
Determination Date (each such date, a “Compliance Certification Date”) prepay Advances
(together with Yield thereon) in an amount necessary to cause the Borrower to be in full compliance
with the Borrowing Base Test on such Compliance Certification Date; provided,
however, that to the extent the Borrower does not have sufficient available funds to fully
cure such compliance shortfall on such Compliance Certification Date, then the Borrower shall (i)
on such Compliance Certification Date prepay outstanding Advances in the amount of its available
funds; (ii) as promptly as practicable and in any event no later than the close of business on the
twelfth (12th) Business Day following such Determination Date prepay Advances in a
principal amount (and pay the Yield thereon) at least sufficient to cause the Borrowing Base to be
at least equal to the product of (x) 1.05 and (y) the Credits Outstanding, as determined on such
Compliance Certification Date; and (iii) no later than the close of business on such Compliance
Certification Date, deliver to the Agent a certificate, signed by an Responsible Officer of the
Borrower, that (1) certifies the amount of the compliance shortfall and (2) certifies that the
requirements of this Section 2.05(b) shall be satisfied on or prior to the twelfth
(12th) Business Day following such Determination Date.




33








 





          (c) If at any time the aggregate credit extended by the Lenders and the Secondary Lenders in
connection with this Agreement exceeds the sum of (x) the product of (a) the Margin Stock
Percentage multiplied by (b) the current market value (as defined in Regulation U) of all Margin
Stock of the Borrower, plus, (y) the good faith loan value (as determined in accordance with
Regulation U) of all other Assets of the Borrower, the Borrower shall immediately prepay the
outstanding Advances in an amount equal to such excess, together with all accrued and unpaid Yield
thereon.




          (d) Subject to Section 7.03, the amount of each prepayment under this Section 2.05 shall be
applied ratably to the Advances of each Lender and each Secondary Lender in the order in which such
Advances were made by such Lender or Secondary Lender; provided, however, that the
amount of such prepayment shall be applied first to any outstanding Advances of the
applicable Lender or Secondary Lender in respect of which Yield is computed by reference to the
Alternate Base Rate, second to any outstanding Advances of the applicable Lender or
Secondary Lender in respect of which Yield is computed by reference to the Eurodollar Rate, and
third to any outstanding Advances of the applicable Lender or Secondary Lender in respect
of which Yield is computed by reference to the CP Rate.




          (e) If at any time the aggregate outstanding principal balance of the Advances exceeds the
Total Commitment, the Borrower shall immediately repay the outstanding Advances in an amount equal
to such excess, together with all accrued and unpaid Yield thereon.




          SECTION 2.06. Yield.




          (a) The Borrower hereby agrees to pay the Yield computed with reference to the principal
amount of each Advance outstanding from time to time. Yield accruing in respect of any Advance for
any Settlement Period shall be due and payable on the Settlement Date immediately succeeding such
Settlement Period and as required by Section 2.05.




          (b) The Agent shall prepare and send to the Borrower an invoice with respect to each
Settlement Date on the second Business Day preceding such Settlement Date setting forth (i) amounts
due on such Settlement Date in respect of Yield and fees hereunder and (ii) the rates of interest
used in determining such Yield.




          (c) It is the intention of the parties hereto that the Yield on the Advances shall not exceed
the maximum rate permissible under applicable law. Accordingly, anything herein or in any Advance
Note to the contrary notwithstanding, in the event any Yield is charged to, collected from or
received from or on behalf of the Borrower by the Lenders or the Secondary Lenders pursuant hereto
or thereto in excess of such maximum lawful rate, then the excess of such payment over that maximum
shall be applied first to the payment of amounts then due and owing by the Borrower to the Secured
Parties under the Program Documents (other than in respect of principal and Yield on Advances) and
then to the reduction of the outstanding principal balance of the Advances.




          SECTION 2.07. Increased Costs.




          (a) If, due to either (i) the introduction of or any change (other than any change by way of
imposition or increase of reserve requirements reflected in the Eurodollar Rate




34









 







Reserve Percentage) in or in the interpretation of any Applicable Law or (ii) the compliance
with any directive or guideline issued by, or request from any central bank or other Authority
(whether or not having the force of law), there shall be any increase in the cost to any Affected
Person of agreeing to make or making, funding or maintaining Eurodollar Rate Advances to the
Borrower, then the Borrower shall from time to time, upon demand by such Affected Person pay to the
Agent for the account of such Affected Person additional amounts sufficient to compensate such
Affected Person for such increased cost. A certificate setting forth in reasonable detail the
amount of such increased cost, submitted to the Borrower by an Affected Person, shall be conclusive
and binding for all purposes, absent manifest error. Notwithstanding anything to the contrary
contained in this Agreement, in no event shall this Section 2.07(a) apply to any Taxes, which shall
be governed exclusively by Section 9.03.




          (b) If an Affected Person determines that compliance with (i) any Applicable Law or (ii) any
directive or guideline issued by, or request from, any central bank or other Authority charged with
the interpretation or administration thereof (whether or not having the force of law), in either
case, (A) affects or would affect the amount of capital required or reasonably expected to be
maintained by such Affected Person and that the amount of such capital is increased by or based
upon the existence of such Affected Person’s commitment under the Program Documents or upon such
Affected Person’s making, funding or maintaining Advances, (B) increases the cost of making or
maintaining such commitment under the Program Documents or making, funding or maintaining such
Advances to any Affected Person or (C) reduces the return of an Affected Person in connection with
the Program Documents, then, promptly upon written demand of such Affected Person (with a copy of
such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such
Affected Person, from time to time as specified by such Affected Person, additional amounts
sufficient to compensate such Affected Person for such increased cost and/or reduced return in
light of such circumstances. A certificate setting forth in reasonable detail such amounts and the
circumstances giving rise thereto submitted to the Borrower by such Affected Person shall be
conclusive and binding for all purposes, absent manifest error. Notwithstanding anything to the
contrary contained in this Agreement, in no event shall this Section 2.07(b) apply to any Taxes,
which shall be governed exclusively by Section 9.03.




          (c) Failure or delay on the part of any Affected Person to demand compensation pursuant to
this Section 2.07 shall not constitute a waiver of such Affected Person’s right to demand such
compensation; provided that the Borrower shall not be required to compensate an Affected Person
pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to
the date that such Affected Person notifies the Borrower of the event giving rise to such costs or
reductions and of such Affected Person’s intention to claim compensation therefor;
provided, that if any change giving rise to such increased costs or reductions is
retroactive, then the 180-day period referred to above shall be extended to include the period of
retroactive effect thereof.




          SECTION 2.08. Compensation.




          Without duplication of any amount due by the Borrower in respect of any Liquidation Fee, the
Borrower shall compensate each Affected Person, upon its written request (which request shall set
forth the basis for requesting such amounts), for all reasonable losses,



35









 






expenses and liabilities (including, without limitation, any interest paid by such Affected
Person to lenders of funds borrowed by it to make or carry its Eurodollar Rate Advances and any
loss sustained by such Affected Person in connection with the re-employment of such funds), which
such Affected Person may sustain: (i) if for any reason (other than a default by such Affected
Person) a borrowing of any Eurodollar Rate Advance by the Borrower does not occur on a date
specified therefor in the Notice of Borrowing (whether or not withdrawn), (ii) if any prepayment of
any of the Borrower’s Eurodollar Rate Advances occurs on a date which is not the last day of a
Settlement Period applicable thereto, (iii) if any prepayment of any of the Borrower’s Eurodollar
Rate Advances is not made on any date specified in a notice of prepayment given by the Borrower, or
(iv) as a consequence of any other default by the Borrower to repay its Eurodollar Rate Advances
when required by the terms of this Agreement.




          SECTION 2.09. Additional Yield on Eurodollar Rate Advances.




          So long as any Affected Person shall be required under regulations of the Board of Governors
of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting
of or including Eurocurrency Liabilities, the Borrower shall pay to such Affected Person Eurodollar
Additional Yield on the principal amount of each outstanding Advance on each date on which Yield is
payable on such Advance. Such Eurodollar Additional Yield shall be determined by such Affected
Person and notified to the Borrower through the Agent within thirty (30) days after any payment is
made with respect to which such additional Yield is requested. A certificate as to such Eurodollar
Additional Yield submitted to the Borrower and the Agent shall be conclusive and binding for all
purposes, absent manifest error.




          SECTION 2.10. Termination or Reduction of the Total Commitment.




          (a) The Borrower may at any time, upon ten (10) Business Days prior written notice to the
Agent, terminate in whole or reduce in part the unused portion of the Total Commitment; provided
that each such partial reduction of the Total Commitment shall be in an amount equal to at least
$5,000,000 or an integral multiple thereof. Upon any such reduction in the Total Commitment, the
Borrower shall immediately make any repayment required pursuant to Section 2.05(e).




          (b) The Total Commitment shall automatically terminate in whole on the date seventy-five (75)
days following delivery of a notice of termination by the Agent after the occurrence of a
Termination Event.




          (c) The Total Commitment shall automatically terminate in whole on the date thirty (30)
Business Days following delivery of a notice of termination by the Agent after the occurrence of a
Rating Termination Event.




          (d) The Borrower shall provide each Rating Agency prompt written notice of any termination or
reduction of the Total Commitment pursuant to this Section 2.10.




          SECTION 2.11. Rescission or Return of Payment.




          The Borrower further agrees that, if at any time all or any part of any payment theretofore
made by it to any Secured Party or their designees is or must be rescinded or returned




36









 







for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or
reorganization of the Borrower or any of its Affiliates), the obligation of the Borrower to make
such payment to such Secured Party shall, for the purposes of this Agreement, to the extent that
such payment is or must be rescinded or returned, be deemed to have continued in existence and this
Agreement shall continue to be effective or be reinstated, as the case may be, as to such
obligations, all as though such payment had not been made.




          SECTION 2.12. Fees Payable by Borrower.




          The Borrower agrees to pay to the Agent and the Secondary Lenders such fees as are set forth
in the Fee Letter.




          SECTION 2.13. Post Default Interest.




          Upon the occurrence and during the continuation of any Event of Default, the outstanding
principal amount of all Advances and, to the extent permitted by applicable law, any interest
payments thereon not paid when due and any fees and other amounts then due and payable hereunder,
shall bear interest (including post-petition interest in any proceeding under the Bankruptcy Code
or other applicable bankruptcy laws, whether or not such interest is allowed or allowable in any
such proceeding) at the Post-Default Rate. Interest at the Post-Default Rate shall accrue from the
initial date of the applicable Event of Default until that Event of Default is cured or waived and
shall be payable upon demand.




          SECTION 2.14. Payments.




          (a) All amounts owing and payable to any Secured Party, any Affected Person or any Indemnified
Party in respect of the Advances and other Borrower Obligations, including, without limitation, the
principal thereof, Yield, fees, indemnities, expenses or other amounts payable under the Program
Documents, shall be paid in Dollars, in immediately available funds on or prior to 11:00 a.m. (New
York City time) on the date due without counterclaim, setoff, deduction, defense, abatement,
suspension or deferment to the Applicable Account. Any payment paid after 11:00 a.m. (New York
City time) on any day shall be deemed to have been made on the next Business Day for all purposes
of this Agreement (other than Section 6.01(a)).




          (b) All computations of interest at the Post-Default Rate and all computations of Yield, fees
and other Borrower Obligations shall be made on the basis of a year of 360 days for the actual
number of days elapsed. Whenever any payment or deposit to be made hereunder shall be due on a day
other than a Business Day, such payment or deposit shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of such payment or deposit.




          (c) Except as otherwise expressly provided in this Agreement, upon receipt of funds deposited
into the Agent’s Account, the Agent shall distribute such funds, first to the Lenders and
the Secondary Lenders on a pro rata basis in accordance with such amounts owed to each Lender and
Secondary Lender in payment in full of all accrued and unpaid Yield owing to the Lenders and
Secondary Lenders, second to the Lenders, the Secondary Lenders or the Agent, on a pro rata
basis in accordance with such amounts owed to each such Person in payment of any other fees or
other amounts owed by the Borrower to the Lenders, the Secondary Lenders and the




37









 







Agent under this Agreement and the other Program Documents (other than in respect of the
principal amount of the Advances), third to the payment of the principal amount of the
Advances owing to such Lenders and Secondary Lenders, and fourth to the Secured Parties on
a pro rata basis in accordance with the amounts owed to each such Person.




          (d) During the continuance of an Event of Default all payments in respect of the Borrower
Obligations, payable by or on behalf of the Borrower, including all Proceeds resulting from the
sale or disposition of the Pledged Collateral shall be remitted to the Agent’s Account and applied
in accordance with Section 7.03(a).




          SECTION 2.15. Ratable Payments.




          If any Secondary Lender or Lender (other than the Conduit Lender), whether by set-off,
bankers’ lien, counterclaim or otherwise, has any payment made to it with respect to any Borrower
Obligations owing to it in a greater proportion than that received by any other Lender or Secondary
Lender entitled to receive a ratable share of such payments, such Lender or Secondary Lender
agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of the
unpaid Borrower Obligations held by the other Lenders and Secondary Lenders so that after such
purchase each Lender and Secondary Lender will hold its ratable proportion of such unpaid Borrower
Obligations; provided that if all or any portion of such excess amount is thereafter
recovered from such Secondary Lender or Lender, as the case may be, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but without interest.




          SECTION 2.16. Borrower’s Obligations Absolute.




          The Borrower’s obligations under this Agreement and under the other Program Documents shall be
absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms
hereof and thereof, under any and all circumstances and irrespective of any setoff, counterclaim or
defense to payment which the Borrower, the Adviser or any other Person may have or have had against
any Secured Party or any other Person.




ARTICLE III

CONDITIONS PRECEDENT




          SECTION 3.01. Conditions Precedent to the Effectiveness of this Agreement.




          The effectiveness of this Agreement and the Conduit Lender’s and the Secondary Lenders’
obligations hereunder shall be subject to the conditions precedent that the Agent shall have
received (or waived receipt thereof) on or before the initial Borrowing Date the following, each
(unless otherwise indicated) in form and substance reasonably satisfactory to the Agent in
sufficient copies for the Conduit Lender and the Secondary Lenders:




          (a) each of the Program Documents duly executed and delivered by the parties thereto, which
shall be in full force and effect;




          (b) the Prospectus, as in effect on the Closing Date;




38









 








          (c) the signed opinions of counsel to the Borrower addressed to the Agent, the Conduit Lender
and each Secondary Lender as to such matters as the Agent, the Conduit Lender and each Secondary
Lender shall have reasonably requested;




          (d) if requested by the Conduit Lender or any Secondary Lender pursuant to Section 2.03 on or
prior to the Closing Date, an Advance Note duly executed and completed by the Borrower to such
Conduit Lender or the Secondary Lender, as applicable;




          (e) copies of all Governmental Authorizations, Private Authorizations and Governmental
Filings, if any, which may be required in connection with the transactions contemplated by the
Program Documents;




          (f) a certificate of a Responsible Officer of the Borrower certifying (i) as to its
certificate of incorporation and by-laws, (ii) as to the resolutions of its Board of Directors
approving this Agreement and the other Program Documents to which it is a party and the
transactions contemplated hereby and thereby, (iii) that its representations and warranties set
forth in the Program Documents to which it is a party are true and correct, and (iv) the incumbency
and specimen signature of each of its officers authorized to execute the Program Documents to which
it is a party and of each of its Responsible Officers for purposes of this Agreement;




          (g) copies of proper financing statements naming the Borrower as debtor and the Agent as
secured party to be filed under the UCC in all jurisdictions that the Agent may deem necessary or
desirable in order to perfect the Agent’s interests in the Pledged Collateral contemplated by this
Agreement;




          (h) copies of proper financing statements, if any, necessary to release all security interests
and other rights of any Person in the Assets of the Borrower previously granted by the Borrower;




          (i) completed requests for information, dated on or before the date of such initial Advance,
listing the financing statements referred to in clause (h) above and all other effective financing
statements filed in the jurisdictions referred to in subsection (g) above that name the Borrower
(under its present name and any previous name) as debtor, together with copies of such other
financing statements (none of which shall cover any Assets of the Borrower);




          (j) a pro-forma Investor Report, which shall evidence compliance with the terms of the Program
Documents, including compliance with the Borrowing Base Test, the TRS Portfolio Test and the Asset
Coverage Test, after giving effect to the initial borrowing of Advances under this Agreement;




          (k) the fees to be received by it on or prior to the Closing Date under this Agreement and the
Fee Letter; and




          (l) such other instruments, certificates and documents from the Borrower as the Agent shall
have reasonably requested, all in form and substance satisfactory to the Agent.




39









 








          SECTION 3.02. Conditions Precedent to All Advances.




