Exchange Agreement



 Exhibit 10.55 
 EXECUTION COPY 
 EXCHANGE AGREEMENT 
 BY AND AMONG 
 NOVASTAR MORTGAGE, INC., 
 NOVASTAR FINANCIAL, INC., 
 NOVASTAR CAPITAL
TRUST I/B, 
 NOVASTAR CAPITAL TRUST II/B, 
 AND 
 THE HOLDERS LISTED ON SCHEDULES I AND II HERETO 
  
  
 Dated as of February 18, 2009 
  
  







 EXCHANGE AGREEMENT 
 THIS EXCHANGE AGREEMENT (this “Exchange Agreement” or “Agreement”), dated as of February 18, 2009 (the “Effective Date”), is entered into by and among, NOVASTAR
MORTGAGE, INC., a Virginia corporation (the “Company”), NOVASTAR FINANCIAL, INC., a Maryland corporation (the “Guarantor”), NOVASTAR CAPITAL TRUST I/B, a Delaware statutory trust (the “NovaStar Trust
I/B”), NOVASTAR CAPITAL TRUST II/B, a Delaware statutory trust (the “NovaStar Trust II/B”, together with NovaStar Trust I/B, the “Trusts” and, together with the Company, the Guarantor and the NovaStar Trust
I/B, the “Exchangors”) and the beneficial owners of the preferred securities of the Existing Trusts (as defined below) whose names appear on the signature pages hereto (the “Holders”). 
 WITNESSETH: 
 WHEREAS, the Holders listed on
Schedule I hereto are the beneficial owners of all of the trust preferred securities currently outstanding which were issued by the NovaStar Capital Trust I, a Delaware statutory trust (the “NovaStar Trust I”), in the stated
liquidation amounts set forth next to their names on such Schedule I (the “2005 Preferred Securities”); 
 WHEREAS, the
Holders listed on Schedule II hereto are the beneficial owners of all of the trust preferred securities currently outstanding (other than such trust preferred securities owned by the Company) which were issued by the NovaStar Capital Trust II, a
Delaware statutory trust (the “NovaStar Trust II” and, together with the NovaStar Trust I, the “Existing Trusts”), in the stated liquidation amounts set forth next to their names on such Schedule II (the “2006
Preferred Securities” and, together with the 2005 Preferred Securities, the “Existing Preferred Securities”); 
 WHEREAS, the NovaStar Trust I is the holder and beneficial owner of all of the outstanding unsecured junior subordinated notes issued by the Company in the aggregate principal amount of $51,550,000 (the “2005 Junior Subordinated
Notes”); 
 WHEREAS, the NovaStar Trust II is the holder and beneficial owner of all of the outstanding unsecured junior
subordinated notes issued by the Company in the aggregate principal amount of $28,995,000 (the “2006 Junior Subordinated Notes” and, together with the 2005 Junior Subordinated Notes, the “Existing Subordinated
Notes”); 
 WHEREAS, the Company proposes to issue to the NovaStar Trust I/B $51,550,000 in aggregate principal amount of the
unsecured junior subordinated notes of the Company (the “2009 I/B Junior Subordinated Notes”) and to cause the NovaStar Trust I/B to issue (a) 50,000 Preferred Securities of the NovaStar Trust I/B, having an aggregate
liquidation amount of $50,000,000 (the “2009 I/B Preferred Securities”), to the applicable Holders in exchange for the transfer by the applicable Holders to the Company of all of the outstanding 2005 Preferred Securities and
(b) 1,550 Common Securities of the NovaStar Trust I/B, having an aggregate liquidation amount of $1,550,000 (the “2009 I/B Common Securities”), to the Company; 







 WHEREAS, the Company proposes to issue to the NovaStar Trust II/B $28,995,000 in aggregate principal
amount of the unsecured junior subordinated notes of the Company (the “2009 II/B Junior Subordinated Notes” and, together with the 2009 I/B Junior Subordinated Notes, the “Junior Subordinated Notes”) and to cause
the NovaStar Trust II/B to issue (a) 28,125 Preferred Securities of the NovaStar Trust II/B, having an aggregate liquidation amount of $28,125,000 (the “2009 II/B Preferred Securities” and, together with the 2009 I/B Preferred
Securities, the “Preferred Securities”), to the applicable Holders in exchange for the transfer by the applicable Holders to the Company of all of the outstanding 2006 Preferred Securities and (b) 870 Common Securities of the
NovaStar Trust II/B, having an aggregate liquidation amount of $870,000 (the “2009 II/B Common Securities” and, together with the 2009 I/B Common Securities, the “Common Securities”), to the Company; 
 WHEREAS, upon receipt of the Existing Preferred Securities from the applicable Holders, the Company proposes to (a) surrender the Existing Preferred
Securities and all of the outstanding common securities which were issued by the Existing Trusts (collectively, the “Existing Common Securities”) to the applicable property trustee of the Existing Trusts for cancellation thereof,
(b) direct the property trustees and administrative trustees of the Existing Trusts to dissolve the Existing Trusts and to surrender the Existing Subordinated Notes to the applicable indenture trustees for cancellation thereof and
(c) cause the indentures pursuant to which the Existing Subordinated Notes were issued to be discharged (the “Existing Indentures”); 
 WHEREAS, the 2009 I/B Preferred Securities and the 2009 I/B Common Securities of the NovaStar Trust I/B will be issued pursuant to the Amended and Restated Trust Agreement (the “2009 I/B Trust
Agreement”), dated as of the Effective Date, among the Company, as depositor, The Bank of New York Mellon Trust Company, National Association, a national banking association (“BNYM”), as property trustee (in such capacity,
the “2009 I/B Property Trustee”), BNY Mellon Trust of Delaware (“BNYM Delaware”), as Delaware trustee (in such capacity, the “2009 I/B Delaware Trustee”) and the administrative trustees named
therein; 
 WHEREAS, the 2009 II/B Preferred Securities and the 2009 II/B Common Securities of the NovaStar Trust II/B will be issued
pursuant to the Amended and Restated Trust Agreement (the “2009 II/B Trust Agreement” and, together with the 2009 I/B Trust Agreement, the “Trust Agreements”), dated as of the Effective Date, among the Company, as
depositor, BNYM, as property trustee (in such capacity, the “2009 II/B Property Trustee”), BNYM Delaware, as Delaware trustee (in such capacity, the “2009 II/B Delaware Trustee”) and the administrative trustees
named therein (together with the administrative trustees named in the 2009 I/B Trust Agreement, the “Administrative Trustees”); 
 WHEREAS, the 2009 I/B Preferred Securities will be guaranteed on a subordinated basis by the Guarantor as to the payment of distributions, and as to payments on liquidation and redemption, to the extent set forth in the Parent Guarantee
Agreement (the “2009 I/B Guarantee”), dated as of the Effective Date, between the Guarantor and BNYM, as guarantee trustee (in such capacity, the “2009 I/B Guarantee Trustee”); 
 WHEREAS, the 2009 II/B Preferred Securities will be guaranteed on a subordinated basis by the Guarantor as to the payment of distributions, and as to
payments on liquidation and redemption, to the extent set forth in the Parent Guarantee Agreement 

