Document:

Exhibit
10.1

	
  

  	
  

  

 

EXECUTION VERSION

 

 

DATED AS OF DECEMBER 21,
2006

 

by

 

ARCH REINSURANCE LTD.

as Obligor

 

with

 

BARCLAYS BANK PLC

as Agent,

 

BARCLAYS BANK PLC, ING
BANK N.V., LONDON BRANCH AND

LLOYDS TSB BANK PLC

 

as Original Lenders

 

and

 

BARCLAYS CAPITAL,

as Mandated Lead Arranger

 

 

AMENDED AND
RESTATED

LETTER OF CREDIT

AND

REIMBURSEMENT
AGREEMENT

 

 

 

    
 

 

 

CONTENTS

	
  Clause

  	
   

  	
   

  	
   

  	
  Page

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Client note:

  	
   

  	
  WHEN YOU UPDATE THIS TOC, PLEASE DELETE THE
  CLAUSES 1 - 25 BETWEEN EXHIBIT B AND C

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1.

  	
   

  	
  Definitions And
  Interpretation

  	
   

  	
  1

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Terms Of The
  Letter Of Credit Facility

  	
   

  	
  14

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Conditions Of
  Issuance Of Letters Of Credit

  	
   

  	
  23

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Representations
  And Warranties

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Covenants

  	
   

  	
  31

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  Events Of
  Default And Remedies

  	
   

  	
  45

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  Changes To
  Parties

  	
   

  	
  50

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  The Finance
  Parties

  	
   

  	
  54

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  Miscellaneous

  	
   

  	
  62

  	
   

  
								

 

	
  Schedule 1

  	
   

  	
  Lender Commitments

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule 2

  	
   

  	
  Existing Encumbrances

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule 3

  	
   

  	
  Existing Indebtedness

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule 4

  	
   

  	
  Dispositions

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  Form Of Letters Of Credit

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Part A

  	
  Form Of Letter Of Credit

  	
   

  	
   

  
	
   

  	
  Part B

  	
  Form Of Lender’s Authorization Letter Under Facility
  B

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit B

  	
   

  	
  Arch Reinsurance Security Agreement

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit C

  	
   

  	
  Form Of Utilization Request

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit D

  	
   

  	
  Form Of Custodial Account Value Certificate

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit E

  	
   

  	
  Form Of Compliance Certificate

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit F

  	
   

  	
  Form Of Assignment And Acceptance

  	
   

  	
   

  
						

 

 i

 

 

AMENDED AND
RESTATED LETTER OF CREDIT

AND REIMBURSEMENT AGREEMENT

This AMENDED AND
RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT is dated as of December 21, 2006 (as
may be further amended, amended and restated, supplemented or otherwise
modified from time to time, this “Agreement”)
by and among Arch Reinsurance Ltd., a Bermuda company (the “Obligor”), Barclays Bank PLC (as agent for
the Finance Parties (as hereinafter defined) (the “Agent” or the “Security
Agent”), Barclays Bank PLC, ING Bank N.V., London Branch and Lloyds
TSB Bank plc as Lenders (the “Original
Lenders”) and Barclays Capital as mandated lead arranger (the “Arranger”).

	
  1.

  	
  DEFINITIONS AND INTERPRETATION

  
	
   

  	
   

  
	
  1.1

  	
  Definitions

  
	
   

  	
   

  
	
   

  	
  Unless the context
  clearly otherwise requires, the following terms shall have the following
  respective meanings:

  
	
   

  	
   

  
	
   

  	
  “Acquired Indebtedness” has the meaning
  set forth in sub-clause 5.6.3(c) of Clause 5.6 (Negative Covenants).

  
	
   

  	
   

  
	
   

  	
  “Adjusted Collateral Value” means, with respect to the
  Obligor and at any date of determination, an amount equal to the sum of (a)
  (i) to the extent that such Investments are comprised of Government
  Securities with less than or equal to two years to maturity, 95% of the
  market value (as determined on a daily basis) of the aggregate of such type
  of Investments in the Custodial Account, (ii) to the extent that such
  Investments are comprised of Government Securities with greater than two and
  less than eleven years to maturity, 90% of the market value (as determined on
  a daily basis) of the aggregate of such type of Investments in the Custodial
  Account, (iii) to the extent that such Investments are comprised of GNMA
  Securities with less than or equal to two years to maturity, 95% of the
  market value (as determined on a daily basis) of the aggregate of such type
  Investments in the Custodial Account, and (iv) to the extent that such
  Investments are comprised of GNMA Securities with greater than two and less
  than eleven years to maturity, 90% of the market value (as determined on a
  daily basis) of the aggregate of such type of Investments in the Custodial
  Account, and (b) 100% of the amount of the aggregate cash deposits in the
  Custodial Account.

  
	
   

  	
   

  
	
   

  	
  “Affiliate” means,
  as to any Person, any other Person which directly or indirectly controls, or
  is under common control with, or is controlled by, such Person.  As used in this definition, “control”
  (including, with its correlative meanings, “controlled by” and “under common
  control with”) shall mean possession, directly or indirectly, of power to
  direct or cause the direction of management or policies (whether through
  ownership of securities or partnership or other ownership interests, by
  contract or otherwise), provided that,
  in any event: (i) any Person which owns directly or indirectly 20% or more of
  the securities having ordinary voting power for the election of directors or
  other governing 

  

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  body of a corporation
  or 20% or more of the partnership or other ownership interests of any other
  Person (other than as a limited partner of such other Person) will be deemed
  to control such corporation or other Person.

  
	
   

  	
   

  
	
   

  	
  “Applicable Insurance Regulatory
  Authority” means the insurance department or similar
  administrative authority or agency that has the principal regulatory
  jurisdiction over the Obligor or other Person.

  
	
   

  	
   

  
	
   

  	
  “Assignment and
  Acceptance” means an assignment and acceptance entered into by a
  Lender and an Eligible Assignee, and accepted by the Agent, in substantially
  the form of Exhibit F hereto.

  
	
   

  	
   

  
	
   

  	
  “Base Currency”
  means U.S. Dollars.

  
	
   

  	
   

  
	
   

  	
  “Beneficiary” means (a) Lloyd’s or
  (b) another financial institution acceptable to the Lenders who has
  issued a letter of credit in favor of Lloyd’s if such Letter of Credit would
  be either a back-to-back letter of credit in favor of such financial institution
  having the same amount, term and other applicable provisions as such
  financial institution’s letter of credit in favor of Lloyd’s or where such
  financial institution’s letter of credit in favor of Lloyd’s includes or
  represents the underwriting obligations of a third party in addition to those
  of the Obligor, the Letter of Credit shall be matched with back-to-back
  obligations included within or incorporated into the financial institution’s
  letter of credit in favor of Lloyd’s.

  
	
   

  	
   

  
	
   

  	
  “Business Day” means any day other
  than a Saturday, Sunday or any other day on which commercial banks in London
  and Bermuda are authorized or required to close.

  
	
   

  	
   

  
	
   

  	
  “Capital Lease Obligations” means,
  for any Person, all obligations of such Person to pay rent or other amounts
  under a lease which has been or should be capitalized on the books of the
  lessee in accordance with GAAP.  For
  purposes of this Agreement, the amount of such obligations shall be the
  capitalized amount thereof, determined in accordance with GAAP.

  
	
   

  	
   

  
	
   

  	
  “Cash Equivalents”
  means, as to any Person, (a) securities issued or directly and fully
  guaranteed or insured by the United States or any agency or instrumentality
  thereof (provided that the full
  faith and credit of the United States is pledged in support thereof) having
  maturities of not more than one year from the date of acquisition, (b) time
  deposits and certificates of deposit of any commercial bank having, or which
  is the principal banking subsidiary of a bank holding company organized under
  the laws of the United States, any State thereof, the District of Columbia or
  any foreign jurisdiction having, capital, surplus and undivided profits
  aggregating in excess of USD$200,000,000, with maturities of not more than
  one year from the date of acquisition by such Person, (c) commercial paper
  rated at least A-1 or the equivalent thereof by S&P or at least P-1, or
  the equivalent thereof by Moody’s and in each case maturing not more than one
  year after the date of acquisition by such Person, and (d) investments in
  money market funds 

  

 2
 

 

 

	
   

  	
  substantially all of whose assets are comprised of
  securities of the types described in clauses (a) through (c) above.

  
	
   

  	
   

  
	
   

  	
  “Change of Control” means the Parent
  ceases to own, directly or indirectly, 100% of the shares of capital stock of
  (or other ownership or profit interests in) the Obligor.

  
	
   

  	
   

  
	
   

  	
  “Code”
  means the U.S. Internal Revenue Code of 1986, as amended from time to time,
  and any rule or regulation issued thereunder.

  
	
   

  	
   

  
	
   

  	
  “Collateral” has the definition set
  forth in Clause 2.10 (Collateral Security).

  
	
   

  	
   

  
	
   

  	
  “Collateral
  Account Control Agreement” means an agreement, satisfactory to the
  Security Agent, by and among the Obligor, the Security Agent and the
  Custodian pursuant to which the Custodian confirms and acknowledges the Security
  Agent’s security interest in the Custodial Account and undertakes such other
  matters as the Security Agent deems appropriate.

  
	
   

  	
   

  
	
   

  	
  “Commitment”
  means:

  
	
   

  	
   

  
	
   

  	
  (a)         in relation to any Original Lender,
  the amount in the Base Currency set forth opposite its name on Schedule 1 (Lender Commitments) hereto,

  
	
   

  	
   

  
	
   

  	
  (b)        in relation to any other Lender, the
  amount in the Base Currency of any Commitment transferred to it under this
  Agreement; and

  
	
   

  	
   

  
	
   

  	
  to the extent not cancelled, reduced or transferred
  by it under this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Compliance Certificate” means a
  compliance certificate delivered to the Agent pursuant to paragraph (i) of
  sub-clause 5.1.2 (Compliance
  Certificate)
  substantially in the form set out in Exhibit E hereto.

