Document:

exv10w1

 

Exhibit 10.1

 

 

SECOND AMENDMENT

TO

CREDIT AGREEMENT

Dated as of August 31, 2006

among

ENCORE WIRE LIMITED,

as the Borrower

BANK OF AMERICA, N.A.,

as Administrative Agent and a Lender,

and

WELLS FARGO BANK, NATIONAL ASSOCIATION,

as Syndication Agent and a Lender

and

The Other Lenders Party Thereto

 

 

      

BANK OF AMERICA, N.A.,

as Sole Lead Arranger and Sole Book Manager

 

 

SECOND AMENDMENT TO CREDIT AGREEMENT

     THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this “Second Amendment”), dated as
of August 31, 2006, is entered into among ENCORE WIRE LIMITED, a Texas limited partnership (the
“Borrower”), BANK OF AMERICA, N.A. (“Bank of America”) and WELLS FARGO BANK,
NATIONAL ASSOCIATION (“Wells Fargo”), in their individual capacities as “Lenders”
(as such term is defined herein), and BANK OF AMERICA, N.A., as Administrative Agent.

BACKGROUND

     A. The Borrower, the Lenders and the Administrative Agent are parties to that certain Credit
Agreement, dated as of August 27, 2004, as amended by that certain First Amendment to Credit
Agreement, dated as of May 16, 2006 (said Credit Agreement, as amended, the “Credit
Agreement”). The terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement.

     B. The Borrower has requested certain amendments to the Credit Agreement to, among other
things, increase the Aggregate Commitments.

     C. The Lenders and the Administrative Agent hereby agree to amend the Credit Agreement,
subject to the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set
forth, and for other good and valuable consideration, the receipt and adequacy of which are all
hereby acknowledged, the Borrower, the Lenders and the Administrative Agent covenant and agree as
follows:

     1. AMENDMENTS.

     (a) The definition of “Aggregate Commitments” set forth at 1.6 of the Credit Agreement
is hereby amended to read as follows:

     “Aggregate Commitments” means the Commitments of all the Lenders. As of the
Second Amendment Effective Date, the Aggregate Commitments are $200,000,000.

     (b) The definition of “Accordion Amount” set forth in Article I of the Credit
Agreement is hereby amended to read as follows:

     “Accordion Amount” means, as of any date of determination, the difference
between $200,000,000 and the Aggregate Commitments in effect on such date of determination.

     (c) The definition of “Note Purchase Agreement” set forth at 1.94 of the Credit
Agreement is hereby amended to read as follows:

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     “Note Purchase Agreements” means, collectively, (a) that certain Note Purchase
Agreement, dated as of August 1, 2004, among the Borrower, Parent and the purchasers party
thereto, in the form in effect on August 27, 2004, and (b) that certain Master Note
Purchase Agreement, dated as of September 15, 2006, among Borrower, Parent and the
purchasers party thereto, in substantially the form of the draft delivered to the
Administrative Agent dated August 21, 2006.

     (d) The definition of “Private Placement Debt” set forth at 1.103 of the Credit
Agreement is hereby amended to read as follows:

     “Private Placement Debt” means unsecured private placement indebtedness of the
Borrower in an aggregate principal amount not to exceed $150,000,000 issued pursuant to (a)
the terms and conditions set forth in the Note Purchase Agreements and (b) any other
documentation containing terms and conditions substantially similar to the Note Purchase
Agreements.

     (e) Article I of the Credit Agreement is hereby amended by adding the defined term “Second
Amendment Effective Date” thereto in proper alphabetical order to read as follows:

     “Second Amendment Effective Date” means August 31, 2006.

     (f) Clause (e) of Section 7.26 of the Credit Agreement is hereby amended to read as follows:

     (e) the Private Placement Debt, so long as there is no Default or Event of Default
immediately before and, on a pro forma basis, after the incurrence of such Indebtedness,

     2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that,
as of the date hereof:

     (a) the representations and warranties contained in the Credit Agreement and the other Loan
Documents are true and correct on and as of the date hereof as made on and as of such date, except
to the extent that such representations and warranties specifically refer to an earlier date, in
which case they shall be true and correct as of such earlier date, and except to the extent such
representations and warranties have been supplemented pursuant to paragraph 7.12 of the Credit
Agreement;

     (b) no event has occurred and is continuing which constitutes a Default or an Event of
Default;

     (c) (i) the Borrower has full power and authority to execute and deliver this Second
Amendment, each Revolving Loan Note payable to the order of each Lender in the amount of each such
Lender’s Commitment as increased by this Second Amendment (collectively, the “Replacement
Notes”), (ii) this Second Amendment and the Replacement Notes have been duly executed and
delivered by the Borrower, and (iii) this Second Amendment, the Replacement

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Notes and the Credit Agreement, as amended hereby, constitute the legal, valid and binding
obligations of the Borrower, enforceable in accordance with their respective terms, except as
enforceability may be limited by applicable Debtor Relief Laws and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at law) and except as
rights to indemnity may be limited by federal or state securities laws;

     (d) neither the execution, delivery and performance of this Second Amendment, the Replacement
Notes or the Credit Agreement, as amended hereby, nor the consummation of any transactions
contemplated herein or therein, will conflict with (i) the certificate or articles of incorporation
or the applicable constituent documents or bylaws of the Borrower or any Guarantor, (ii) any Law
applicable to the Borrower or any Guarantor or (iii) any indenture, agreement or other instrument
to which the Borrower, any Guarantor or any of their respective properties are subject; and

     (e) no authorization, approval, consent, or other action by, notice to, or filing with, any
Governmental Authority or other Person not previously obtained is required for (i) the execution,
delivery or performance by the Borrower of this Second Amendment or the Replacement Notes or (ii)
the acknowledgement by each Guarantor of this Second Amendment.

     3. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall be effective upon
satisfaction or completion of the following:

     (a) the Administrative Agent shall have received counterparts of this Second Amendment
executed by each Lender;

     (b) the Administrative Agent shall have received an executed Replacement Note for each Lender;

     (c) the Administrative Agent shall have received counterparts of this Second Amendment
executed by the Borrower and acknowledged by each Guarantor;

     (d) the Administrative Agent shall have received a certified resolution of the Board of
Directors of the Borrower authorizing the execution, delivery and performance of this Second
Amendment and the Replacement Notes;

     (e) the Administrative Agent shall have received an opinion of the Borrower’s counsel, in form
and substance satisfactory to the Administrative Agent and its counsel, with respect to the matters set forth in clauses (c), (d) and (e) of Section 2 of this
Second Amendment and with respect to such other matters as the Administrative Agent and its counsel
shall reasonably request;

     (f) the Administrative Agent shall have received in immediately available funds for the
account of each Lender a fee in an amount equal to the product of (A) 0.10% and (B) the amount of
the increase of each such Lender’s Commitment pursuant to this Second Amendment; and

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     (g) the Administrative Agent shall have received, in form and substance satisfactory to the
Administrative Agent and its counsel, such other documents, certificates and instruments as the
Administrative Agent shall require.

     4. REFERENCE TO THE CREDIT AGREEMENT.

     (a) Upon the effectiveness of this Second Amendment, each reference in the Credit Agreement to
“this Agreement”, “hereunder”, or words of like import shall mean and be a reference to the Credit
Agreement, as affected and amended hereby.

     (b) The Credit Agreement, as amended by the amendments referred to above, shall remain in full
force and effect and is hereby ratified and confirmed.

     5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all costs and
expenses of the Administrative Agent in connection with the preparation, reproduction, execution
and delivery of this Second Amendment and the other instruments and documents to be delivered
hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the
Administrative Agent with respect thereto).

     6. GUARANTOR’S
ACKNOWLEDGMENT. By signing below, each Guarantor (a) acknowledges, consents and agrees to the execution, delivery and performance by the Borrower of
this Second Amendment, (b) acknowledges and agrees that its obligations in respect of its Guaranty
(i) are not released, diminished, waived, modified, impaired or affected in any manner by this
Second Amendment or any of the provisions contemplated herein, and (ii) include the increase of the
Aggregate Commitments provided for in this Second Amendment, (c) ratifies and confirms its
obligations under its Guaranty, and (d) acknowledges and agrees that it has no claims or offsets
against, or defenses or counterclaims to, its Guaranty.

     7. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same
instrument. For purposes of this Second Amendment, a counterpart hereof (or signature page thereto)
signed and transmitted by any Person party hereto to the Administrative Agent (or its counsel) by
facsimile machine, telecopier or electronic mail is to be treated as an original. The signature of
such Person thereon, for purposes hereof, is to be considered as an original signature, and the
counterpart (or signature page thereto) so transmitted is to be considered to have the same binding
effect as an original signature on an original document.

     8. GOVERNING LAW; BINDING EFFECT. This Second Amendment shall be governed by and
construed in accordance with the laws of the State of Texas, provided that the Administrative Agent
and each Lender shall retain all rights arising under federal law, and shall be binding upon the
parties hereto and their respective successors and assigns.

     9. HEADINGS. Section headings in this Second Amendment are included herein for
convenience of reference only and shall not constitute a part of this Second Amendment for any
other purpose.

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     10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND AMENDMENT, AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

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     IN WITNESS WHEREOF, this Second Amendment is executed as of the date first set forth above.

	 	 	 	 	 	 	 
	 	 	BORROWER:
	 
	 	 	 	 	 	 
	 	 	ENCORE WIRE LIMITED
	 
	 	 	 	 	 	 
	 	 	By:	 	EWC GP Corp., its general partner
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 	 	 	 	 
	 

	 	 	 	Name:
	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Title:
	 	 
	 

	 	 	 	 	 	 

6

 

	 	 	 	 	 	 	 
	 	 	ADMINISTRATIVE AGENT:
	 
	 	 	 	 	 	 
	 	 	BANK OF AMERICA, N.A.
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	BANK OF AMERICA, N.A., as a Lender
	 
	 	 	 	 	 	 
	Commitment: $120,000,000
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 
	 

	 	 	 	 	 	 

7

 

	 	 	 	 	 	 	 
	 	 	WELLS FARGO BANK, NATIONAL
	 	 	ASSOCIATION, as a Lender
	 
	 	 	 	 	 	 
	Commitment: $80,000,000
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 
	 

	 	 	 	 	 	 

8

 

	 	 	 	 	 	 	 
	ACKNOWLEDGED AND AGREED:	 	 
	 
	 	 	 	 	 	 
	EWC GP CORP.	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	EWC LP CORP.	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	EWC AVIATION CORP.	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

9<PAGE>

                                                                 EXHIBIT 10.38.6

WAREHOUSE AGREEMENT dated as of August 28, 2006 (this "AGREEMENT"), between
Merrill Lynch International ("MLI") and Hanover Capital Mortgage Holdings, Inc.
("COLLATERAL MANAGER").