  

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(the “2009 II/B Guarantee” and, together with the 2009 I/B Guarantee, the “Guarantees”), dated as of the Effective Date,
between the Guarantor and BNYM, as guarantee trustee (in such capacity, the “2009 II/B Guarantee Trustee”); 
 WHEREAS, the
2009 I/B Junior Subordinated Notes will be issued pursuant to a Junior Subordinated Indenture, dated as of the Effective Date (the “2009 I/B Indenture”), between the Company and BNYM, as indenture trustee (in such capacity, the
“2009 I/B Indenture Trustee”); 
 WHEREAS, the 2009 II/B Junior Subordinated Notes will be issued pursuant to a Junior
Subordinated Indenture, dated as of the Effective Date (the “2009 II/B Indenture” and, together with the 2009 I/B Indenture, the “Indentures”), between the Company and BNYM, as indenture trustee (in such capacity,
the “2009 II/B Indenture Trustee”); and 
 WHEREAS, WolfBlock LLP, not in its individual capacity, but solely as escrow
agent (the “Escrow Agent”), will, pursuant to an Escrow Agreement, dated as of the Effective Date, between the Escrow Agent, the Exchangors and the Holders (the “Escrow Agreement”), facilitate the exchange upon
satisfaction of the conditions precedent set forth herein. 
 NOW, THEREFORE, in consideration of the mutual agreements and subject to the
terms and conditions set forth herein, the parties hereto agree as follows: 
 Section 1. Definitions. The Preferred Securities,
the Common Securities and the Junior Subordinated Notes are collectively referred to herein as the “Securities.” The Existing Preferred Securities, the Existing Common Securities and the Existing Subordinated Notes are collectively
referred to herein as the “Existing Securities.” This Exchange Agreement, the Indentures, the Trust Agreements, the Guarantees and the Securities are collectively referred to herein as the “Operative Documents.”

 Section 2. Exchange of the Existing Preferred Securities. 
 2.1 On the Exchange Date, the Company hereby agrees to issue the 2009 I/B Junior Subordinated Notes to the NovaStar Trust I/B and to cause the NovaStar
Trust I/B to issue (a) the 2009 I/B Preferred Securities to the applicable Holders in exchange for the transfer by the applicable Holders to the Company of all of the outstanding 2005 Preferred Securities and (b) the 2009 I/B Common
Securities to the Company. On the Exchange Date, the NovaStar Trust I/B hereby agrees to accept the 2009 I/B Junior Subordinated Notes and to issue the 2009 I/B Preferred Securities and the 2009 I/B Common Securities. On the Exchange Date, the
applicable Holders hereby agree to accept the 2009 I/B Preferred Securities in exchange for the 2005 Preferred Securities. 
 2.2 On the
Exchange Date, the Company hereby agrees to issue the 2009 II/B Junior Subordinated Notes to the NovaStar Trust II/B and to cause the NovaStar Trust II/B to issue (a) the 2009 II/B Preferred Securities to the applicable Holders in exchange for
the transfer by the applicable Holders to the Company of all of the outstanding 2006 Preferred Securities and (b) the 2009 II/B Common Securities to the Company. On the Exchange Date, the NovaStar Trust II/B hereby agrees to accept the 2009
II/B Junior Subordinated Notes and to issue the 2009 II/B Preferred Securities and the 2009 II/B Common Securities. On the Exchange Date, the applicable Holders hereby agree to accept the 2009 II/B Preferred Securities in exchange for the 2006
Preferred Securities. 
  

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 2.3 Prior to or on the Exchange Date, the Company hereby agrees to deliver to the 2009 I/B Indenture
Trustee all of its 2009 I/B Junior Subordinated Notes and to the 2009 II/B Indenture Trustee all of its 2009 II/B Junior Subordinated Notes, in each case together with a request for authentication and delivery on the Exchange Date, and may not
withdraw such delivery and request unless and until this Agreement is terminated in accordance with Section 9. Prior to or on the Exchange Date, the Company hereby agrees to cause the Administrative Trustees to deliver to the 2009 I/B
Property Trustee all of the 2009 I/B Preferred Securities and to the 2009 II/B Property Trustee all of the 2009 II/B Preferred Securities, in each case together with a request for authentication and delivery on the Exchange Date, and may not
withdraw such delivery and request unless and until this Agreement is terminated in accordance with Section 9. Prior to or on the Exchange Date, each Holder hereby agrees to deliver an issuer order (an “Issuer Order”)
instructing each trustee (in each such capacity, a “CDO Trustee”) under the applicable indenture pursuant to which such CDO Trustee serves as trustee for such Holder to exchange the Existing Preferred Securities for the Preferred
Securities on the Exchange Date and to deliver to the 2009 I/B Property Trustee or the 2009 II/B Property Trustee, as applicable, all of its Existing Preferred Securities on or before the Exchange Date and may not withdraw such Issuer Order or
delivery unless and until this Agreement is terminated in accordance with Section 9. 
 2.4 If the applicable Holders elect to
have the Preferred Securities rated, each Holder shall be responsible for its pro rata portion of any rating agency costs for the Preferred Securities of the applicable Trust that such Holder will acquire upon the Exchange Date (defined
below). In no event shall any Holder be responsible for any rating agency costs of any other Holder or the fees and expenses set forth in Section 7, and, each Holder is solely responsible for its own expenses to the extent not reimbursed
by the Company or the Guarantor pursuant to the Settlement Agreement (defined below). Outstanding as of the Effective Date are: 
  

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

  