  
	
   

  	
   

  
	
   

  	
  “Consolidated Net
  Income” means, for any Person, for any period, net income (or
  loss) after income taxes of such Person and its Subsidiaries for such period,
  determined on a consolidated basis in accordance with GAAP.

  
	
   

  	
   

  
	
   

  	
  “Consolidated
  Tangible Net Worth” means, for any Person, as of the date of any
  determination, Net Worth of such Person and its Subsidiaries on such date
  less the amount of all intangible items included therein, including, without
  limitation, goodwill, franchises, license, patents, trademarks, trade names,
  copyrights, service marks, brand names and write-ups of assets.

  
	
   

  	
   

  
	
   

  	
  “Constituent Documents” means, with
  respect to any Corporation, such Corporation’s certificate of incorporation,
  memorandum of association or other similar document concerning the formation,
  organization and existence of such Corporation required under the laws of the
  jurisdiction of organization of such Corporation, and such Corporation’s 

  

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  by-laws or other similar document required
  under the laws of such jurisdiction of organization.

  
	
   

  	
   

  
	
   

  	
  “Controlled Group”
  means all members of a controlled group of corporations or other business
  entities and all trades or businesses (whether or not incorporated) under
  common control which are treated as a single employer under Section 414 of
  the Code.

  
	
   

  	
   

  
	
   

  	
  “Corporation” includes companies,
  associations, corporations, partnerships, limited liability companies and
  other legal entities of all kinds.

  
	
   

  	
   

  
	
   

  	
  “Credit Protection
  Arrangement” means any “over the counter” arrangement designed to
  transfer credit risk from one party to another, including credit default
  swaps (including, without limitation, single name, basket and
  first-to-default swaps), total return swaps and credit-linked notes.

  
	
   

  	
   

  
	
   

  	
  “Custodial Account” shall have the
  meaning set forth in the Security Agreement executed and delivered by the
  Obligor.

  
	
   

  	
   

  
	
   

  	
  “Custodian” shall have the meaning
  set forth in the Custodian Agreement.

  
	
   

  	
   

  
	
   

  	
  “Custodian Agreement” means the
  Custody Agreement dated July 21, 2005 between the Bank of New York, as
  Custodian, and the Obligor, as the same may be amended, amended and restated,
  supplemented or otherwise modified from time to time.

  
	
   

  	
   

  
	
   

  	
  “Default” means any event or
  condition specified in Clause 6.1 (Events of Default
  Defined) which, upon the giving of notice, the lapse of time, or
  the happening of any further condition, would become an Event of Default.

  
	
   

  	
   

  
	
   

  	
  “Disruption Event”
  means either or both of:

  
	
   

  	
   

  
	
   

  	
  (a)

  	
  a material
  disruption to those payment or communications systems or to those financial
  markets which are, in each case, required to operate in order for payments to
  be made in connection with the Facility (or otherwise in order for the
  transactions contemplated by the Fundamental Documents to be carried out)
  which disruption is not caused by, and is beyond the control of, any of the
  Parties; or

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (b)

  	
  the occurrence
  of any other event which results in a disruption (of a technical or
  systems-related nature) to the treasury or payments operations of a Party
  preventing that, or any other Party:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (i)

  	
  from performing
  its payment obligations under the Fundamental Documents; or

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (ii)

  	
  from
  communicating with other Parties in accordance with the terms of the
  Fundamental Documents,

  
	
   

  	
   

  
						

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  (and which (in either such case)) is not caused by,
  and is beyond the control of, the Party whose operations are disrupted.

  
	
   

  	
   

  
	
   

  	
  “Dollar Equivalent” means, with
  respect to any monetary amount in a currency other than U.S. Dollars, at any
  date of determination thereof, the amount of U.S. Dollars obtained by
  converting such currency involved in such computation into U.S. Dollars at
  the spot rate for the purchase of U.S. Dollars with the applicable currency
  as published in the Financial Times (or any successor thereto) on the date of
  such determination.

  
	
   

  	
   

  
	
   

  	
  “Eligible Assignee”
  means (i) a Lender, (ii) an Affiliate of a Lender and (iii) any other bank or
  financial institution, trust, fund or other entity which is regularly engaged
  in or established for the purpose of making, purchasing or investing in
  loans, securities or other financial assets approved by Lloyd’s for the
  purpose of providing guarantees and issuing or confirming letters of credit
  comprising a member’s Funds at Lloyd’s (as such term is defined in paragraph
  4 of the Membership Bylaw (No. 17 of 1993)).

  
	
   

  	
   

  
	
   

  	
  “ERISA”
  means the Employee Retirement Income Security Act of 1974, as amended from
  time to time, and any rule or regulation issued thereunder.

  
	
   

  	
   

  
	
   

  	
  “ERISA Affiliate”
  has the meaning set forth in Clause 4.12 (ERISA).

  
	
   

  	
   

  
	
   

  	
  “Event of Default” has the meaning
  set forth in Clause 6.1 (Events of Default
  Defined).

  
	
   

  	
   

  
	
   

  	
  “Facility” means the Letters of
  Credit that the Agent has agreed to issue on behalf of the Lenders under this
  Agreement in an amount (including all Letter of Credit Obligations and
  Reimbursement Obligations for the Obligor) not to exceed at the time of
  issuance of any Letter of Credit USD$150,000,000 (or the foreign currency
  Dollar Equivalent of pounds sterling or euro) in the aggregate.

  
	
   

  	
   

  
	
   

  	
  “Facility
  Availability Period” means the Restatement Date up to and including
  December 31, 2007.

  
	
   

  	
   

  
	
   

  	
  “Facility Office”
  means the office or offices notified by a Lender to the Agent in writing on
  or before the date it becomes a Lender (or, following that date, by not less
  than five Business Days’ written notice) as the office or offices through
  which it will perform its obligations under this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Facility Termination Date” means
  December 31, 2011.

  
	
   

  	
   

  
	
   

  	
  “Finance Party”
  means the Agent, the Security Agent, the Arranger or a Lender.

  
	
   

  	
   

  
	
   

  	
  “Fitch”
  means Fitch Ratings Ltd. or any successor to its rating business.

  
	
   

  	
   

  
	
   

  	
  “Fundamental Documents” means and
  includes each of the following for the time being in force:

  
	
   

  	
   

  
	
   

  	
  (a)         this Agreement;

  
	
   

  	
   

  

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  (b)        the Letters of Credit;

  
	
   

  	
   

  
	
   

  	
  (c)         the Security Agreement;

  
	
   

  	
   

  
	
   

  	
  (d)        the Custodian Agreement; and

  
	
   

  	
   

  
	
   

  	
  (e)         any other Security Document.

  
	
   

  	
   

  
	
   

  	
  “GAAP” shall mean
  United States generally accepted accounting principles in effect from time to
  time.

  
	
   

  	
   

  
	
   

  	
  “GNMA Securities” means securities issued
  by the Government National Mortgage Association.

  
	
   

  	
   

  
	
   

  	
  “Government Securities” means both U.S.
  Government Securities and OECD Government Securities.

  
	
   

  	
   

  
	
   

  	
  “Group” means the Parent and its
  Subsidiaries from time to time.

  
	
   

  	
   

  
	
   

  	
  “Guarantee”
  of or by any Person (the “guarantor”)
  means any obligation guaranteeing or intended to guarantee any Indebtedness,
  leases, dividends or other obligations (“primary
  obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or
  indirectly, including, without limitation, any obligation of such Person,
  whether or not contingent, (a) to purchase any such primary obligation or any
  property constituting direct or indirect security therefor, (b) to advance or
  supply funds (i) for the purchase or payment of any such primary obligation
  or (ii) to maintain working capital or equity capital of the primary obligor
  or otherwise to maintain the net worth or solvency of the primary obligor,
  (c) to purchase property, securities or services primarily for the purpose of
  assuring the owner of any such primary obligation of the ability of the
  primary obligor to make payment of such primary obligation or (d) otherwise
  to assure or hold harmless the owner of such primary obligation against loss
  in respect thereof; provided, however, that
  the term Guarantee shall not include (x) endorsements of instruments for
  deposit or collection in the ordinary course of business or (y) obligations
  of the Obligor under insurance contracts, reinsurance agreements or
  retrocession agreements.  The amount of
  any Guarantee shall be deemed to be an amount equal to the stated or
  determinable amount of the primary obligation in respect of which such
  Guarantee is made or, if not stated or determinable, the maximum reasonably
  anticipated liability in respect thereof (assuming such Person is required to
  perform thereunder) as determined by such Person in good faith.