                                    RECITALS

WHEREAS, pursuant to an engagement letter dated June 14, 2006 (the "ENGAGEMENT
LETTER"), between Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS")
and the Collateral Manager, the Collateral Manager engaged MLPFS with respect
to, among other things, (a) the formation of a special purpose entity to be
organized under the law of the Cayman Islands (the "ISSUER") for the purpose of
acquiring a diversified portfolio of mezzanine grade asset-backed securities
(such securities, "COLLATERAL DEBT SECURITIES"), and certain other investments
and assets including one or more eligible investments ("ELIGIBLE INVESTMENTS"),
and (b) the structuring of several classes of notes (the "NOTES") and preference
shares (the "PREFERENCE SHARES" and, collectively with the Notes, the "OFFERED
SECURITIES") to be issued by the Issuer and secured or backed by such Collateral
Debt Securities and the Eligible Investments;

WHEREAS, Collateral Manager will act as collateral manager to the Issuer; and

WHEREAS, the Offered Securities are to be offered and sold (the "OFFERING") by
the Issuer in a transaction (the "TRANSACTION") exempt from the registration
requirements of the Securities Act of 1933, as amended;

NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties hereby agree as follows:

DEFINITIONS

1.     Capitalized terms used herein and not otherwise defined herein shall have
the meanings set forth in the Engagement Letter. The following terms have the
respective meanings set forth below for all purposes of this Agreement
(including the recitals set forth above):

"ACCUMULATION PERIOD" means the period commencing on the date hereof and ending
on, but excluding, the earlier of (a) the date three Business Days prior to the
Closing Date and (b) the Termination Date.

"ADJUSTED PURCHASE PRICE" means, with respect to any Collateral Debt Security
constituting part of the Warehouse Portfolio on any date of determination, a
price equal to (a) the Gross Purchase Price of such Collateral Debt Security
(together with the aggregate amount of all scheduled periodic payments made on
or prior to such date of determination by MLI under any Pre-Pricing Hedge
related to such Collateral Debt Security) MINUS (b) the aggregate amount of all
distributions of principal and interest actually received from the issuer
thereof by MLI on or prior to such date of determination in respect of such
Collateral Debt Security (together with the aggregate amount of all scheduled
periodic payments received on or prior to such date of determination by MLI
under any Pre-Pricing Hedge related to such Collateral Debt Security).

                                       1
<PAGE>

"AFFILIATE" means, in relation to any specified Person, (a) any other Person
who, directly or indirectly, is in control of, or controlled by, or is under
common control with, such Person or (b) any other Person who is a director,
officer, member or partner of (i) such Person or (ii) any such other Person
described in clause (a) above; PROVIDED that no other special purpose company to
which an administrator of the Issuer provides directors and acts as share
trustee shall be an Affiliate of the Issuer. For the purposes of this
definition, CONTROL of a Person means the power, direct or indirect, (i) to vote
more than 50% of the securities having ordinary voting power for the election of
directors of such Person or (ii) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.

"ASSET-BACKED SECURITIES" means (a) securities (excluding, for the avoidance of
doubt, any commercial loan or participation interest in a commercial loan) that
entitle the holders thereof to receive payments that depend primarily on the
cash flow from a specified pool of financial assets or securities, either fixed
or revolving, that by their terms convert into cash within a finite time period,
together with rights or other assets designed to assure the servicing or timely
distribution of proceeds to holders of such securities and (b) corporate debt
securities issued by REITs.

"BUSINESS DAY" means any day (a) that is a trading day on the New York Stock
Exchange and (b) on which commercial banks are open for general business
(including dealings in foreign exchange and foreign currency deposits) in New
York City and London.

"CARRY PERIOD" means, with respect to any Collateral Debt Security constituting
part of the Warehouse Portfolio, the period commencing on (and including) the
settlement date on which MLI purchases such Collateral Debt Security hereunder
and ending on (and excluding) (A) if such Collateral Debt Security is sold to
the Issuer on the Closing Date, the Closing Date and (B) otherwise, the
occurrence of any Realization Event with respect to such Collateral Debt
Security.

"CARRY YIELD" means, with respect to a Collateral Debt Security, the effective
yield (determined by MLI in good faith) on such Collateral Debt Security on the
first day of the Carry Period for such Collateral Debt Security implied by the
Gross Purchase Price (expressed on a "clean" basis); PROVIDED that, with respect
to any such Collateral Debt Security that bears interest at an interest rate
determined by reference to a fixed spread above or below a London Interbank
offered rate, such effective yield (as determined by MLI in good faith) shall be
expressed as the sum of (i) such London Interbank offered rate (as in effect
from time to time) plus (or minus) (ii) a spread above or below the level of
such London Interbank offered rate used to calculate such interest rate for the
period that includes the first day of the Carry Period for such Collateral Debt
Security.

"CDO SECURITY" means a debt security issued by an entity formed for the purpose
of investing and, in certain cases, reinvesting in a pool comprised primarily of
debt obligations and/or debt securities (including Asset-Backed Securities)
subject to specified investment and management criteria.

"CLOSING DATE" means the date on which the Offered Securities are issued.

"CODE" means the U.S. Internal Revenue Code of 1986, as amended.

                                       2
<PAGE>

"COLLATERAL MANAGER EVENT" means any of the following events:

(a)    the Collateral Manager shall fail to perform any of its obligations
       under, or shall breach any provision of, this Agreement or the Engagement
       Letter, where such failure or breach could have a material adverse effect
       on Merrill Lynch or the Transaction;

(b)    any representation or warranty made or deemed made by or on behalf of the
       Collateral Manager in or pursuant to this Agreement or the Engagement
       Letter, or in any certificate or other document furnished pursuant hereto
       or thereto, shall prove to have been incorrect in any material respect
       when made or deemed made;

(c)    the occurrence of an act by the Collateral Manager or any of its
       Affiliates that constitutes fraud, misappropriation, embezzlement or
       other intentional misconduct; or any director, officer or
       management-level employee of the Collateral Manager or any of its
       Affiliates is convicted of a felony related to its activities in any
       securities, financial advisory or other investment business; or the
       Collateral Manager or any of its Affiliates is indicted for, adjudged
       liable in a civil suit for or convicted of a violation of any United
       States Federal securities law or any rules or regulations thereunder; or

(d)    the Collateral Manager shall seek to terminate (or shall disaffirm,
       disclaim, repudiate or reject, in whole or in part, or shall challenge
       the validity of, any of its obligations under) this Agreement or the
       Engagement Letter (other than any termination hereof or thereof effected
       or to be effected with the consent of each other party);

PROVIDED that none of the foregoing events, if remediable, shall constitute a
"Collateral Manager Event" unless and until such event shall have continued for
two Business Days after the earlier of (A) actual knowledge thereof by the
Collateral Manager and (B) notice thereof to the Collateral Manager from MLI or
any of its Affiliates.

"CREDIT RISK ASSET" means any Collateral Debt Security that, in the sole
judgment of MLI exercised in good faith, has a material risk of declining in
credit quality, becoming a Defaulted Asset or becoming an Ineligible Asset.

"DEFAULTED ASSET" means any Collateral Debt Security as to which (A) there has
occurred a default as to the payment of principal and/or interest (without
regard to any notice requirement or grace period), (B) there has occurred a
default with respect to such Collateral Debt Security that MLI believes or has
reason to believe will likely result in a default as to the payment of principal
and/or interest on such Collateral Debt Security, (C) there has occurred a
default as to the payment of principal and/or interest on any other material
obligation of any obligor on such Collateral Debt Security (without regard to
any notice requirement or grace period), (D) an Insolvency Event has occurred
with respect to any obligor on such Collateral Debt Security or (E) there has
been proposed or effected any distressed exchange or other debt package of
securities that either (1) amount to a diminished financial obligation or (2)
has the sole purpose of enabling the obligor to avoid a default; PROVIDED that,
with respect to a default referred to in clause (A), (B) or (C) above, the
related Collateral Debt Security will only constitute a "Defaulted Asset" for so
long as such default has not been cured or waived.

                                       3
<PAGE>

"ELIGIBILITY CRITERIA" means the criteria relating to the acquisition of
Collateral Debt Securities set forth in Annex A.

"EQUITY SECURITY" means any obligation or security that does not entitle the
holder thereof to receive periodic payments of interest and one or more
installments of principal or any other obligation or security convertible into
or exchangeable for any such obligation or security.

"EXPECTED PORTFOLIO BALANCE" means U.S.$125,000,000; PROVIDED that the Expected
Portfolio Balance may be adjusted by mutual agreement in writing by the parties
hereto.

"FITCH" means Fitch, Inc., or any successor or successors thereto.

"GROSS PURCHASE PRICE" means, in respect of any Collateral Debt Security
constituting part of the Warehouse Portfolio, the aggregate dollar amount paid
by MLI to acquire such Collateral Debt Security (including accrued interest).

"GUARANTEED ASSET-BACKED SECURITY" means an Asset-Backed Security as to which
the timely payment of interest when due, and the payment of principal no later
than stated legal maturity thereof, is unconditionally guaranteed pursuant to a
corporate guarantee or other similar instrument, but only if such corporate
guarantee or other similar instrument (a) expires no earlier than such stated or
actual legal maturity, (b) provides that payment thereunder is independent of
the performance by the obligor on the relevant Asset-Backed Security and (c) is
issued by a Person having a credit rating assigned by each nationally recognized
statistical rating organization that currently rates such Asset-Backed Security
higher than the credit rating assigned by such rating organization to such
Asset-Backed Security determined without giving effect to such corporate
guarantee or other similar instrument.

"HEDGE ADJUSTED PURCHASE PRICE" means, with respect to any Collateral Debt
Security constituting part of the Warehouse Portfolio on any date of
determination, a price equal to (a) the Adjusted Purchase Price of such
Collateral Debt Security on such date PLUS (b) the Carry Yield accrued on such
Collateral Debt Security during the Carry Period therefor PLUS (c) any
Pre-Pricing Hedge Termination Payment with respect to such Collateral Debt
Security MINUS (d) any Pre-Pricing Hedge Termination Receipt with respect to
such Collateral Debt Security.