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

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

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

2.7 Each Holder and each Exchangor agrees that, on and as of the Exchange Date, (a) all obligations under the Existing Securities shall be deemed
to be fully discharged and satisfied, and (b) all right, title and interest in and to any payments of principal, interest or any other amounts under or with respect to the Existing Securities, whether or not any of such payments are due or
accrued and unpaid, shall be deemed surrendered and forfeited. 
 2.8 The exchange date shall be the date upon which all of the conditions
precedent set forth in Section 3 shall have been satisfied (the “Exchange Date”). If the Exchange Date has not occurred on or before April 30, 2009 (the “Expiry Date”), (a) the 2009 I/B Property
Trustee and the 2009 II/B Property Trustee shall return the Existing Preferred Securities to the applicable Holders and the Preferred Securities to the Administrative Trustees of the applicable Trusts, (b) the 2009 I/B Indenture Trustee and the
2009 II/B Indenture Trustee shall return the Junior Subordinated Notes to the Company, (c) the Company shall return the Common Securities to the applicable Trusts, (d) no exchange shall take place pursuant to this Agreement, (e) the
Escrow Agent shall return the full amount of the Settlement Amount (as defined in the Escrow Agreement) to the Company, and (f) this Agreement and the Operative Documents shall be terminated in accordance with Section 9. 

 

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 2.9 The Preferred Securities shall be delivered by each of the Trusts, directly or indirectly, to each
Holder without registration of any of the Securities under the Securities Act of 1933, as amended (the “Securities Act”), or any other applicable securities laws in reliance upon exemptions from the registration requirements of the
Securities Act and other applicable securities laws. 
 Section 3. Closing Conditions. The exchange of the Securities pursuant to
this Agreement is subject to the timely satisfaction of the following conditions precedent: 
 3.1 Conditions to be Satisfied prior to or
on Effective Date. 
 (a) Escrow Agreement. Prior to or on the Effective Date, the Exchangors, the Holders and the Escrow Agent
shall have executed and delivered the Escrow Agreement, in form and substance acceptable to each Holder and each Exchangor (acceptance of such form and substance to be evidenced by such Holder’s or such Exchangor’s execution and delivery
thereof). 
 (b) Settlement Agreement. Prior to or on the Effective Date, the parties to that certain Settlement Agreement (the
“Settlement Agreement”) shall have executed and delivered such Settlement Agreement, in form and substance acceptable to each Holder and each Exchangor (acceptance of such form and substance to be evidenced by such Holder’s or
such Exchangor’s execution and delivery thereof), and the Company shall have deposited the Settlement Amount (as defined therein) with the Escrow Agent pursuant to the Escrow Agreement and the Settlement Agreement. 
 (c) Operative Documents. On the Effective Date, the parties to this Exchange Agreement, the Indentures, the Trust Agreements and the Guarantees
shall have executed and delivered such Operative Documents to the other parties thereto and in form and substance acceptable to each Holder and each Exchangor (acceptance of such form and substance to be evidenced by such Holder’s or such
Exchangor’s execution and delivery thereof). 
 3.2 Conditions to be Satisfied prior to or on the Exchange Date. 
 (a) Accuracy of Representations and Warranties. The representations and warranties contained in this Agreement, and the statements of the
Exchangors and the Holders made in any certificates pursuant to this Agreement, shall be accurate as of the Exchange Date. 
 (b) Opinions
of Counsel. 
 (i) The Holders shall have received an opinion of Husch Blackwell Sanders LLP, special counsel for the Company and the
Guarantor, dated as of the Exchange Date and in form and substance acceptable to each Holder. 
  

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 (ii) The Holders shall have received an opinion of Husch Blackwell Sanders LLP, special tax counsel for
the Guarantor, dated as of the Exchange Date and in form and substance acceptable to each Holder. 
 (iii) The Holders, the Company and the
Guarantor shall have received an opinion of Richards, Layton & Finger, P.A., special counsel for the Trusts and the 2009 I/B Delaware Trustee and the 2009 II/B Delaware Trustee, dated as of the Exchange Date and in form and substance
acceptable to each Holder, the Company and the Guarantor. 
 (iv) The Holders and the Exchangors shall have received an opinion of Gardere
Wynne Sewell LLP, special counsel for the 2009 I/B Property Trustee, 2009 II/B Property Trustee, 2009 I/B Indenture Trustee and 2009 II/B Indenture Trustee, dated as of the Exchange Date and in form and substance acceptable to each Holder and each
Exchangor. 
 (v) The Exchangors shall have received an opinion of Winston & Strawn LLP, special counsel for the Holders, dated as
of the Exchange Date and in form and substance acceptable to each Exchangor. 
 (vi) The Holders shall have received an opinion of
Winston & Strawn, LLP, special tax counsel for the Holders, dated as of the Exchange Date and in form and substance acceptable to each Holder. 
 (c) Dismissal Order. On or before the Expiry Date, the Holders shall have obtained entry of the Dismissal Order (as defined in the Settlement Agreement) (the “Dismissal Order”). 
 (d) Officer’s Certificate of the Company and the Guarantor. Each of the Company and the Guarantor shall have furnished to each Holder a
certificate of the Company and the Guarantor, as applicable, in form and substance acceptable to each Holder, signed by the Chief Executive Officer, President or a Vice President and by the Chief Financial Officer, Treasurer or Assistant Treasurer
of the Company and the Guarantor, as applicable, and each Trust shall have furnished to the Holders of the Preferred Securities issued by such Trust a certificate of the Trust signed by an Administrative Trustee of such Trust, in each case dated the
Exchange Date, and, in the case of the Company, the Guarantor and each Trust, that the representations and warranties in this Agreement are true and correct on and as of the Exchange Date with the same effect as if made on and at such time, and the
Company, the Guarantor and the Trusts have complied in all material respects with all the agreements and satisfied all the conditions on each of their part to be performed or satisfied at or prior to the Exchange Date. 
 (e) Officer’s Certificate of each Holder. Each Holder shall have furnished to the Company and the Guarantor a certificate of the applicable
Holder, in form and substance acceptable to the Company and the Guarantor, signed by an authorized signatory of such Holder, in each case dated the Exchange Date, and, stating that the representations and warranties in this Agreement are true and
correct on and as of the Exchange Date with the same effect as if made on and at such time, and that such Holder has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed or satisfied
at or prior to the Exchange Date. 
  