          The obligation of the Conduit Lender and the Secondary Lenders to make any Advance (including
the initial Advances) on any Borrowing Date shall be subject to the fulfillment of the following
conditions:




          (a) each of the representations and warranties of the Borrower and the Custodian contained in
this Agreement, the Control Agreement, and the other Program Documents shall be true and correct as
of such date and shall continue to be true immediately after giving effect to such Advance;




          (b) no Default or Event of Default shall have occurred and be continuing at or prior to the
time of the making of such Advance or shall result from the making of such Advance;




          (c) the conditions precedent set forth in Section 3.01 shall have been fully satisfied
or waived;




          (d) immediately after giving effect to such Advance and all other Advances to be made on such
date the Borrower shall be in full compliance with each of the Borrowing Base Test, the TRS
Portfolio Test and the Asset Coverage Test;




          (e) immediately after the making of any such Advance and all other Advances to be made on such
date, the aggregate outstanding principal amount of all Advances shall not exceed the Total
Commitment (or such lesser amount as shall be specified in Section 2.01);




          (f) the Agent shall have received a pro-forma Investor Report, which shall evidence compliance
with the terms of this Agreement, including compliance with the Asset Coverage Test, the TRS
Portfolio Test and the Borrowing Base Test, after giving effect to all borrowings on such Borrowing
Date;




          (g) the aggregate credit extended by the Lenders and the Secondary Lenders in connection with
this Agreement does not exceed the sum of (x) the Margin Stock Percentage of the current market
value (as defined in Regulation U) of all Margin Stock of the Borrower, plus (y) the good faith
loan value (as determined in accordance with Regulation U) of all other Assets of the Borrower;




          (h) the Agent shall have received (i) with respect to the initial Advance to the Borrower, a
Form FR G-3 and a Form FR U-1, each duly completed, executed and delivered by the Borrower
demonstrating the compliance of such initial borrowing with Regulation U, and (ii) with respect to
each subsequent Advance to the Borrower, a Notice of Borrowing that shall constitute an amendment
to the Form FR G-3 and the Form FR U-1 previously delivered in accordance with the provisions of
Section 221.3(c)(2)(iv) of Regulation U; and




          (i) the Agent shall have received such other instruments, certificates and documents as the
Agent shall reasonably request.




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ARTICLE IV

REPRESENTATIONS AND WARRANTIES




          SECTION 4.01. Representations and Warranties of the Borrower.




          The Borrower represents and warrants to each of the Secured Parties on and as of the Closing
Date, each Borrowing Date and each date that any Asset is credited to or removed from the
Collateral Account (and in respect of clause (l) below, each date such information is provided), as
follows:




          (a) Due Organization. The Borrower is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Delaware, with full power and authority to own
and operate its assets and properties, conduct the business in which it is now engaged and to
execute and deliver and perform its obligations under this Agreement and the other Program
Documents to which it is a party.




          (b) Due Qualification and Good Standing. The Borrower is duly qualified to do
business and is in good standing in each jurisdiction in which the nature of its business, assets
and properties, including, without limitation, the performance of its obligations under this
Agreement and the other Program Documents to which it is a party, requires such qualification.




          (c) Due Authorization; Execution and Delivery; Legal, Valid and Binding;
Enforceability. The execution and delivery by the Borrower of, and the performance by the
Borrower of its obligations under the Program Documents to which it is a party and the other
instruments, certificates and agreements contemplated thereby are within its corporate powers and
have been duly authorized by all requisite corporate action by the Borrower and have been duly
executed and delivered by the Borrower and constitute the legal, valid and binding obligations of
the Borrower enforceable against the Borrower in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally
and by general equitable principles (whether enforcement is sought by proceedings in equity or at
law).




          (d) Noncontravention. Neither the execution and delivery by the Borrower of this
Agreement, the other Program Documents to which it is a party, or any instrument, certificate or
agreement referred to herein or therein, or contemplated hereby or thereby, nor the consummation of
the transactions herein or therein contemplated, nor compliance with the terms, conditions and
provisions hereof or thereof by it, will (i) conflict with, or result in a breach or violation of,
or constitute a default under its certificate of incorporation, by-laws or other organizational
documents, (ii) conflict with or contravene (A) any Applicable Law, (B) any contractual restriction
binding on or affecting the Borrower or any of its Assets, or (C) any order, writ, judgment, award,
injunction or decree binding on or affecting the Borrower or any of its Assets, (iii) result in a
breach or violation of, or constitute a default under, or permit the acceleration of any obligation
or liability in, or but for any requirement of the giving of notice or the passage of time (or
both) would constitute such a conflict with, breach or violation of, or default under, or permit
any such acceleration in, any contractual obligation or any agreement or document to which it is a
party or by which it or any of its properties is bound (or to which any




41









 







such obligation, agreement or document relates), or (iv) result in any Adverse Claim upon any
Asset of the Borrower.




          (e) Governmental Authorizations; Private Authorizations; Governmental Filings. The
Borrower has obtained all necessary Governmental Authorizations and Private Authorizations, and
made all Governmental Filings necessary for the execution and delivery by the Borrower of, and the
performance by the Borrower of its obligations under this Agreement, the other Program Documents to
which it is a party and the agreements, certificates and instruments contemplated hereby or
thereby, and no Governmental Authorization, Private Authorization or Governmental Filing which has
not been obtained or made, is required to be obtained or made by it in connection with the
execution and delivery by the Borrower of, or the performance of its obligations under this
Agreement and the other Program Documents.




          (f) Security Interest. All Borrowing Base Eligible Assets and TRS Eligible Assets of
the Borrower (including Cash but excluding Loan Assets) are held in or credited to the Collateral
Account. This Agreement and the Control Agreement and the actions required to be taken pursuant to
the terms hereof and thereof are, and at all times shall be, effective to create and perfect in the
Agent for the benefit of the Secured Parties a first priority perfected security interest in the
Pledged Collateral (subject to the Lien of the Custodian securing (i) the Custodian’s Overdraft
Advances to the extent permitted by Section 5.02(m), (ii) indemnification payments owing by the
Borrower in favor of the Custodian in an amount not to exceed $100,000 and (iii) Permitted Expenses
of the Custodian in an amount not to exceed $50,000) free and clear of all Adverse Claims.




          (g) Borrowing Base Eligible Assets, TRS Eligible Assets, Adverse Claims, Etc. The
Borrower owns each Borrowing Base Eligible Asset and TRS Eligible Asset free and clear of Adverse
Claims and as of the initial Borrowing Date and at all times thereafter, the Agent has a first
priority perfected security interest in the Pledged Collateral (subject to the Lien of the
Custodian securing (i) the Custodian’s Overdraft Advances to the extent permitted by Section
5.02(m), (ii) indemnification payments owing by the Borrower in favor of the Custodian in an amount
not to exceed $100,000 and (iii) Permitted Expenses of the Custodian in an amount not to exceed
$50,000) free and clear of all Adverse Claims and no actions, except as have been taken, are
necessary or advisable to perfect or protect such security interest free and clear of Adverse
Claims.




          (h) No Financing Statement. No effective financing statements or other instruments
similar in effect covering any Asset of the Borrower are on file in any recording office, except
those filed in favor of the Agent pursuant to this Agreement.




          (i) Principal Office; Organization. The Borrower’s principal place of business and
chief executive office is at the addresses set forth in Schedule VII, the Borrower’s jurisdiction
of incorporation is the State of Delaware and the Borrower has not transacted any business under
any name other than “Highland Distressed Opportunities, Inc.”




          (j) Pending Litigation or Other Proceeding. There are no pending or, to the best of
the Borrower’s knowledge, threatened investigations, actions, suits or proceedings




42









 







involving the Borrower which could give rise to a reasonable possibility of a Material Adverse
Effect.




          (k) RIC/BDC Requirements; Investment Policies. The Borrower is and will continue to
be a non-diversified, closed-end company that has filed its election under the Investment Company
Act to be treated as a business development company and is in full compliance with each RIC/BDC
Requirement and the Investment Policies and Restrictions.




          (l) Information and Reports. The Prospectus, each Investor Report, each Weekly
Portfolio Report, each Notice of Borrowing and all other written information, reports, certificates
and statements (with respect to which, other than the Investor Report, the Weekly Portfolio Report
and each Notice of Borrowing, shall be taken as a whole) provided by or on behalf of the Borrower
to any Secured Party for purposes of or in connection with this Agreement, the other Program
Documents or the transactions contemplated hereby or thereby is, and all such information hereafter
provided by or on behalf of the Borrower to any Secured Party is and will be (except for
projections and forward looking statements (other than any pro forma Investor Report)) true,
correct and complete in all material respects as of the date to which such information speaks and
no such information contains, or will contain, any material misrepresentation or any omission to
state therein matters necessary to make the statements made therein not misleading in any material
respect when considered in its entirety.




          (m) Applicable Law. The Borrower is in full compliance with all Applicable Law,
including, without limitation, the Securities Act and the Investment Company Act, including the
rules and regulations promulgated thereunder.




          (n) ERISA. Neither the Borrower nor any ERISA Affiliate of the Borrower (i) is now or
has during the past five years been a member of an ERISA Group or (ii) has or during the past five
years has had any liability or obligation with respect to any Plan, Multiemployer Plan or Benefit
Arrangement.




          (o) No Default or Event of Default. No Default or Event of Default has occurred and
is continuing and on each Borrowing Date and immediately after the making of each Advance each of
the conditions precedent to the making of Advances set forth in Section 3.02 are fully satisfied.




          (p) Borrowing Base Test; TRS Portfolio Test; Asset Coverage Test, Etc. The Borrowing
Base Test, the TRS Portfolio Test and the Asset Coverage Test are fully satisfied; provided
that if on any date this representation is made (other than a Borrowing Date) the Borrower is in
full compliance with the requirements set forth in clause (b) of Section 2.05, the Borrower shall
be deemed to be in compliance with the Borrowing Base Test for purposes of this clause (p) as of
such date.




          (q) Internal Revenue Code. The Borrower is qualified, and intends to continue to
qualify, as a “regulated investment company” within the meaning of the Code, and as such its income
is not and will not be subject to tax at the trust level under the Code.




          (r) Taxes. The Borrower has filed all United States Federal income tax returns and
all other material tax returns which are required to be filed by it, if any, and has paid




43









 







all taxes due pursuant to such returns, if any, or pursuant to any assessment for material
taxes received by the Borrower, except for any taxes or assessments which are being contested in
good faith by appropriate proceedings and with respect thereto adequate reserves have been
established in accordance with GAAP and the non-payment of which would otherwise not give rise to a
Material Adverse Effect and the charges, accruals and reserves on the books of the Borrower in
respect of taxes or other governmental charges, if any, are, in the opinion of the Borrower,
adequate.




          (s) Financial Condition. The statement of assets and liabilities of the Borrower as
of December 31, 2007, certified by PricewaterhouseCoopers LLP independent auditors, fairly presents
in conformity with GAAP the financial position of the Borrower at such date and since such date
there has been no material adverse change in the business, Assets, condition (financial or
otherwise) or operations of the Borrower.




          (t) Regulations U and X. Neither the making of any Advance nor the use of proceeds
thereof will violate or be inconsistent with the provisions of Regulation U or Regulation X.




          (u) Perfection Representations, Warranties and Covenants. The Perfection
Representations, Warranties and Covenants set forth in Exhibit E shall be a part of this
Agreement for all purposes.




ARTICLE V

COVENANTS




          SECTION 5.01. Affirmative Covenants of the Borrower.




          The Borrower covenants and agrees that it shall:




          (a) Compliance with Agreements, Laws, Etc. (i) Duly observe, comply with and conform
to all requirements of Applicable Law relative to the conduct of its business or to its Assets,
including without limitation the Investment Company Act, (ii) preserve and keep in full force and
effect the legal existence of the Borrower, (iii) preserve and keep in full force and effect all
rights, privileges, qualifications and franchises of the Borrower material to the conduct of its
business, (iv) comply with the terms and conditions of each Program Document to which it is a
party, and (v) obtain, maintain and keep in full force and effect all material Governmental
Authorizations, Private Authorizations and Governmental Filings which are necessary or appropriate
to properly carry out its business and the transactions contemplated to be performed by the
Borrower under this Agreement and the other Program Documents.




          (b) Taxes. Cause to be computed, paid and discharged when due all taxes, assessments
and other governmental charges or levies imposed upon it, or upon any income or Assets of the
Borrower, prior to the day on which penalties are attached thereto, unless and to the extent that
the same shall be contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been established on the books of the Borrower in accordance with GAAP and
the non-payment of which would not otherwise give rise to a Material Adverse Effect.




44









 








          (c) Further Assurances. Promptly, at its expense, execute and deliver such further
instruments and take such further action in order to (i) establish and protect the rights,
interests and remedies created, or intended to be created, in favor of the Secured Parties
including, without limitation, all such actions which are necessary or advisable to maintain and
protect the Agent’s first priority perfected security interest in the Pledged Collateral for the
benefit of the Secured Parties free and clear of Adverse Claims, (ii) enable the Secured Parties to
enforce their rights and remedies under the Program Documents, including, without limitation, to do
all things necessary at the request of the Agent during the continuance of an Event of Default to
have each Loan Asset which constitutes Pledged Collateral and the related Loan Documents assigned
to the Agent or its designee, and (iii) effectuate the intent and purpose of, and to carry out the
terms of, the Program Documents.




          (d) Continued Existence. Keep the State of Delaware as its jurisdiction of
incorporation and keep its principal place of business and chief executive office at the address of
the Borrower set forth in Section 9.02 or, upon thirty (30) days’ prior written notice to the
Agent, in any other jurisdiction of incorporation or at any other locations in jurisdictions where
all actions reasonably requested by the Agent to protect and perfect the Agent’s first priority
perfected security interest in the Pledged Collateral have been taken and completed.




          (e) Financial Statement; Accountants’ Reports; Other Information. Provide to the
Agent (with enough additional copies for the Conduit Lender and each Secondary Lender):





          (i) as soon as available, and in any event within one hundred twenty (120) days after
the end of each fiscal year of the Borrower, a statement of assets and liabilities of the
Borrower as at the end of such fiscal year, and statements of operations and of changes in
net assets of the Borrower for such fiscal year, and the Borrower’s portfolio of investments
as of the end of such fiscal year, with an audit report thereon issued by
PricewaterhouseCoopers LLP or other independent certified public accountants of nationally
recognized standing, together with the comparable report for the prior fiscal year;




          (ii) as soon as available and in any event within sixty (60) days after the end of each
quarterly fiscal period of the Borrower, a statement of assets and liabilities of the
Borrower as at the end of such period, a statement of operations and of changes in net
assets of the Borrower for such period, and the Borrower’s portfolio of investments as of
the end of such period, all in reasonable detail and stating in comparative form the
respective figures for the comparable period in the preceding year, prepared in accordance
with GAAP, consistently applied and all certified (subject to normal year-end adjustment) as
to fairness of presentation in all material respects by a Responsible Officer of the
Borrower;




          (iii) simultaneously with the delivery of each set of financial statements referred to
in clauses (i) and (ii) above, a statement of a Responsible Officer of the Borrower to the
effect that nothing has come to the attention of such Responsible Officer to cause such
Responsible Officer to believe that any Default or Event of Default existed on the date of
such statements;



45









 






          (iv) as soon as possible, and in any event within two (2) Business Days after a
Responsible Officer of the Borrower has knowledge of the occurrence of any Termination
Event, Default or Event of Default, a certificate of a Responsible Officer of the Borrower
setting forth the details thereof and, in the case of a Default or Event of Default, the
action which the Borrower is taking or proposes to take with respect thereto;




          (v) as soon as possible, and in any event within two (2) Business Days, after a
Responsible Officer of the Borrower has knowledge of any failure by the Custodian to perform
or observe any term, covenant or agreement on its part to be performed under the Custodial
Agreement or the Control Agreement which failure gives rise to a reasonable possibility of a
Material Adverse Effect, written notice thereof executed by a Responsible Officer of the
Borrower;




          (vi) promptly upon the mailing thereof to the shareholders of the Borrower generally,
copies of all financial statements, reports and proxy statements so mailed;




          (vii) promptly upon the filing thereof, copies of all registration statements (other
than the exhibits thereto and any registration statements on Form N-2 or its equivalent) and
annual and semi-annual reports which the Borrower shall have filed with the SEC;




          (viii) on or before the third Business Day of each week, weekly portfolio reports and
weekly covenant compliance certificates in substantially the form of Schedule III attached
hereto (each a “Weekly Portfolio Report”) with respect to the immediately preceding
calendar week, signed by a Responsible Officer of the Borrower (which certificate shall
include a calculation of the Borrower’s compliance with the Borrowing Base Test, Asset
Coverage Test and TRS Portfolio Test as of the end of such calendar week);




          (ix) on or before the tenth (10th) Business Day of each calendar month (or (A) as more
frequently as the Agent shall request at the direction of a Rating Agency or (B) during the
continuance of a Default or Event of Default, more frequently as the Agent shall reasonably
request (which may be daily)), an Investor Report substantially in the form of Schedule II
hereto, as of the last Business Day of the immediately preceding calendar month (or other
relevant period if delivered on a daily or weekly basis), together with a certificate of a
Responsible Officer of the Borrower in substantially the form of Annex A to the Investor
Report;




          (x) promptly upon its receipt of and contemporaneously with its giving of any notice
relating to the termination of the Custodial Agreement or the Control Agreement, copies of
any such notice;




          (xi) prior to the issuance by the Borrower of any preferred shares, notice of such
issuance which notice shall include the offering materials to be used in connection with the
issuance of such preferred shares;



46









 






          (xii) prompt notice of any amendment or modification to the Investment Policies and
Restrictions or the Asset valuation procedures of the Borrower, which notice shall include,
in reasonable detail, a description of any such change;




          (xiii) from time to time upon the reasonable request of the Agent, copies of a current
report identifying the locations of any Pledged Collateral maintained by the Borrower or
which is in the possession of or is maintained in securities accounts with an agent or
sub-custodian of the Custodian which report shall specify the Pledged Collateral held by
each agent or sub-custodian;




          (xiv) as soon as possible, and in any event within one (1) Business Day after a
Responsible Officer of the Borrower has knowledge that (A) the Borrowing Base as of any date
is equal to or less than 105% of the Credits Outstandings as of such date, (B) the Borrowing
Base as of any date is equal to or less than the Credits Outstandings as of such date or (C)
following any occurrence described in the foregoing clause (B), the Borrower shall have
caused the Borrowing Base of any date to be equal to or greater than the Credits Outstanding
as of such date, a certificate of a Responsible Officer of the Borrower setting forth the
details of such occurrence; and




          (xv) from time to time such additional information regarding the financial position or
business of the Borrower as the Agent may reasonably request.