  
	
   

  	
   

  
	
   

  	
  “Indebtedness” means, for any
  Person, without duplication, (a) obligations created, issued or incurred by
  such Person for borrowed money (whether by loan, the issuance and sale of
  debt securities or the sale of Property to another Person subject to an
  understanding or agreement, contingent or otherwise, to repurchase such
  Property from such Person); (b) obligations of such Person to pay the
  deferred purchase or acquisition price of Property or 

  

 6
 

 

 

	
   

  	
  services, other than
  trade accounts payable (other than for borrowed money) arising, and accrued
  expenses incurred, in the ordinary course of business; (c) indebtedness of
  others secured by a Lien on the Property of such Person, whether or not the
  respective indebtedness so secured has been assumed by such Person; (d)
  reimbursement obligations of such Person in respect of letters of credit or
  similar instruments issued or accepted by banks and other financial
  institutions for account of such Person; (e) Capital Lease Obligations of
  such Person; (f) Guarantees by such Person of Indebtedness of others; (g)
  Rate Hedging Obligations of such Person; and (h) any other obligation for
  borrowed money or other financial accommodation which in accordance with GAAP
  or SAP, as applicable, would be shown as a liability on the consolidated
  balance sheet of such Person.   For the
  avoidance of doubt, Indebtedness shall not include (v) trade payables
  (including payables under insurance contracts and reinsurance payables) and
  accrued expenses in each case arising in the ordinary course of business, (w)
  obligations of the Obligor with respect to Policies, (x) obligations arising
  under deferred compensation plans of the Obligor and its Subsidiaries in
  effect on the date hereof or which have been approved by the board of
  directors of the Obligor, (y) obligations with respect to products
  underwritten by the Obligor in the ordinary course of business, including
  insurance policies, annuities, performance and surety bonds and any related
  contingent obligations and (z) reinsurance agreements entered into by the
  Obligor in the ordinary course of business.

  
	
   

  	
   

  
	
   

  	
  “Insurance License” means licenses
  (including, without limitation, licenses or certificates of authority from
  Applicable Insurance Regulatory Authorities) permits or authorizations to
  transact insurance and reinsurance business.

  
	
   

  	
   

  
	
   

  	
  “Interest Rate” means the rate of
  interest per annum equal to 2% above LIBOR from time to time in effect, not
  to exceed the maximum rate of interest permitted by applicable law.

  
	
   

  	
   

  
	
   

  	
  “Investment” means (i) Government
  Securities and (ii) GNMA Securities.

  
	
   

  	
   

  
	
   

  	
  “ISP” means the International
  Standby Practices (ISP 1998), International Chamber of Commerce Publication
  No. 590.

  
	
   

  	
   

  
	
   

  	
  “Issue Date”
  means the date on which a Letter of Credit is issued.

  
	
   

  	
   

  
	
   

  	
  “JPMorgan Credit
  Agreement” means the Credit Agreement, dated as of September 16,
  2004, as amended and restated as the Amended and Restated Credit Agreement,
  dated as of November 29, 2005 and as amended and restated as the Second
  Amended and Restated Credit Agreement, dated as of August 30, 2006, by
  and among the Parent, Arch Capital Group (U.S.) Inc., other Subsidiaries of
  the Parent, including the Obligor, the Agent, HSBC Bank USA, N.A., ING Bank
  N.V., London Branch, The Bank of New York, and Wachovia Bank, N.A., Calyon
  and Citibank, N.A., as documentation agents, Bank of America, N.A., as
  syndication agent, and JPMorgan Chase Bank, N.A. as administrative agent.

  
	
   

  	
   

  
	
   

  	
  “Lender” means:

  
	
   

  	
   

  

 

 7

 

 

	
   

  	
  (a)         each Original Lender; and

  
	
   

  	
   

  
	
   

  	
  (b)        any Eligible Assignee which has become
  a Lender hereto pursuant to an Assignment and Acceptance,

  
	
   

  	
   

  
	
   

  	
  which in each case has not ceased to be a Party in
  accordance with the terms of this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Letter(s) of Credit” means the
  irrevocable standby letters of credit issued for the benefit of the
  Beneficiaries under this Agreement having an expiry date up to four years
  from the date of issue in the aggregate issued amount at any one time, when
  aggregated with any other outstanding Letters of Credit under this Agreement,
  not to exceed a face amount of USD$150,000,000.

  
	
   

  	
   

  
	
   

  	
  “Letter of Credit Exposure” means, with
  respect to any Lender, as of any date of determination (a) prior to the
  termination of the Commitments, that Lender’s Commitment, and (b) after the
  termination of the Commitments, the Lender’s aggregate Letter of Credit
  Obligations in respect of all Letters of Credit issued by the Agent on behalf
  of such Lender.

  
	
   

  	
   

  
	
   

  	
  “Letter of Credit Obligations”
  means, as at any date of determination thereof, on an aggregate basis
  for all Letters of Credit issued at the request of the Obligor, the maximum
  amount that could be drawn by the Beneficiaries of such Letters of Credit
  (assuming, notwithstanding any provision of a Letter of Credit to the
  contrary, that such Beneficiary was then entitled to draw the full amount
  remaining available thereunder) but which has not been drawn as of that date
  (for purposes of any Letters of Credit denominated in pounds sterling or
  euro, the maximum amount that could be drawn by the Beneficiaries of such
  Letters of Credit shall be deemed to be the Dollar Equivalent of such amount
  as of such date).

  
	
   

  	
   

  
	
   

  	
  “LIBOR” means,

  
	
   

  	
   

  
	
   

  	
  (a)         the applicable Screen Rate; or

  
	
   

  	
   

  
	
   

  	
  (b)        (if no Screen Rate is available for
  the applicable currency) the arithmetic mean of the rates (rounded upwards to
  four decimal places) as supplied to the Agent at its request quoted by the
  Reference Bank to leading banks in the London interbank market;

  
	
   

  	
   

  
	
   

  	
  as of the
  relevant time on the quotation date in accordance with market practice for
  the offering of deposits in such currency and for the specified period

  
	
   

  	
   

  
	
   

  	
  “Lien” means,
  with respect to any Property, any mortgage, lien, pledge, charge, security
  interest or encumbrance of any kind in respect of such Property.  For purposes of this Agreement, a Person
  shall be deemed to own subject to a Lien any Property that it has acquired or
  holds subject to the interest of a vendor or lessor under any conditional
  sale 

  

 8
 

 

 

	
   

  	
  agreement, capital
  lease or other title retention agreement (other than an operating lease)
  relating to such Property.

  
	
   

  	
   

  
	
   

  	
  “Lloyd’s” means The Society and Council of
  Lloyd’s or its affiliates or the managing agents of any Lloyd’s syndicate
  reinsured by the Obligor.

  
	
   

  	
   

  
	
   

  	
  “Majority Lenders” means:

  
	
   

  	
   

  
	
   

  	
  (a)        if
  there are no Letters of Credit then outstanding, a Lender or Lenders whose
  Ratable Share aggregate more than 662/3% of the total Commitments
  (or, if the total Commitments have been reduced to zero, aggregated more than
  662/3% of the total Commitments
  immediately prior to the reduction); or

  
	
   

  	
   

  
	
   

  	
  (b)        at
  any other time, a Lender or Lenders whose Ratable Share in the Letters of
  Credit then outstanding aggregate more than 662/3% of all the Letters of
  Credit then outstanding.

  
	
   

  	
   

  
	
   

  	
  “Margin Stock” means margin stock or “margin security” within the meaning of
  Regulations T, U and X.

  
	
   

  	
   

  
	
   

  	
  “Material Adverse Effect” means an event
  or circumstance which has or could reasonably be expected to have a material
  adverse effect on:

  
	
   

  	
   

  
	
   

  	
  (a)         the ability of the Obligor to meet
  the obligations of this Agreement;

  
	
   

  	
   

  
	
   

  	
  (b)        the business assets or financial
  condition of the Obligor and its Subsidiaries taken as a whole or the Parent
  and its Subsidiaries taken as a whole; or

  
	
   

  	
   

  
	
   

  	
  (c)         the validity or enforceability of the
  rights and remedies of the Lenders or the Agent under the Fundamental
  Documents.

  
	
   

  	
   

  
	
   

  	
  “Moody’s” means
  Moody’s Investors Service, Inc. or any successor thereto.

  
	
   

  	
   

  
	
   

  	
  “Multiemployer Plan” means a
  “multiemployer plan” (as defined in Section (3)(37) of ERISA) contributed to
  for any employees of any Affiliate of the Obligor.

  
	
   

  	
   

  
	
   

  	
  “Net Worth” means,
  as at any date of determination, for any Person, the sum of its capital stock
  (including, without limitation, its preferred stock), capital in excess of
  par or stated value of shares of its capital stock (including, without
  limitation, its preferred stock), retained earnings and any other account
  which, in accordance with GAAP, constitutes stockholders equity, but
  excluding (i) any treasury stock and (ii) the effects of Financial Accounting
  Statement No. 115 which shall be determined on a consolidated basis in
  accordance with GAAP after appropriate deduction for any minority interests
  in Subsidiaries.

  
	
   

  	
   

  
	
   

  	
  “Notice of Termination” means a notice of
  the kind referred to in Clause 2.1.3.

  
	
   

  	
   

  

 9
 

 

 

	
   

  	
  “Obligor” means Arch Reinsurance Ltd., a
  Bermuda company.

  
	
   

  	
   

  
	
   

  	
  “OECD Country” means a
  country that (a) either (i) is a full member of the Organization for Economic
  Cooperation and Development or (ii) has concluded special lending
  arrangements with the International Monetary Fund’s General Arrangements to
  Borrow and (b) has not rescheduled its external sovereign debt within the
  previous five years.

  
	
   

  	
   

  
	
   

  	
  “OECD Government Securities”
  means securities issued by any OECD Country in U.S. Dollars, pounds sterling
  or euro and which are rated at least AAA by S&P (or Moody’s or Fitch
  equivalent).

  
	
   

  	
   

  
	
   

  	
  “Original Agreement”
  means the Letter of Credit and Reimbursement Agreement dated as of November
  25, 2003 by and among the Obligor and Barclays Bank PLC, as amended and
  restated on August 19, 2004, on November 24, 2004 and on December 6, 2004, as
  amended on July 21, 2005 and as amended and restated on December 31, 2005.

  
	
   

  	
   

  
	
   

  	
  “Original Beneficiary” means any
  Beneficiary as defined in the Original Agreement.

  
	
   

  	
   

  
	
   

  	
  “Original Letters of Credit”
  means the letters of credit issued under the Original Agreement.