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 (f) No Subsequent Change. Subsequent to the execution of this Agreement but prior to the Exchange
Date, there shall not have been any change, or any development involving a prospective change, in, or affecting the condition (financial or other), earnings, business or assets of the Guarantor and its subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, the effect of which is, in each Holder’s or the Company’s reasonable judgment, so material and adverse as to make it impractical or inadvisable to proceed with the transactions contemplated
hereby. 
 (g) Purchase Permitted by Applicable Laws; Legal Investment. The exchange of the Existing Preferred Securities for the
Preferred Securities as described in this Agreement shall (a) not be prohibited by any applicable law or governmental regulation, (b) not subject the Holders or the Exchangors to any material penalty under or pursuant to any applicable law
or governmental regulation and (c) be permitted by the laws and regulations of the jurisdictions to which the Holders and the Exchangors are subject. 
 (h) Cancellation of Certain Existing Preferred Securities, Existing Common Securities and Corresponding Like Amount of Notes. On or before the Expiry Date, (i) the Company shall have surrendered to the
BNYM as property trustee for the NovaStar Trust II (the “2006 Property Trustee”) the trust preferred securities currently outstanding and owned by the Company which were issued by the NovaStar Trust II and a proportionate amount of
the common securities issued by NovaStar Trust II (the “Surrendered Securities”) for cancellation thereof, (ii) the 2006 Property Trustee shall have cancelled the Surrendered Securities, (iii) the 2006 Property Trustee
shall have caused the NovaStar Trust II to have surrendered to BNYM, as trustee pursuant to that certain Junior Subordinated Indenture, dated as of April 18, 2006 (the “2006 Indenture Trustee”), an amount of 2006 Junior
Subordinated Notes with an outstanding principal amount equal to the stated liquidation amount of the Surrendered Securities (the “Surrendered Notes”) for cancellation thereof and (iv) the 2006 Indenture Trustee shall have
cancelled the Surrendered Notes. 
 (i) Acknowledgment of Trustees. On or before the Expiry Date, the Holders, the Company and the
Guarantor shall have received the Acknowledgment of Trustees (as defined in the Settlement Agreement). 
 Section 4. Representations
and Warranties of the Exchangors. The Exchangors jointly and severally represent and warrant to the Holders as of the Effective Date and as of the Exchange Date (except as otherwise noted herein) as follows (it being understood that each Trust
is hereby making the following representations and warranties only as to itself and not the other Trusts); provided, however, that none of the following representations or warranties apply or relate to any acts or omissions by the
Holders or their Affiliates, and provided, further, that the representations and warranties made in Section 4.15 are made as of the respective closing dates of the agreements therein referenced or as of such earlier dates
as noted otherwise therein: 
 4.1 Securities Laws Matters: 
 (a) None of the Exchangors, nor any of their “Affiliates” (as defined in Rule 501(b) of Regulation D under the Securities Act
(“Regulation D”)), nor any person acting on any of their behalf (except for the Holders, as to which no representation or warranty is made) has, directly or indirectly, made offers or sales of any security, or solicited offers to
buy any security, under circumstances that would require the registration under the Securities Act of any of the Securities. 
  

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 (b) None of the Exchangors, nor any of their Affiliates, nor any person acting on any of their behalf
(except for the Holders, as to which no representation or warranty is made) has (i) offered for sale or solicited offers to purchase the Securities, (ii) engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with any offer or sale of any of the Securities, or (iii) engaged in any “directed selling efforts” within the meaning of Regulation S under the Securities Act (“Regulation S”)
with respect to the Securities. 
 (c) The Securities (i) are not and have not been listed on a national securities exchange registered
under Section 6 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or quoted on a U.S. automated interdealer quotation system and (ii) are not of an open-end investment company, unit investment trust
or face-amount certificate company that are, or are required to be, registered under Section 8 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the Securities otherwise satisfy the
eligibility requirements of Rule 144A(d)(3) promulgated pursuant to the Securities Act (“Rule 144A(d)(3)”). 
 (d) None of
the Exchangors is, and, immediately following consummation of the transactions contemplated hereby, none of the Exchangors will be, an “investment company” or an entity “controlled” by an “investment company,” in each
case within the meaning of Section 3(a) of the Investment Company Act. 
 (e) None of the Exchangors have paid or agreed to pay to any
person or entity, directly or indirectly, any fees or other compensation for soliciting another to purchase any of the Securities. 
 4.2
Standing and Qualification of the Trusts. Each Trust has been duly formed and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, 12 Del. C. §3801, et seq. (the “Statutory
Trust Act”), with all requisite power and authority to own property and to conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents to which it is a party. Each
Trust is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, business or assets of the Trusts, whether or not occurring in the ordinary course of business. None of the Trusts is a party to, or otherwise bound by, any agreement other than the
Operative Documents to which they are a party and the other agreements contemplated by the Operative Documents. Each of the Trusts is, and under current law will continue to be, classified for federal income tax purposes as grantor trusts and not as
a business entity or an association or publicly traded partnership taxable as a corporation. 
  

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 4.3 Trust Agreements. Upon approval of the Trust Agreements and the other Operative Documents by
the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), the Trust Agreements shall have each been duly authorized, executed and delivered by the Company and the Administrative Trustees of each of
the respective Trusts and, assuming due authorization, execution and delivery by the 2009 I/B Property Trustee, the 2009 II/B Property Trustee, the 2009 I/B Delaware Trustee and the 2009 II/B Delaware Trustee, respectively, will be a legal, valid
and binding obligation of the Company and the respective Administrative Trustees, enforceable against them in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to
general principles of equity. Each of the Administrative Trustees of the Trusts is an employee of the Company and has been duly authorized by the Company to execute and deliver each of the Trust Agreements. To the knowledge of the respective
Administrative Trustees, no Trust is in violation of any provision of the Statutory Trust Act. 
 4.4 Indenture. Upon approval of the
Indentures and the other Operative Documents by the Bankruptcy Court, each Indenture shall have been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the 2009 I/B Indenture Trustee and
the 2009 II/B Indenture Trustee, respectively, will be a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’
rights generally and to general principles of equity. 
 4.5 Preferred Securities and Common Securities. Upon approval of the
Operative Documents by the Bankruptcy Court, the Preferred Securities and the Common Securities shall have been duly authorized by the respective Trusts and, in the case of the Preferred Securities, when issued, authenticated and delivered on the
Exchange Date by the 2009 I/B Property Trustee or the 2009 II/B Property Trustee, as applicable, to the Holders in exchange for the Existing Preferred Securities in accordance with this Agreement and, in the case of the Common Securities, when
issued and delivered to the Company in accordance with this Agreement, will be validly issued, fully paid and nonassessable and will represent undivided beneficial interests in the assets of the respective Trusts entitled to the benefits of the
respective Trust Agreements, enforceable against the respective Trusts in accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity. The
issuance of the Securities is not subject to preemptive or other similar rights. On the Exchange Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim,
lien or other encumbrance (each, a “Lien”). 
 4.6 Junior Subordinated Notes. Upon approval of the Indentures and the
other Operative Documents by the Bankruptcy Court, the Junior Subordinated Notes shall have been duly authorized by the Company and, when executed by the Company and authenticated and delivered on the Exchange Date by the 2009 I/B Indenture Trustee
or the 2009 II/B Indenture Trustee, as applicable, in exchange for the issuance of the Preferred Securities and the Common Securities in accordance with this Agreement, will constitute legal, valid and binding obligations of the Company entitled to
the benefits of the respective Indentures enforceable 