"HEDGE AGREEMENT" means any Pre-Pricing Hedge or Portfolio Hedge.

"HYBRID SECURITY" means any security (including, without limitation,
Asset-Backed Securities the payments on which depend on the cash flow from
adjustable-rate mortgages) that, pursuant to its Underlying Instruments, bears
interest at a fixed rate for a limited period of time, after which it bears
interest based upon a floating rate index for U.S. dollar-denominated
obligations commonly used as a reference rate in the United States of America or
the United Kingdom.

"INELIGIBLE ASSET" means any Collateral Debt Security that

(i)    does not satisfy on the date on which such Collateral Debt Security was
       purchased by MLI hereunder, or on any date thereafter on or prior to the
       Termination Date, the Eligibility Criteria; or

                                       4
<PAGE>

(ii)   fails to conform to the investment criteria established by any of the
       Rating Agencies as applicable to the Transaction, including by reason of
       any change in the investment criteria established by any of the Rating
       Agencies.

"INSOLVENCY EVENT" means, with respect to any Person, such Person (1) shall be
dissolved or liquidated; (2) shall become insolvent or unable to pay its debts
as they become due; (3) shall make a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) shall institute or
have instituted against it a proceeding seeking a judgment of insolvency or
bankruptcy or any other relief under any bankruptcy or insolvency law or other
similar law affecting creditors' rights, or a petition is presented for its
winding-up or liquidation, and, in the case of any such proceeding or petition
instituted or presented against it, such proceeding or petition (A) results in a
judgment of insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or (B) is not dismissed,
discharged, stayed or restrained in each case within 60 days of the institution
or presentation thereof; (5) shall have a resolution passed for its winding-up,
official management or liquidation (other than pursuant to a consolidation,
amalgamation or merger); (6) shall seek or become subject to the appointment of
an administrator, provisional liquidator, conservator, receiver, trustee,
custodian or other similar official for it or for all or substantially all its
property; (7) shall have a secured party take possession of all or substantially
all its property or have a distress, execution, attachment, sequestration or
other legal process levied, enforced or sued on or against all or substantially
all its property and such secured party shall maintain possession, or any such
process is not dismissed, discharged, stayed or restrained, in each case within
30 days thereafter; (8) shall cause or become subject to any event with respect
to it which, under the applicable laws of any jurisdiction, has an analogous
effect to any of the events specified in clauses (1) to (7) (inclusive); or (9)
shall take any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the foregoing acts.

"ISSUER DOCUMENTATION" means, collectively, the documentation related to the
offering, placement, issuance or sale of any of the Offered Securities
(including any indenture), in any revision or completed version thereof or in
any amendment, supplement or modification of any thereof or any other agreement
or instrument binding upon the Issuer referred to therein.

"MARKET VALUE" means, in respect of any Realization Event and a Collateral Debt
Security constituting part of the Warehouse Portfolio, an amount equal to
either:

(a)    if an actual sale or liquidation of such Collateral Debt Security by or
       on behalf of MLI has occurred at the time the Market Value is determined,
       the net proceeds (after deducting all costs, fees and expenses incurred
       in connection therewith) received by MLI from a sale on an arm's length
       basis of such Collateral Debt Security to any Person other than MLI or
       any of its Affiliates, or

(b)    otherwise, the arithmetic average of at least three bids obtained by or
       on behalf of MLI from nationally recognized securities dealers in the
       relevant market (other than MLI or any of its Affiliates) to purchase
       such Collateral Debt Security (inclusive of accrued interest, but after
       deducting all costs, fees and expenses that MLI estimates would be
       incurred in connection with any actual sale of such Collateral Debt
       Security by MLI).

                                       5
<PAGE>

Any determination of the Market Value of a Collateral Debt Security (including
by reference to any cost, fee or expense that would be incurred in consideration
of a sale thereof) made by or on behalf of MLI in the manner described above
shall be conclusive if made in good faith and on any commercially reasonable
basis.

"MATERIAL ADVERSE CHANGE" means the occurrence of one or both of the following
events:

(a)    there occurs after the date hereof a material adverse change in the
       business, operations, financial condition or prospects of the Collateral
       Manager; or

(b)    the Collateral Manager or any of its Affiliates becomes the subject of an
       Insolvency Event;

PROVIDED that, in the case of any event or circumstance specified above other
than an Insolvency Event with respect to the Collateral Manager, such event or
circumstance has, or could reasonably be expected to have, a material adverse
effect on the marketability of the Offered Securities or on the economic terms
of the Transaction or on the ability of the Collateral Manager to perform its
obligations under the Engagement Letter or in connection with the Transaction,
each as determined in good faith and on a commercially reasonable basis by MLI.

"MOODY'S" means Moody's Investors Service, Inc. and any successor or successors
thereto.

"NET GAIN" means the excess, if any, of (a) the sum of (i) the aggregate amount
of all Realized Gains PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Receipts OVER (b) the sum of (i) the aggregate amount of all
Realized Losses PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Payments.

"NET LOSS" means the excess, if any, of (a) the sum of (i) the aggregate amount
of all Realized Losses PLUS (ii) the aggregate amount of all Portfolio Hedge
Termination Payments OVER (b) the sum of (i) the aggregate amount of all
Realized Gains PLUS (ii) the aggregate amount of all Portfolio Hedge Termination
Receipts.

"NON-CONFORMING ASSET" means any Credit Risk Asset, Ineligible Asset, Defaulted
Asset or Written-Down Security.

"OTHER ABS" means (i) a debt security (other than a CDO Security) issued by an
entity formed for the purpose of holding or investing and, in certain cases,
reinvesting in a pool of receivables, debt obligations, debt securities, finance
leases subject to specified acquisition or investment and management criteria or
(ii) a beneficial interest in a trust all of the assets of which would satisfy
the Eligibility Criteria.

"PERSON" means any individual, corporation, company, voluntary association,
partnership, limited liability company, joint venture, trust, unincorporated
organization or government (or any agency, instrumentality or political
subdivision thereof).

"PIK BOND" means any security that, pursuant to the terms of the related
Underlying Instruments, permits the payment of interest thereon to be deferred
and capitalized as additional principal thereof or that issues identical
securities in place of payments of interest in cash.

                                       6
<PAGE>

"PORTFOLIO HEDGE" has the meaning assigned to such term in Section 2.

"PORTFOLIO HEDGE TERMINATION PAYMENT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid by MLI upon the early
termination or liquidation of the Portfolio Hedge MINUS (b) any amounts included
in the calculation of the amount specified in clause (a) of this definition
owing by MLI that have accrued under the Portfolio Hedge prior to but excluding
the date of the early termination or liquidation of the Portfolio Hedge but not
yet been paid PLUS (c) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing to MLI that have accrued (but
not yet been paid) under the Portfolio Hedge prior to but excluding the date of
the early termination or liquidation of the Portfolio Hedge; and otherwise,
zero.

"PORTFOLIO HEDGE TERMINATION RECEIPT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid to MLI upon the early
termination or liquidation of the Portfolio Hedge PLUS (b) any amounts included
in the calculation of the amount specified in clause (a) of this definition
owing by MLI that have accrued under the Portfolio Hedge prior to but excluding
the date of the early termination or liquidation of the Portfolio Hedge (but not
yet been paid) MINUS (c) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing to MLI that have accrued (but
not yet been paid) under the Portfolio Hedge prior to but excluding the date of
the early termination or liquidation of the Portfolio Hedge; and otherwise,
zero.

"PRE-PRICING HEDGE" has the meaning assigned to such term in Section 2.

"PRE-PRICING HEDGE TERMINATION PAYMENT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid by MLI upon the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security MINUS (b) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing by MLI that have accrued under
the related Pre-Pricing Hedge prior to but excluding the date of the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security but not yet been paid PLUS (c) any amounts included in the
calculation of the amount specified in clause (a) of this definition owing to
MLI that have accrued (but not yet been paid) under the related Pre-Pricing
Hedge prior to but excluding the date of the early termination or liquidation of
the Pre-Pricing Hedge related to such Collateral Debt Security; and otherwise,
zero.

"PRE-PRICING HEDGE TERMINATION RECEIPT" means the amount, if positive, equal to
(a) the amount of the payment required to be paid to MLI upon the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security PLUS (b) any amounts included in the calculation of the amount
specified in clause (a) of this definition owing by MLI that have accrued under
the related Pre-Pricing Hedge prior to but excluding the date of the early
termination or liquidation of the Pre-Pricing Hedge related to such Collateral
Debt Security but not yet been paid MINUS (c) any amounts included in the
calculation of the amount specified in clause (a) of this definition owing to
MLI that have accrued (but not yet been paid) under the related Pre-Pricing
Hedge prior to but excluding the date of the early termination or liquidation of
the Pre-Pricing Hedge related to such Collateral Debt Security; and otherwise,
zero.

                                       7
<PAGE>

"PRICING DATE" means the date on which MLPFS, in its capacity as placement agent
for the Issuer, prices the Notes.

"QUALIFYING FOREIGN OBLIGOR" means a corporation, partnership or other entity
located in any of Australia, Canada, France, Germany, Ireland, New Zealand,
Sweden, Switzerland or the United Kingdom, so long as the unguaranteed,
unsecured and otherwise unsupported long-term U.S. dollar sovereign debt
obligations of such country are rated "Aa2" or better by Moody's and "AA" or
better by Standard & Poor's.

"RATING AGENCY" means each of Moody's and Standard & Poor's.

"REALIZATION EVENT" means, with respect to any Collateral Debt Security
constituting part of the Warehouse Portfolio, the sale or other liquidation of
such Collateral Debt Security pursuant to Section 3(a) to the Issuer or Section
4 (including any sale to the Collateral Manager) or the election by MLI to
retain such Collateral Debt Security for its own account pursuant to Section 4.

"REALIZED GAIN" means, with respect to any Realization Event and a Collateral
Debt Security constituting part of the Warehouse Portfolio, the amount, if any,
by which the Market Value of such Collateral Debt Security exceeds the Hedge
Adjusted Purchase Price for such Collateral Debt Security, in each case,
determined as of the date of such Realization Event.

"REALIZED LOSS" means, with respect to any Realization Event and a Collateral
Debt Security constituting part of the Warehouse Portfolio, the amount, if any,
by which the Hedge Adjusted Purchase Price for such Collateral Debt Security
exceeds the Market Value of such Collateral Debt Security, in each case,
determined as of the date of such Realization Event.