  
	
   

  	
   

  
	
   

  	
  “Parent” means
  Arch Capital Group Ltd., a Bermuda company.

  
	
   

  	
   

  
	
   

  	
  “Party” means a party to this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Permitted Indebtedness”
  has the meaning set forth in sub-clause 5.6.3(c) of Clause 5.6 (Negative Covenants).

  
	
   

  	
   

  
	
   

  	
  “Person” means
  and includes an individual, a partnership, trust, estate, corporation,
  company, unincorporated organization, limited liability company and a
  government or any agency, instrumentality or political subdivision thereof.

  
	
   

  	
   

  
	
   

  	
  “Plan” means an employee pension benefit
  plan which is covered by Title IV of ERISA or subject to the minimum funding
  standards under Section 412 of the Code as to which any Credit Party or any
  member of the Controlled Group may have any liability.

  
	
   

  	
   

  
	
   

  	
  “Property” means
  any right or interest in or to property of any kind whatsoever, whether real,
  personal or mixed and whether tangible or intangible.

  
	
   

  	
   

  
	
   

  	
  “Policies” means all insurance policies,
  annuity contracts, guaranteed interest contracts and funding agreements
  (including riders to any such policies or contracts, certificates issued with
  respect to group life insurance or annuity contracts and any contracts issued
  in connection with retirement plans or arrangements) and assumption
  certificates issued or to be issued (or filed pending current review by
  applicable governmental authorities) by the Obligor and any coinsurance
  agreements entered into or to be entered into by the Obligor.

  
	
   

  	
   

  

 10
 

 

 

	
   

  	
  “Ratable Share” of any amount means, with
  respect to any Lender at any time, the product of such amount times a
  fraction, the numerator of which is that Lender’s Letter of Credit Exposure
  and the denominator of which is the aggregate Letter of Credit Exposure of
  all Lenders, as the applicable percentage may be adjusted by assignments
  permitted pursuant to Clause 9.4 (Successors
  and Assigns).  The initial
  Ratable Share of each Lender is set forth opposite the name of that Lender
  set forth on Schedule 1 (Lender Commitments)
  hereto.

  
	
   

  	
   

  
	
   

  	
  “Rate Hedging Obligations”
  means, for any Person, any and all net obligations of such Person,
  whether absolute or contingent and howsoever and whensoever created, arising,
  evidenced or acquired (including all renewals, extensions and modifications
  thereof and substitutions therefor), under (a) any agreements, devices or
  arrangements designed to protect at least one of the parties thereto from the
  fluctuations of interest rates, exchange rates or forward rates applicable to
  such party’s assets, liabilities or exchange transactions, including but not
  limited to, U.S. Dollar-denominated or cross-currency interest
  rate exchange agreements, forward currency exchange agreements, interest rate
  cap or collar protection agreements, forward rate currency or interest rate
  options, puts and warrants, or any similar derivative transactions, and (b)
  any and all cancellations, buy backs, reversals, terminations or assignments
  of any of the foregoing.

  
	
   

  	
   

  
	
   

  	
  “Reference Bank” means
  the principal London office of Barclays Bank PLC or such other banks as may
  be appointed by the Agent.

  
	
   

  	
   

  
	
   

  	
  “Regulations T, U and X” means,
  respectively, Regulations T, U and X of the Board of Governors of the Federal
  Reserve System of the United States (or any successor) as now and from time
  to time hereafter in effect from the date of this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Reimbursement Obligations”
  means with respect to the Obligor, all of its obligations pursuant to
  Clause 2.2 (Reimbursement; Agent’s
  Responsibility) to reimburse each Lender for payments made by each
  Lender upon any drawings under any Letter of Credit issued at the request of
  the Obligor and to pay to the Agent and Lenders all other amounts that are
  payable by the Obligor to the Agent and Lenders pursuant to this Agreement
  and the other Fundamental Documents. 
  For purposes of drawings under any Letters of Credit denominated in
  pounds sterling or euro, the amount of such drawing shall be deemed to be the
  Dollar Equivalent of such amount as of the date of repayment of such drawing,
  provided, however, that, solely
  for the purpose of determining the Obligor’s compliance with the requirements
  of sub-clause 5.1.4 (Maintenance of Adjusted
  Collateral Value) hereof and Clause 1 of the Security
  Agreement on any given date, the amount of any such unreimbursed drawing
  shall be deemed to be the Dollar Equivalent of such amount as of such date.

  
	
   

  	
   

  
	
   

  	
  “Repeating
  Representations” means the representations which are set out in
  Clause 4.1 (Corporate Existence and
  Power) to Clause 4.18 (Investment Company Act)
  inclusive (it being understood and agreed that the representation or warranty
  contained in sub-clause 

  

 11
 

 

 

	
   

  	
  4.6.1 shall be required to be true and correct only
  as of the Restatement Date and any other representation or warranty that is
  expressly stated to have been made as of a specific date shall be required to
  be true in all material respects only as of such specific date).

  
	
   

  	
   

  
	
   

  	
  “Restatement” means the delivery of the
  executed Fundamental Documents by the parties thereto on the Restatement
  Date.

  
	
   

  	
   

  
	
   

  	
  “Restatement Date” means the date on which
  all of the conditions set forth in Clause 3.1 (Conditions Precedent to Restatement and Issuance of Initial Letters
  of Credit) shall have been satisfied or waived by the Lenders.

  
	
   

  	
   

  
	
   

  	
  “SAP” means the
  accounting procedures and practices prescribed or permitted by the Applicable
  Insurance Regulatory Authority, applied on a basis consistent with those that
  are to be used in making the calculations for purposes of determining
  compliance with this Agreement.

  
	
   

  	
   

  
	
   

  	
  “SAP Financial Statements”
  means the financial statements of the Obligor which have been
  submitted or are required to be submitted to the Applicable Insurance
  Regulatory Authority.

  
	
   

  	
   

  
	
   

  	
  “S&P” shall
  mean Standard & Poor’s Rating Services, a division of The McGraw-Hill
  Companies, Inc., or any successor thereto.

  
	
   

  	
   

  
	
   

  	
  “Screen Rate” means the British Bankers’
  Association Interest Settlement Rate for the relevant currency period,
  displayed on the appropriate page of the Telerate screen.   If
  the agreed page is replaced or service ceases to be available, the Agent may
  specify another page or service displaying the appropriate rate.

  
	
   

  	
   

  
	
   

  	
  “SEC” means the United States Securities
  and Exchange Commission or any successor thereto.

  
	
   

  	
   

  
	
   

  	
  “Security” means a mortgage, pledge, Lien
  or other security interest securing any obligation of any person or any other
  agreement or arrangement having a substantially similar effect.

  
	
   

  	
   

  
	
   

  	
  “Security Agreement” means
  the Amended and Restated Security Agreement, dated as of December 21, 2006,
  in the form of Exhibit B hereto, between the Security Agent and the Obligor,
  as the same may be further amended, amended and restated, supplemented or
  otherwise modified from time to time, securing the obligations of the Obligor
  under this Agreement and the relevant Letters of Credit.

  
	
   

  	
   

  
	
   

  	
  “Security Documents” means,
  collectively, the Security Agreement, the Collateral Account Control
  Agreement and each other instrument or agreement that secures or guarantees
  the Letter of Credit Obligations and the Reimbursement Obligations.

  
	
   

  	
   

  

 12
 

 

 

	
   

  	
  “Single Employer Plan” means a Plan
  maintained by any member of the Controlled Group for employees of any member
  of the Controlled Group.

  
	
   

  	
   

  
	
   

  	
  “Subsidiary” of a Person means:

  
	
   

  	
   

  
	
   

  	
  (a)         any corporation more than 50% of the
  outstanding securities having ordinary voting power of which shall at the
  time be owned or controlled, directly or indirectly, by such Person or by one
  or more of its Subsidiaries or by such Person and one or more of its
  Subsidiaries; or

  
	
   

  	
   

  
	
   

  	
  (b)        any partnership, association, joint
  venture, limited liability company or similar business organization more than
  50% of the ownership interests having ordinary voting power of which shall at
  the time be so owned or controlled. 
  Unless otherwise expressly provided, all references herein to a
  “Subsidiary” shall mean a Subsidiary of the Obligor.

  
	
   

  	
   

  
	
   

  	
  “Tax” means any
  present or future tax, rate, duty, impost, governmental charge or levy,
  including, without limitation thereto, any corporation, income (other than
  any taxes imposed on or measured by the gross income or profits of the Agent
  or any Lender), value added, capital gains, sales, transfer, use, excise,
  occupation, franchise, property, stamp or other tax or duty and any license,
  registration and recording fee and all penalties, fines, interest imposed,
  assessed or otherwise payable in respect of any of the foregoing and all
  deductions or withholdings required to be made in respect of any of the
  foregoing levied, assessed, charged or required by any government or taxing
  authority in any country.

  
	
   

  	
   

  
	
   

  	
  “Total Commitments” means the aggregate of
  the Commitments being USD$150,000,000 at the date of this Agreement.

  
	
   

  	
   

  
	
   

  	
  “Unpaid Sum” means any sum due and payable
  but unpaid under the Fundamental Documents.

  
	
   

  	
   

  
	
   

  	
  “U.S. Government Securities”
  means securities (treasury bills, notes and bonds) that are direct
  obligations of, and obligations the timely payment of principal and interest
  on which is fully guaranteed by, the U.S. Government and which are rated at
  least AAA by S&P and Aaa by Moody’s (provided
  that if the relevant security has a split rating, the lower of the
  two ratings shall apply).

  
	
   

  	
   

  
	
   

  	
  “Utilization Request” means a utilization
  request substantially in the form set out in Exhibit C hereto.