  

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


  

 12 








 
condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such indebtedness by the respective Trusts or the Company, the Guarantor or any of their subsidiaries prior to its scheduled maturity. 
 4.10 Organization, Standing and Qualification of the Company and the Guarantor. Each of the Company and the Guarantor has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite corporate power and authority to own, lease and operate its properties and conduct the business it
transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the
Company or the Guarantor, as the case may be, to be so qualified could not reasonably be expected to, singly or in the aggregate, have a Material Adverse Effect. 
 4.11 Government Licenses; Laws. Each Trust holds all necessary approvals, authorizations, orders, licenses, consents, registrations, qualifications, certificates and permits (collectively, “Government
Licenses”) of and from Governmental Entities necessary to conduct their respective businesses as now being conducted, and neither Trust has received any notice of proceedings relating to the revocation or modification of any such Government
License, except where the failure to be so licensed or approved or the receipt of an unfavorable decision, ruling or finding, would not, singly or in the aggregate, have a Material Adverse Effect; all of the Government Licenses are valid and in full
force and effect, except where the invalidity or the failure of such Government Licenses to be in full force and effect, would not, singly or in the aggregate, have a Material Adverse Effect; and the Company, the Guarantor and their subsidiaries are
in compliance with all applicable laws, rules, regulations, judgments, orders, decrees and consents, except where the failure to be in compliance, would not, singly or in the aggregate, have a Material Adverse Effect. 
 4.12 Taxes. Neither Trust is subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated
Notes, interest payable by the Company on the Junior Subordinated Notes is deductible by the Company for United States federal income tax purposes, and neither Trust is, or will not be within ninety (90) days of the Effective Date, subject to
more than a de minimis amount of other taxes, duties or other governmental charges. 
 4.13 Conflicts, Authorizations and
Approvals. No filing with, authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity, other than the Dismissal Order and those that have been made or obtained, is necessary or required
for the performance by any of the Exchangors of their respective obligations under the Operative Documents, as applicable, or the consummation by the Exchangors of the transactions contemplated by the Operative Documents. 
 4.14 Litigation. There is no action, suit or proceeding before or by any Governmental Entity, arbitrator or court, domestic or foreign, now
pending or, to the knowledge of the Exchangors after due inquiry, threatened against or affecting any of the Exchangors or any of their subsidiaries, except for such actions, suits or proceedings that, if adversely determined, would not, singly


  

 13 








 
or in the aggregate, adversely affect the consummation of the transactions contemplated by the Operative Documents, other than the proceedings pending before
the Bankruptcy Court on the date hereof. 
 4.15 Representations and Warranties Made in Certain Purchase Agreements. All of the
representations and warranties made by each of the Company and the Guarantor, in its own capacity and in its capacity as sponsor of the Existing Trusts, as applicable, in the Sections 4 of that certain Purchase Agreement dated March 15, 2005
among the Company, the Guarantor, Nova Star Trust I, Merrill Lynch International and Taberna Preferred Funding I, Ltd. and that certain Purchase Agreement dated April 18, 2006 among the Company, the Guarantor, the NovaStar Trust II and Kodiak
Warehouse LLC, are hereby made to each Holder, as applicable, as of the dates the Company made such representations and warranties in such purchase agreements, or as of such earlier dates as noted otherwise therein. 
 Section 5. Representations and Warranties of the Holders. Each Holder severally represents and warrants, solely as to itself, to, and agrees
with, the Exchangors, as of the Effective Date and as of the Exchange Date (except as otherwise noted herein) as follows, provided, however, that none of the following representations or warranties apply or relate to any acts or
omissions by the Exchangors or their Affiliates: 
 5.1 The Holder understands and acknowledges that the Securities (i) have not and will
not be registered under the Securities Act, or any other applicable securities law, and (ii) may not be offered, sold, pledged or otherwise transferred by the Holder except in compliance with the registration requirements of the Securities Act
or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto. 
 5.2 The Holder is
acquiring the Preferred Securities for its own account, for investment and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any
requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Preferred Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A
promulgated pursuant to the Securities Act (“Rule 144A”) or any other exemption from registration available under the Securities Act or any other applicable securities law. The Holder agrees to the legends and transfer restrictions
applicable to the Securities contained in the Trust Agreements. The Holder understands that no public market exists for any of the Securities, and that it is unlikely that a public market will ever exist for the Securities. 
 5.3 The Holder (a) has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith
to the extent they have deemed necessary; (b) has had a reasonable opportunity to ask questions of and receive answers and request additional information from officers and representatives of the Exchangors, any such questions have been answered
to its satisfaction, and any such additional information has been provided to its satisfaction; (c) has had the opportunity to review all publicly available records and filings concerning the Exchangors and it has carefully reviewed such
records and filings that it considers relevant to making an investment decision; and (d) has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary and not upon any
view expressed by the Exchangors. 
  

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 5.4 The Holder is (i) an institutional “accredited investor” within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under the Securities Act, and (ii) a “qualified purchaser” (as determined in accordance with Section 2(a)(51) of the Investment Company Act of 1940, as
amended) not formed solely for the purpose of owning the Preferred Securities or the Junior Subordinated Notes. 
 5.5 The Holder has full
power and authority to deliver, exchange, sell, assign and transfer the Existing Preferred Securities; the Company will acquire good, marketable and unencumbered title to the Existing Preferred Securities provided for exchange, free and clear of all
Liens, restrictions, charges and encumbrances; and the Existing Preferred Securities provided for exchange are not subject to any adverse claims or proxies. Such Holder will, upon request, execute and deliver any additional documents reasonably
deemed by any Exchangor or the Escrow Agent to be necessary or desirable to complete the exchange of the Existing Preferred Securities pursuant to this Agreement. 
 5.6 Neither any of the Holders, nor any of the Holders’ affiliates, nor any person acting on the Holders’ or the Holders’ affiliates’ behalf have engaged, or will engage, in any form of
“general solicitation or general advertising” (within the meaning of Regulation D) or in any “direct selling efforts” (within the meaning of Regulation S) in connection with any offer or sale of the Preferred Securities.