"REIT" means a real estate investment trust within the meaning of Section 856 of
the Code or any successor provision.

"RESIDENTIAL INTEREST ONLY SECURITY" means any Asset-Backed Security that (a)
entitles the holders thereof to receive payments that depend on the cash flow
from residential mortgage loans and (b) does not provide for payment or
repayment of a stated principal amount.

"RMBS SECURITIES" means securities (excluding, for the avoidance of doubt, any
commercial loan or participation interest in a commercial loan) that entitle the
holders thereof to receive payments that depend (except for rights or other
assets designed to assure the servicing or timely distribution of proceeds to
holders of such securities) on the cash flow from a pool of residential mortgage
loans.

"SECURITIES ACT" means the United States Securities Act of 1933, as amended.

"SPV FOREIGN OBLIGOR" means a corporation, partnership or other entity located
in the Bahamas, Bermuda, the Cayman Islands, the Channel Islands, the
Netherlands Antilles or any other similar jurisdiction generally imposing either
no or nominal taxes on the income of entities organized under the law of such
jurisdiction.

                                       8
<PAGE>

"STANDARD & POOR'S" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and any successor or successors thereto.

"STEP-DOWN BOND" means a security which by the terms of the related Underlying
Instruments provides for a decrease in the per annum interest rate on such
security (other than by reason of any change in the applicable index or
benchmark rate used to determine such interest rate) or in the spread over the
applicable index or benchmark rate, solely as a function of the passage of time;
PROVIDED that a Step-Down Bond shall exclude (a) any such security that provides
for payment of a constant rate of interest at all times after the date of
acquisition by MLI and (b) any Hybrid Security.

"STEP-UP BOND" means a security which by the terms of the related Underlying
Instruments provides for an increase in the per annum interest rate on such
security or in the spread over the applicable index or benchmark rate, solely as
a function of the passage of time; PROVIDED that a Step-Up Bond shall exclude
(a) any such security providing for payment of a constant rate of interest at
all times after the date of acquisition by MLI and (b) any Hybrid Security.

"TERMINATION DATE" means the earliest to occur of (a) the Closing Date, (b) the
date on which (after the expiration of any applicable grace period and
fulfillment of applicable notice requirements) a Collateral Manager Event
occurs, (c) any date on which MLI determines that any event or circumstance
occurring after the date hereof has resulted in a Material Adverse Change and
(d) the date of any termination or expiration of the Engagement Letter.

"UNDERLYING INSTRUMENTS" means the indenture or other agreement pursuant to
which a Collateral Debt Security or Reference Obligation has been issued or
created and each other agreement that governs the terms of or secures the
obligations represented by such Collateral Debt Security or Reference Obligation
(or of which the holders of such Collateral Debt Security or Reference
Obligation are the beneficiaries).

"WAREHOUSE ACCOUNT" has the meaning assigned to such term in Section 2.

"WAREHOUSE PORTFOLIO" means the Collateral Debt Securities acquired from time to
time hereunder.

"WRAPPED ASSET-BACKED SECURITY" means a CDO Security or Other ABS guaranteed as
to ultimate or timely payment of principal or interest by a monoline financial
insurance company.

"WRITTEN-DOWN SECURITY" means, as of any date of determination, any security as
to which the aggregate outstanding par amount of such Collateral Debt Security
and all other securities secured by the same pool of collateral that rank pari
passu with or senior in priority of payment to such Collateral Debt Security
exceeds the aggregate outstanding principal amount (including reserved interest
or other amounts available for overcollateralization) of all collateral securing
such securities (excluding defaulted collateral).

"ZERO COUPON BOND" means a security that, pursuant to the terms of its
Underlying Instruments, on the date on which it is purchased, does not provide
for the payment of interest, or provides that all payments of interest will be
deferred until the final maturity thereof.

                                       9
<PAGE>

ACCUMULATION OF COLLATERAL DEBT SECURITIES

2.(a)  Subject to the other provisions of this Agreement and in particular the
       right of MLI in its sole discretion to refuse to acquire any Collateral
       Debt Security hereunder, the Collateral Manager may, so long as it has
       complied and is continuing to comply with all of its obligations
       hereunder and under the Engagement Letter, send a written or electronic
       request to MLI on any Business Day occurring during the Accumulation
       Period which shall specify (i) the Collateral Debt Securities that the
       Collateral Manager wishes to be included in the Warehouse Portfolio and
       (ii) for each Collateral Debt Security identified therein, the price that
       MLI shall purchase such Collateral Debt Security. The Collateral Manager
       hereby acknowledges that MLI may acquire such Collateral Debt Securities
       and otherwise perform its obligations under this Agreement through any of
       its Affiliates.

  (b)  In respect of a purchase of a Collateral Debt Security, (i) subject to
       MLI's prior approval, the Collateral Manager shall direct the seller of
       the Collateral Debt Security specified under Section 2(a) above to
       transfer such Collateral Debt Security to MLI and (ii) MLI shall hold all
       such Collateral Debt Securities in an account established by MLI (the
       "WAREHOUSE ACCOUNT") pending the resale of such Collateral Debt
       Securities in accordance with Section 3 or Section 4; PROVIDED that MLI
       may in its sole discretion refuse to acquire any Collateral Debt Security
       hereunder for inclusion in the Warehouse Portfolio, including, without
       limitation, by reason of any of the following conditions failing to be
       satisfied (after giving effect to any such acquisition):

       (A)    MLI is satisfied in its sole discretion that such Collateral Debt
              Security satisfies the Eligibility Criteria; and

       (B)    in the case of any Collateral Debt Security to be acquired by MLI
              prior to the Pricing Date, MLI is satisfied in its sole discretion
              that the risk of depreciation in market value of such Collateral
              Debt Security by reason of an increase in interest rates during
              the Carry Period for such Collateral Debt Security is hedged
              pursuant to one or more interest rate protection arrangements
              entered into by MLI that are satisfactory in form and substance to
              MLI acting in its sole discretion exercised in good faith (a
              "PRE-PRICING HEDGE").

(c)    MLI shall provide the Collateral Manager, on or before the relevant trade
       settlement date, with a written confirmation of, or a copy of the trade
       ticket for each acquisition or sale of a Collateral Debt Security by MLI
       hereunder and, if any, each Hedge Agreement entered into, sold or
       terminated by MLI in connection herewith.

  (d)  The Collateral Manager hereby represents, warrants and undertakes to MLI
       that (i) the Collateral Manager will not issue any request to MLI in
       connection with the purchase of a Collateral Debt Security if (A) at the
       time of the issuance of such request, any of the Eligibility Criteria
       will not be satisfied with respect to such Collateral Debt Security
       immediately after giving effect to such purchase or entry or (B) the
       acquisition and ownership of such Collateral Debt Security by the Issuer
       would cause the Issuer to be engaged in a trade or business within the
       United States for United States Federal income tax purposes (PROVIDED
       that the Collateral Manager shall be entitled to rely upon

                                       10
<PAGE>

       compliance with the procedures set forth in Annex E) and (ii) it will
       promptly notify MLI if at any time during the Carry Period it obtains
       actual knowledge that one or more of the Eligibility Criteria are not
       satisfied with respect to any Collateral Debt Security constituting part
       of the Warehouse Portfolio.

  (e)  MLI shall be entitled to retain for its own benefit all distributions of
       principal, interest and/or other amounts received by MLI in respect of
       any Collateral Debt Security constituting part of the Warehouse Portfolio
       during the Carry Period for such Collateral Debt Security (together with
       all payments received under any Hedge Agreement during such Carry Period)
       constituting part of the Warehouse Portfolio.

  (f)  Subject to Sections 4(a)(iii) and 4(b)(iii), on or about the Pricing Date
       or on any other date as determined by MLI in its sole discretion (the
       "PORTFOLIO HEDGE PRICE DATE"), MLI shall terminate all Pre-Pricing Hedges
       entered into by it in respect of the Collateral Debt Securities pursuant
       to this Agreement. On the Portfolio Hedge Price Date, the Collateral
       Manager shall arrange for the entry into an interest rate hedging
       agreement for account of the Issuer with respect to the portfolio of
       securities expected to be acquired by the Issuer on the Closing Date (the
       "PORTFOLIO HEDGE").

  (g)  None of MLI and its Affiliates shall have any obligation to ascertain
       whether the acquisition hereunder of any Collateral Debt Security
       complies with any Issuer Documentation or the Eligibility Criteria.

FORWARD SALE OF COLLATERAL DEBT SECURITIES TO ISSUER ON THE CLOSING DATE

3.     Each of MLI and the Collateral Manager (both in its individual capacity
       and as Collateral Manager for the Issuer) hereby agrees as follows:

(a)    subject to the consummation of the Offering on the Closing Date, MLI
       shall sell to the Issuer, and the Issuer shall purchase from MLI, each
       Collateral Debt Security (other than any Non-Conforming Asset) held in
       the Warehouse Account on the Closing Date at a purchase price equal to
       the Hedge Adjusted Purchase Price.

(b)    delivery by MLI to the Issuer of any Collateral Debt Security on the
       Closing Date shall be made only against receipt by MLI or its designee of
       the Hedge Adjusted Purchase Price therefor, and none of the property
       interest of MLI in any such Collateral Debt Security shall pass to the
       Issuer until such payment is received;

(c)    upon receipt by MLI or its designee of the Hedge Adjusted Purchase Price
       for a Collateral Debt Security held in the Warehouse Account, MLI shall
       sell, assign and transfer such Collateral Debt Security to or upon order
       of the Issuer; PROVIDED that such sale, assignment and transfer shall be
       made without recourse and without any representation or warranty other
       than as provided under applicable law; and

(d)    MLI hereby waives all commissions, fees and other similar amounts payable
       with respect to any sale to the Issuer of a Collateral Debt Security
       constituting part of the Warehouse Portfolio held in the Warehouse
       Account pursuant to this Section 3.