  
	
   

  	
   

  
	
  1.2

  	
  Interpretation

  
	
   

  	
   

  
	
   

  	
  1.2.1     The terms “hereof,” “hereunder”
  and “herein” refer to this
  Agreement as a whole.

  
	
   

  	
   

  

 13
 

 

 

	
   

  	
  1.2.2     References by number to Clauses,
  Schedules and Exhibits refer to the Clauses, Schedules and Exhibits of this
  Agreement unless otherwise stated.

  
	
   

  	
   

  
	
   

  	
  1.2.3     The singular form of any word also refers
  to the plural form of such word, and vice
  versa, and any word of any particular gender includes the
  correlative words of the other genders.

  
	
   

  	
   

  
	
   

  	
  1.2.4     Any references in this Agreement to one
  or more items preceded by the word “including” shall not be deemed limited to
  the stated items but shall be deemed without limitation.

  
	
   

  	
   

  
	
   

  	
  1.2.5     Unless otherwise specified, all
  references herein to the amount of a Letter of Credit at any time shall be
  deemed to mean the Dollar Equivalent of the maximum face amount of such
  Letter of Credit after giving effect to all increases thereof contemplated by
  such Letter of Credit or any Letter of Credit application related thereto,
  whether or not such maximum face amount is in effect at such time.

  
	
   

  	
   

  
	
   

  	
  1.2.6     “Barclays
  Capital” is a reference to Barclays Capital, the investment
  banking division of Barclays Bank PLC.

  
	
   

  	
   

  
	
  2.

  	
  TERMS
  OF THE LETTER OF CREDIT FACILITY

  
	
   

  	
   

  
	
  2.1

  	
  The
  Letters of Credit

  
	
   

  	
   

  
	
   

  	
  2.1.1     On the terms and subject to the further
  conditions hereinafter set forth and upon satisfaction of the conditions set
  forth in Clause 3 (Conditions of Issuance
  of Letters of Credit), the Agenthereby
  agrees to issue on behalf of the Lenders on and after the Restatement Date Letters
  of Credit, each dated the date of its issuance, substantially in the form of
  Exhibit A hereto (or, in the case of a Letter of Credit issued to an
  Original Beneficiary on the Restatement Date in exchange for an Original
  Letter of Credit, substantially in the form of the Original Letter of Credit
  issued to such Original Beneficiary with appropriate changes to reflect the
  Commitments of the Lenders) and in the aggregate issued and outstanding at
  any one time in a face amount not to exceed USD$150,000,000 and so long as
  (after giving effect to the issuance of the requested Letter of Credit) the
  Adjusted Collateral Value is not less than the sum of all amounts then
  outstanding with respect to the Letter of Credit Obligations and
  Reimbursement Obligations, as more specifically set forth below in sub-clause
  2.1.2.  Letters of Credit may be issued
  in U.S. Dollars, pounds sterling or euro, provided
  that the Obligor is in compliance with sub-clause 5.1.4 of Clause
  5.1 (Affirmative Covenants).  So long as any Letter of Credit is
  outstanding and has not expired, this Agreement shall continue to be in full
  force and effect with respect to such Letter of Credit, provided, however, that no Letter of
  Credit shall be renewed, nor shall any

  
	
   

  	
   

  

 14
 

 

 

	
   

  	
               Letter of Credit be issued, on or
  after the last date of the Facility Availability Period.

  
	
   

  	
   

  
	
   

  	
  2.1.2     The Obligor may, from time to time,
  request that the Agent issue on behalf of the Lenders Letters of Credit
  during the period from the date hereof to but not including the last date of
  the Facility Availability Period, to cover underwriting years of account 2007
  and 2008; provided, however, that (i) the aggregate amount of
  Letter of Credit Obligations and Reimbursement Obligations at any time issued
  shall not exceed the Adjusted Collateral Value, and (ii) the aggregate face
  amount of all Letters of Credit issued under this Agreement, shall not exceed
  USD$150,000,000.  The Obligor shall make
  such request by executing and delivering to the Agent, in the case of Letters
  of Credit to be issued in U.S. Dollars or euro, not more than five nor less
  than three Business Days, or, in the case of Letters of Credit to be issued
  in pounds sterling, one Business Day, before the proposed Issue Date a
  Utilization Request and related documentation (in hardcopy and/or electronic
  format acceptable to the Agent).  If
  there shall exist any inconsistency between the terms of this Agreement (and
  the Security Documents) and any such documentation relating to a Letter of
  Credit issued under this sub-clause 2.1.2, the terms of this Agreement (and
  the Security Documents) shall control.

  
	
   

  	
   

  
	
   

  	
  2.1.3     The Agent is hereby authorized by each
  Lender to issue any Letter of Credit pursuant to sub-clause 2.1.1 by:

  
	
   

  	
   

  
	
   

  	
  (a)    completing the issue date and the proposed
  expiry date of such Letter of Credit;

  
	
   

  	
   

  
	
   

  	
  (b)    completing the schedule to such Letter of
  Credit with the percentage participation of each Lender as allocated pursuant
  to the terms hereof; and

  
	
   

  	
   

  
	
   

  	
  (c)    executing such Letter of Credit on behalf
  of each Lender and following such execution delivering such Letter of Credit,
  together with, if requested by the Beneficiary, a copy of each Lender’s
  Authorization Letter, to the Beneficiary on the Issue Date.

  
	
   

  	
   

  
	
   

  	
  2.1.4     Upon the termination of the Commitments,
  if no Letters of Credit are outstanding or such Letters of Credit are either
  (i) collateralized in a manner satisfactory to the Lenders by cash equal to
  not less than 100% of the amounts outstanding or available for drawing in a
  manner satisfactory to the Lenders or (ii) supported by back-to-back letters
  of credit the terms, conditions and issuer of which are satisfactory to the
  Lenders, and if the principal of and interest on each drawing remaining
  unpaid pursuant to the terms of reimbursement set forth in sub-clause 2.2.1 (Reimbursement; Agent’s Responsibility) and all fees
  payable hereunder shall have been paid in full, the Lenders agree to review
  the suspension of certain 

  

 15
 

 

 

	
   

  	
  covenants and
  events of default while cash deposits in the Custodian Account exceed the
  face amount of outstanding Letters of Credit or such Letters of Credit are
  supported by back-to-back letters of credit from banking institutions
  acceptable to the Lenders on terms and conditions of which are acceptable to
  the Lenders.

  
	
   

  	
   

  
	
   

  	
  2.1.5     The Agent shall on the date of issuance
  of each Letter of Credit give a Notice of Termination to the Beneficiary of
  such Letter of Credit (and the Lenders hereby authorize the Agent to serve
  such notice) so that such Letter of Credit expires on the fourth anniversary
  date of the Commencement Date (as defined in such Letter of Credit) or on any
  date subsequent thereto as specified in such Notice of Termination (whereupon
  the maximum actual and contingent liability of each Lender thereunder shall
  be reduced to zero).

  
	
   

  	
   

  
	
   

  	
  2.1.6     The Obligor may request a Letter of
  Credit be amended, renewed or extended by delivering a Utilization Request to
  the Agent.  The issue of any amended,
  renewed or extended Letter of Credit shall be subject to the same conditions
  as a new Utilization Request.  If the
  conditions for the issuance thereof have been met, the Agent shall issue such
  amended, renewed or extended Letter of Credit in accordance with the
  provisions of this Agreement as if it were a Letter of Credit and each
  Lender’s participation therein shall be determined accordingly.

  
	
   

  	
   

  
	
  2.2

  	
  Reimbursement;
  Agent’s Responsibility

  
	
   

  	
   

  
	
   

  	
  2.2.1     The Agent shall promptly notify each
  Lender and the Obligor of a demand for drawing under any Letter of Credit
  issued at the request of the Obligor on or prior to the date of payment of
  such drawing by contacting such Person telephonically, promptly followed by
  written notice.  Reimbursement by the
  Obligor of the amount of each such drawing is due and payable in full in the
  currency in which such drawing is to be made (i) on the same day that each
  such Lender honors such drawing, if the foregoing notice is received before
  1:00 p.m. (London time) on the date of such drawing or (ii) on the Business
  Day immediately following the date of such drawing, if the foregoing notice
  is received after 1:00 p.m. (London time) on the date of such drawing, and
  the Obligor absolutely and unconditionally agrees to pay or cause to be paid
  to the Agent for the account each Lender, on such date, without demand, the
  amount of any drawing under a Letter of Credit issued at the request of the
  Obligor.

  
	
   

  	
   

  
	
   

  	
  2.2.2     The Obligor absolutely and
  unconditionally agrees to pay, or cause to be paid, to the Agent for the
  account of each Lender, on demand, interest at the Interest Rate on any
  amount (including on overdue interest to the extent permitted by law) due by
  the Obligor hereunder that is not paid when due, for each day such amount is
  unpaid.

  
	
   

  	
   

  

 

 16

 

	
  2.3

  	
  Obligations of Lenders

  
	
   

  	
   

  
	
   

  	
  Whenever a
  Lender receives a demand for payment under a Letter of Credit, it will
  promptly examine the demand to determine whether or not it is in conformity
  with such Letter of Credit under which it is presented.  Each Lender shall be entitled to make any
  payment in accordance with the terms of the relevant Letter of Credit without
  reference to or further authority from the Obligor or any other investigation
  or enquiry if the demand for payment appears on its face to be in accordance
  with the terms and conditions of such Letter of Credit.  The Obligor irrevocably authorizes each
  Lender to comply with any demand under a Letter of Credit which appears on
  its face to be in order.