The Borrower shall provide each Rating Agency a copy of each item delivered to the Agent pursuant
to the foregoing clauses (i), (ix) and (xiv).




          (f) Maintenance of Insurance. Maintain in force with financially sound and reputable
insurers, policies with respect to its assets and property and business against such risks and
contingencies and in such amounts as are customary in the case of closed-end funds engaged in
similar lines of business of comparable size and financial strength and as may be required by the
RIC/BDC Requirements.




          (g) Maintenance of Business. Remain at all times a non-diversified, closed-end
company that has filed its election under the Investment Company Act to be treated as a business
development company and continue to engage in business of the same general type as now conducted by
the Borrower, and will continue to be a Delaware corporation and will preserve, renew and keep in
full force and effect its existence and rights, privileges and franchises necessary or desirable in
the normal conduct of business and will at all times comply with each RIC/BDC Requirement.




          (h) Audits. Annually within 120 days of the end of each fiscal year of the Borrower
(or more frequently as the Agent, for itself and as agent for the Secured Parties may require after
the occurrence of and during the continuance of a Default or an Event of Default) and at the sole
cost and expense of the Borrower (i) cause PricewaterhouseCoopers LLP, or another independent
nationally recognized accounting firm selected by the Borrower and reasonably satisfactory to the
Agent, to enter the premises of the Borrower and any Person to whom the Borrower delegates all or
any portion of its duties under any Program Document and examine and audit the books, records and
accounts of the Borrower and such other Person




47









 







relating to its business, financial condition, operations and the Borrower’s and such other
Person’s performance under the Program Documents as determined pursuant to the scope of audit set
forth on Schedule V hereto, (ii) permit such accounting firm to discuss the Borrower’s and such
other Person’s affairs and finances with the officers, partners, employees and accountants of any
of them, (iii) cause such accounting firm to provide to the Agent, for itself and as agent for the
Secured Parties, and each Rating Agency with a certified report in respect of the foregoing, which
shall be in form and scope reasonably satisfactory to the Agent, for itself and as agent for the
Secured Parties, and (iv) authorize such accounting firm to discuss such affairs, finances and
performance with representatives of the Agent and its designees; it being understood that any such
annual audit and report of such accountants may be coordinated with the Borrower’s regular audits
by the Borrower’s accountants provided, however, that upon the occurrence or
continuance of a Default or Event of Default the scope of such audit specified in Schedule V may be
expanded upon the request of the Agent to explore the cause and nature of such Default or Event of
Default or to confirm that any such event has been cured or rectified.




          (i) Access to Records. Permit the Agent or any Person designated by the Agent to,
upon reasonable advance notice and during normal hours, visit and inspect at reasonable intervals
its and any Person to which it delegates any of its duties under the Program Documents, books,
records and accounts relating to its business, financial condition, operations, Assets and its
performance under the Program Documents and to discuss the foregoing with its and such Person’s
officers, partners, employees and accountants, all as often as the Agent may reasonably request.




          (j) Investment Policies and Restrictions. At all times (i) be in compliance in all
material respects with the Investment Policies and Restrictions, (ii) maintain necessary liquidity
to meet its obligations and (iii) cause all Derivatives Transactions entered into by the Borrower
to be in compliance with the applicable criteria therefor established by S&P.




          (k) Defense of Secured Parties’ Interest. Warrant and defend each of the Secured
Parties’ right and interest in, to and under the Pledged Collateral against all Adverse Claims of
all Persons whomsoever.




          (l) Custody and Control. At all times cause all Borrowing Base Eligible Assets and
TRS Eligible Assets of the Borrower (including all instruments and other investments, if any,
evidencing the same and all Loan Documents) to constitute Pledged Collateral and to be (i)
custodied with the Custodian or a sub-custodian of the Custodian pursuant to the Custodial
Agreement, and (ii) subject to the control and custody of the Custodian or a sub-custodian of the
Custodian in accordance with the Custodial Agreement and the Control Agreement; provided
that if such Borrowing Base Eligible Asset or TRS Eligible Asset is a Loan Asset and concurrently
with any request to register such Loan Asset in the name of the Borrower, the Borrower shall
deliver instructions to all Selling Institutions, Transaction Agents and Obligors related to such
Loan Asset requiring that any instrument evidencing such Loan Asset be delivered to the Custodian.
At all times cause (x) all Borrowing Base Eligible Assets and TRS Eligible Assets of the Borrower
(including Cash but excluding Loan Assets) to be held or credited to the Collateral Account and (y)
all Assets of the Borrower (including Cash but excluding (1) Loan Assets, (2) cash held in the
Borrower’s Account in connection with any Restricted Payment permitted under 5.02(k) and (3) any
cash or Assets maintained in a




48









 







segregated account with the Custodian subject to a Lien described in clause (viii) of the
definition of Permitted Lien) to be held or credited to the Collateral Account. At all times cause
all Loan Documents to be held at the address of the Borrower set forth in Section 9.02 or, such
other location as the Borrower shall designate upon twenty (20) days’ prior written notice to the
Agent. Provide to the Custodian a CUSIP, SEDOL or ISIN number with respect to each Borrowing Base
Eligible Asset (other than Loan Assets and Cash). Following delivery of any notice of termination
of the Control Agreement by the Agent in accordance with Section 21(a) thereof, upon the request
of the Agent, the Borrower shall give to the Custodian immediate notice of termination of the
Custodial Agreement in accordance with the terms thereof.




          (m) Notice of Litigation or Other Proceedings. Promptly give notice in writing to the
Agent of all litigation, arbitration proceedings and regulatory proceedings affecting the Borrower
or the Assets of the Borrower, except such proceedings which could not give rise to a reasonable
possibility of a Material Adverse Effect.




          (n) Maintenance of Books of Record and Account. Keep proper books of record and
account in which full, true and correct entries shall be made of all dealings and transactions in
relation to its business and activities in accordance with the requirements of the SEC or under the
Investment Company Act.




          (o) Proceeds of Pledged Collateral. Cause all Proceeds of the Pledged Collateral to
be subject to the control and custody of the Custodian or a sub-custodian of the Custodian in
accordance with the Custodial Agreement and the Control Agreement if a Default or Event of Default
shall be continuing or would occur as a result of the failure to so cause such control and custody
to occur.




          (p) Use of Proceeds. Use the net proceeds of any Advance made hereunder solely for
the purpose of (i) financing the purchasing and holding of Assets of the Borrower or (ii) for
general corporate purposes.




          (q) Perfection Representations, Warranties and Covenants. The Perfection
Representations, Warranties and Covenants set forth in Exhibit E shall be a part of this
Agreement for all purposes.




          SECTION 5.02. Negative Covenants of the Borrower.




          The Borrower covenants and agrees that the Borrower shall not:




          (a) Impairment of Rights. Enter into any agreement containing any provision which
would be violated or breached by the performance of its obligations under any Program Document.




          (b) Creation of Debt. Create, assume or suffer to exist any Debt or any Guarantee,
except for Permitted Debt.




          (c) Mergers; Sale of Assets. Adopt or carry out any plan of liquidation, partial
liquidation, reorganization, incorporation, recapitalization, merger or consolidation nor




49









 







sell, transfer or otherwise dispose of all or any substantial portion of its Assets (whether
in one transaction or a series of related transactions), without the prior written consent of the
Agent.




          (d) Investments. Purchase or acquire the obligations or stock of, or any other
interest in, or make loans, advances or capital contributions to, any Person, except such
obligations, stocks, loans, advances, capital contributions or other interests as comply with
Borrower’s Investment Policies and Restrictions.




          (e) Custodial Agreement; Investment Policies and Restrictions; Advisory Agreement.
Without the prior written consent of the Agent (i) cancel or terminate the Custodial Agreement,
(ii) permit or consent to any material amendment, modification or waiver of the Custodial Agreement
unless the Borrower has delivered to the Agent a copy thereof together with a certificate of a
Responsible Officer of the Borrower certifying that such amendment, modification or waiver could
not reasonably be expected to have a Material Adverse Effect, (iii) take any action inconsistent in
any material respect with the Prospectus or the Investment Policies and Restrictions, (iv) permit
or cause the Advisory Agreement to be terminated or (v) permit or cause the Advisory Agreement to
be amended, waived or otherwise modified in any respect that (A) could reasonably be expected to be
adverse to any Secured Party or (B) would require the consent or approval of the shareholders of
the Borrower; provided, that with respect to the foregoing clause (v) such consent of the
Agent shall not be unreasonably withheld; or.




          (f) Amendments to Organizational Documents. Amend, terminate, supplement or otherwise
modify its certificate of incorporation, by-laws or other organizational documents in any manner
that could reasonably be expected to be materially adverse to any Secured Party.




          (g) ERISA. (i) Become an ERISA Affiliate of any Person that has any liability to any
Plan, Multiemployer Plan or Benefit Arrangement or (ii) incur any liability or obligation with
respect to any Plan, Multiemployer Plan or Benefit Arrangement.




          (h) Liens. Create, assume or suffer to exist any Adverse Claim on any Asset now owned
or hereafter acquired by it.




          (i) Senior Securities. Issue any “senior securities”, as such term is defined and
used in the Investment Company Act, other than (i) shares of preferred stock of the Borrower with
respect to which the Agent has received prior written notice as to such issuance and (ii) Permitted
Senior Securities.




          (j) Margin Requirements. Extend credit to others for the purpose of buying or
carrying any “margin stock” in such a manner as to violate Regulation U or Regulation X or use any
portion of any Advance in violation of Regulation U or Regulation X.




          (k) Restricted Payments. Make any Restricted Payment (i) if any Default or Event of
Default shall be continuing or shall result therefrom, (ii) if immediately after giving effect to
such payment the Borrower will not be in full compliance with the Borrowing Base Test, the TRS
Portfolio Test and the Asset Coverage Test, (iii) at any time after the Agent shall have delivered
a Notice of Exclusive Control to the Custodian (unless such Notice of Exclusive Control has been
revoked in writing by the Agent), or (iv) at any time after the Maturity Date of





50









 







the Advances shall have occurred. Notwithstanding anything in clause (i) of this Section
5.02(k) to the contrary, the Borrower shall not be prohibited from making a Restricted Payment
which constitutes a dividend during the continuance of a Default if (i) such dividend was declared
prior to the occurrence of such Default, and (ii) after the payment of such dividend the Borrower
will be in full compliance with the Borrowing Base Test, the TRS Portfolio Test and the Asset
Coverage Test.




          (l) Name Change. Change its name (i) without giving the Agent at least thirty (30)
days prior written notice, and (ii) unless all actions necessary and appropriate to protect and
perfect the Secured Parties’ first priority perfected security interest in the Pledged Collateral
have been taken and completed.




          (m) Custodian’s Overdraft Advances. Permit the Aggregate Custodian’s Advance Amount
to at any time exceed $5,000,000.




          (n) Pledged Collateral; Notice of Exclusive Control. Without the prior written
consent of the Agent, sell, dispose of or substitute any Pledged Collateral or originate any
entitlement orders or other instructions with respect to any Pledged Collateral unless immediately
following any such sale, disposition or substitution the Borrower will be in full compliance with
the Borrowing Base Test and the TRS Portfolio Test. After the Borrower has received written notice
of delivery by the Agent to the Custodian of a Notice of Exclusive Control, unless such Notice of
Exclusive Control is revoked in writing by the Agent, give any instruction to the Custodian in
respect of the Pledged Collateral without the prior written consent of the Agent.




          (o) Equity Securities. Purchase or otherwise possess publicly-traded Equity
Securities or Convertible Securities issued by a single issuer that exceed (or are convertible into
Equity Securities that exceed) five percent (5%) of the aggregate Asset Value of the outstanding
Equity Securities of such issuer as the number of such Equity Securities are reported in the most
recent report or statement published by such issuer. Purchase publicly-traded Equity Securities or
Convertible Securities of any class issued by a single issuer that exceed (or are convertible into
publicly-traded Equity Securities of any class that exceed) the average reported weekly trading
volume of such class of Equity Security.




          (p) Subsidiaries. Establish any Subsidiaries without the prior written consent of the
Agent.




          (q) Industry Classifications. Without the prior written consent of the Agent, permit
any change in any industry classification criteria set forth on Schedule IV hereto.





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ARTICLE VI

EVENTS OF DEFAULT




          SECTION 6.01. Events of Default.




          If any of the following events (each an “Event of Default”) shall occur:




          (a) the Borrower or the Custodian shall fail to make or cause to be made in the manner and
when due any payment or deposit to be made or to be caused to be made by it under this Agreement or
any of the other Program Documents to which it is a party and such failure shall continue for (i)
in the case of any principal payments on any Advance (other than the failure to comply with Section
2.05(b) in which no grace period or requirement of notice shall apply), two (2) Business Days, and
(ii) in the case of all other payments (other than the failure to comply with Section 2.05(b) in
which no grace period or requirement of notice shall apply), three (3) Business Days; or




          (b) the Borrower shall (i) fail to be in compliance with the Asset Coverage Test, provided
that if a Responsible Officer of the Borrower has certified that the Borrower is taking all steps
necessary to cause the Borrower to be in full compliance with the Asset Coverage Test within five
(5) Business Days after such date of determination, such event shall not constitute an Event of
Default unless such non-compliance shall continue for five (5) Business Days after such date of
determination, (ii) fail to be in compliance with the TRS Portfolio Test, provided that if a
Responsible Officer of the Borrower has certified that the Borrower is taking all steps necessary
to cause the Borrower to be in full compliance with the TRS Portfolio Test within five (5) Business
Days after such date of determination, such event shall not constitute an Event of Default unless
such non-compliance shall continue for five (5) Business Days after such date of determination or
(iii) fail to comply with clause (b) of Section 2.05, clauses (d), (e)(iv), (e)(v), (g), (l) or (p)
of Section 5.01, Section 5.02 or Section 9.11; or




          (c) the Borrower or the Custodian shall fail to perform or observe any other term, covenant or
agreement on its part to be performed or observed under this Agreement or any other Program
Document and (except with respect to any such failure of the Custodian that gives rise to a
reasonable possibility of a Material Adverse Effect) such failure shall continue for thirty (30)
Business Days; or




          (d) any representation or warranty made or deemed made by the Borrower or the Custodian under
or in connection with this Agreement or any other Program Document or any other certificate,
information or report delivered by or on behalf of the Borrower or the Custodian shall be deemed to
have been false or incorrect in any material respect when made or deemed made or delivered; or




          (e) the Agent shall for any reason cease to have a valid and perfected first priority security
interest in the Pledged Collateral (subject to the Lien of the Custodian securing (i) the
Custodian’s Overdraft Advances to the extent permitted by Section 5.02(m), (ii) indemnification
payments owing by the Borrower in favor of the Custodian in an amount not to exceed $100,000 and
(iii) Permitted Expenses of the Custodian in an amount not to exceed $50,000) free and clear of all
Adverse Claims or the Custodian, as collateral agent and/or




52









 








securities intermediary under the Control Agreement, shall not have custody and control, as
contemplated by the Control Agreement, of the Pledged Collateral; or




          (f) the Borrower, the Adviser or the Custodian shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors; or any proceeding shall be instituted by or
against the Borrower, the Adviser or the Custodian seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, custodian or other similar official for it or for any substantial part of
its property and, in the case of any such proceeding instituted against it (but not instituted by
it), either (x) such proceeding shall remain undismissed or unstayed for a period of sixty (60)
days, (y) an order for relief against the Borrower shall have been entered and such order remains
unstayed for a period of sixty (60) days, or (z) an order shall have been entered appointing a
receiver, trustee, custodian or other similar official for it, or for any substantial part of its
property and such order remains unstayed and in effect for a period of sixty (60) days; or the
Borrower, the Adviser or the Custodian shall take any corporate action to authorize any of the
actions set forth above in this subsection; provided, however, that the occurrence
of any event set forth in this clause (f) in respect of the Custodian shall not constitute an Event
of Default if, prior to the day which is forty-five (45) days after the Borrower has actual
knowledge of circumstances which give rise to such event, a successor custodian, reasonably
satisfactory to the Agent, shall have been appointed as custodian under the Custodial Agreement and
shall have assumed the obligations of the Custodian under the Custodial Agreement and the Control
Agreement and the Agent shall have received such certificates and opinions as it shall have
reasonably requested, all in form, scope and substance reasonably satisfactory to the Agent; or