 5.7 The Holder is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is
organized with all requisite (i) power and authority to execute, deliver and perform the Operative Documents to which it is a party, to make the representations and warranties specified herein and therein and to consummate the transactions
contemplated herein and (ii) right and power to exchange the Existing Preferred Securities for the Preferred Securities. 
 5.8 This
Agreement has been duly authorized, executed and delivered by the Holder and no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction
over the Holder, other than those that have been made or obtained, is necessary or required for the performance by the Holder of its obligations under this Exchange Agreement or to consummate the transactions contemplated herein. 
 5.9 This Agreement constitutes the legal, valid and binding obligation of the Holder, enforceable against the Holder, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors’ rights generally and to general principles of equity. 
 5.10 Each Holder listed on
Schedules I and II hereto currently holds legal and beneficial interests in the aggregate liquidation amount of the Existing Preferred Securities set forth next to their names on such Schedules I and II. 
 Section 6. Covenants. Each of the Exchangors and the Holders covenants and agrees with the other parties hereto as follows: 
 6.1 Compliance with Representations and Warranties. During the period from the date of this Agreement to the Exchange Date, the Exchangors and the Holders
shall use commercially reasonable efforts to cause their representations and warranties contained in Sections 4 and 5, as applicable, to be true as of the Exchange Date (except as otherwise noted therein), after giving effect to the
transactions contemplated by this Agreement, as if made on and as of the Exchange Date. 
  

 15 








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

 6.3 Clearing and Settlement. With respect to the 2009 II/B Preferred Securities only, the Exchangors will cooperate with the
Holders (or any holder of the 2009 II/B Preferred Securities) and use all commercially reasonable efforts to make the 2009 II/B Preferred Securities eligible for clearance and settlement as book-entry securities through the facilities of the DTC and
listed for trading through the PORTAL Market (“PORTAL”), and will execute, deliver and comply with all material representations made to, and agreements with, DTC and PORTAL. This Section 6.3 will survive delivery of the
2009 II/B Preferred Securities in exchange for the 2006 Preferred Securities. 
 6.4 Integration. None of the Company, the Guarantor
nor any Trust will, until one hundred eighty (180) days following the Exchange Date, without the prior written consent of each Holder, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, directly or indirectly,
(i) any Preferred Securities or other securities of such Trust other than as contemplated by this Agreement or (ii) any other securities convertible into, or exercisable or exchangeable for, any Preferred Securities or other securities of
such Trust. 
 6.5 Qualification of Securities. The Exchangors will arrange for the qualification of the Preferred Securities for sale
under the laws of such jurisdictions as each of the Holders may designate and will maintain such qualifications in effect so long as required for the sale of the Preferred Securities. The Exchangors, as the case may be, will promptly advise each of
the Holders of the receipt by the Exchangors, as the case may be, of any notification with respect to the suspension of the qualification of the Preferred Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for
such purpose. 
 6.6 Investment Company. So long as any of the Securities are outstanding, (i) the Securities shall not be listed
on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated interdealer quotation system, (ii) neither the Company, the Guarantor nor any Trust shall be an open-end investment company,
unit investment trust or face-amount certificate company that is, or is required to be, registered under Section 8 of the Investment Company Act, and, the Securities shall otherwise satisfy the eligibility requirements of Rule 144A(d)(3) and
(iii) neither the Company, the Guarantor nor any Trust shall 
  

 16 








 
engage, or permit any subsidiary to engage, in any activity which would cause it or any subsidiary to be an “investment company” under the
provisions of the Investment Company Act. 
 6.7 Solicitation and Advertising. Neither the Company, the Guarantor nor any Trust will,
nor will any of them permit any of their Affiliates or any person acting on their behalf to (i) engage in any “directed selling efforts” within the meaning of Regulation S or (ii) engage in any form of “general solicitation
or general advertising” (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities. 
 6.8
Compliance with Rule 144A(d)(4) under the Securities Act. So long as any of the Securities are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Exchangors will, during
any period in which they are not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, or the Exchangors are not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the Exchange
Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser in connection with any proposed
transfer, any information required to be provided by Rule 144A(d)(4) under the Securities Act, if applicable. The information provided by the Exchangors pursuant to this Section 6.8 will not, at the date thereof, contain any untrue
statement of a material fact. If the Company, the Guarantor or any of the Trusts are required to register under the Exchange Act, such reports filed in compliance with Rule 12g3-2(b) shall be sufficient information as required above. This covenant
is intended to be for the benefit of the Holders, the holders of the Securities, and the prospective purchasers designated by such holders, from time to time, of the Securities. 
 6.9 Press Releases and Announcements. None of the Company, the Guarantor nor any Trust will identify any of the Indemnified Parties (as defined
below) in a press release or any other public statement without the consent of such Indemnified Party, except as otherwise required by applicable laws. 
 6.10 Replacement Notes. Each Holder shall have the right under this Agreement, the Indentures and the Trust Agreements to request the substitution of new notes for all or a portion of the Junior Subordinated
Notes held by any of the Trusts, as applicable. Each Trust shall be required under the terms of this Agreement, the Indentures and the Trust Agreements to accept such newly issued notes (the “Replacement Notes”) from the Company and
surrender a like amount of Junior Subordinated Notes to the Company. The Replacement Notes shall bear terms identical to the Junior Subordinated Notes with the sole exception of interest payment dates (and corresponding redemption date and maturity
date), which will be specified by the applicable Holders but shall be quarterly. In no event will the interest payment dates (and corresponding redemption date and maturity date) on the Replacement Notes vary by more than sixty (60) calendar
days from the original interest payment dates (and corresponding redemption date and maturity date) under the Junior Subordinated Notes. Each Exchangor acknowledges and agrees that, to the extent of the principal amount of the Replacement Notes
issued to such Trust under the applicable Indenture, the applicable Holders (and each successor to such Holders’ interest in the Preferred Securities) will require the applicable Trust to issue a new series of Preferred Securities having a
principal 

  