  
	
   

  	
   

  
	
  2.4

  	
  Participations

  
	
   

  	
   

  
	
   

  	
  Each Lender
  shall participate in each Letter of Credit (or an amendment to a Letter of
  Credit increasing or decreasing the amount thereof) issued pursuant to this
  Clause 2 in an amount equal to its Ratable Share of the face amount of such
  Letter of Credit. The Obligor hereby agrees to each such participation. Each
  Lender acknowledges and agrees that its obligation to acquire participations
  pursuant to this paragraph in respect of Letters of Credit is absolute and
  unconditional and, so long as each Letter of Credit is issued, amended,
  renewed or extended in accordance with this Agreement, shall not be affected
  by any circumstance whatsoever, including any such amendment, renewal or
  extension of any Letter of Credit or the occurrence and continuance of a
  Default, and that each such payment shall be made without any offset,
  abatement, withholding or reduction whatsoever. The obligations of each
  Lender are several and the failure by a Lender to perform its obligations
  hereunder shall not affect the obligations of the Obligor towards any other
  party hereto nor shall any other party be liable for the failure by such
  Lender to perform its obligations hereunder.

  
	
   

  	
   

  
	
  2.5

  	
  Unconditional
  Obligations of the Obligor

  
	
   

  	
   

  
	
   

  	
  2.5.1     The Obligor agrees with the Agent and
  each Lender that the following provisions shall apply with respect to each
  Letter of Credit issued at the request of the Obligor:

  
	
   

  	
   

  
	
   

  	
  (a)         Except as otherwise expressly stated
  in any Letter of Credit, but without limiting any provision of this Agreement
  or any Letter of Credit, there may be accepted or honored as complying with
  such Letter of Credit any documents of any character that comply with the
  provisions and interpretations contained in the ISP.

  
	
   

  	
   

  
	
   

  	
  (b)        The Agent, the Security Agent, any
  Lender or any of their respective correspondents or agents shall not be
  responsible for: (i) the truth or accuracy of any statement contained in any
  document received under the Letters of Credit; (ii) the validity, sufficiency
  or genuineness of any such document believed by the Agent or a Lender in good
  faith and in the 

  

 

 17
 

 

 

	
   

  	
  exercise of ordinary care to be valid, even if
  wholly fraudulent or forged; (iii) any breach of contract between the Obligor
  or any other Person and the Beneficiary of any Letter of Credit; (iv)
  interruptions or delays in the transmission or delivery of messages, by mail,
  courier service or electronic means, whether in cipher or not; (v) any errors
  or omissions in the translation of any document; (vi) failure or delay in
  giving any notice or in complying with any other formality; (vii) delay in
  arrival or failure to arrive of any property or required instrument or
  document; (viii) failure of any document to bear adequate reference to a
  Letter of Credit, or failure of any Person to note the amount of any payment
  on the reverse side of a Letter of Credit or to surrender or to take up a
  Letter of Credit or to send forward documents as required by the terms of a
  Letter of Credit, each of which provisions, if contained in a Letter of
  Credit itself, it is agreed may be waived by the Agent or a Lender; (ix) the
  fact that any instructions, oral or written, given to the Agent or a Lender
  purporting to have been given by or on behalf of the Obligor and believed by
  the Agent or such Lender in good faith and in the exercise of ordinary care to
  be valid which pertain to the issuance of any Letter of Credit, any
  extension, increase or other modification of any Letter of Credit or other
  action to be taken or omitted with reference thereto, were wholly or partly
  insufficient, erroneous, unauthorized or fraudulent; or (x) any other act or
  omission as to which banks are relieved from responsibility under the terms
  of the ISP, provided that none of the
  contingencies referred to in subparagraphs (i) through (x) of this sub-clause
  (b) is attributable to the gross negligence or willful misconduct of the
  Agent, the Security Agent, any Lender or any of their respective
  correspondents or agents.

  
	
   

  	
   

  
	
   

  	
  (c)         The Obligor will,
  without expense to the Agent or the Lenders, procure or cause to be procured
  promptly all necessary licenses which are required with respect to the
  transaction(s) which is/are the subject of any Letter of Credit issued for
  the Obligor or to which any such Letter of Credit relates, will comply with
  or cause to be complied with all applicable governmental regulations in
  regard thereto, and will furnish or cause to be furnished to the Agent such
  documents and certificates in respect thereof as the Agent may require.

  
	
   

  	
   

  
	
   

  	
  (d)        The Obligor hereby agrees to indemnify
  and hold harmless the Agent, the Security Agent and the Lenders from and
  against all liability, loss or expense (including reasonable legal fees,
  court costs and other expenses which the Agent, the Security Agent, the Agent
  and the Lenders may incur in enforcing their respective rights hereunder)
  incurred as a consequence of (i) any failure on the part of the Obligor duly
  to perform its agreements contained in this Clause 2.5, (ii) any action taken
  or omitted by the Agent, 

  

 

 18
 

 

 

	
   

  	
  the Security
  Agent, any Lender or any of their respective correspondents in relation to
  any Letter of Credit issued at the request of or on behalf of the Obligor, or
  (iii) any claims asserted by any party to any transaction in connection with
  which such Letters of Credit are issued, except such liability, loss or expense,
  if any, as is incurred as a result of the gross negligence or willful
  misconduct on the part of the Agent, the Security Agent, any Lender or of any
  of their respective correspondents.

  
	
   

  	
   

  
	
  2.6

  	
  Voluntary
  Cancellation

  
	
   

  	
   

  
	
   

  	
  During the
  Facility Availability Period, the Obligor shall have the right at any time
  and from time to time to cancel the undrawn portion of the Facility in whole
  or in part (if in part, in minimum amounts of not less than USD$5,000,000)
  without penalty upon ten Business Days’ prior written notice to the
  Agent.  Amounts so cancelled may not be
  reinstated.  Upon the last day of the
  Facility Availability Period, the undrawn portion of the Facility shall automatically
  be cancelled.  Notwithstanding the
  foregoing, no such cancellation shall reduce the Facility below an aggregate
  amount equal to the Letter of Credit Obligations and the Reimbursement
  Obligations.

  
	
   

  	
   

  
	
  2.7

  	
  Regulatory
  Requirements; Additional Costs

  
	
   

  	
   

  
	
   

  	
  The Obligor
  shall pay to the Agent from time to time upon demand such amounts as the
  Agent or a Lender determines in its sole discretion is necessary to
  compensate the Agent or such Lender for any costs attributable to the Agent’s
  issuing on behalf of the Lenders or having outstanding, or any Lender’s
  participation in, or a Lender’s making payment under, any Letter of Credit
  issued at the request of the Obligor resulting from the application of any
  domestic or foreign law or regulation or the interpretation or administration
  thereof applicable to the Agent or any Lender regarding any reserve,
  assessment, capitalization (including the cost of maintaining capital
  sufficient to permit issuance of the Letters of Credit, provided the cost
  attributed to the Letters of Credit is determined in good faith by any
  reasonable method) or similar requirement whether existing at the time of
  issuance of any such Letter of Credit or adopted thereafter, including,
  without limitation, any reduction in amounts receivable hereunder as a result
  of any change in applicable law, treaty, regulation, policy or directive, or
  the imposition of any Tax or increase in any existing Tax, applicable to the
  transactions contemplated hereunder or the commitments of the Lenders
  hereunder.

  
	
   

  	
   

  
	
  2.8

  	
  Fees

  
	
   

  	
   

  
	
   

  	
  2.8.1     The Obligor agrees to pay to the Agent
  for the account of the Agent and each Lender the following fees in connection
  with this Agreement:

  
	
   

  	
   

  
	
   

  	
  (a)         a Letter of Credit commission fee
  payable quarterly in arrears (and calculated based upon a 360-day year and
  actual days elapsed) on the last Business Day of each March, June, September
  and December, commencing 

  

 19
 

 

 

	
   

  	
  on
  March 31, 2007 in an amount equal to 0.25% per annum of the amount of
  the total Letter of Credit Obligations from time to time outstanding;

  
	
   

  	
   

  
	
   

  	
  (b)        a Letter of Credit participation fee,
  within ten days of the Restatement Date, in an amount equal to 0.075% per
  annum of the amount of the Facility;

  
	
   

  	
   

  
	
   

  	
  (c)         a Letter of
  Credit unused fee payable quarterly in arrears (and calculated based upon a
  360-day year and actual days elapsed) on the last Business Day of each March,
  June, September and December, commencing on March 31, 2007 in an amount
  equal to 0.075% per annum of an amount equal to USD$150,000,000 minus the
  total Letter of Credit Obligations from time to time outstanding; and

  
	
   

  	
   

  
	
   

  	
  (d)        Such fees shall be paid to the Agent
  and the Original Lenders from the date hereof, and to the Lenders from the
  effective date specified in the Assignment and Acceptance pursuant to which
  it became a Lender, until the Facility Termination Date. The amount paid to
  each Lender will be its Ratable Share of the fees paid.