          (g) any provision of any Program Document shall cease to be a legal, valid and binding
obligation of any of the parties purported to be bound thereby, enforceable in accordance with its
respective terms or the Borrower or the Custodian shall so assert in writing; or




          (h) any judgment or order, or any series of judgments or orders, shall have been entered
against the Borrower, provided that (i) such judgments or orders shall aggregate to $5,000,000 or
more, and (ii) enforcement actions have been commenced with respect thereto and have not been
dismissed or stayed pending appeal for sixty (60) days of such entry; or




          (i) either (1) PFPC (or (i) an Affiliate of PFPC to the extent permitted to succeed PFPC as
Custodian under the Custodial Agreement without the consent of the Borrower or (ii) any other
successor approved of in writing by the Agent (such consent not to be unreasonably withheld)) shall
at any time cease to serve as Custodian under the Custodial Agreement or the Control Agreement,
unless a successor thereto reasonably satisfactory to the Agent shall have assumed the duties of
Custodian thereunder and in accordance with the terms of the Program Documents, or (2) the
Custodian shall have given notice of the termination of the Custodial Agreement or the Control
Agreement; provided, however, that the event specified in clause (2) above shall
not constitute an Event of Default if prior to the tenth (10th) Business Day immediately
preceding the effective date of such termination a successor custodian reasonably



53









 




satisfactory to the Agent shall have been appointed as custodian under the Custodial Agreement
and shall have assumed the obligations of the Custodian under the Custodial Agreement and the
Control Agreement and the Agent shall have received such certificates and opinions as it shall have
reasonably requested; or




          (j) any event or condition shall occur which results in the acceleration of the maturity of
any Debt of the Borrower which Debt in the aggregate is at least $5,000,000 or enables (or, with
the giving of notice or lapse of time or both would enable) the holder of such Debt or any Person
acting on such holder’s behalf to accelerate the maturity thereof; or




          (k) Highland Capital (or (i) an Affiliate of Highland Capital reasonably acceptable to the
Agent or (ii) any other Person acceptable to the Agent in its sole discretion) is not the current
investment adviser for the Borrower; or




          (l) the Adviser shall acquire all or substantially all of the assets of another Person, unless
the Agent has consented to the same in writing (such consent not to be unreasonably withheld);



then, and in any such event, in addition to all rights and remedies specified in this Agreement,
including without limitation, Article VII, and the rights and remedies of a secured party under
Applicable Law including, without limitation the UCC, the Agent, upon the direction of the Conduit
Lender, may, by notice to the Borrower, declare the Lender Termination Date and the Secondary
Lender Termination Date to have occurred and declare the outstanding Advances to be due and payable
(in which case the Lender Termination Date and the Secondary Lender Termination Date and the
Maturity Date shall be deemed to have occurred); provided that, upon the occurrence of any
event (without any requirement for the passage of time or the giving of notice, or both) described
in subsection (f) of this Section 6.01 with respect to the Borrower, the Lender Termination Date,
the Secondary Lender Termination Date and the Maturity Date shall be deemed to have automatically
occurred.




ARTICLE VII

PLEDGE OF PLEDGED COLLATERAL;

RIGHTS OF THE AGENT




          SECTION 7.01. Security Interests.




          In consideration of the Lenders and the Secondary Lenders making and maintaining the Advances,
and as collateral security for the prompt, complete and unconditional payment and performance of
all of the Borrower Obligations, the Borrower hereby grants to the Agent for the benefit of the
Secured Parties a continuing Lien upon and security interest in, all of the Borrower’s right, title
and interest in, to and under all of the Borrower’s accounts, equipment, fixtures, inventory,
investment property, payment intangibles, goods, chattel paper (both tangible and intangible),
general intangibles, letter-of-credit rights, financial assets, supporting obligations, commercial
tort claims, contract rights, instruments, promissory notes and documents, together with all books
and records, customer lists, credit files, computer files, programs, printouts and other computer
materials and records related thereto, and all products and proceeds thereof, whether now owned or
existing or hereafter arising or acquired and




54









 







wheresoever located, including, without limitation, each of the following (collectively, the
“Pledged Collateral”):





          (i) all of the cash, Assets, investments and property from time to time credited to the
Collateral Account, and all Security Entitlements with respect to the Collateral Account and
all Loan Assets of the Borrower evidenced by, secured by or governed by any Loan Document;




          (ii) the Collateral Account (together with all other accounts in which the
distributions referred to in clause (iii) below are remitted);




          (iii) all interest, dividends, stock dividends, stock splits, distributions and other
money or property of any kind distributed in respect of the Assets, investments, property
and Security Entitlements described in clause (i) above, including without limitation the
principal, interest, fees and other payments in respect of such Loan Assets;




          (iv) all rights and remedies of the Borrower under the Loan Documents and the Custodial
Agreement in respect of the Assets, investments, property and Security Entitlements
described in clause (i) above;




          (v) all security interests, liens, collateral, property, guaranties, supporting
obligations, insurance and other agreements or arrangements of whatever character from time
to time supporting or securing payment of the Assets, investments, property and Security
Entitlements described in clause (i) above;




          (vi) all accounts, contract rights, documents, instruments, securities, investment
property, chattel paper, general intangibles (including payment intangibles), inventory,
goods, equipment and all other property of every kind and nature, now owned or hereafter
acquired in respect of the Assets, investments, property and Security Entitlements described
in clause (i) above;




          (vii) all books, records and other information (including, without limitation, computer
programs, tapes, discs, punch cards, data processing software and related property and
rights) relating to the Assets, investments, property and Security Entitlements described in
clause (i) above; and




          (viii) all Proceeds of any and all of the foregoing.


Terms not otherwise defined in this Section 7.01 shall have the meaning set forth in Article 8 or
9, as applicable, of the New York UCC.




          SECTION 7.02. Substitution of Collateral and Release of Security Interest.




          (a) Subject to Section 5.02(n), so long as no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence of such sale, disposition or substitution and the
Borrowing Base Test and TRS Portfolio Test will be satisfied immediately following such sale,
disposition or substitution, the Borrower may originate entitlement orders and instructions with
respect to the Collateral Account and may sell or dispose of or substitute




55









 







Pledged Collateral in accordance with the terms of this Agreement and the Control Agreement.
The Agent and the Secured Parties acknowledge and agree that upon the sale or disposition of an
Asset which constitutes Pledged Collateral by the Borrower in compliance with the terms and
conditions of this Section 7.02(a), the security interest of the Secured Parties in such Asset
shall immediately terminate.




          (b) After the Program Termination Date, the Agent at the request of the Borrower shall
execute, deliver and file such instruments as the Borrower shall reasonably request in order to
reassign, release or terminate its security interest in the Pledged Collateral. Any and all
actions under this Section 7.02 shall be without any recourse to, or representation or warranty by,
the Agent or any Secured Party and shall be at the sole cost and expense of the Borrower.




          SECTION 7.03. Application of Proceeds.




          (a) After the occurrence and during the continuance of an Event of Default, all amounts
remitted to the Agent’s Account in respect of the Borrower Obligations, including without
limitation all Proceeds resulting from the sale or other disposition of the Pledged Collateral
shall be applied by the Agent in the following order and priority:




          First, to the payment of all amounts advanced or expended by the Agent and all costs
and expenses incurred by the Agent in connection with the enforcement of the Secured Parties’
rights and remedies under the Program Documents;




          Second, to the extent funds are remaining after the above application, to the Lenders
and the Secondary Lenders for the payment of all accrued and unpaid Yield on all outstanding
Advances on a pro-rata basis according to the amount of accrued Yield owing to each Lender and each
Secondary Lender;




          Third, to the extent funds are remaining after the above applications, to the Secured
Parties for the payment of all fees payable under the Fee Letter on a pro rata basis according to
the amount of such fees owing to each Secured Party;




          Fourth, to the extent funds are remaining after the above applications, to the Lenders
and the Secondary Lenders for the payment of the principal amount of each outstanding Advance on a
pro-rata basis according to the amount of principal owing to each Lender and each Secondary Lender;
and




          Fifth, to the extent funds are remaining after the above applications, to the Secured
Parties and any Affected Person for the payment of all other Borrower Obligations owing pursuant to
this Agreement and the other Program Documents on a pro rata basis according to the amounts owed to
each Person.




               The Agent shall, after the final payment in full of all Advances and the occurrence of the
Program Termination Date, remit the remaining excess Proceeds which it had received from the sale
or disposition of the Pledged Collateral to the Borrower’s Account.



56









 





          (b) For purposes of determining the application to be made of such monies and other cash
proceeds by the Agent to the Lenders and the Secondary Lenders pursuant to this Section 7.03, the
Agent may rely exclusively upon a certificate or other statement of a Lender or a Secondary Lender,
as the case may be, setting forth in reasonable detail the amount then owing to such Lender and
such Secondary Lender, as the case may be. The Agent shall not be liable for any application of
funds in accordance with any certificate or direction delivered pursuant to this Section 7.03;
provided, however, that no application of funds in accordance with any certificate
delivered pursuant to this Section 7.03 shall be deemed to restrict or limit the right of any party
to contest with the purported obligee its respective liability in respect of the amount set forth
in such certificate.




          SECTION 7.04. Rights and Remedies upon Event of Default.




          (a) The Agent (for itself and on behalf of the other Secured Parties) shall have all of the
rights and remedies of a secured party under the UCC and other Applicable Law, subject to
compliance with all contractual provisions applicable to Pledged Collateral which are required to
be complied with by the Agent. Upon the occurrence and during the continuance of an Event of
Default, the Agent or its designees may (i) deliver a Notice of Exclusive Control to the Custodian;
(ii) instruct the Custodian to deliver any or all of the Pledged Collateral and any Loan Documents
relating to the Pledged Collateral to the Agent or its designees and otherwise give all
instructions and entitlement orders to the Custodian regarding the Pledged Collateral; (iii)
require the Borrower to terminate the purchase of any additional Assets, whereupon the Borrower
agrees to cease purchasing Assets (other than, as set forth in the Control Agreement, with respect
to any transaction which is in the process of being executed prior to the delivery of a Notice of
Exclusive Control); (iv) in accordance with the Control Agreement, require that the Custodian
immediately take action to liquidate the Assets to pay amounts due and payable in respect of the
Borrower Obligations; (v) sell or otherwise dispose of the Pledged Collateral, all without judicial
process or proceedings; (vi) take control of the Proceeds of any such Pledged Collateral; (vii)
subject to the provisions of the applicable Loan Documents, exercise any consensual or voting
rights in respect of the Pledged Collateral; (viii) release, make extensions, discharges, exchanges
or substitutions for, or surrender all or any part of the Pledged Collateral; (ix) enforce the
Borrower’s rights and remedies under the Custodial Agreement with respect to the Pledged
Collateral; (x) institute and prosecute legal and equitable proceedings to enforce collection of,
or realize upon, any of the Pledged Collateral; (xi) require that the Borrower and the Custodian
immediately take action to liquidate the Assets to pay amounts due and payable in respect of the
Borrower Obligations; (xii) remove from the Borrower’s, the Adviser’s and their respective agents’
(other than, except as set forth in the Control Agreement, the Custodian) place of business all
books, records and documents relating to the Pledged Collateral unless copies thereof shall have
been provided to the Agent which copies of such books and records shall thereafter be deemed to be
originals thereof; and/or (xiii) notify all Selling Institutions, Transaction Agents and Obligors
related to the Loan Assets which constitute Pledged Collateral to make payments in respect thereof
directly to the Agent’s Account; (xiv) at the request of the Agent execute all documents and
agreements which are necessary or appropriate to have the Pledged Collateral which constitutes Loan
Assets to be assigned to the Agent or its designee; and (xv) endorse the name of the Borrower upon
any items of payment relating to the Pledged Collateral or upon any proof of claim in bankruptcy
against an account debtor. For purposes of taking the actions described in Subsections (i) through
(xv) of this Section 7.04(a) the Borrower




57









 







hereby irrevocably appoints the Agent as its attorney-in-fact (which appointment being coupled
with an interest is irrevocable while any of the Borrower Obligations remain unpaid), with power of
substitution, in the name of the Agent or in the name of the Borrower or otherwise, for the use and
benefit of the Agent, but at the cost and expense of the Borrower and without notice to the
Borrower. The Agent shall comply in all material respects with any applicable law binding upon it
with respect to its sale of the Pledged Collateral, including, without limitation, any obligation
to act in a commercially reasonable manner.




          (b) All sums paid or advanced by the Agent in connection with the foregoing and all costs and
expenses (including, without limitation, reasonable attorneys’ fees and expenses) incurred in
connection therewith, together with interest thereon at the Post-Default Rate from the date of
payment until repaid in full, shall be paid by the Borrower to the Agent on demand and shall
constitute and become a part of the Borrower Obligations secured hereby.




          SECTION 7.05. Remedies Cumulative.




          Each right, power, and remedy of the Agent and the other Secured Parties, or any of them, as
provided for in this Agreement or in the other Program Documents or now or hereafter existing at
law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in
addition to every other right, power, or remedy provided for in this Agreement or in the other
Program Documents or now or hereafter existing at law or in equity or by statute or otherwise, and
the exercise or beginning of the exercise by the Agent or any other Secured Party of any one or
more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by
such Persons of any or all such other rights, powers, or remedies.




          SECTION 7.06. Enforcement of Remedies under the Custodial Agreement and Loan
Documents.




          (a) The Borrower agrees that it shall (i) upon the request of the Agent (and at the Borrower’s
own expense) diligently enforce the rights and remedies under the Custodial Agreement and at law or
equity against the Custodian for the breach by the Custodian of any term, covenant or agreement
thereunder relating to or affecting any Pledged Collateral, and (ii) diligently enforce its rights
and remedies under the Loan Documents relating to the Pledged Collateral. The Borrower shall at
all times enforce its rights and remedies under the Custodial Agreement and the Loan Documents with
the same degree of care and diligence that it would exercise if this Agreement had not been entered
into; provided that the Borrower shall not, in enforcing such rights and remedies, settle
any claim against the Custodian without the prior written consent of the Agent (which consent shall
not be unreasonably withheld).




          (b) The Borrower agrees that to the extent not expressly prohibited by the terms of the
related Loan Documents, after the occurrence and during the continuance of an Event of Default, it
shall (i) upon the written request of the Agent promptly forward to the Agent all information and
notices which it receives under or in connection with the Loan Documents relating to the Pledged
Collateral, and (ii) act and refrain from acting in respect of any request, act, decision or vote
under the Loan Documents relating to the Pledged Collateral only in accordance with the direction
of the Agent.




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          SECTION 7.07. Authorization to File Financing Statements. The Borrower hereby
irrevocably authorizes the Agent at any time and from time to time to file in any filing office in
any UCC jurisdiction any initial financing statements and amendments thereto that indicate the
Pledged Collateral as all assets of the Borrower or words of similar effect or as being of an equal
or lesser scope or with greater detail.




ARTICLE VIII

THE AGENT




          SECTION 8.01. Authorization and Action.




          Each Lender and each of the Secondary Lenders hereby irrevocably appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers under this Agreement
and the other Program Documents as are delegated to the Agent by the terms hereof and thereof,
together with such powers as are reasonably incidental thereto. The Agent shall not have any duties
or responsibilities, except those expressly set forth herein or in the other Program Documents, or
any fiduciary relationship with any Secured Party, and no implied covenants, functions,
responsibilities, duties or obligations or liabilities on the part of the Agent shall be read into
this Agreement or any other Program Document or otherwise exist for the Agent. As to any matters
not expressly provided for by this Agreement or the other Program Documents, the Agent shall not be
required to exercise any discretion or take any action, but shall be required to act or to refrain
from acting (and shall be fully protected in so acting or refraining from acting) upon the
instructions of the Lenders or the Secondary Lenders; provided, however, that the
Agent shall not be required to take any action which exposes the Agent to personal liability or
which is contrary to this Agreement, the other Program Documents or Applicable Law. Each Lender
and each Secondary Lender agrees that in any instance in which the Program Documents provide that
the Agent’s consent may not be unreasonably withheld, provide for the exercise of the Agent’s
reasonable discretion, or provide to a similar effect, it shall not in its instructions to the
Agent withhold its consent or exercise its discretion in an unreasonable manner.




          SECTION 8.02. Delegation of Duties.




          The Agent may execute any of its duties under this Agreement and each other Program Document
by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable care.




          SECTION 8.03. Agent’s Reliance, Etc.