 17 








 
amount related to the principal amount of the Replacement Notes (the “Replacement Securities”) to designated holders of Preferred
Securities, provided that any such Replacement Securities, and any distributions from such Trust to the holders of Replacement Securities, must relate solely to such Trust’s interest in the Replacement Notes and in no event will the Preferred
Securities other than the Replacement Securities share in the returns from any Replacement Notes. The Replacement Securities shall have payment dates (and corresponding redemption date and maturity date) that relate to the Replacement Notes. Each
Exchangor agrees to cooperate with all reasonable requests of the Holders in connection with any of the foregoing; provided, that, except as set forth herein, no action requested of any Exchangor in connection with such cooperation shall otherwise
modify the obligations or rights of the Company pursuant to such documents. The Holders shall pay all reasonable expenses in connection with the issuance of the Replacement Notes and the Replacement Securities. 
 6.11 Reports. So long as any of the Securities are outstanding, the Company shall furnish to (i) the Holders and any subsequent holder of the
Securities reasonably identified to the Company, and (ii) any beneficial owner of the Securities reasonably identified to the Company (which identification may be made by either such subsequent holder, beneficial owner or by the Holder, as
applicable), a duly completed and executed certificate in the form attached hereto as Exhibit A, including the financial statements referenced in such exhibit, which certificate and financial statements shall be so furnished by the Company
not later than forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company and not later than ninety (90) days after the end of each fiscal year of the Company. 
 6.12 Further Assurances. The Exchangors and the Holders covenant and agree to execute and deliver (whether prior to or after the Exchange Date)
such other agreements, opinions and certificates as may be reasonably required in order (i) to cancel the Existing Securities, (ii) terminate the Existing Trusts and (iii) discharge the Existing Indentures, all on or after the
Exchange Date and in accordance with the terms and conditions set forth in the Existing Trusts and the Existing Indentures. 
 Section 7. Payment of Expenses. The Company and the Guarantor, jointly and severally, hereby covenant and agree that they shall pay (without duplication) or cause to be paid (directly or by reimbursement) all costs and expenses
incident to the performance of the obligations of the Exchangors under this Agreement, including (a) the Kodiak Restructuring Costs (as defined in the Settlement Agreement); (b) the Taberna Restructuring Costs (as defined in the Settlement
Agreement); (c) the reasonable fees and reasonable expenses of the counsel, the accountants and any other experts or advisors retained by the Company, the Guarantor or the Trusts; (d) the reasonable fees and reasonable expenses (including
reasonable expenses of counsel) of the Trusts’ property trustees, Delaware trustees, and administrative trustees and the Indentures’ indenture trustees and the reasonable fees of such trustees to administer the Trusts; (e) CUSIP and
PORTAL fees; and (f) all costs and expenses of the Company and the Guarantor not otherwise included in this Section 7 incident to the authorization, issuance, exchange and delivery of the Preferred Securities and any taxes incurred
by the Exchangors payable in connection therewith. All amounts payable pursuant to clauses (a) and (b) above shall be paid solely from the Settlement Amount deposited with the Escrow Agent pursuant to the terms of the Escrow
Agreement and the Settlement Agreement. Except as described in the preceding sentence, neither the Company nor the Guarantor shall have any direct or 

  

 18 








 
indirect obligation or liability with respect to the amounts payable pursuant to clauses (a) and (b) above, even if such amounts, in
the aggregate, exceed the Settlement Amount. 
 Section 8. Indemnification. 
 8.1 Indemnification.   
 8.1.1 The Company, the Guarantor and each Trust (each, an “Indemnifying Party,” and collectively, the “Indemnifying Parties”) agree jointly and severally to indemnify and hold harmless each Holder of each
Preferred Security issued by such Trust (collectively, the “Indemnified Parties”), each person, if any, who controls any of the Indemnified Parties within the meaning of the Securities Act, or the Exchange Act, and the Indemnified
Parties’ respective directors, officers, employees and agents and each person who “controls” the Indemnified Parties within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained in any information or documents furnished or made available to the Holders by or on
behalf of the Company, the Guarantor or any Trust by an Administrative Trustee, (b) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading,
(c) the breach or alleged breach of any representation, warranty or agreement of any Exchangor contained herein or (d) the execution and delivery by the Company, the Guarantor and/or any Trust of this Agreement or any of the other
Operative Documents and/or the consummation of the transactions contemplated hereby and thereby; provided, however, that none of the Guarantor, the Company or any Trust shall be liable to the extent that any such loss, claim, damage or
liability arises out of or is based on any statement, act or omission of the Indemnified Parties, and agrees to reimburse the Indemnified Parties, as incurred, for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability that the Company, the Guarantor or the Trusts may otherwise have. 
 8.1.2 Promptly after receipt by an Indemnified Party under this Section 8 of notice of the commencement of any action, such Indemnified Party
will, if a claim in respect thereof is to be made against the Indemnifying Party under this Section 8, promptly notify the Indemnifying Party in writing of the commencement thereof; but the failure so to notify the Indemnifying Party
(i) will not relieve the Indemnifying Party from liability under paragraph (a) above unless and to the extent that such failure results in the forfeiture by the Indemnifying Party of material rights and defenses and (ii) will not, in
any event, relieve the Indemnifying Party from any obligations to any Indemnified Party other than the indemnification obligation provided in paragraph (a) above. The Holders shall be entitled to appoint counsel to represent the Indemnified
Party in any action for which indemnification is sought. An Indemnifying Party may participate at its own expense in the defense of any such action; provided, that counsel to the Indemnifying Party shall not (except with the consent of the
Indemnified Party) also be counsel to the Indemnified Party. In no event shall the Indemnifying Parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all 

  

 19 








 
Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. An Indemnifying Party will not, without the prior written consent of the Indemnified Parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether or not the Indemnified Parties are actual or potential parties to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out of such claim, action, suit or proceeding. 
 8.2
Additional Remedies. The indemnity agreements contained in this Section 8 are in addition to any liability that the Exchangors may otherwise have to any Indemnified Party. 
 8.3 Additional Indemnification. The Company and the Guarantor shall indemnify and hold harmless each Trust against all loss, liability, claim,
damage and expense whatsoever, as due from the respective Trusts under Sections 8.1 and 8.2. 
 Section 9.
Termination. This Agreement and the other Operative Documents shall terminate automatically, and without notice to any party thereof, if the Exchange Date has not occurred on or before the Expiry Date. In the event that this Agreement is
terminated, the Escrow Agent shall return the Settlement Amount to the Company as provided in the Escrow Agreement and the Settlement Agreement, and the Existing Preferred Securities and the Securities shall be returned to the applicable parties as
provided in Section 2 hereof. 
 Section 10. Miscellaneous. 
 10.1 Notices. All communications hereunder will be in writing and effective only on receipt, and will be mailed, delivered by hand or courier or
sent by facsimile and confirmed: 
 if to the Holders, to the addresses for notice set forth on Schedules I and II hereto, with a copy to:

  

			
	 Winston & Strawn LLP
 35 West Wacker Drive
 Chicago, Illinois 60601
 Telephone: (312) 558-5600
 Facsimile: (312) 558-5700
 Attention: Katherine A. McAvopy, Esq.