  
	
   

  	
   

  
	
   

  	
  2.8.2     The Obligor agrees to pay to the Agent
  separately, and for its own account, the following fees in connection with
  this Agreement:

  
	
   

  	
   

  
	
   

  	
  (a)         after twenty Letters of Credit have
  been issued hereunder in any twelve-month period, a Letter of Credit issuance
  fee of USD$250 to be paid prior to or on each Issue Date for each additional
  Letter of Credit issued at the request of the Obligor; and

  
	
   

  	
   

  
	
   

  	
  (b)        all charges, costs and fees in the
  amounts and at the times separately agreed upon between the Obligor and the
  Agent from time to time

  
	
   

  	
   

  
	
  2.9

  	
  Payments
  and Computations

  
	
   

  	
   

  
	
   

  	
  2.9.1     Except as specifically set forth in this
  Agreement, all payments to be made by or on behalf of the Obligor under this
  Agreement shall be made, not later than 4:00 p.m. London time, on the date
  when due, in immediately available funds by federal funds wire to the Agent
  in the applicable currency at:

  
	
   

  	
   

  
	
   

  	
  if U.S. Dollars:

  
	
   

  	
   

  
	
   

  	
  Barclays Bank
  PLC New York

  SWIFT Address:               BARC
  US 33

  Account No.:                     050036211

  Beneficiary:                        Loan
  Operations re Agency Loans

  Reference:                          Loan
  Ops re:  Arch Re

  
	
   

  	
   

  
	
   

  	
  if pounds
  sterling:

  
	
   

  	
   

  

 20
 

 

 

	
   

  	
  Barclays Bank PLC
  London

  Sort Code:                          20-00-34

  Account:                            GSU
  fees claimed

  Account No:                      08290385

  Reference:                          Loan Ops re: Arch Re

  
	
   

  	
   

  
	
   

  	
  if euros:

  
	
   

  	
   

  
	
   

  	
  Barclays Bank PLC

  London

  Account No:                      12990655

  SWIFT Address:               BARCGB22

  Beneficiary:                        Barclays Bank PLC
  Wholesale, London

  Swift Address:                   BARCGB5G

  Reference:                          Loan Ops re: Arch Re

  
	
   

  	
   

  
	
   

  	
  or to such other
  address or account, or to the attention of such other Person as the Agent
  shall notify the Obligor.

  
	
   

  	
   

  
	
   

  	
  2.9.2     All payments made by or on behalf of the
  Obligor under this Agreement shall be made without setoff or counterclaim and
  free and clear of, and without deduction for, any Taxes (other than any taxes
  imposed on or measured by the gross income or profits of the Agent or any
  Lender), levies, imposts, duties, charges, fees, deductions, withholdings,
  compulsory loans, restrictions or conditions of any nature now or hereafter
  imposed or levied by any country or any political subdivision thereof or
  taxing or other authority therein unless the Obligor is compelled by law to
  make such deduction or withholding.  If
  any such obligation is imposed upon the Obligor with respect to any amount
  payable by it hereunder, it will pay to the Agent, on the date on which such
  amount becomes due and payable hereunder and in U.S. Dollars, such additional
  amount as shall be necessary to enable the Agent or any Lender to receive the
  same net amount which it would have received on such due date had no such
  obligation been imposed upon the Obligor. 
  If, at any time, the Agent or any Lender, or any Eligible Assignee of
  a Lender hereunder (an “Assignee”),
  is organized under the laws of any jurisdiction other than the United States
  or any state or other political subdivision thereof, the Agent or any Lender
  or the Assignee shall deliver to the Obligor, through the Agent, on the date
  it becomes a party to this Agreement, and at such other times as may be necessary
  in the determination of the Obligor in its reasonable discretion, such
  certificates, documents or other evidence, properly completed and duly
  executed by the Agent or any Lender or the Assignee (including, without
  limitation, Internal Revenue Service Form W-8BEN or W-8ECI, as appropriate,
  or any successor form prescribed by the Internal Revenue Service) to
  establish that the Agent, any such Lender or the Assignee is not subject to
  deduction or withholding of United States Federal Income Tax under 

   

  

 21
 

 

 

	
   

  	
  Section 1441 or
  1442 of the Internal Revenue Code or otherwise (or under any comparable
  provisions of any successor statute) with respect to any payments to the
  Agent, any such Lender or the Assignee of principal, interest, fees or other
  amounts payable hereunder.  The Obligor
  shall not be required to pay any additional amount to the Agent, any such
  Lender or any Assignee under this sub-clause 2.9.2 if the Agent, any such
  Lender or such Assignee shall have failed to satisfy the requirements of the
  immediately preceding sentence; provided
  that if the Agent, any such Lender or any Assignee shall have
  satisfied such requirements on the date it became a party to this Agreement,
  nothing in this sub-clause 2.9.2 shall relieve the Obligor of its obligation
  to pay any additional amounts pursuant to this sub-clause 2.9.2 in the event
  that, as a result of any change in applicable law, the Agent, any such Lender
  or such Assignee is no longer properly entitled to deliver certificates,
  documents or other evidence at a subsequent date establishing the fact that
  the Agent, any such Lender or the Assignee is not subject to withholding as
  described in the immediately preceding sentence.

  
	
   

  	
   

  
	
   

  	
  2.9.3     All payments made by or on behalf of the
  Obligor under this Agreement shall be applied first to the payment of all
  fees, expenses and other amounts due to the Agent and the Lenders (excluding
  principal and interest) by the Obligor, then to accrued interest with respect
  to the Reimbursement Obligations, and the balance on account of outstanding
  principal with respect to the Reimbursement Obligations; provided, however, that upon the
  occurrence and during the continuation of an Event of Default, payments will
  be applied to the obligations of the Obligor to the Agent and the Lenders as
  the Lenders determine in their sole discretion.

  
	
   

  	
   

  
	
   

  	
  2.9.4     All payments which shall be due hereunder
  on a day that is not a Business Day shall be extended to the next succeeding
  Business Day, and interest shall accrue during such extension.

  
	
   

  	
   

  
	
   

  	
  2.9.5     Computations of interest hereunder and
  computations of fees stated to be on an annual basis shall be made on the
  basis of a year of 360 days for the actual number of days elapsed (including
  the first day but excluding the last day).

  
	
   

  	
   

  
	
  2.10

  	
  Collateral
  Security

  
	
   

  	
   

  
	
   

  	
  All of the
  obligations of the Obligor to the Agent, the Security Agent or any Lender
  under this Agreement and the other Fundamental Documents shall be secured by
  a security interest and pledge granted by the Obligor, as security for the
  Obligor’s obligations under this Agreement and the Letters of Credit issued
  at the request of the Obligor, in favor of the Security Agent, for and on
  behalf of the Agent and the Lenders, in the securities and other collateral
  described in the Security Documents (together with all property or interests
  therein and all income therefrom and proceeds thereof, collectively, the “Collateral”).

  
	
   

  	
   

  

 22
 

 

 

	
  2.11

  	
  Original
  Agreement

  
	
   

  	
   

  
	
   

  	
  From the date of
  this Agreement, the Obligor shall not request any Letter of Credit (as
  defined in the Original Agreement) be issued under the Original Agreement

  
	
   

  	
   

  
	
  3.

  	
  CONDITIONS
  OF ISSUANCE OF LETTERS OF CREDIT

  
	
   

  	
   

  
	
  3.1

  	
  Conditions
  Precedent to Restatement and Issuance of Initial Letters of Credit

  
	
   

  	
   

  
	
   

  	
  This Agreement
  shall be effective upon, and the obligations of the Agent to issue on behalf
  of the Lenders any Letter of Credit under this Agreement on or after the
  Restatement Date are subject to, the satisfaction of the following conditions
  precedent (it being understood that until such time as the following
  conditions precedent have been satisfied, the Original Agreement shall remain
  in full force and effect):

  
	
   

  	
   

  
	
   

  	
  3.1.1     Fundamental
  Documents:  The Obligor
  shall have executed and delivered to the Agent eachFundamental
  Document required hereunder, which shall be in full force and effect.

  
	
   

  	
   

  
	
   

  	
  3.1.2     Proof of
  Corporate Action:  The Agent
  shall have received a certificate of the Obligor’s corporatesecretary or assistant secretary, or the equivalent
  thereof, dated the Restatement Date, setting forth resolutions of theBoard of Directors, or the equivalent thereof, of the
  Obligor approving the transactions contemplated by this Agreement and the
  other Fundamental Documents and authorizing the execution, delivery and
  performance by the Obligor of this Agreement and the other Fundamental
  Documents to which the Obligor is a party, which certificate shall state that
  such resolutions are in full force and effect without amendment.

  
	
   

  	
   

  
	
   

  	
  3.1.3     Incumbency
  Certificates:  The Agent
  shall have received a certificate of the Obligor’s corporate secretary or
  assistant secretary, or the equivalent thereof, dated the Restatement Date,
  setting forth the names and containing a specimen signature of each officer
  and director of the Obligor authorized to sign this Agreement and the other
  Fundamental Documents to which the Obligor is a party and to give notices and
  to take other action on behalf of the Obligor hereunder and in relation to
  the Collateral.

  
	
   

  	
   

  
	
   

  	
  3.1.4     Constituent
  Documents:  The Agent shall
  have received a certificate of the Obligor’s corporate secretary or
  assistance secretary, or equivalent thereof, dated the Restatement Date,
  certifying that the Constituent Documents of the Obligor are true and correct
  as of the Restatement Date.

  
	
   

  	
   

  
	
   

  	
  3.1.5     Bermuda
  Requirements:  The Agent
  shall have received a certificate of compliance issued by the Bermuda
  Regulatory Authority (Registrar of Companies and, if applicable, the Bermuda
  Monetary Authority) for each of the Parent and the Obligor in form and
  substance satisfactory to the Agent.

  
	
   

  	
   

  

 

 23

 

3.1.6                            Legal Opinions:  The
Agent shall have received signed legal opinions of (i) counsel for the Obligor
and (ii) counsel for the Agent, each in form and substance satisfactory to the
Agent, which opinions shall be addressed to and allow reliance thereon by the
Agent and the Original Lenders.

3.1.7                            Original Beneficiaries: 
Each Original Beneficiary shall have returned cancelled all Original
Letters of Credit issued to it; provided that in
the case of Original Letters of Credit issued to Lloyds TSB Bank plc, an
indemnity with respect to such Original Letters of Credit shall have been
executed and delivered to Barclays Bank PLC as issuing bank by Lloyds TSB Bank
plc, such indemnity to be in form and substance satisfactory to Barclays Bank
PLC.