          Neither the Agent nor any of its directors, officers, agents or employees shall be liable for
any action taken or omitted to be taken by it or them under or in connection with this Agreement or
any of the other Program Documents, except for its or their own gross negligence or willful
misconduct. Without limiting the generality of the foregoing, the Agent: (i) may consult with
legal counsel (including counsel for the Borrower or the Adviser) and independent public
accountants and other experts selected by it and shall not be liable for any action taken or




59









 







omitted to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (ii) makes no warranty or representation to any Secured Party or any other
Person and shall not be responsible to any Secured Party or any Person for any statements,
warranties or representations (whether written or oral) made in or in connection with this
Agreement or the other Program Documents; (iii) shall not have any duty to ascertain or to inquire
as to the performance or observance of any of the terms, covenants or conditions of this Agreement,
the other Program Documents or any Loan Documents on the part of the Borrower, the Adviser, the
Custodian or any other Person or to inspect the property (including the books and records) of the
Borrower, the Adviser, the Custodian or any other Person; (iv) shall not be responsible to any
Secured Party or any other Person for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, the other Program Documents, any Loan Document
or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no
liability under or in respect of this Agreement or any other Program Document by acting upon any
notice, consent, certificate or other instrument or writing (which may be delivered by telecopier,
telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or
parties.




          SECTION 8.04. Indemnification.




          Each of the Secondary Lenders agrees to indemnify and hold the Agent harmless (to the extent
not reimbursed by or on behalf of the Borrower) from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted
against the Agent in any way relating to or arising out of this Agreement or any other Program
Document or any action taken or omitted by the Agent under this Agreement or any other Program
Document; provided that no Secured Party shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent’s gross negligence or willful misconduct. Without
limitation of the foregoing, each of the Secondary Lenders agrees to reimburse the Agent promptly
upon demand for any out-of-pocket expenses (including reasonable counsel fees) incurred by the
Agent in connection with the administration or enforcement (whether through negotiations, legal
proceedings or otherwise) or legal advice in respect of rights or responsibilities under this
Agreement or the other Program Documents, to the extent that the Agent is not reimbursed for such
expenses by or on behalf of the Borrower. Each Secondary Lender shall be obligated to pay its Pro
Rata Share of all amounts payable to the Agent under this Section 8.04. As used in this Section
8.04, the term “Pro Rata Share” in respect of any Secondary Lender means the fraction,
expressed as a percentage, the numerator of which is the Secondary Lender Commitment of such
Secondary Lender and the denominator of which is the Total Commitment.




          SECTION 8.05. Successor Agent.




          The Agent may, upon thirty (30) days’ notice to the Conduit Lender and the Secondary Lenders,
resign as Agent. If the Agent shall resign, then the Lenders during such thirty (30) day period
shall appoint from among the Secondary Lenders a successor agent. If for any reason a successor
agent is not so appointed and does not accept such appointment during such thirty (30) day period,
the Agent may appoint a successor agent. Any resignation of the




60









 







Agent shall be effective upon the appointment of a successor agent pursuant to this Section
8.05 and the acceptance of such appointment by such successor. After the effectiveness of any
retiring Agent’s resignation hereunder as Agent, the retiring Agent shall be discharged from its
duties and obligations hereunder and under the other Program Documents and the provisions of this
Article VIII and Section 9.04 shall continue in effect for its benefit with respect to any actions
taken or omitted to be taken by it while it was Agent under this Agreement and under the other
Program Documents.




          SECTION 8.06. Notice of Name Change.




          In the event the Agent shall receive notice from the Borrower pursuant to Section
5.02(l) that the Borrower intends to change its name, the Agent shall promptly provide notice
of such name change to each Rating Agency.




ARTICLE IX

MISCELLANEOUS




          SECTION 9.01. No Waiver; Modifications in Writing.




          No failure or delay on the part of any Secured Party in exercising any right, power or remedy
hereunder or with respect to the Advances shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right, power or remedy preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to any Secured Party, at law
or in equity. No amendment, modification, supplement, termination or waiver of this Agreement
shall be effective unless the same shall be in writing and signed by the Borrower, the Agent and
the Conduit Lender and the Rating Agency Condition shall have been satisfied with respect thereto.
Any waiver of any provision of this Agreement, and any consent to any departure by the Borrower
from the terms of any provision of this Agreement, shall be effective only in the specific instance
and for the specific purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar or other
circumstances.




          SECTION 9.02. Notices, Etc.




          Except where telephonic instructions are authorized herein to be given, all notices, demands,
instructions and other communications required or permitted to be given to or made upon any party
hereto shall be in writing and shall be personally delivered or sent by registered, certified or
express mail, postage prepaid, or by prepaid telegram (with messenger delivery specified in the
case of a telegram), or by facsimile transmission, or by prepaid courier service, and shall be
deemed to be given for purposes of this Agreement on the day that such writing is received by the
intended recipient thereof in accordance with the provisions of this Section 9.02. Unless
otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of
this Section 9.02, notices, demands, instructions and other communications in writing shall be
given to or made upon the respective parties hereto at their respective addresses (or to their
respective facsimile numbers) indicated below, and, in the case




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of telephonic instructions or notices, by calling the telephone number or numbers indicated
for such party below:




	 	 	 
	If to the Conduit Lender:

	 	LIBERTY STREET FUNDING LLC
	 

	 	c/o The Bank of Nova Scotia
	 

	 	One Liberty Plaza
	 

	 	New York, NY 10006
	 

	 	Attention: William Sun
	 

	 	Telephone No. 212-225-5331
	 

	 	Facsimile No. 212-225-5290
	 
	 	 
	If to the Agent:

	 	THE BANK OF NOVA SCOTIA
	 

	 	Asset-Backed Finance
	 

	 	One Liberty Plaza, 26th Floor
	 

	 	New York, NY 10006
	 

	 	Attention: Darren Ward
	 

	 	Telephone No. 212-225-5264
	 

	 	Facsimile No. 212-225-5274
	 
	 	 
	If to the Borrower:

	 	HIGHLAND DISTRESSED OPPORTUNITIES, INC.
	 

	 	13455 Noel Rd., Suite 800
	 

	 	Dallas, TX 75240
	 

	 	Attention: Joe Dougherty
	 

	 	Telephone No. 972-628-4100
	 

	 	Facsimile No. 972-628-4171
	 
	 	 
	If to a Rating Agency:

	 	To such address as the Agent shall specify from time to time.






          SECTION 9.03. Taxes.




          (a) Any and all payments by the Borrower under this Agreement, the Advance Notes or any other
Program Document shall be made, in accordance with this Agreement, free and clear of and without
deduction for any Indemnified Taxes. If the Borrower shall be required by law to deduct any
Indemnified Taxes from or in respect of any sum payable hereunder, under any Advance Note or under
any other Program Document to any Secured Party, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions applicable to
additional sums payable under this Section 9.03) such Secured Party receives an amount equal to the
sum it would have received had no such deductions been made, (ii) the Borrower shall make such
deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with Applicable Law.




          (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise from any payment made
by the Borrower hereunder, under the Advance Notes or under any




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other Program Document or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement, the Advance Notes or under any other Program Document (hereinafter
referred to as “Other Taxes”).




          (c) The Borrower will indemnify each of the Secured Parties for the full amount of Indemnified
Taxes or Other Taxes (including, without limitation, any Indemnified Taxes or Other Taxes imposed
by any jurisdiction on amounts payable under this Section 9.03) paid by any Secured Party in
respect of the Borrower and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were
correctly or legally asserted. This indemnification shall be made within thirty (30) days from the
date the Secured Party makes written demand therefor to the Borrower.




          (d) Within thirty (30) days after the date of any payment of Indemnified Taxes or Other Taxes,
the Borrower will furnish to the Agent the original or a certified copy of a receipt evidencing
payment thereof.




          (e) No increased payments by the Borrower to any Secured Party or Eligible Assignee shall be
required pursuant to this Section 9.03 if the applicable Secured Party or Eligible Assignee has not
complied with the requirements of this Section 9.03(e) unless such Secured Party or Eligible
Assignee is unable to comply with this Section 9.03(e) because of (x) a change in applicable law,
regulation or official interpretation thereof or (y) an amendment, modification or revocation of
any applicable tax treaty or a change in official position regarding the application or
interpretation thereof, in each case after the date hereof (or, in the case of any Eligible
Assignee, after the date of the applicable assignment):





          (i) Each Secured Party and Eligible Assignee that is a United States Person (as such
term is defined in Section 7701(a)(30) of the Code) shall deliver to the Borrower, in the
case of a Secured Party, on or prior to the Closing Date or, in the case of an Eligible
Assignee, on or prior to the date of such assignment, and at such other times as may be
necessary in the determination of the Borrower (in the reasonable exercise of its
discretion), two properly completed and duly executed originals of United States Internal
Revenue Service Form W-9 (or any successor form) certifying that such Secured Party or
Eligible Assignee is not subject to United States federal backup withholding tax.




          (ii) Each Secured Party and Eligible Assignee that is not a United States Person (as
such term is defined in Section 7701(a)(30) of the Code) shall deliver to the Borrower, in
the case of a Secured Party, on or prior to the Closing Date or, in the case of an Eligible
Assignee, on or prior to the date of such assignment, and at such other times as may be
necessary in the determination of the Borrower (in the reasonable exercise of its
discretion), either of the following:




          (x) if such Secured Party or Eligible Assignee is not (1) a “bank” as described
in Section 881(c)(3)(A) of the Code, (2) a 10% shareholder of the Borrower (within
the meaning of Section 871(h)(3)(B) of the Code) or (3) a controlled foreign
corporation related to the Borrower within the meaning of Section 864(d)(4) of the
Code, a statement, signed und penalty of perjury, to the



63









 







effect that such Secured Party or Eligible Assignee is eligible for a complete
exemption from withholding of United States federal income tax under the “portfolio
interest” exemption and two properly complete and duly executed originals of United
States Internal Revenue Service Form W-8BEN (or any successor form); or




          (y) two (2) properly completed and duly executed originals of United States
Internal Revenue Service Form W-8BEN or Form W-8ECI (or any successor forms),
certifying in either case that such Secured Party or Eligible Assignee is entitled
to receive any payment under this Agreement or any of the other Loan Documents
without deduction or withholding of any United States federal income tax, and such
other documentation required under the Code and reasonably requested by the Borrower
to establish that such Secured Party or Eligible Assignee is not subject to any such
deduction or withholding of United States federal income tax.



          (f) If any Secured Party or Eligible Assignee determines, in its sole discretion, that it has
received a refund with respect to any Indemnified Taxes or Other Taxes or with respect to which the
Borrower has paid additional amounts pursuant to Section 9.03, it shall promptly pay to the
Borrower an amount equal to such refund actually received (but only to the extent of the indemnity
payments made, or additional amounts paid, by the Borrower under this Section 9.03 with respect to
Indemnified Taxes or Other Taxes giving rise to such refund), net of all out of pocket expenses of
such Secured Party or Eligible Assignee; provided that the Borrower, upon the request of
such Secured Party or Eligible Assignee, agrees to repay the amount paid over to the Borrower to
such Secured Party or Eligible Assignee (plus any interest or other charges imposed by the relevant
Authority) in the event the Secured Party or Eligible Assignee is required to repay such refund to
an Authority.




          (g) Each Secured Party shall take all reasonable actions (consistent with its internal policy
and with legal and regulatory restrictions) requested by Borrower to assist Borrower, at the sole
expense of Borrower, to recover from the relevant Authority any Indemnified Taxes or Other Taxes in
respect of which amounts were paid by Borrower pursuant to Sections 9.03(a), (b) or (c). However,
a Secured Party will not be required to take any action that would be, in the sole judgment of such
Secured Party, legally inadvisable, or commercially or otherwise disadvantageous to such Secured
Party, and in no event shall such Secured Party be required to disclose any Tax returns or any
other information that, in the sole judgment of such Secured Party, is confidential.




          (h) Any Secured Party claiming any increased or additional payments pursuant to Section
9.03(a), (b) or (c) or that becomes aware that such increased or additional payment will be
required shall use its reasonable efforts (consistent with legal and regulatory restrictions) to
change the jurisdiction of its lending office or any other office from which such Secured Party
makes or maintains any extension of credit under any Loan Documents, if the making of such would
avoid the need for or reduce the amount of any such increased or additional payment amount that may
thereafter accrue. In addition, each Secured Party shall take all actions that would not result in
unreasonable costs, administrative burdens or other hardships on such Secured Party and that are
consistent with applicable Law to (i) maintain all exemptions




64









 







available to it from withholding taxes (whether available by treaty or administrative waiver)
and (ii) minimize any increased or additional payment amounts payable by the Borrower hereunder.




          SECTION 9.04. Costs and Expenses; Indemnification.




          (a) The Borrower agrees to promptly pay on demand all reasonable costs and expenses of each of
the Secured Parties (including, without limitation, the fees and disbursements of counsel (whether
through negotiations, legal proceedings or otherwise)), in connection with the preparation, review,
negotiation, reproduction, execution, delivery, administration, modification and amendment of this
Agreement, the Advance Notes or any other Program Document, including, without limitation, the
reasonable fees and disbursements of counsel for the Secured Parties with respect thereto and with
respect to advising the Secured Parties, as to its rights, remedies and responsibilities under this
Agreement and the other Program Documents, all actuarial fees, UCC filing fees, periodic auditing
expenses and all other related fees and expenses. The Borrower agrees to promptly pay on demand
all costs and expenses of each of the Secured Parties (including, without limitation, the fees and
disbursements of counsel (whether through negotiations, legal proceedings or otherwise)), in
connection with the enforcement of this Agreement, the Advance Notes or any other Program Document,
including, without limitation, the reasonable fees and disbursements of counsel for the Secured
Parties with respect thereto and with respect to advising the Secured Parties, as to its rights,
remedies and responsibilities under this Agreement and the other Program Documents.




          (b) In addition, the Borrower shall pay on demand in connection with the transaction
contemplated by the Program Documents, the applicable pro rata costs and expenses of the rating
agencies’ rating the Conduit Lender’s promissory notes.




          (c) The Borrower agrees to indemnify and hold harmless each Secured Party and each of their
Affiliates and the respective officers, directors, employees, agents, managers of, and any Person
controlling any of, the foregoing (each, an “Indemnified Party”) from and against any and
all claims, damages, losses, liabilities, obligations, expenses, penalties, actions, suits,
judgments and disbursements of any kind or nature whatsoever, (including, without limitation, the
reasonable fees and disbursements of counsel) (collectively the “Liabilities”) that may be incurred
by or asserted or awarded against any Indemnified Party, in each case arising out of or in
connection with or by reason of the execution, delivery, enforcement, performance, administration
of or otherwise arising out of or incurred in connection with this Agreement or any other Program
Document or any transaction contemplated hereby or thereby (and regardless of whether or not any
such transactions are consummated), including, without limitation any such Liability that is
incurred or arises out of or in connection with, or by reason of any one or more of the following:
(i) preparation for a defense of, any investigation, litigation or proceeding arising out of,
related to or in connection with this Agreement or any other Program Document or any of the
transactions contemplated hereby or thereby; (ii) any breach or alleged breach of any covenant by
the Borrower or the Custodian contained in any Program Document; (iii) any representation or
warranty made or deemed made by the Borrower or the Custodian, contained in any Program Document or
in any certificate, statement or report delivered in connection therewith is, or is alleged to be,
false or misleading; (iv) any failure by the Borrower or the Adviser to comply with any Applicable
Law or contractual obligation binding upon it; (v) any failure to vest, or delay in vesting, in the
Secured Parties a first priority perfected security




65









 







interest in all of the Pledged Collateral; (vi) any action or omission, not expressly
authorized by the Program Documents, by the Borrower or the Adviser which has the effect of
reducing or impairing the Pledged Collateral or the rights of the Agent or the Secured Parties with
respect thereto; (vii) any Default or Event of Default; and (viii) any claim that any Secured Party
has assumed any obligation or liability of the Borrower under any Loan Document or otherwise; and
(ix) any transactions related to the funding, carrying or repayment of the outstanding principal
amount of the Advances in connection with the Program Documents; except to the extent any
such Liability is found in a final, non-appealable judgment by a court of competent jurisdiction to
have resulted solely from such Indemnified Party’s gross negligence or willful misconduct.




          (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the
agreements and obligations of the Borrower contained in this Section 9.04 shall survive the
termination of this Agreement and the payment in full of principal and Yield on the Advances.




          SECTION 9.05. Execution in Counterparts.




          This Agreement may be executed in any number of counterparts and by different parties hereto
on separate counterparts, each of which counterparts, when so executed and delivered, shall be
deemed to be an original and all of which counterparts, taken together, shall constitute but one
and the same agreement.




          SECTION 9.06. Assignability.