  

 20 









			
		
	if to the Exchangors, to:	 	
	
	 NovaStar Mortgage, Inc.
 2114 Central Street, Suite 600
 Kansas City, MO 64108
 Telephone: (816) 237-7000
 Facsimile:
(816) 237-7515
 Attention: Chief Executive Officer






		
	with a copy to:	 	
	
	 Husch Blackwell Sanders LLP
 1200 Main Street, Suite 2300
 Kansas
City, MO 64105
 Telephone: (816) 421-4800
 Facsimile: (816) 421-0596
 Attention: Christopher Redmond







 All such notices and communications shall be deemed to have been duly received (i) at the
time delivered by hand, if personally delivered, (ii) five business days after being deposited in the mail, postage prepaid, if mailed, (iii) when answered back, if telexed, (iv) the next business day after being telecopied, or
(v) the next business day after timely delivery to a courier, if sent by overnight air courier guaranteeing next-day delivery. From and after the Exchange Date, the foregoing notice provisions shall be superseded by any notice provisions of the
Operative Documents under which notice is given. The Holders, the Exchangors and their respective counsel, may change their respective notice addresses, from time to time, by written notice to all of the foregoing persons. 
 10.2 Parties in Interest, Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the parties hereto, their successors, assigns, heirs and legal representatives, any right
or obligation hereunder. None of the rights or obligations of the parties under this Agreement may be assigned, whether by operation of law or otherwise, without the prior written consent of each of the other parties hereto. The rights and
obligations of each Holder in connection with the transfer of the Preferred Securities permitted pursuant to the terms of the applicable Trust Agreement may be assigned without the Exchangors’ consent; provided that the assignee assumes
the obligations and makes the representations and warranties of the respective Holders under this Agreement. 
 10.3 Amendments. This
Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement by each of the parties hereto. 
 10.4 Counterparts and Facsimile. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts
shall together constitute one and the same instrument. This Agreement may be executed by any one or more of the parties hereto by facsimile which shall be effective as delivery of a manually executed counterpart hereof. 
  

 21 








 10.5 Headings. The headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof. 
 10.6 Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW). 
 10.7 Submission to Jurisdiction. ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS AGREEMENT MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW
YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. 
 10.8 Entire Agreement. This Agreement, together with the Operative Documents, the Settlement Agreement and the other documents delivered in
connection with the transactions contemplated by this Agreement and the Settlement Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding
of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the
Operative Documents, the Settlement Agreement and the other documents delivered in connection with the transactions contemplated by this Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject
matter. 
 10.9 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or
affected, it being intended that all of the parties’ rights and privileges shall be enforceable to the fullest extent permitted by law. 
 10.10 Survival. The respective agreements, representations, warranties, covenants, indemnities and other statements of the Exchangors and the Holders set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any of the Holders, the Company, the Guarantor or the Trusts or any of their respective officers, directors, trustees or controlling persons, and will survive the exchange of the
Securities. The provisions of the first paragraph of Section 2.4 relating to the payment of rating agency costs and Sections 7 and 8 shall survive the termination or cancellation of this Agreement. 
 Signatures appear on the following page 
  

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

			
	NOVASTAR MORTGAGE, INC.
		
	By:	 	  

	Name:	 	
	Title:	 	
	
	NOVASTAR FINANCIAL, INC.
		
	By:	 	  

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

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

	Name:	 	
	Title:	 	










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

	Name:	 	Robert M. Hurley
	Title:	 	Chief Financial Officer










			
	 TABERNA PREFERRED FUNDING I, LTD., 
 as
Holder

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

	Name:	 	Raphael Licht
	Title:	 	Secretary
	
	 TABERNA PREFERRED FUNDING II, LTD.,
 as
Holder

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

	Name:	 	Raphael Licht
	Title:	 	Secretary









 Schedule I 
 NovaStar Capital Trust I and NovaStar Capital Trust I/B 
  

							
	 Holder
	  	Stated Liquidation Amount of
2005 Preferred
Securities Held as of
the Effective Date	  	Liquidation Amount of
2009 I/B Preferred Securities
to be Received upon
Completion of
the Exchange
	 Taberna Preferred Funding I, Ltd.
	  	$	25,000,000	  	$	25,000,000
	 Taberna Preferred Funding II, Ltd
	  	$	25,000,000	  	$	25,000,000
		  	 	 	  	 	 
	 Total
	  	$	50,000,000	  	$	50,000,000

 Taberna Preferred Funding I, Ltd. 
 Taberna Capital Management, LLC 
 2929 Arch Street, 17th Floor 
 Philadelphia, PA 19104 
 Fax: (215) 243-9030 
 Taberna Preferred Funding II, Ltd. 
 Taberna Capital Management, LLC 
 2929 Arch Street, 17th Floor 
 Philadelphia, PA 19104 
 Fax: (215) 243-9030 
 Email: rlicht@raitft.com and mfralin@tabernasecurities.com 







 Schedule II 
 NovaStar Capital Trust II and NovaStar Capital Trust II/B 
  

							
	 Holder
	  	Stated Liquidation Amount of
2006 Preferred
Securities Held as of
the Effective Date	  	Liquidation Amount
of 2009 II/B Preferred Securities
to be Received
upon
Completion of the Exchange
	 Kodiak CDO I, Ltd.
	  	$	28,125,000	  	$	28,125,000
		  	 	 	  	 	 
	 Total
	  	$	28,125,000	  	$	28,125,000

 Kodiak CDO I, Ltd. 
 c/o Kodiak Capital Management Company, LLC 
 Attn: Chief Financial Officer 
 2107 Wilson Boulevard, Suite 400 
 Arlington, VA 22201 
 Email : rhurley@ejfcap.com and lkucera@ejfcap.com