                                       11
<PAGE>

REALIZATION EVENTS; LIABILITY FOR LOSSES

4.(a)  If the Closing Date shall fail to occur on or prior to the Termination
       Date:

              (i)    each of the Collateral Manager and the Issuer shall cease
              to have any rights against MLI or any of its Affiliates with
              respect to the purchase, finance, entry into or warehousing of
              Collateral Debt Securities hereunder;

              (ii)   MLI may, in its sole discretion, sell, otherwise liquidate,
              enter into an offsetting hedge with respect to, or retain for its
              own account each Collateral Debt Security held in the Warehouse
              Account; and

              (iii)  MLI may, in its sole discretion, terminate any Pre-Pricing
              Hedge then outstanding, and MLI may, in its sole discretion,
              terminate or instruct the Collateral Manager to cause the Issuer
              or other relevant Person to terminate any Portfolio Hedge then
              outstanding, and the Collateral Manager shall act in accordance
              with such instructions.

  (b)  If, at any time during the Carry Period, a Collateral Debt Security held
       in the Warehouse Account is or becomes a Non-Conforming Asset:

              (i)    each of the Collateral Manager and the Issuer shall cease
              to have any rights against MLI or any of its Affiliates with
              respect to the purchase, finance, entry into or warehousing of
              such Collateral Debt Security by MLI hereunder; and

              (ii)   MLI may, in its sole discretion, sell, otherwise liquidate,
              enter into an offsetting hedge with respect to, or retain for its
              own account such Collateral Debt Security held in the Warehouse
              Account; and

              (iii)  MLI may, in its sole discretion and in good faith,
              terminate any related Pre-Pricing Hedge then outstanding, and MLI
              may, in its sole discretion, instruct the Collateral Manager to
              cause the Issuer to modify any Portfolio Hedge then outstanding,
              and the Collateral Manager shall act in accordance with such
              instructions.

  (c)  MLI shall be entitled to retain any Net Gain in respect of the Warehouse
       Portfolio. The Net Loss, if any, incurred with respect to the Warehouse
       Portfolio shall be solely for the account of MLI, except that if the
       Closing Date shall fail to occur on or prior to the Termination Date, the
       Collateral Manager shall on the Termination Date pay to MLI an amount
       equal to 100% of the Net Loss in respect of the Warehouse Portfolio.

  (d)  Any payment by the Collateral Manager to MLI or any of its Affiliates
       hereunder shall be made to the account of MLI or such Affiliate most
       recently designated by MLI or such Affiliate for such purpose by notice
       to the Collateral Manager.

  (e)  In the event that any payment made with respect to any Collateral Debt
       Security is required to be repaid or returned to any issuer, guarantor or
       other obligor thereon (an "UNDERLYING OBLIGOR"), or any other person
       (including, without limitation, any

                                       12
<PAGE>

       bankruptcy trustee for any Underlying Obligor) in accordance with a
       sharing or similar clause in any Collateral Debt Security or as required
       by bankruptcy, insolvency or similar law (a "REPAYMENT"), then (i) each
       payment obligation under this Agreement that preceded such repayment or
       return shall be recomputed by MLI in good faith, as if such repaid or
       returned amount had not been paid, and MLI shall promptly notify the
       parties to this Agreement of such recomputed amounts, and (ii) any
       additional amount required to be paid by MLI, the Issuer or the
       Collateral Manager in light of such recomputation shall be paid to the
       other party within three Business Days after such other party's demand
       therefor. The obligations of the parties under this paragraph shall
       survive the Termination Date; PROVIDED that no party shall be liable
       hereunder with respect to a claim for a Repayment that is first made by
       an Underlying Obligor or other person more than two years after the
       Termination Date.

INDEMNITY

5.     The Collateral Manager hereby indemnifies and holds harmless each of MLI
and its Affiliates on the terms, and subject to the general limitations and
qualifications, set forth in the indemnification provisions in the Engagement
Letter, which terms are incorporated herein by reference.

REPRESENTATIONS AND ACKNOWLEDGEMENTS

6.(a)  Each party hereto represents and warrants to the other party that:

              (i)    it is duly authorized to execute and deliver this Agreement
              and to perform its obligations hereunder and has taken all
              necessary action to authorize such execution, delivery and
              performance;

              (ii)   the person signing this Agreement on its behalf is duly
              authorized to do so on its behalf;

              (iii)  it has obtained all authorizations of any governmental body
              required in connection with this Agreement and the transactions
              contemplated hereby and such authorizations are in full force and
              effect; and

              (iv)   the execution, delivery and performance of this Agreement
              and the transactions contemplated hereby will not violate any law,
              ordinance, charter, by-law or rule applicable to it or any other
              agreement by which it is bound or by which any of its assets are
              affected. Each party shall be deemed to repeat all of the
              foregoing representations made by it on each date on which MLI
              acquires any Collateral Debt Security prior to the Termination
              Date.

  (b)  The Collateral Manager hereby acknowledges and agrees that neither MLI
       nor any of its Affiliates is, or holds itself out to be, an advisor as to
       legal, tax, accounting or regulatory matters in any jurisdiction. The
       Collateral Manager shall consult with its own advisors concerning such
       matters and shall be responsible for making its own independent
       investigation and appraisal of the risks, benefits and suitability of the
       transactions contemplated by this Agreement, and agrees that neither MLI
       nor any of its Affiliates

                                       13
<PAGE>

       shall have any responsibility or liability to the Collateral Manager or
       the Issuer or any other Person with respect thereto.

NOTICES

7.     Unless expressly provided in writing by the parties hereto, all notices,
requests, demands and other communications required or permitted under this
Agreement must be in writing and shall be deemed to have been duly given, made
and received when delivered against receipt or upon actual receipt of registered
or certified mail, postage prepaid, return receipt requested, or in the case of
facsimile, when confirmation of transmission is received, addressed as set forth
below:

       (a)    If to MLI:

                         Merrill Lynch International
                         c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
                         4 World Financial Center, 7th Floor
                         New York, New York 10080
                         Attention: Harin De Silva
                         Phone No.: (212) 449-9359
                         Fax No.: (212) 669-0718

                         With a copy to:

                         Merrill Lynch International
                         c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
                         4 World Financial Center, 7th Floor
                         New York, New York 10080
                         Attention: Kenneth Margolis
                         Phone No.: (212) 449-9396
                         Fax No.: (212) 669-0718

                         With a copy to:

                         Merrill Lynch, Pierce, Fenner & Smith Incorporated
                         4 World Financial Center, 12th Floor
                         New York, New York 10080
                         Attention: Sales & Trading TM Group
                         Phone No.: (212) 449-8123
                         Fax No.: (212) 449-0265

                                       14
<PAGE>

       (b)    If to the Collateral Manager:

                         Hanover Capital Mortgage Holdings, Inc.
                         200 Metroplex Drive, Suite 100
                         Edison, NJ 08817
                         Attention: Harold McElraft, CFO & Treasurer
                         Phone No.: (732) 593-1044
                         Fax No.: (732) 548-9486

Each party hereto may alter the address or facsimile number to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this Section 7 for the giving of
notice.

WAIVER; SPECIFIC PERFORMANCE; PAYMENTS; FURTHER ASSURANCES

8.(a)  No failure on the part of either party hereto to exercise and no delay in
       exercising, and no course of dealing with respect to, any right, power or
       privilege under this Agreement shall operate as a waiver thereof, nor
       shall any single or partial exercise of any right, power or privilege
       under this Agreement preclude any other or further exercise thereof or
       the exercise of any other right, power or privilege. The remedies
       provided herein are cumulative and not exclusive of any remedies provided
       by law.

(b)    If either party hereto fails to comply in any material respect with any
       provision of this Agreement that is applicable to such party, the other
       party hereto may, to the fullest extent permitted by applicable law,
       demand specific performance of this Agreement and may exercise any other
       remedy available at law or equity.

(c)    All payments to be made to MLI or any of its Affiliates hereunder shall
       be made in U.S. Dollars and in immediately available funds, without
       set-off, deduction or counterclaim.

(d)    Any amount payable by the Collateral Manager to MLI hereunder or by the
       Collateral Manager to MLPFS under the Engagement Letter will, at the
       option of MLI (and without prior notice to the Collateral Manager), be
       reduced by MLI's set-off against any amount(s) payable (whether at such
       time or in the future or upon the occurrence of a contingency) by MLI or
       any of its Affiliates to the Collateral Manager (irrespective of the
       currency, place of payment or booking office of the obligation) hereunder
       or under any other agreement(s) between MLI or any of its Affiliates and
       the Collateral Manager or instrument(s) or undertaking(s) issued or
       executed by MLI or any of its Affiliates to, or in favor of, the
       Collateral Manager. For this purpose, any amount so payable may be
       converted by MLI into the currency in which any other amount is
       denominated at the rate of exchange at which MLI would be able, acting in
       a reasonable manner and in good faith, to purchase the relevant amount of
       such currency.

(e)    Each party hereto shall execute such documents and take such other
       actions as may be reasonably requested by the other party hereto to give
       effect to the transactions contemplated by this Agreement and the
       Engagement Letter.

                                       15
<PAGE>

AMENDMENTS; SUCCESSORS; ASSIGNMENTS

9.(a)  Except where otherwise expressly provided herein, no amendment,
       modification or waiver in respect of this Agreement will be effective
       unless in writing (including a writing evidenced by a facsimile
       transmission) and executed by each party hereto.

(b)    This Agreement shall be binding upon and inure to the benefit of the
       parties hereto and their respective successors and permitted assigns.

(c)    This Agreement, together with the Engagement Letter, sets forth the
       entire understanding of the parties hereto relating to the subject matter
       hereof, and supersedes and cancels all prior and contemporaneous
       agreements, understandings, inducements and conditions, express or
       implied, oral or written, of any nature whatsoever with respect to the
       subject matter hereof.

(d)    Neither this Agreement nor any interest or obligation in or under this
       Agreement may be transferred (whether by way of security or otherwise) by
       MLI without the prior written consent of the Collateral Manager or by the
       Collateral Manager without the prior written consent of MLI. Any
       purported transfer that is not in compliance with this Section will be
       void. No Person other than the parties hereto shall have any rights or
       obligations under this Agreement.

GOVERNING LAW; SUBMISSION TO JURISDICTION; ETC.

10.(a) GOVERNING LAW. This Agreement shall be construed in accordance with, and
       this Agreement and all matters arising out of or relating in any way
       whatsoever to this Agreement (whether in contract, tort or otherwise)
       shall be governed by, the law of the State of New York.