          (a) This Agreement and the Conduit Lender’s rights and obligations herein (including the
outstanding Advances) shall be assignable by the Conduit Lender and its successors and assigns to
an Eligible Assignee; provided that without the prior written consent of the Borrower
(which consent shall not be unreasonably withheld or delayed and which consent shall in any event
not be required if an Event of Default shall have occurred and be continuing) such Conduit Lender
shall not assign its rights and obligations under this Agreement to any Person other than to a U.S.
Affiliate of the Agent which is a special purpose entity that issues promissory notes. Each such
assignor shall notify the Agent and the Borrower of any such assignment. Each such assignor may, in
connection with the assignment or participation, disclose to the assignee or participant any
information relating to the Borrower, including the Pledged Collateral, furnished to such assignor
by or on behalf of the Borrower or by the Agent; provided that, prior to any such
disclosure, the assignee or participant agrees to preserve the confidentiality of any confidential
information relating to the Borrower received by it from any of the foregoing entities.
Notwithstanding the foregoing, without the consent of the Borrower, the Conduit Lender may,
pursuant to the Asset Purchase Agreement or otherwise, sell, assign, transfer and convey all or any
portion of the Advances maintained by the Conduit Lender, together with all rights hereunder and
under the Program Documents in respect thereof, to BNS and any other bank or financial institution
which is also a Secondary Lender.




          (b) Each Secondary Lender may, with the written consent of the Borrower (which consent shall
not be unreasonably withheld or delayed and which consent shall, in any event, not be required if
an Event of Default shall have occurred and be continuing), assign to any Eligible Assignee or to
any other Secondary Lender all or a portion of its rights and




66









 







obligations under this Agreement (including, without limitation, all or a portion of its
Secondary Lender Commitment and the outstanding Advances or interests therein owned by it);
provided that the Borrower’s consent to any such assignment shall not be required if the
assignee is an existing Secondary Lender or a U.S. Affiliate of an existing Secondary Lender. The
parties to each such assignment shall execute and deliver to the Agent an Assignment and
Acceptance. Notwithstanding any other provision of this Section 9.06, any Secondary Lender may at
any time pledge or grant a security interest in all or any portion of its rights (including,
without limitation, rights to payment of principal and Yield) under this Agreement to secure
obligations of such Secondary Lender, without notice to or consent of the Borrower or the Agent;
provided that no such pledge or grant of a security interest shall release such Secondary Lender
from any of its obligations hereunder or substitute any such pledgee or grantee for such Secondary
Lender as a party hereto.




          (c) The Borrower may not assign its rights or obligations hereunder or any interest herein
without the prior written consent of the Agent.




          (d) The Borrower acknowledges and agrees that each Lender’s (other than the Conduit Lender)
and each Secondary Lender’s source of funds may derive in part from its participants. Accordingly,
references in Sections 2.06, 2.07, 2.08, 9.03 and 9.04 and the other terms and provisions of this
Agreement and the other Program Documents to rates, determinations, reserve and capital adequacy
requirements, accounting principles, expenses, increased costs, reduced receipts and the like as
they pertain to the Lender and the Secondary Lenders shall be deemed also to include those of each
of its participants; provided that the Borrower shall not be required to reimburse
a participant of a Secondary Lender pursuant to Sections 2.06, 2.07, 2.08, 9.03 and 9.04 in an
amount in excess of the amount that would have been payable to such Secondary Lender had such
participation not been made.




          (e) The Agent shall maintain at its address specified in Section 9.02 or such other address as
the Agent shall designate in writing to the Lenders and Secondary Lenders, a copy of this Agreement
and each signature page hereto and each Assignment and Acceptance delivered to and accepted by it
and a register (the “Register”) for the recordation of the names and addresses of the
Lender and Secondary Lenders, their Secondary Lender Commitment, effective dates and Secondary
Lender Stated Expiration Date, and the aggregate outstanding principal amount of the outstanding
Advances made by each Lender and Secondary Lender under this Agreement. The entries in the
Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower,
the Agent, the Lender and the Secondary Lenders shall treat each Person whose name is recorded in
the Register as a Lender or Secondary Lender, as applicable, hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower or any Secondary Lender
at any reasonable time and from time to time upon reasonable prior notice. No interest hereunder
may be transferred unless entered in the Register.




          SECTION 9.07. Governing Law.




          THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK,
AND FOR ALL PURPOSES




67









 







SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE.




          SECTION 9.08. Severability of Provisions.




          Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.




          SECTION 9.09. Confidentiality.




          (a) Each of the Secured Parties agrees (i) to keep all non-public information with respect to
the Borrower and the Adviser and their respective Affiliates which such Secured Party receives
pursuant to the Program Documents (collectively, the “Borrower Information”) confidential
and to disclose Borrower Information only to those of its officers, employees, agents, accountants,
legal counsel and other representatives of the Secured Parties (collectively, the “Secured
Party Representatives”), to providers of program-wide credit enhancement for the Conduit
Lender, and to S&P, Moody’s and any other rating agency that rates the promissory notes of the
Conduit Lender (collectively, the “Rating Agencies”) which, in each case, may have a need
to know or review such Borrower Information for the purpose of assisting in the negotiation,
completion, administration and evaluation of this Agreement; (ii) to use the Borrower Information
only in connection with this Agreement and not for any other purpose; and (iii) to cause its
related Secured Party Representatives to comply with the provisions of this Section 9.09(a).




          The provisions of this Section 9.09(a) shall not apply to any Borrower Information that is a
matter of general public knowledge or that has heretofore been made available to the public by any
Person other than any Secured Party or any Secured Party Representative or that is required to be
disclosed by applicable law or regulation or is requested by any Authority with jurisdiction over
any Secured Party or Secured Party Representative or any of its Affiliates.




          (b) Notwithstanding the foregoing, the Borrower Information may be disclosed by any Secured
Party Representative to permitted assignees and participants and potential assignees and
participants under this Agreement to the extent such disclosure is made pursuant to a written
agreement of confidentiality substantially similar to this Section 9.09.




          (c) The obligations of the Borrower, the Agent, each Secondary Lender and each Lender under
this section shall be in effect from the date of this Agreement until seven years from the date of
the termination of this Agreement




          SECTION 9.10. Merger.




          The Program Documents taken as a whole incorporate the entire agreement between the parties
thereto concerning the subject matter thereof. The Program Documents supersede any prior
agreements among the parties relating to the subject matter thereof.




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          SECTION 9.11. No Proceedings; No Recourse.




          Each of the Borrower, the Agent, the Secondary Lenders and each assignee of an Advance or any
interest therein and each entity which enters into a commitment to make Advances to the Borrower
hereunder hereby agrees that it will not institute against the Conduit Lender any proceeding of the
type referred to in Section 6.01(f) so long as any promissory notes or other senior indebtedness
issued by the Conduit Lender shall be outstanding or there shall not have elapsed one year plus one
day since the last day on which any such promissory notes or other senior indebtedness shall have
been outstanding. The obligations of the Conduit Lender under and in connection with this
Agreement and the other Program Documents are solely the obligations of the Conduit Lender. It is
expressly agreed that no recourse shall be had for the payment of any amount owing in respect of
this Agreement or any other Program Document or for any other obligation or claim arising out of or
based upon this Agreement or any other Program Document, against any member, stockholder, employee,
officer, manager, director, organizer or incorporator of the Conduit Lender or against any member,
stockholder, employee, officer, manager, director, organizer or incorporator of any such member,
stockholder or manager.




          SECTION 9.12. Survival of Representations and Warranties.




          All representations and warranties made hereunder, in the other Program Documents and in any
document, certificate or statement delivered pursuant hereto or thereto or in connection herewith
or therewith shall survive the execution and delivery of this Agreement and the making of the
Advances hereunder. The agreements in Sections 9.03, 9.04, 9.09 and 9.11 shall survive the
termination of this Agreement.




          SECTION 9.13. Loan Documents.




          No obligation or liability of the Borrower is intended to be assumed by the Agent or any other
Secured Party under or as a result of this Agreement or the other Program Documents, and the
transactions contemplated hereby and thereby, including, without limitation, under any Loan
Document and, to the maximum extent permitted under provisions of law, the Agent and the other
Secured Parties expressly disclaim any such assumption. The Borrower shall indemnify, defend and
hold harmless the Agent and the other Secured Parties from any loss, liability or expense incurred
as a result of any claim that any such obligation or liability has been so assumed.




          If an Event of Default under Section 6.01(f) in respect of the Borrower shall have occurred
and is continuing or the Agent shall have delivered a Notice of Exclusive Control to the Custodian,
and such notice has not been revoked by the Agent, the Borrower will use its best efforts to obtain
and give all necessary consents under all Loan Documents relating to any Pledged Collateral and
execute and deliver all agreements and documents which are necessary or appropriate in order to
enable the Secured Parties to enforce their rights and remedies hereunder and under the other
Program Documents, including without limitation, to permit the Pledged Collateral which constitutes
Loan Assets to be assigned to the Agent or its designees. In addition, the Borrower shall pay all
assignment fees which are required to be paid pursuant to the Loan Documents relating to the
Pledged Collateral in connection with the foregoing. The Agent




69









 







and the Secured Parties acknowledge that in order to enforce certain of their remedies in
respect of the Pledged Collateral which constitutes Loan Assets after the occurrence of an Event of
Default, certain provisions of the related Loan Documents may need to be complied with, including
provisions requiring the consent of the related Transaction Agent and/or Obligor.




          SECTION 9.14. Submission to Jurisdiction; Waivers; Etc.




          The Borrower hereby irrevocably and unconditionally:




          (a) submits for itself and its property in any legal action or proceeding relating to this
Agreement or the other Program Documents to which it is a party, or for recognition and enforcement
of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the
State of New York, the courts of the United States of America for the Southern District of New
York, and the appellate courts of any of them;




          (b) consents that any such action or proceeding may be brought in any of such courts and
waives any objection that it may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in an inconvenient court
and agrees not to plead or claim the same;




          (c) agrees that service of process in any such action or proceeding may be effected by mailing
a copy thereof by registered or certified mail (or any substantially similar form of mail), postage
prepaid, to the Borrower at its address set forth in Section 9.02 or at such other address as may
be permitted thereunder;




          (d) agrees that nothing herein shall affect the right to effect service of process in any
other manner permitted by law or shall limit the right to sue in any other jurisdiction or court;




          (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or
recover in any legal action or proceeding against any Secured Party arising out of or relating to
this Agreement or any other Program Document any special, exemplary, punitive or consequential
damages; and




          (f) acknowledges and agrees that in addition to any right of setoff, banker’s lien or
counterclaim a Secured Party may otherwise have, each Secured Party shall be entitled, at its
option, to set-off any amount owing by it to the Borrower or any balances held by it for the
account of the Borrower against any Borrower’s Obligations which is not paid when due.




          SECTION 9.15. E-Mail Reports.




          Subject to the following terms and conditions the Borrower may, unless otherwise notified to
the contrary by the Agent, transmit Investor Reports and Weekly Portfolio Reports to the Agent by
electronic mail (each an “E-Mail Report”). Each E-Mail Report shall be formatted as the
Agent may designate from time to time. Each E-Mail Report shall be sent to the Agent at an
electronic mail address designated by the Agent, and the executed “summary sheet” for each E-Mail
Report shall be transmitted via facsimile transmission to the Agent at the facsimile numbers
specified for the Agent in Section 9.02.




70









 








          SECTION 9.16. Waiver of Jury Trial.




          EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY
LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER PROGRAM DOCUMENT OR FOR ANY
COUNTERCLAIM THEREIN OR RELATING THERETO.




          SECTION 9.17. Several Obligations.




          Except for the commitment of the Secondary Lenders to make Advances if the Conduit Lender has
declined to make an Advance to the extent expressly required by Section 2.02, no Lender or
Secondary Lender shall be responsible for the failure of any other Lender or Secondary Lender to
make any Advance or to perform any obligation on this Agreement or any other Program Document. The
Agent shall not have any liability to the Borrower, any Lender or any Secondary Lender for the
Borrower’s, any Lender’s or any Secondary Lender’s, as the case may be, performance of, or failure
to perform, any of their respective obligations and duties under this Agreement or any other
Program Document. The Agent shall not have any liability to the Borrower, any Lender or any
Secondary Lender for the Borrower’s, any Lender’s or any Secondary Lender’s, as the case may be,
performance of, or failure to perform, any of their respective obligations and duties under this
Agreement or any other Program Document.




[REMAINDER OF PAGE INTENTIONALLY BLANK]




71









 








          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their
respective officers thereunto duly authorized, as of the date first above written.




	 	 	 	 	 
	 	HIGHLAND DISTRESSED OPPORTUNITIES, INC., 

as Borrower

 	 
	 	By:  	/s/ Joe Dougherty
 	 
	 	 	Name:  	Joe Dougherty 	 
	 	 	Title:  	Senior Vice President 	 
	 



Signature Page to

Revolving Credit and Security Agreement





 









 








	 	 	 	 	 
	 	LIBERTY STREET FUNDING LLC,

as Conduit Lender

 	 
	 	By:  	/s/ Jill A. Gordon
 	 
	 	 	Name:  	Jill A. Gordon 	 
	 	 	Title:  	Vice President 	 
	 



Signature Page to

Revolving Credit and Security Agreement





 









 








	 	 	 	 	 
	 	THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Agent

 	 
	 	By:  	/s/ Norman Last
 	 
	 	 	Name:  	Norman Last 	 
	 	 	Title:  	Managing Director 	 
	 



Signature Page to

Revolving Credit and Security Agreement




 









 








	 	 	 	 	 
	 	THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Secondary Lender

 	 
	 	By:  	/s/ Norman Last
 	 
	 	 	Name:  	Norman Last 	 
	 	 	Title:  	Managing Director

Percentage: 100% 	 
	 



Signature Page to

Revolving Credit and Security Agreement





 









 








SCHEDULE I




Certain Borrowing Base Advance Rates





     The Borrowing Base Advance Rate with respect to any Bond Asset, Second Lien Loan Asset or
Senior Unsecured Loan Asset shall be determined according to the chart set forth below as the rate
corresponding to the lower of the Moody’s Rating and S&P Rating applicable to such Asset;
provided, that (a) if such Asset is rated by only S&P, the Borrowing Base Advance Rate with
respect thereto shall be the rate corresponding to such rating and (b) if such Asset is rated only
by Moody’s or is rated by neither Moody’s nor S&P, the Borrowing Base Advance Rate with respect
thereto shall be the rate corresponding to the rating one level below the Moody’s Rating applicable
to such Asset (or, if such Asset is unrated by Moody’s, the rate corresponding to the rating one
level below the Moody’s Rating that, in the reasonable judgment of that the Adviser, is equivalent
to the credit quality of such Asset); provided, further, that the Borrowing Base
Advance Rate with respect to any such Asset that constitutes a Distressed Bond Asset or Distressed
Loan Asset shall be 0.0%.



	 	 	 	 	 
	 	 	 	 	Borrowing Base
	S&P Rating	 	Moody’s Rating	 	Advance Rate
	AAA
	 	Aaa
	 	90.2%
	AA+
	 	Aa1
	 	88.9%
	AA
	 	Aa2
	 	87.7%
	AA-
	 	Aa3
	 	86.7%
	A+
	 	A1
	 	85.1%
	A
	 	A2
	 	84.3%
	A-
	 	A3
	 	83.1%
	BBB+
	 	Baa1
	 	81.1%
	BBB
	 	Baa2
	 	79.9%
	BBB-
	 	Baa3
	 	78.5%
	BB+
	 	Ba1
	 	64.6%
	BB
	 	Ba2
	 	64.2%
	BB-
	 	Ba3
	 	60.8%
	B+
	 	B1
	 	55.9%
	B
	 	B2
	 	49.6%
	B-
	 	B3
	 	43.5%
	CCC+
	 	Caa1
	 	41.9%
	CCC
	 	Caa2
	 	32.1%
	CCC-
	 	Caa3
	 	19.3%






 









 






SCHEDULE II




FORM OF INVESTOR REPORT




See attached.




 









 





	 	 	 
	 

	 	Annex A
	 

	 	to
	 

	 	Schedule II






Investor Report Officer’s Certificate




     The undersigned,
_______________, [INSERT TITLE] of HIGHLAND DISTRESSED
OPPORTUNITIES, INC. (the “Borrower”) pursuant to Section 5.01(e)(ix) of that certain Revolving
Credit and Security Agreement, dated as of June 27, 2008 (the “Credit Agreement”) among the
Borrower, LIBERTY STREET FUNDING LLC, as Conduit Lender, THE BANK OF NOVA SCOTIA, ACTING THROUGH
ITS NEW YORK AGENCY, the other banks and financial institutions parties thereto and THE BANK OF
NOVA SCOTIA, ACTING THROUGH ITS NEW YORK AGENCY, as agent (the “Agent”), as the same may be
amended, modified or supplemented from time to time, hereby certifies that:




	 	1.	 	The Investor Report furnished herewith to the Agent pursuant to Section
5.01(e) of the Credit Agreement is true, accurate and complete as of the date
hereof.

	 
	 	2.	 	Except as expressly disclosed in writing to the Agent, no event has occurred
and is continuing which would constitute a Default or an Event of Default.

	 
	 	3.	 	Except as expressly disclosed in writing to the Agent, as of the date hereof,
the Borrower is in compliance with the Borrowing Base Test, the TRS Portfolio Test and
the Asset Coverage Test.






     Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to
such terms in the Credit Agreement.



     IN WITNESS WHEREOF, the undersigned has duly signed on behalf of the Borrower as of the date
set forth below.