(b)    SUBMISSION TO JURISDICTION. With respect to any suit, action or
       proceedings relating to this Agreement (PROCEEDINGS), each party
       irrevocably (i) submits to the non-exclusive jurisdiction of the courts
       of the State of New York and the United States District Court located in
       the Borough of Manhattan in New York City and (ii) waives any objection
       which it may have at any time to the laying of venue of any Proceedings
       brought in any such court, waives any claim that such Proceedings have
       been brought in an inconvenient forum and further waives the right to
       object, with respect to such Proceedings, that such court does not have
       any jurisdiction over such party. Nothing in this Agreement precludes
       either party hereto from bringing Proceedings in any other jurisdiction,
       nor will the bringing of Proceedings in any one or more jurisdictions
       preclude the bringing of Proceedings in any other jurisdiction.

WAIVER OF JURY TRIAL

11.    EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

                                       16
<PAGE>

TERM OF AGREEMENT; EXPENSES OF ENFORCEMENT

12.(a) This Agreement shall continue in full force and effect until the
       Termination Date.

(b)    Notwithstanding any termination of this Agreement pursuant to Section
       12(a), the provisions of Sections 4 and 5 shall survive and remain in
       full force and effect regardless of the consummation of the transactions
       contemplated hereby or the termination of this Agreement or any provision
       hereof.

(c)    A party that defaults in any of its payment obligations hereunder will,
       on demand, indemnify and hold harmless the other party for and against
       all reasonable out-of-pocket expenses, including legal fees, incurred by
       such other party by reason of the enforcement and protection of its
       rights under this Agreement, including, but not limited to, costs of
       collection.

EXECUTION IN COUNTERPARTS

13.    This Agreement (and each amendment, modification and waiver in respect of
it) may be executed and delivered in counterparts (including by facsimile
transmission), each of which will be deemed an original.

PROVISIONS SEPARABLE

14.    If any term, provision, covenant or condition of this Agreement, or the
application thereof to either party or any circumstance, is held to be
unenforceable, invalid or illegal (in whole or in part) for any reason (in any
relevant jurisdiction), the remaining terms, provisions, covenants and
conditions of this Agreement, modified by the deletion of the unenforceable,
invalid or illegal portion (in any relevant jurisdiction), will continue in full
force and effect, and such unenforceability, invalidity, or illegality will not
otherwise affect the enforceability, validity or legality of the remaining
terms, provisions, covenants and conditions of this Agreement so long as this
Agreement as so modified continues to express, without material change, the
original intentions of the parties as to the subject matter hereof and the
deletion of such portion of this Agreement will not substantially impair the
respective expectations or reciprocal obligations of the parties or the
practical realization of the benefits that would otherwise be conferred upon the
parties. The parties will endeavour in good faith negotiations to replace the
prohibited or unenforceable provision with a valid provision, the economic
effect of which comes as close as possible to that of the prohibited or
unenforceable provision.

HEADINGS NOT TO AFFECT INTERPRETATION

15.    The headings used in this Agreement are for convenience of reference only
and are not to affect the construction of or to be taken into consideration in
interpreting this Agreement.

                                       17
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

MERRILL LYNCH INTERNATIONAL

By: /s/ James Newsome
    -----------------------------------
    Name: James Newsome
          -----------------------------
    Title: Director
           ----------------------------

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

By: /s/ John A. Burchett
    -----------------------------------
    Name: John A. Burchett
          -----------------------------
    Title: President and CEO
           ----------------------------

                                       18
<PAGE>

                         ANNEX A - ELIGIBILITY CRITERIA

A Collateral Debt Security will be eligible for purchase by MLI for inclusion in
the Warehouse Portfolio if, in each case, at the time, and immediately after, it
is so purchased or designated:

(a)    such obligation or security is one of the following:

       (i)    an Asset-Backed Security publicly issued or privately placed by an
              issuer that is incorporated or organized under the laws of the
              United States or any state thereof, by a Qualifying Foreign
              Obligor or by an SPV Foreign Obligor;

       (ii)   a Guaranteed Asset-Backed Security;

(b)    such obligation or security is a RMBS Security;

(c)    such obligation or security is denominated in U.S. dollars and is not
       convertible into an obligation or security denominated in a currency
       other than U.S. dollars;

(d)    such obligation or security is eligible under the instrument or agreement
       pursuant to which it was issued or created to be purchased by each of MLI
       and the Issuer and assigned, pledged or otherwise transferred free and
       clear or any existing liens, claims or encumbrances of any nature
       whatsoever (other than any lien created by the Issuer Documentation) by
       the Issuer to its designee;

(e)    such obligation or security is not a Non-Conforming Asset;

(f)    such obligation or security is an obligation or security in respect of
       which the Rating from Standard & Poor's does not include the subscript
       "r" or "t";

(g)    such obligation or security provides for periodic payments of interest in
       cash no less frequently than semi-annually;

(h)    the acquisition (including the manner of acquisition), ownership,
       enforcement and disposition of such obligation or security will not cause
       the Issuer to be treated as engaged in a U.S. trade or business for U.S.
       Federal income tax purposes or otherwise to be subject to tax on a net
       income basis in any jurisdiction outside the Issuer's jurisdiction of
       incorporation;

(i)    each of MLI and the Issuer will receive all payments from and all
       proceeds from the disposition of such obligation or security free and
       clear of withholding taxes, other than withholding tax as to which the
       obligor or issuer must make additional payments so that the net amount
       received by MLI or the Issuer after satisfaction of such tax is the
       amount due to MLI or the Issuer before the imposition of such withholding
       tax;

(j)    such obligation or security is in registered form for purposes of the
       Code and it (and if it is a certificate of interest in a trust that is
       treated as a grantor trust and not as a REMIC or FASIT for U.S. Federal
       income tax purposes, each of the obligations or securities held by such
       trust) was issued after July 18, 1984;

                                       19
<PAGE>

(k)    such obligation or security is not (i) an obligation or security issued
       by an issuer located in a country that imposes foreign exchange controls
       that effectively limit the availability or use of U.S. dollars to make
       when due the scheduled payments of principal of and interest on such
       security; (ii) "margin stock" as defined under Regulation U issued by the
       Board of Governors of the Federal Reserve System; (iii) a financing by a
       debtor-in-possession in any insolvency proceeding; (iv) an obligation or
       security that by the terms of its Underlying Instruments provides for
       mandatory conversion or exchange into equity capital at any time prior to
       its maturity; or (v) the subject of a call for redemption or exchange by
       the issuer thereof in connection with an offering to prospective
       investors;

(l)    such obligation or security is not an obligation or security of which the
       holder is required by the related Underlying Instruments to make any
       payment or advance after its acquisition by such holder to the issuer
       thereof;

(m)    such obligation or security is not a Residential Interest Only Security;

(n)    if the stated maturity of such security or obligation occurs later than
       2045, the aggregate principal balance of all such securities and
       obligations in the Warehouse Portfolio does not exceed 5% of the Expected
       Portfolio Balance; PROVIDED that the Weighted Average Life of all such
       securities and obligations shall not be greater than 15 years; For
       purposes of this clause (n), (1) "Weighted Average Life" shall mean the
       number obtained by (i) summing the products obtained by multiplying (a)
       the Average Life at such time of each such Collateral Debt Security by
       (b) the outstanding principal balance of such Collateral Debt Security
       and (ii) dividing such sum by the aggregate principal balance at such
       time of all such Collateral Debt Securities, and (2) "Average Life" shall
       mean the quotient obtained by dividing (i) the sum of the products of (a)
       the number of years (rounded to the nearest one tenth thereof) from such
       measurement date to the respective dates of each successive scheduled
       distribution of principal of such Collateral Debt Security and (b) the
       respective amounts of principal of such scheduled distributions by (ii)
       the sum of all successive scheduled distributions of principal on such
       Collateral Debt Security.

(o)    such obligation or security is not publicly rated below "BBB-" by
       Standard & Poor's and/or Fitch, and/or "Baa3" by Moody's;

(p)    Standard & Poor's has not placed its rating of such obligation or
       security on a watch list for possible downgrade;(1)

(q)    the aggregate principal balance of all securities and obligations in the
       Warehouse Portfolio publicly rated below "A-" by Standard & Poor's and/or
       Fitch, and/or A3 by Moody's does not exceed $75,000,000;

(r)    if such obligation or security is a REIT debt security, such obligation
       or security is publicly rated at least "Baa2" by Moody's and "BBB" by
       Standard & Poor's and Fitch;

----------
(1) See Annex D for description of notching criteria of Moody's and S&P.

                                       20
<PAGE>

(s)    the aggregate principal balance of all securities and obligations in the
       Warehouse Portfolio that form part of the same issue as such obligation
       or security does not exceed 5% of the Expected Portfolio Balance;
       PROVIDED that, up to five issues in the Warehouse Portfolio may each
       exceed 5% of the Expected Portfolio balance but may not exceed 6% of the
       Expected Portfolio Balance;

(u)    the aggregate principal balance of all securities and obligations in the
       Warehouse Portfolio that are PIK Bonds, Step-Up Bonds, Step-Down Bonds or
       Zero Coupon Bonds does not exceed 5.0% of the Expected Portfolio Balance;

PROVIDED that, notwithstanding the foregoing, MLI and the Collateral Manager may
by mutual written consent designate an obligation or security for inclusion in
the Warehouse Portfolio that does not comply with one or more of the clauses
above (other than clauses (g) through (i)).

As used herein:

"MOODY'S MAXIMUM RATING DISTRIBUTION" is the number determined on any date by
DIVIDING:

(a)    the summation of the series of products obtained by MULTIPLYING (i) the
       principal balance on such date of each Collateral Debt Security or
       Reference Obligation BY (ii) its respective Moody's Rating Factor on such
       date, BY

(b)    the aggregate principal balance on such date of all Collateral Debt
       Securities and Reference Obligations,

and rounding the result up to the nearest whole number.

"MOODY'S RATING FACTOR" means, for purposes of computing the Moody's Maximum
Rating Distribution, the number assigned below to the Moody's Rating applicable
to each Collateral Debt Security or Reference Obligation.