	 	 	 
	DATED: __________________
	 	 
	 

	 	Name:
	 

	 	Title:






 









 






SCHEDULE III




FORM OF WEEKLY PORTFOLIO REPORT




See attached.




 









 





	 	 	 
	 

	 	Annex A
	 

	 	to
	 

	 	Schedule II






Weekly Portfolio Report and Officer’s Certificate




     The undersigned, __________________, [INSERT TITLE] of HIGHLAND DISTRESSED
OPPORTUNITIES, INC. (the “Borrower”) pursuant to Section 5.01(e)(viii) of that certain Revolving
Credit and Security Agreement, dated as of June 27, 2008 (the “Credit Agreement”) among the
Borrower, LIBERTY STREET FUNDING LLC, as Conduit Lender, THE BANK OF NOVA SCOTIA, ACTING THROUGH
ITS NEW YORK AGENCY, the other banks and financial institutions parties thereto and THE BANK OF
NOVA SCOTIA, ACTING THROUGH ITS NEW YORK AGENCY, as agent (the “Agent”), as the same may be
amended, modified or supplemented from time to time, hereby certifies that:



     The aggregate
outstanding principal balance of Advances as of the date hereof is $_________.



     The aggregate Borrowing Base Asset Value of Borrowing Base Eligible Assets as of the date
hereof is $_________. The Borrowing Base as of the date hereof is $_________.



     The aggregate TRS Asset Value of TRS Eligible Assets as of the date hereof is $_________.
The TRS Portfolio Value as of the date hereof is $_________.



     Except as expressly disclosed in writing to the Agent, no event has occurred and is continuing
which would constitute a Termination Event, Default or an Event of Default.



     The Weekly Portfolio Report to which this certificate is attached is true, accurate and
complete.



     Except as expressly disclosed in writing to the Agent, as of the date hereof, the Borrower is
in compliance with the Borrowing Base Test, the TRS Portfolio Test and the Asset Coverage Test.



     Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to
such terms in the Credit Agreement.



     IN WITNESS WHEREOF, the undersigned has duly signed on behalf of the Borrower as of the date
set forth below.



	 	 	 
	DATED: _____________________
	 	 
	 

	 	Name:
	 

	 	Title:







 













 





SCHEDULE IV




INDUSTRY CLASSIFICATION CRITERIA




Aerospace and Defense

Automobile

Banking

Beverage, Food and Tobacco

Buildings and Real Estate

Chemicals, Plastics and Rubber

Containers, Packaging and Glass

Personal and Non Durable Consumer Products (Manufacturing Only)

Diversified/Conglomerate Manufacturing

Diversified/Conglomerate Service

Diversified Natural Resources, Precious Metals and Minerals

Ecological

Electronics

Finance

Farming and Agriculture

Grocery

Healthcare, Education and Childcare

Home and Office Furnishings, Housedress, and Durable Consumer Products

Hotels, Motels, Inns and Gaming

Insurance

Leisure, Amusement, Entertainment

Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

Mining, Steel, Iron and Non-Precious Metals

Oil and Gas

Personal, Food and Miscellaneous

Printing and Publishing

Cargo Transport

Retail Stores

Structured Finance

Telecommunications

Textiles and Leather

Transportation

Utilities

Broadcasting and Entertainment




 









 





SCHEDULE V




SCOPE OF AUDIT




Agreed — Upon Procedures to be Performed Annually by External Auditors




     Select three Investor Reports, including the monthly Investor Report corresponding to the
Borrower’s year-end (the “Year-End Investor Report”). Perform the following procedures for
each Investor Report, except as otherwise specified:



I. Calculation of the Borrowing Base





	1.	 	Agree the aggregate Borrowing Base Asset Value of Borrowing Base Eligible Assets and the
aggregate Borrowing Base Adjusted Asset Value of Borrowing Base Eligible Assets to the
Calculations worksheet. Additionally, agree Cash to the Borrower’s supporting documentation.







	2.	 	Agree all Borrowing Base Excess Concentrations the total of Sections [___] of
the Investor Reports.

	 
	3.	 	Recalculate the Borrowing Base.






II. Calculation of the TRS Portfolio Value





	1.	 	Agree the aggregate TRS Asset Value of TRS Eligible Assets and the aggregate TRS Adjusted
Asset Value of TRS Eligible Assets to the Calculations worksheet.







	2.	 	Agree all TRS Excess Concentrations the total of Sections [___] of the
Investor Reports.

	 
	3.	 	Recalculate the TRS Portfolio Value.






III. Calculation of Credits Outstanding





	1.	 	Recalculate the principal balance of the Advances.

	 
	2.	 	Recalculate the accrued Yield for 30 Days (accrued Yield is calculated at the Assignee Rate
(1-Month LIBOR plus the Applicable Margin)).

	 
	3.	 	Agree Custodian Overdraft Amounts outstanding (if any) to the Borrower’s supporting
documentation.

	 
	4.	 	Recalculate Credits Outstanding.






IV. Compliance Tests





	1.	 	Recalculate compliance with the Borrowing Base Test as defined in the Program Documents.

	 
	2.	 	Recalculate compliance with the Asset Coverage Test as defined in the Program Documents.





 









 






	3.	 	Recalculate compliance with the TRS Portfolio Test as defined in the Program Documents.






V. Excess Obligor Concentration (Borrowing Base)





	1.	 	Select the top ten obligors in this section and perform the following steps:







	 	•	 	Verify the accuracy of the obligor rating in the Calculation worksheet.

	 
	 	•	 	Verify that the Borrowing Base Advance Rate applied in the Calculation worksheet
corresponds to the Program Documents.

	 
	 	•	 	Recalculate the Borrowing Base Adjusted Asset Value in the Calculation worksheet.







	2.	 	Recalculate the Excess Concentrations (for each obligor and in aggregate).

	 
	3.	 	Determine if outstanding balances among affiliated obligors are being properly aggregated in
calculating the total outstanding balance.






VI. Excess Industry Concentration (Borrowing Base)





	1.	 	Select five industries (based on highest aggregate Borrowing Base Adjusted Asset Value per
industry) in this section and perform the following steps:







	 	•	 	Agree the industry name in the Calculation worksheet to the Borrower’s supporting
documentation.

	 
	 	•	 	Recalculate the aggregate Borrowing Base Adjusted Asset Value per industry.







	2.	 	Recalculate the Excess Concentrations (for each industry and in aggregate).






VII. Other Excess Concentrations (Borrowing Base)





	1.	 	Single Asset Type

	 
	 	 	For one (selected at random) of the types of Asset Type Concentration listed on the Report
worksheet perform the following steps:







	 	•	 	Verify the accuracy of the asset type in the Calculation worksheet.

	 
	 	•	 	Recalculate the aggregate Borrowing Base Adjusted Asset Value for such Asset Type
Concentration.

	 
	 	•	 	Recalculate the Excess Concentrations (by category and in aggregate).







	2.	 	Single Developed Market

	 
	 	 	Select one Developed Market (based on highest aggregate Borrowing Base Adjusted Asset Value) in
this section and perform the following steps:







	 	•	 	Agree the country name in the Calculations worksheet to the Borrower’s supporting
documentation.

	 
	 	•	 	Recalculate the aggregate Borrowing Base Adjusted Asset Value for such Developed
Market.





 









 






	 	•	 	Recalculate the Excess Concentrations (by category and in total) for each Developed
Market.






VIII. Borrowing Base Eligible Asset Test





	1.	 	Select a sample of 25 Borrowing Base Eligible Assets from the Calculation worksheet. Agree
the information by obligor in the Calculation worksheet to the Borrower’s supporting
documentation.







	2.	 	For the sample selected in step 1, test that the Assets satisfy the criteria for Borrowing
Base Eligible Assets per the Program Documents.






IX. TRS Portfolio Value





	1.	 	Select a sample of 25 TRS Eligible Assets from the Calculation worksheet. Agree the
information by obligor in the Calculation worksheet to the Borrower’s supporting
documentation.







	2.	 	For the sample selected in step 1, test that the Assets satisfy the criteria for TRS Eligible
Assets per the Program Documents.






X. Excess Concentrations (TRS Portfolio Value)





	1.	 	Recalculate the Excess Concentrations set forth in the definition of TRS Portfolio Excess
Amount.






XI. Calculation Worksheet





	1.	 	Agree the total market value of Assets of Borrower to the Borrower’s supporting documentation
and agree the market value of all Assets of Borrower on the Year-End Investor Report to the
total of the portfolio of investments included in the Borrower’s audited financial statements.





 









 











SCHEDULE VI




[Reserved]




 









 








SCHEDULE VII




PRINCIPAL OFFICE




13455 Noel Rd., Suite 800

Dallas, TX 75420





 









 








SCHEDULE VIII




FOREIGN CURRENCY BORROWING BASE ADVANCE RATES




	 	 	 	 	 
	Foreign Currency	 	Foreign Currency Borrowing Base Advance Rate
	 
	 	 	 	 
	Australian Dollar
	 	 	85.68	%
	British Pound
	 	 	89.29	%
	Canadian Dollar
	 	 	90.46	%
	Danish Krone
	 	 	86.65	%
	Euro
	 	 	87.24	%
	Icelandic Krona
	 	 	86.06	%
	Japanese Yen
	 	 	85.57	%
	New Zealand Dollar
	 	 	84.49	%
	Norwegian Krone
	 	 	85.83	%
	Swedish Krona
	 	 	85.60	%
	Swiss Franc
	 	 	85.77	%






 









 






SCHEDULE IX




CLOSING DATE TRS ELIGIBLE ASSETS




See attached.




 









 





EXHIBIT A




FORM OF ADVANCE NOTE




ADVANCE NOTE




	 	 	 
	$                    

	 	                    , ___






     FOR VALUE RECEIVED, on the Maturity Date (as defined in the Credit Agreement hereinafter
referred to) of each Advance made by the [Conduit Lender] [Secondary
Lender] to the undersigned (the “Borrower”) pursuant to the Credit Agreement (defined
below), the Borrower hereby promises to pay [INSERT NAME OF CONDUIT LENDER OR SECONDARY
LENDER] (together with its successors and assigns the [”Conduit Lender“]
[”Secondary Lender“]) the unpaid principal amount of each such Advance, in
immediately available funds and in lawful money of the United States of America, and to pay Yield
on the unpaid balance of said principal Advance from the Borrowing Date thereof, until the
principal amount thereof shall have been paid in full, in like funds and money as provided in said
Credit Agreement for Advances made by the [Conduit Lender] [Secondary
Lender] and at the maturity thereof. Capitalized terms used in this promissory note unless
otherwise defined herein shall have the meaning assigned to such terms in the Credit Agreement.



     This promissory note is an Advance Note referred to in the Revolving Credit and Security
Agreement dated as of June 27, 2008 (as from time to time amended, modified, or supplemented, the
“Credit Agreement”) among the Borrower, [the Conduit Lender], [Secondary
Lender], the other banks and financial institutions parties thereto, and The Bank of Nova
Scotia, acting through its New York Agency, as agent. The date and principal amount of each
Advance made to the Borrower and of each repayment of principal thereon shall be recorded by the
[Conduit Lender] [Secondary Lender] or its designee on Schedule II
attached to this Advance Note, and the aggregate unpaid principal amount shown on such schedule
shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Advances
made by the [Conduit Lender] [Secondary Lender]. The failure to
record or any error in recording any such amount on such schedule shall not, however, limit or
otherwise affect the obligations of the Borrower hereunder or under the Credit Agreement to repay
the principal amount of the Advances together with all Yield accrued thereon.



A-1









 




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




	 	 	 	 	 
	 	HIGHLAND DISTRESSED OPPORTUNITIES, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 



A-2









 






	 	 	 	 	 



SCHEDULE II

TO EXHIBIT A




          This Advance Note evidences Advances made by [INSERT NAME OF CONDUIT LENDER OR
SECONDARY LENDER], (the [”Conduit Lender“] [”Secondary
Lender“]) under the Revolving Credit and Security Agreement dated as of June 27, 2008 (as
from time to time amended, modified, or supplemented, the “Credit Agreement”) among the Borrower,
LIBERTY STREET FUNDING LLC, as Conduit Lender, THE BANK OF NOVA SCOTIA, ACTING THROUGH ITS NEW YORK
AGENCY, the other banks and financial institutions parties thereto and THE BANK OF NOVA SCOTIA,
ACTING THROUGH ITS NEW YORK AGENCY, as agent, in the principal amounts and on the dates set forth
below, subject to the payments and prepayments of principal set forth below:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	PRINCIPAL	 	PRINCIPAL	 	PRINCIPAL	 	 
	 	 	 	 	AMOUNT	 	AMOUNT PAID	 	BALANCE	 	NOTATION
	DATE	 	ADVANCED	 	OR PREPAID	 	OUTSTANDING	 	BY





A-3









 






EXHIBIT B




FORM OF NOTICE OF BORROWING




THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Agent

Asset-Backed Finance

One Liberty Plaza, 26th Floor

New York, NY 10006

Attention: Darren Ward




NOTICE OF BORROWING




          This Notice of Borrowing is made pursuant to Section 2.02 of that certain Revolving Credit and
Security Agreement dated as of June 27, 2008, among LIBERTY STREET FUNDING LLC, as lender (the
“Conduit Lender”), The Bank of Nova Scotia, acting through its New York Agency, and the other
lenders parties thereto, The Bank of Nova Scotia, acting through its New York Agency, as agent and
Highland Distressed Opportunities, Inc., as borrower (the “Borrower”) (as the same may from time to
time be amended, supplemented, waived or modified, the “Credit Agreement”). Unless otherwise
defined herein, capitalized terms used herein have the meanings assigned to those terms in the
Credit Agreement.




          1. The Borrower hereby requests that on                     , ___(the “Borrowing Date”) it
receive borrowings under the Credit Agreement in an aggregate principal amount of                     
Dollars ($___) (the “Requested Amount”).




          2. The Borrower hereby gives notice of its request for an Advance or Advances in the
aggregate principal amount equal to the Requested Amount to the Agent pursuant to Section 2.02 of
the Credit Agreement and requests the Conduit Lender or the Secondary Lender remit, or cause to be
remitted, the proceeds thereof to [the Borrower’s Account] [SPECIFY
ACCOUNT, IF APPLICABLE].




          3. The Borrower certifies that (i) the representations and warranties of the Borrower
contained or reaffirmed in Section 4.01 of the Credit Agreement are true and correct in all
material respects on and as of the date hereof to the same extent as though made on and as of the
date hereof (except to the extent such representations and warranties expressly relate to any
earlier date); (ii) no Default or Event of Default has occurred and is continuing under the Credit
Agreement or will result from the proposed borrowing; (iii) the Borrower has performed in all
material respects all agreements and satisfied all conditions under the Credit Agreement to be
performed by it on or before the date hereof; (iv) the conditions precedent to the making of the
proposed borrowings set forth in Article III of the Credit Agreement have been fully satisfied;
(v) immediately after the making of any such Advance, the aggregate outstanding principal amount of
all Advances shall not exceed the Total Commitment for the Borrower (or such lesser amount as shall
be specified in Section 2.01); and (vi) immediately after giving effect to such


B-1









 







           Advance, the aggregate credit extended by the Lenders and the Secondary Lenders under the
Credit Agreement does not exceed the sum of (x) the Margin Stock Percentage of the current market
value (as defined in Regulation U) of all Margin Stock of the Borrower as specified in Annex
A hereto, plus, (y) the good faith loan value (as determined in accordance with Regulation U)
of all other Assets of the Borrower as specified in Annex A hereto. It is the intent of
the parties to the Credit Agreement that Annex A to this Notice of Borrowing shall constitute an
amendment to the Form FR U-1 or Form FR G-3 purpose statement executed by the applicable Lenders or
Secondary Lenders funding an Advance in connection with this Notice of Borrowing, which amendment
shall be attached to such purpose statement as required by Section 221.3(c)(iv) of Regulation U.
The Borrower further represents and warrants that it owns the Pledged Collateral free and clear of
any Adverse Claims and that the attached current list of collateral of the Borrower adequately
supports all credit extended under the Credit Agreement as determined in accordance with Regulation
U.





B-2











 




          WITNESS my hand on this       day of                     ,      .



	 	 	 	 	 
	 	
HIGHLAND DISTRESSED OPPORTUNITIES, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 




B-3









 





Annex A




[CURRENT LIST OF COLLATERAL OF BORROWER WHICH ADEQUATELY

SUPPORTS ALL CREDIT EXTENDED UNDER THE CREDIT AGREEMENT]





B-4









 








EXHIBIT C




FORM OF ASSIGNMENT AND ACCEPTANCE




ASSIGNMENT AND ACCEPTANCE




          Reference is made to the Revolving Credit and Security Agreement dated as of June 27, 2008 (as
amended, supplemented or otherwise modified from time to time, the “Credit Agreement”) among
LIBERTY STREET FUNDING LLC (together with its successors and assigns, the “Conduit Lender”), The
Bank of Nova Scotia, ACTING THROUGH ITS NEW YORK AGENCY, together with the other banks and
financial institutions from time to time parties to the Credit Agreement (the “Secondary Lenders”),
The Bank of Nova Scotia, ACTING THROUGH ITS NEW YORK AGENCY, as agent for the Secondary Lenders (in
such capacity, together with its successors and assigns, the “Agent”) and HIGHLAND DISTRESSED
OPPORTUNITIES, INC. (together with its permitted successors and assigns, the “Borrower”). Terms
defined in the Credit Agreement are used herein with the same meaning.