                       MOODY'S                                         MOODY'S
                        RATING                                          RATING
MOODY'S RATING          FACTOR          MOODY'S RATING                  FACTOR

      Aaa                 1                  Ba1                           940
      Aa1                 10                 Ba2                         1,350
      Aa2                 20                 Ba3                         1,780
      Aa3                 40                  B1                         2,220
      A1                  70                  B2                         2,720
      A2                 120                  B3                         3,490
      A3                 180                 Caa1                        4,770
     Baa1                260                 Caa2                        6,500
     Baa2                360                 Caa3                        8,070
     Baa3                610             Ca or lower                    10,000

Notwithstanding the foregoing, each of the parties hereto acknowledges and
agrees that (a) any reference to a rating by a Rating Agency in the Eligibility
Criteria set forth in this Annex A shall,

                                       21
<PAGE>

where applicable, be construed as a reference to the eventual rating given by
such Rating Agency to the applicable Collateral Debt Security or Reference
Obligation following the application by such Rating Agency of its notching
practices and guidelines with respect to such Collateral Debt Security or
Reference Obligation (as the same may be amended or modified from time to time)
and (b) the Eligibility Criteria set forth in this Annex A represent an
approximation of the expected investment criteria to be applied to the
Collateral Debt Securities and Reference Obligations for the Transaction, and
remain subject to further amendment by the mutual consent of both parties
including, without limitation, as a result of comments received from MLI, the
Collateral Manager, the Rating Agencies or the trustee for the holders of the
Notes.

                                       22
<PAGE>

                          ANNEX B - MOODY'S INDUSTRIES

The relevant industries for purposes of the Moody's Asset Correlation are as
follows:

1.    ABS-auto
2.    ABS-auto BIG
3.    ABS-aircraft lease
4.    ABS-aircraft lease BIG
5.    ABS-credit card
6.    ABS-credit card BIG
7.    ABS-entertainment
8     ABS-entertainment BIG
9.    ABS-HEL
10.   ABS-HEL BIG
11.   ABS-MH
12.   ABS-MH BIG
13.   ABS-student loans
14.   ABS-student loans BIG
15.   ABS-residential A mtg
16.   ABS-residential A mtg BIG
17.   ABS-residential B&C mtg
18.   ABS-residential B&C mtg BIG
19.   ABS-CMBS Conduit
20.   ABS-CMBS Conduit BIG
21.   ABS-CMBS CTL
22.   ABS-CMBS CTL BIG
23.   ABS-CMBS Large Loan
24.   ABS-CMBS Large Loan BIG
25.   ABS-SBL
26.   ABS-SBL BIG
27.   ABS-Tax Liens
28.   ABS-Tax Liens BIG
29.   ABS-Mutual Fund Fees
30.   ABS-Mutual Fund Fees BIG
31.   ABS-Structured Settlements
32.   ABS-Structured Settlements BIG
33.   ABS-Utility
34.   ABS-Utility BIG
35.   REITS-Hotel
36.   REITS-Multi Family
37.   REITS-Office
38.   REITS-Retail
39.   REITS-Industrial
40.   REITS--Healthcare
41.   REITS-Self-storage
42.   REITS-Diversified
43.   CBO-EM CBO Aaa

                                       23
<PAGE>

44.   CBO-EM CBO Aa
45.   CBO-EM CBO A
46.   CBO-EM Baa
47.   Corp-EM CBO Ba
48.   Corp-EM CBO B
49.   Corp-HY CBO Aaa
50.   Corp-HY CBO Aa
51.   Corp-HY CBO A
52.   Corp-HY CBO Baa
53.   Corp-HY CBO Ba
54.   Corp-HY CBO B
55.   Corp-ABS CBO Aaa
56.   Corp-ABS CBO Aa
57.   Corp-ABS CBO A
58.   Corp-ABS CBO Baa
59.   Corp-ABS CBO Ba
60.   Corp-ABS CBO B

                                       24
<PAGE>

                   ANNEX C - STANDARD & POOR'S ASSET CLASSES

1. Consumer ABS
         Automobile Loan Receivable Securities
         Automobile Lease Receivable Securities
         Car Rental Receivables Securities
         Credit Card Securities
         Healthcare Securities
         Student Loan Securities

2. Commercial ABS
         Cargo Securities
         Equipment Leasing Securities
         Aircraft Leasing Securities
         Small Business Loan Securities
         Restaurant and Food Services Securities
         Tobacco Litigation Securities

3. Non-RE-REMIC RMBS
         Manufactured Housing Loan Securities

4. Non-RE-REMIC CMBS
         CMBS - Conduit
         CMBS - Credit Tenant Lease
         CMBS - Large Loan
         CMBS - Single Borrower
         CMBS - Single Property

5. CBO/CLO Cashflow Securities
         Cash Flow CBO - at least 80% High Yield Corporate
         Cash Flow CBO - at least 80% Investment Grade Corporate
         Cash Flow CLO - at least 80% High Yield Corporate
         Cash Flow CLO - at least 80% Investment Grade Corporate

6. REITs
         REIT - Multifamily & Mobile Home Park
         REIT - Retail
         REIT - Hospitality
         REIT - Office
         REIT - Industrial
         REIT - Healthcare
         REIT - Warehouse
         REIT - Self Storage
         REIT - Mixed Use

7. Real Estate Operating Companies

8. Residential Mortgages
         Residential "A"
         Residential "B/C"
         Home equity loans

                                       25
<PAGE>

9. Specialty Structured
         Stadium Financings
         Project Finance
         Future flows

                                       26
<PAGE>

                    ANNEX D - RATING AGENCY NOTCHING CRITERIA

PART 1: MOODY'S GUIDELINES

CMBS - Conduit                      1.5 notches off the lower of S&P and Fitch
                                    if Moody's has rated a tranche senior to the
                                    security / 2 notches if Moody's has not -
                                    Credit Estimate required if only one agency
                                    has rated security

CMBS - CTL or Large Loan            Credit Estimate required

Residential Jumbo A/Alt A           1/2/3 off S&P's AAA/AA/AA->; 2/3/4 off Fitch
                                    >A+/>=BBB-/<BBB- (Fitch limit of 5%
                                    aggregate and 1% each obligor) - Moody's is
                                    currently revisiting methodology

CDOs                                Credit Estimate required (have notched off
                                    S&P in past - 2 sub-categories)

Manufactured Housing                1/2/3 off S&P >A+/>=BBB-/<BBB-
Home Equity                         1/2/3 off S&P >A+/>=BBB-/<BBB-
Aircraft and auto leases:           2/3/4 off S&P >A+/>=BBB-/<BBB-
Consumer loans:                     1/3/4 off S&P >A+/>=BBB-/<BBB-
Franchise loans:                    1/2/4 off S&P >A+/>=BBB-/<BBB-
Future receivables:                 1/1/2 off S&P >A+/>=BBB-/<BBB-
Mutual Fund Fees:                   1/2/4 off S&P >A+/>=BBB-/<BBB-
Trade receivables:                  2/3/4 off S&P >A+/>=BBB-/<BBB-

                                       27
<PAGE>

PART 2: STANDARD & POOR'S GUIDELINES: SCHEDULE A

Asset classes eligible for notching if they are not first loss tranches or
combination securities. If the security is rated by two agencies, notch down as
shown below based on the lowest rating. If rated only by one agency, then notch
down what is shown below plus one more notch. This schedule may be modified or
adjusted at any time, so please verify applicability.

<TABLE>
<CAPTION>
                                            Issued prior to 8/1/01                    Issued on or after 8/1/01
                                            Current rating is:                        Current rating is:
                                            Inv. Grade             Non Inv. Grade     Inv. Grade                 Non Inv. Grade
                                            -----------------------------------------------------------------------------------
<S>                                         <C>                    <C>                 <C>                       <C>

1.  CONSUMER ABS                                       -1             -2                       -2                   -3
        Automobile Loan Receivable
          Securities
        Automobile Lease Receivable
          Securities
        Car Rental Receivables Securities
        Credit Card Securities
        Healthcare Securities
        Student Loan Securities

2.  COMMERCIAL ABS                                     -1             -2                       -2                   -3
        Cargo Securities
        Equipment Leasing Securities
        Aircraft Leasing Securities
        Small Business Loan Securities
        Restaurant and Food Services
          Securities
        Tobacco Litigation Securities

3.  Non-RE-REMIC RMBS                                  -1             -2                       -2                   -3
        Manufactured Housing Loan
          Securities

4.  Non-RE-REMIC CMBS                                  -1             -2                       -2                   -3
        CMBS - Conduit
        CMBS - Credit Tenant Lease
        CMBS - Large Loan
        CMBS - Single Borrower
        CMBS - Single Property

5.  CBO/CLO CASHFLOW SECURITIES                        -1             -2                       -2                   -3
        Corporate
        Grade Corporate
        Corporate
        Grade Corporate

6.  REITs                                              -1             -2                       -2                   -3
        REIT- Multifamily & Mobile Home
          Park
        REIT - Retail
        REIT - Hospitality
        REIT - Office
        REIT - Industrial
        REIT - Healthcare
        REIT - Warehouse
        REIT - Self Storage
        REIT - Mixed Use

7.  SPECIALTY STRUCTURED                               -3             -4                       -3                   -4
        Stadium Financings

</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                         Issued prior to 8/1/01                    Issued on or after 8/1/01
                                         Current rating is:                        Current rating is:
                                         Inv. Grade             Non Inv. Grade     Inv. Grade                 Non Inv. Grade
                                         -----------------------------------------------------------------------------------
<C>                                                     <C>            <C>                      <C>                  <C>

        Project Finance
        Future flows

8.  RESIDENTIAL MORTGAGES                              -1             -2                       -2                   -3
        Residential "A"
        Residential "B/C"
        Home equity loans

9.  REAL ESTATE OPERATING COMPANIES                    -1             -2                       -2                   -3

</TABLE>

                                       29
<PAGE>

PART 3: STANDARD & POOR'S GUIDELINES: SCHEDULE B

The following asset classes are not eligible to be notched. Credit estimates
must be performed. This schedule may be modified or adjusted at any time, so
please verify applicability.

ASSET TYPE

l. Non-U.S. Structured Finance Securities

2. Guaranteed Securities

3. CDOs of Structured Finance and Real Estate

4. CBOs of CDOs

5. CLOs of Distressed Debt

6. Mutual Fund Fee Securities

7. Catastrophe Bonds

8. First Loss Tranches of any securitization

9. Synthetics

10. Synthetic CBOs

11. Combination Securities

12. Re-REMICs

13. Market Value CDOs

14. Net Interest Margin Securities (NIMs)

15. Any asset class not listed on Schedule A

                                       30
<PAGE>

                                     ANNEX E

For purposes of this Agreement:

1.     The Collateral Manager shall not receive any fees on behalf of the Issuer
       for services paid by an obligor in connection with the origination or
       syndication of a Collateral Debt Security.

2.     The Collateral Manager shall not cause the Issuer to hold itself out as
       being willing to enter into either side of, or to offer to enter into,
       assume, offset, assign or otherwise terminate positions in (x) interest
       rate, currency, equity, or commodity swaps or caps or (y) derivative
       financial instruments (including options, forward contracts, short
       positions, and similar instruments) in any commodity, currency, share of
       stock, partnership or trust, note, bond, debenture or other evidence of
       indebtedness, swap or cap.

3.     The Collateral Manager agrees not to take any action that it actually
       knows would result in the Issuer (a) being required to register as or
       become subject to regulatory supervision or (b) to comply with other
       similar legal requirements under the laws of any country or political
       subdivision thereof as a bank, insurance company or finance company.

4.     The Collateral Manager agrees not to take any action that it actually
       knows would result in the Issuer being treated as a bank, insurance
       company or finance company for purposes of (i) any tax, securities law or
       other filing or submission made to any governmental authority, (ii) any
       application made to a rating agency or (iii) qualification for any
       exemption from tax, securities law or any other legal requirements.

5.     The Collateral Manager agrees not to cause the Issuer to hold itself out
       to the public as a bank, insurance company, finance company or
       broker-dealer.

6.     The Collateral Manager agrees not to cause the Issuer to hold itself out
       to the public, through advertising or otherwise, as originating loans,
       lending funds, or making a market in loans or other assets.

7.     The Collateral Manager agrees not to acquire a Collateral Debt Security
       unless it (or, if it is a certificate of beneficial interest in an entity
       that is treated as a grantor trust or a partnership and not as a REMIC or
       FASIT for U.S. Federal income tax purposes, each of the debt instruments
       or securities held by such entity) is described in at least one of the
       following clauses:

       (i)    it is issued pursuant to an effective registration statement under
              the Securities Act of 1933, as amended, in a firm commitment
              underwriting for which neither the Collateral Manager nor an
              affiliate thereof served as underwriter;

       (ii)   it is a security that was not purchased by the Collateral Manager
              (on behalf of the Issuer) in any of the following manners (a)
              directly or indirectly from the underlying issuer, (b) pursuant to
              a legally binding agreement made before the issuance of the
              security or (c) from any affiliate of the Collateral Manager or
              any account or fund managed or controlled by the Collateral
              Manager or any of its

                                       31
<PAGE>

              affiliates, unless such affiliate, account or fund either (A)
              acquired such security in compliance with these guidelines or (B)
              (1) regularly acquires securities of the same type for its own
              account, (2) could have held the security for its own account
              consistent with its policies (such policies requiring arms-length
              transactions at market prices), (3) did not identify the security
              as intended for sale to the Issuer (or the Collateral Manager)
              within 60 days of its issuance and (4) held the obligation or
              security for at least 90 days;

       (iii)  it is a privately placed security eligible for resale under Rule
              144A or Regulation S under the Securities Act of 1933, as amended,
              and

              (a)    it was originally issued pursuant to an Offering Circular,
                     private placement memorandum or similar offering document;

              (b)    the Collateral Manager (including on behalf of the Issuer)
                     and the affiliates of the Collateral Manager and accounts
                     and funds managed or controlled by the Collateral Manager
                     or any of its affiliates may at original issuance acquire
                     50% or more of the aggregate principal amount of any class
                     of securities offered by the issuer of the security in the
                     offering and any related offering so long as such
                     acquisition does not represent 33% or more of the aggregate
                     principal amount of all classes of securities offered by
                     the issuer of the security in the offering and any related
                     offering; provided in each case that any acquisition by an
                     affiliate of the Collateral Manager that is not a direct or
                     indirect subsidiary of the Collateral Manager or any
                     account or fund managed by an affiliate of the Collateral
                     Manager that is not a direct or indirect subsidiary of the
                     Collateral Manager shall be included only if the Collateral
                     Manager or any of its employees or agents knew or had
                     reason to know of such acquisition; and

              (c)    the Collateral Manager (including on behalf of the Issuer)
                     and any affiliate of the Collateral Manager did not
                     participate in negotiating or structuring the terms of the
                     security, except (1) to the extent such participation
                     consisted of an election by the Collateral Manager
                     (including on behalf of the Issuer) or an affiliate of the
                     Collateral Manager to tranche the subordinate classes of
                     securities of an issue in the form of one of the
                     structuring options generally available to investors
                     offered by the issuer of the securities or (2) for the
                     purposes of (i) commenting on offering documents to an
                     unrelated underwriter or placement agent where the ability
                     to comment on such documents was generally available to
                     investors, (ii) due diligence of the kind customarily
                     performed by investors in securities; or

       (iv)   it is the sole material obligation of a repackaging vehicle formed
              and operated exclusively to hold a single Collateral Debt Security
              described in at least one of clauses (i), (ii) or (iii), which
              vehicle may also hold a derivative financial instrument or
              guarantee designed solely to offset one or more terms of such
              Collateral Debt Security.

                                       32
<PAGE>

8.     The Collateral Manager agrees not to acquire a Collateral Debt Security
       if (i) after the acquisition of such security, it (on behalf of the
       Issuer) or the Issuer will be required by the security's underlying
       instruments to make any payment or advance to the issuer thereof, (or to
       the related synthetic security counterparty in the case of a synthetic
       security, if any), (ii) such security is treated for U.S. Federal income
       tax purposes as an equity interest in a pass-through entity that is
       engaged in a trade or business in the United States, (iii) the gain from
       the disposition of such security will be subject to U.S. Federal income
       or withholding tax under Section 897 or Section 1445 of the Internal
       Revenue Code of 1986, as amended (the "Code"), and the Treasury
       Regulations promulgated thereunder. Except for clause (i), the Collateral
       Manager may rely upon the offering materials made available to it
       provided there has been no change in the terms of the applicable security
       from the time such offering materials were finalized.

9.     In the case of an Eligible Loan, the Collateral Manager may purchase or
       commit to purchase such Collateral Debt Security provided (i) it is
       purchased from an unrelated third party, (ii) such purchase or commitment
       occurs anytime after the second business day after the later of (A) the
       execution of the principal transaction documents governing the loan or
       (B) the full funding of the loan. The Collateral Manager (on behalf of
       the Issuer) will not, directly or indirectly, (i) structure or negotiate
       any term of, syndicate, act as a placement agent with respect to,
       underwrite, or provide any similar services with respect to, any such
       loan. The Collateral Manager will not have any discussions with any
       obligor under a loan prior to the date on which the Collateral Manager
       (on behalf of the Issuer) acquires legal and beneficial ownership of such
       asset, except for due diligence purposes as a secondary market purchaser.
       The Collateral Manager (on behalf of the Issuer) will not negotiate or
       consent to any amendments, supplements or other modifications of the
       terms of a loan that would require an additional advance to the obligor
       on or after the date such loan has been acquired under the terms of these
       guidelines, unless based on the advice of nationally recognized tax
       counsel, such amendment, supplement or other modification would not cause
       the Issuer to be treated as engaged in a U.S. trade or business for U.S.
       Federal income tax purposes. The Collateral Manager (on behalf of the
       Issuer) will not execute any loan instruments with an obligor under a
       loan prior the date such loan has been acquired under the terms of these
       guidelines.

10.    The Collateral Manager agrees not to acquire a Collateral Debt Security
       unless (i) it is the obligation of a single issuer treated as a
       corporation under the State or Federal laws of the United States; (ii)
       the Collateral Manager (on behalf of the Issuer) has received an opinion
       of counsel that the issuer of the obligation or security will be treated
       as a corporation for U.S. Federal income tax purposes; (iii) the
       Collateral Manager (on behalf of the Issuer) has received an opinion of
       counsel that owning the obligation or security will not subject the
       Issuer to U.S. Federal income tax on a net income basis or cause the
       Issuer to be treated as engaged in a trade or business within the United
       States; (iv) the Collateral Manager (on behalf of the Issuer) has
       received an opinion of counsel that the obligation or security will be
       treated as debt for U.S. Federal income tax purposes; (v) the Collateral
       Manager (on behalf of the Issuer) has been provided with a tax opinion
       rendered at the issuance of such obligation or security to the effect
       that (A) such obligation or security will be treated as debt for U.S.
       Federal income tax purposes or (B)

                                       33
<PAGE>

       owning the obligation or security will not subject a non-United States
       person to U.S. Federal income tax on a net income basis or cause a
       non-United States person to be treated as engaged in a trade or business
       within the United States (along with appropriate agreements or other
       documentation permitting the Collateral Manager, on behalf of the Issuer,
       to rely on such opinion); (vi) the Collateral Manager (on behalf of the
       Issuer) has received documents pursuant to which such obligation or
       security was offered, if any, which include or refer to an opinion of
       counsel to the effect that such security will be treated as debt for U.S.
       Federal income tax purposes (along with appropriate agreements or other
       documentation permitting the Issuer to rely on such opinion); (vii) the
       Collateral Manager (on behalf of the Issuer) has received an opinion of
       counsel that the security will be treated as a regular interest in a
       REMIC or FASIT for U.S. Federal income tax purposes; or (viii) the
       security is a certificate of beneficial interest in a trust treated as a
       grantor trust for purposes of the Code, all the assets of which are (a)
       regular interests in an entity that is a REMIC or a FASIT within the
       meaning of the Code (as evidenced by an opinion of counsel or a reference
       to an opinion of counsel in offering documents (along with appropriate
       agreements or other documentation permitting the Collateral Manager, on
       behalf of the Issuer, to rely on such opinion)), and/or (b) interest rate
       swaps, caps or other notional principal contracts (within the meaning of
       Treasury Regulations) designed to hedge interest rate risk with respect
       to the assets of or the regular interests in such REMIC or FASIT,
       provided that (A) in the case of clauses (v), (vi) and (viii) above there
       has been no change in the terms of such security prior to the date of
       such security's acquisition by the issuer and (B) for purposes of this
       paragraph 10, an opinion of counsel that the issuer of such security will
       be treated as a REMIC or FASIT within the meaning of the Code shall be
       treated as an opinion of counsel that such security will be treated as
       debt for U.S. Federal income tax purposes (unless such security is the
       residual interest in the REMIC or the ownership interest in the FASIT)
       within the meaning of the Code.

11.    The Collateral Manager agrees not to cause the Issuer to indirectly
       violate any of the guidelines 1 through 10 above through an MLI Credit
       Swap or Issuer Credit Swap or synthetic security, if any.

                                       34

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