          The “Assignor” and the “Assignee” referred to on Schedule II hereto agree as follows:





     1. As of the Effective Date (as defined below), the Assignor hereby absolutely and
unconditionally sells and assigns, without recourse, to the Assignee, and the Assignee hereby
purchases and assumes, without recourse to or representation of any kind (except as set forth
below) from Assignor, an interest in and to the Assignor’s rights and obligations under the
Credit Agreement and under the other Program Documents equal to the percentage interest
specified on Schedule II hereto, including the Assignor’s Secondary Lender Commitment and the
percentage interest specified on Schedule II hereto of the outstanding principal amount of the
Advances (such rights and obligations assigned hereby being the “Assigned Interests”). After
giving effect to such sale, assignment and assumption, the Assignee’s “Secondary Lender
Commitment” and the Assignee’s “Percentage” will be as set forth on Schedule II hereto.




     2. The Assignor (i) represents and warrants that immediately prior to the Effective Date it
is the legal and beneficial owner of the Assigned Interest free and clear of any Adverse Claim
created by the Assignor; (ii) makes no representation or warranty and assumes no responsibility
with respect to any statements, warranties or representations made in or in connection with the
Program Documents or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of, or the perfection or priority of any lien or security or ownership interest created
or purported to be created under or in connection with, the Program Documents or any other
instrument or document furnished pursuant thereto or the condition or value of the Assigned
Interest, Pledged Collateral, or any interest therein; and (iii) makes no representation or
warranty and assumes no responsibility with respect to the condition (financial or otherwise) of
any of the Borrower, the Agent, or any other Person, or the performance or observance by any
Person of any of its obligations under any Program Document or any instrument or document
furnished pursuant thereto.



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     3. The Assignee (i) confirms that it has received a copy of the Credit Agreement and the
other Program Documents, together with copies of any financial statements delivered pursuant to
Sections 5.01 of the Credit Agreement and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this Assignment and
Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the
Assignor, the Conduit Lender or any other Secondary Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under or in connection with any of the Program Documents; (iii)
confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers and discretion under the Program
Documents as are delegated to the Agent by the terms thereof, together with such powers and
discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance
with their terms all of the obligations that by the terms of the Program Documents are required
to be performed by it as a Secondary Lender; (vi) confirms that the assignment hereunder
complies with any applicable legal requirements including the Securities Act of 1933, as
amended; (vii) confirms that such Assignee is a United States Person (as defined in Section 7701
(a)(30) of the Code) or that such Assignee shall have provided the Agent with two Internal
Revenue Service forms W-8BEN and W-8ECI (or successor forms) certifying that the income from the
Assigned Interest is effectively connected with the conduct of such Person’s trade or business
in the United States of America; and (viii) confirms that such Assignee is not a partnership,
grantor trust or S corporation (as such terms are defined in the Internal Revenue Code).




     4. Following the execution of this Assignment and Acceptance, it will be delivered to the
Agent for acceptance and recording by the Agent. The effective date for this Assignment and
Acceptance (the “Effective Date”) shall be the date of acceptance hereof by the Agent, unless a
later effective date is specified on Schedule II hereto.




     5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the
Assignee shall be a party to and bound by the provisions of the Credit Agreement and, to the
extent provided in this Assignment and Acceptance, have the rights and obligations of a
Secondary Lender thereunder and under any other Program Document and (ii) the Assignor shall, to
the extent provided in this Assignment and Acceptance, relinquish its rights and be released
from its obligations under the Credit Agreement and under any other Program Document.




     6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the
Agent shall make all payments under the Credit Agreement in respect of the Assigned Interest to
the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under
the Credit Agreement and the Assigned Interests for periods prior to the Effective Date directly
between themselves.




     7. This Assignment and Acceptance shall be governed by, and construed in accordance with,
the laws of the State of New York.




     8. This Assignment and Acceptance may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so executed shall



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be deemed to be an original and all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of Schedule II to this Assignment and
Acceptance by telecopier shall be effective as a delivery of a manually executed counterpart of
this Assignment and Acceptance.



          IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment
and Acceptance to be executed by their officers thereunto duly authorized as of the date specified
thereon.




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Schedule II




	 	 	 	 	 
	Percentage interest 	 	 
	transferred by Assignor:  	     % 	 
	
Assignee’s “Secondary Lender Commitment”: 	
$           	 
	
Assignor: 	
[INSERT NAME OF ASSIGNOR], 	 
	 	

              as Assignor,

 	 
	 	By:  	 	 
	 	 	Authorized Signatory, 	 
	 	 	 	 
	 
	Assignee:                                                	[INSERT NAME OF ASSIGNEE]

              as Assignee

 	 
	 	By:  	 	 
	 	 	Authorized Signatory 	 
	 	 	 	 



	 	 	 	 	 
	Accepted, Consented to and

Acknowledged this       day of

                    ,      



THE BANK OF NOVA SCOTIA,

ACTING THROUGH ITS NEW YORK AGENCY,

as Agent

 	 	 
	By:  	 	 	 
	 	Authorized Signatory 	 	 
	 	 	 	 
	[HIGHLAND DISTRESSED OPPORTUNITIES, INC.

 	 	 
	By:  	
 	]* 	 
	 	Authorized Signatory 	 	 





 




			
	*	 	If required pursuant to Section 9.06(b)







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EXHIBIT D




FORM OF NOTICE OF PREPAYMENT




HIGHLAND DISTRESSED OPPORTUNITIES, INC.

13455 Noel Rd., Suite 800

Dallas, TX 75240




THE BANK OF NOVA SCOTIA ACTING

THROUGH ITS NEW YORK AGENCY, as Agent

Asset-Backed Finance

One Liberty Plaza, 26th Floor

New York, NY 10006

Attention: Darren Ward




NOTICE OF PREPAYMENT




          This Notice of Prepayment is made pursuant to Section 2.05 of that certain Revolving Credit
and Security Agreement dated as of June 27, 2008, among LIBERTY STREET FUNDING LLC, as lender (the
“Conduit Lender”), The Bank of Nova Scotia, acting through its New York Agency, and the other
lenders parties thereto, The Bank of Nova Scotia, acting through its New York Agency, as agent and
Highland Distressed Opportunities, Inc., as borrower (the “Borrower”) (as the same may from time to
time be amended, supplemented, waived or modified, the “Credit Agreement”). Unless otherwise
defined herein, capitalized terms used herein have the meanings assigned to those terms in the
Credit Agreement.




          1. The Borrower hereby gives notice that on                     ,       (the “Prepayment Date”) it
will prepay under the Credit Agreement in the principal amount of                      Dollars ($          )
(the “Prepayment Amount”).




          2. The Borrower hereby gives notice of intent to prepay in the aggregate principal amount
equal to the Prepayment Amount to the Agent and the Conduit Lender pursuant to Section 2.05 of the
Credit Agreement and will remit, or cause to be remitted, the proceeds thereof to [INSERT
ACCOUNT INFORMATION].




          3. The Borrower certifies that such prepayment is [a voluntary prepayment pursuant to
Section 2.05(a), requires one (1) Business Day’s prior written notice, and shall be an integral
multiple of $100,000, with a minimum amount of $1,000,000][due to non-compliance with the
Borrowing Base Test pursuant to Section 2.05(b) and requires payment on the Prepayment
Date] [due to non-compliance with the TRS Portfolio Test and requires payment on
the Prepayment Date] [due to non-compliance with the Asset Coverage Test and
requires payment on the Prepayment Date][due to the requirements of Section 2.05(c) and
requires payment on the Prepayment Date].




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          4. The Prepayment Amount shall be applied to the Advances in the order in which such Advances
were made.




WITNESS my hand on this       day of                     ,      .




	 	 	 	 	 
	 	HIGHLAND DISTRESSED OPPORTUNITIES, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 




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EXHIBIT E




PERFECTION REPRESENTATIONS, WARRANTIES AND COVENANTS



In addition to the representations, warranties and covenants contained in the Agreement, to induce
the Lender, the Secondary Lenders and the Agent to enter into the Agreement and, in the case of the
Lender and the Secondary Lender, to make Advances thereunder, the Borrower hereby represents,
warrants and covenants to the Agent, the Lender and the Secondary Lenders as to itself as follows:




General



1. The Agreement creates a valid and continuing security interest (as defined in the applicable
UCC) in the Pledged Collateral in favor of the Agent for the benefit of the Secured Parties, which
security interest is prior to all other Liens (subject to the Lien of the Custodian securing (i)
the Custodian’s Overdraft Advances to the extent permitted by Section 5.02(m), (ii) indemnification
payments owing by the Borrower in favor of the Custodian in an amount not to exceed $100,000 and
(iii) Permitted Expenses of the Custodian in an amount not to exceed $50,000), and is enforceable
as such as against creditors of and purchasers from the Borrower.



2. The Pledged Collateral held in the Collateral Account constitutes “security entitlements”
arising from “investment property” within the meaning of the applicable UCC.



3. The Collateral Account constitutes a “securities account” within the meaning of the applicable
UCC.



4. All of the Pledged Collateral that constitute securities entitlements have been and will have
been credited to the Collateral Account. The securities intermediary for the Collateral Account has
agreed to treat all assets credited to the Collateral Account as “financial assets” within the
meaning of the applicable UCC.




Creation



5. The Borrower owns and has good and marketable title to the Pledged Collateral free and clear of
any Lien, claim or encumbrance of any Person, excepting only the Liens of the Agent for the benefit
of the Secured Parties under the Agreement and Permitted Liens.



6. The Borrower has received all consents and approvals required by the terms of the Pledged
Collateral that constitute securities entitlements, certificated securities or uncertificated
securities to transfer to the Agent for the benefit of the Secured Parties a security interest and
rights in the Pledged Collateral under the Agreement.




Perfection



7. The Borrower has caused or will have caused, within thirty (30) days after the Closing Date, the
filing of all appropriate financing statements in the proper filing office in the appropriate
jurisdictions under applicable law to the extent effective under the applicable UCC to


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perfect the security interest in the Pledged Collateral granted to the Agent for the benefit of the
Secured Parties under the Agreement.



8. With respect to Pledged Collateral that constitutes securities accounts or securities
entitlements, either:






(a) the Borrower has caused or will have caused, within thirty (30) days after the Closing
Date, the filing of all appropriate financing statements in the proper filing office in the
appropriate jurisdictions under applicable law in order to perfect the security interest
granted in the Pledged Collateral to the Agent for the benefit of the Secured Parties; or




(b) the Borrower has delivered to the Agent a fully executed agreement pursuant to which the
securities intermediary has agreed to comply with all entitlement orders originated by the
Agent relating to the Collateral Account without further consent by the Borrower; or




(c) the Borrower has taken all steps necessary to cause the securities intermediary to
identify in its records the Agent as the person having a security entitlement against the
securities intermediary in the Collateral Account.


9. With respect to Pledged Collateral that constitutes certificated securities (other than
securities entitlements), either:





(a) the Borrower has caused or will have caused, within thirty (30) days after the Closing
Date, the filing of all appropriate financing statements in the proper filing office in the
appropriate jurisdictions under applicable law in order to perfect the security interest
granted in the Pledged Collateral to the Agent for the benefit of the Secured Parties; or




(b) the Agent has received a written acknowledgment from the Custodian that the Custodian
(i) is not a securities intermediary, (ii) is holding the security certificates that
constitute or evidence the Pledged Collateral solely on behalf of and for the benefit of
Agent, and (iii) each such security certificate either (A) is in bearer form, (B) has been
indorsed by an effective indorsement to the Agent or the Custodian or in blank, or (C) has
been registered in the name of the Agent or the Custodian; or




(c) the Agent has received a written acknowledgment from the Custodian that the Custodian
(i) is a securities intermediary, (ii) is holding the security certificates in registered
form that constitute or evidence the Pledged Collateral on behalf of and for the benefit of
Agent, and (iii) each such security certificate either: (A) registered in the name of the
Agent, (B) payable to the order of the Agent, or (C) specially indorsed to the Agent by an
effective indorsement and has not been indorsed to the securities intermediary or in blank.


10. With respect to Pledged Collateral that constitute uncertificated securities (other than
securities entitlements), either:




E-2









 









(a) the Borrower has caused or will have caused, within thirty (30) days after the Closing
Date, the filing of all appropriate financing statements in the proper filing office in the
appropriate jurisdictions under applicable law in order to perfect the security interest
granted in the Pledged Collateral to the Agent for the benefit of the Secured Parties to the
extent such security interest may be perfected by the filing of financing statements under
the UCC; or




(b) each issuer of any Pledged Collateral that constitutes an uncertificated security has
registered the Agent as the registered owner; or




(c) the Custodian, who is not a securities intermediary, has become the registered owner of
such uncertificated security on behalf of the Agent, and has acknowledged in writing that it
holds for the Agent; or




(d) the Borrower is the registered owner of such uncertificated security and each issuer of
such uncertificated securities has agreed in writing that it will comply with instructions
originated by the Agent without further consent by the Borrower.



Priority



11. No Other Grants. Other than the security interest granted to the Agent for the benefit
of the Secured Parties pursuant to the Agreement and other than with respect to Permitted Liens,
the Borrower has not pledged, assigned, sold, granted a security interest in, or otherwise conveyed
any of the Pledged Collateral. The Borrower has not authorized the filing of, or is not aware of
any financing statements against the Borrower that include a description of collateral covering the
Pledged Collateral other than any financing statement relating to the security interest granted to
the Agent for the benefit of the Secured Parties under the Agreement or that has been terminated.



12. No Filings. The Borrower is not aware of any judgment, ERISA or tax lien filings
against the Borrower.



13. No Pledge or Assignment. None of the certificated securities that constitute or
evidence the Pledged Collateral has any marks or notations indicating that they have been pledged,
assigned or otherwise conveyed to any Person other than the Secured Parties.



14. Collateral Account in Name of the Borrower. The Collateral Account is not in the name
of any person other than the Borrower. The Borrower has not granted to the securities intermediary
of the Collateral Account the power to comply with entitlement orders of any person other than the
Agent on behalf of the Secured Parties.



15. Survival of Perfection Representations. Notwithstanding any other provision of this
Agreement or any other Loan Document, the Perfection Representations, Warranties and Covenants
contained in this Exhibit E shall be continuing, and remain in full force and effect
(notwithstanding any termination of the Total Commitments or any replacement of the Borrower or
termination of the Borrower’s rights to act as such) until such time as all obligations under
Agreement have been finally and fully paid and performed.




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16. No Waiver. The parties to this Agreement: (a) shall not, without obtaining a
confirmation of the then-current rating of the Commercial Paper Notes (as defined below), waive any
of the Perfection Representations, Warranties and Covenants; (b) shall provide the Ratings Agencies
with prompt written notice of any breach of the Perfection Representations, Warranties and
Covenants and shall not, without obtaining a confirmation of the then-current rating of the
Commercial Paper Notes (as determined after any adjustment or withdrawal of the ratings following
notice of such breach) waive a breach of any of the Perfection Representations, Warranties and
Covenants. “Commercial Paper Notes” means promissory notes issued or to be issued by the
Conduit Lender to fund its Advances or investments in other financial assets.



17. Borrower to Maintain Perfection and Priority. The Borrower covenants that, in order to
evidence the interests of the Agent under the Agreement, the Borrower shall take such action, or
execute and deliver such instruments (other than effecting a Filing (as defined below), unless such
Filing is effected in accordance with this paragraph 17) as may be necessary or advisable
(including, without limitation, such actions as are requested by the Agent) to maintain and
perfect, as a first priority interest, the Agent’s security interest for the benefit of the Secured
Parties in the Pledged Collateral. The Borrower shall, from time to time and within the time
limits established by law, prepare and present to the Agent for the Agent to authorize (based in
reliance on the opinion of counsel hereinafter provided for) the Borrower to file, all financing
statements, amendments, continuations, initial financing statements in lieu of a continuation
statement, terminations, partial terminations, releases or partial releases, or any other filings
necessary or advisable to continue, maintain and perfect the Agent’s security interest for the
benefit of the Secured Parties in the Pledged Collateral as a first-priority interest (each a
“Filing”). The Borrower shall present each such Filing to the Agent together with (x) an
opinion of counsel to the effect that such Filing satisfies the requirements for a Filing of such
type under the UCC in the applicable jurisdiction (or if the UCC does not apply, the applicable
statute governing the perfection of security interests), and (y) a form of authorization for the
Agent’s signature. Upon receipt of such opinion of counsel and form of authorization, the Agent
shall promptly authorize in writing the Borrower to, and Borrower shall, effect such Filing under
the UCC without the signature of the Borrower, Agent or the Secured Parties where allowed by
applicable law. Notwithstanding anything else in this Agreement to the contrary, the Borrower
shall not have any authority to effect a Filing without obtaining written authorization from the
Agent in accordance with this paragraph 17.





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