3.1.8                            Proceedings and Documents: 
All corporate and other proceedings and all other matters in connection
with the transactions contemplated by this Agreement (including, without
limitation, all regulatory and third party approvals), the other Fundamental
Documents and all other documents incidental hereto and thereto, including all
opinions of counsel, shall be reasonably satisfactory in form and substance to
the Lenders.

3.1.9                            Financial Information: 
The Obligor shall have furnished all financial data and other information
requested by the Agent or the Lenders.

3.1.10                      No
Default; Representations and Warranties:  On and as of the Restatement Date, there
shall exist no Default or Event of Default and all representations and
warranties made by the Obligor in this Agreement and each of the Fundamental
Documents shall be true and complete in all material respects (it being
understood and agreed that the representation or warranty that is expressly
stated to have been made as of a specific date shall be required to be true in
all material respects only as of such specific date).

3.1.11                      Regulations
and Policies:  There have been
no material changes in governmental regulation or policy affecting the Agent or
any Lender in respect of this Agreement or the Obligor.

3.1.12                      Consents
and Approvals:  The Obligor
and the Agent shall have obtained all necessary consents and approvals for the
transactions contemplated by this Agreement and the other Fundamental
Documents.

3.1.13                      Lender’s
Authorization Letter:  The
Agent shall have received a signed copy of each Lender’s Authorization Letter
substantially in the form of Part B of Exhibit A hereto executed by each
Lender.

3.1.14                      Collateral
Requirements:  The Lenders
shall be satisfied with the Custodian Agreement, the Security Agreement, the Collateral
Account Control Agreement, subordination of the Custodian’s Liens and any other
relevant documentation 

 24
 

 

                                                    required
in respect of the collateral requirements and the Obligor shall have made or
caused to be made all such filings and recordings in each applicable
jurisdiction reasonably requested by the Agent to be filed to create or perfect
the Liens intended to be created under the Security Documents.

3.1.15                      Custodial
Account: The Obligor shall have confirmed that the Adjusted
Collateral Value as of the Restatement Date is not less than the sum of all
amounts then outstanding with respect to Letter of Credit Obligations and
Reimbursement Obligations and that each of the Investments utilized in the
preceding calculation of Adjusted Collateral Value has been deposited into the
Custodial Account.

3.1.16                      Know
Your Customer:  The Agent and
each Lender shall have received all documents and evidence reasonably requested
by the Agent (for itself or on behalf of any Lender) or any Lender in order for
the Agent or such Lender to carry out and be satisfied with the results of all
necessary “know your customer” or other similar checks under all applicable
laws and regulations pursuant to the transactions contemplated in the
Fundamental Documents.

3.1.17                      Fees:  The Agent shall have received for its own
account and for distribution (as appropriate) to each Lender the fees payable
on the Restatement Date under Clause 2.8 (Fees).

3.2                           Additional Conditions Precedent to the Issuance of Letters of Credit

The obligations of the
Agent to issue on behalf of the Lenders any Letter of Credit under this
Agreement on each Issue Date are subject to the further conditions precedent
that:

3.2.1                            both immediately prior to
the issuance of such Letter of Credit and also after giving effect thereto:

(a)                     no Default shall have occurred and
be continuing;

(b)                    the representations and warranties
made by the Obligor in this Agreement and each of the Fundamental Documents
shall be true and complete in all material respects on and as of the date of
the issuance of such Letter of Credit with the same force and effect as if made
on and as of such date (it being understood and agreed that the representation
or warranty contained in sub-clause 4.6.1 shall be required to be true and
correct only as of the Restatement Date and any other representation or
warranty that is expressly stated to have been made as of a specific date shall
be required to be true in all material respects only as of such specific date);

3.2.2                            the Agent shall have
received a Utilization Request;  and

3.2.3                            the Obligor shall have
confirmed (i) that the Adjusted Collateral Value as of the date of any
requested issuance of a Letter of Credit is not less than the sum of all 

 25
 

 

                                                    amounts
then outstanding with respect to Letter of Credit Obligations and Reimbursement
Obligations, taking into account the amount of the requested Letter of Credit,
(ii) that each of the Investments utilized in the preceding calculation of
Adjusted Collateral Value has been deposited into the Custodial Account and
(iii) that the aggregate face amount of the Letters of Credit issued under this
Agreement (taking into account the requested Letter of Credit) does not exceed
USD$150,000,000 or such lower amount of the Facility as a result of
cancellation under Clause 2.5 (Unconditional
Obligations of the Obligor).

Each request for a Letter
of Credit hereunder shall constitute a certification by the Obligor to the
effect set forth above (both as of the date of such notice and, unless the
Obligor otherwise notifies the Agent prior to the date of such Letter of Credit
issuance, as of the date of such issuance).

4.                                 REPRESENTATIONS AND WARRANTIES

In order to induce the
Agent and the Lenders to enter into this Agreement and to issue the Letters of
Credit, the Obligor for itself hereby represents and warrants on the
Restatement Date that:

4.1                           Corporate Existence and Power

The Obligor (a) is a
company or corporation duly organized, validly existing without limitation of
its corporate existence and in good standing under the laws of Bermuda and (b)
has adequate power and authority and legal right to own or hold under lease the
properties it purports to own or to hold under lease and to carry on the
business in which it is engaged or presently proposes to engage.  The Obligor has adequate power and authority
to enter into this Agreement and each of the other Fundamental Documents to
which it is a party, to request Letters of Credit hereunder, to create the
Collateral for the Letter of Credit Obligations and the Reimbursement Obligations
contemplated by this Agreement and the Security Documents and to perform its
obligations under this Agreement and each of the other Fundamental Documents to
which it is or is to become a party as contemplated by this Agreement.

4.2                           Authority

The execution and
delivery by the Obligor of this Agreement and each other Fundamental Document
to which it is or is to become a party as contemplated hereby, the obtaining of
Letters of Credit hereunder, the pledging of the Collateral for the Letter of
Credit Obligations and the Reimbursement Obligations contemplated by this
Agreement and the Security Documents and the performance by the Obligor of its
obligations in respect of this Agreement and the other Fundamental Documents in
accordance with their respective terms, have been duly authorized by all
necessary corporate action on the part of the Obligor and do not and will not
(a) contravene any provision of the Constituent Documents of the Obligor, (b)
conflict with, or result in a breach of the terms, conditions 

 26
 

 

or provisions of, or
constitute a default under or, except as contemplated by this Agreement, result
in the creation or imposition of any Lien pursuant to the terms of any
mortgage, indenture, deed of trust, security agreement, pledge agreement,
charge or other instrument to which the Obligor or any of its respective
property is bound, (c) violate any law, governmental rule, regulation, order or
decree of any court or administrative agency or governmental officer applicable
to and binding upon the Obligor, (d) require any waiver, consent or other
action by any governmental or regulatory authority or by any trustee or holder
of any Indebtedness or obligations of the Obligor or (e) require the approval
of the shareholders of the Obligor.

4.3                           Binding Effect of Agreement and Other Fundamental Documents

4.3.1                            This Agreement has been
duly executed and delivered by the Obligor and the agreements contained herein
constitute, and the agreements contained in each other Fundamental Document to
which the Obligor is or is to become a party will, when each such other
Fundamental Document is executed and delivered, constitute valid and legally
binding obligations for the Obligor enforceable in accordance with their
respective terms, except as such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting the enforcement of creditors’ rights generally, and (ii) general
principles of equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).

4.3.2                            Each Security Document
executed and delivered on or after the date hereof will effectively create the
Liens purported to be created thereby and such Liens will be first-priority
Liens on the Collateral covered thereby, subject to no other Liens (except
Liens in favor of the Custodian).

4.4                           Financial Information

The Parent and the
Obligor have heretofore furnished to the Agent accurate and complete financial
data and other information in all material respects based on its operations in
previous years, and said financial data furnished to the Agent is accurate and
complete and fairly presents in all material respects the financial position
and the results of operations for the period indicated therein in all material
respects.

4.5                           Pari passu ranking

The Obligor’s payment
obligations under the Fundamental Documents rank at least pari passu with the claims of all its
other unsecured and unsubordinated creditors, except for obligations
mandatorily preferred by law applicable to the Obligor.

 27
 

 

4.6                           Material Adverse Change; No Default

4.6.1                            Since December 31, 2005,
nothing has occurred which has had, or would reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.

4.6.2                            No Default or Event of
Default exists with respect to the Obligor.

4.7                           Existing Security Interest

No Security exists on or
over the assets of the Obligor except as permitted by sub-clause 5.6.1 (Negative Pledge).

4.8                           Litigation 

There are no legal or
arbitral proceedings, or any proceedings by or before any governmental or
regulatory authority or agency, now pending or (to the knowledge of the
Obligor) threatened against the Parent or the Obligor that are reasonably
likely (either individually or in the aggregate) to have a Material Adverse
Effect.

4.9                           Compliance with Laws and Agreements

The Obligor is in
compliance with laws, regulations and orders of any governmental agency or
authority applicable to it or its Properties and all indentures, agreements and
other instruments binding upon it or its Property, except where the failure to
do so, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.

4.10                     Winding-up

No meeting has been
convened for the winding-up, administration, dissolution or liquidation of the
Obligor, no such step is intended by the Obligor and, so far as it is aware, no
petition, application or equivalent or analogous procedure under the law of the
jurisdiction of the Obligor’s incorporation is outstanding for its winding-up,
administration, dissolution or liquidation (save where such petition,
application or equivalent or analogous procedure is frivolous or vexatious in
nature).

4.11                     Reorganizations

No step is intended or
has been taken by the Obligor for the reorganization, reconstruction, merger,
amalgamation or consolidation (or any equivalent or analogous procedure) of the
Obligor save where (i) it will survive such procedure as a separate legal
entity and such step or procedure will not have or be likely to have a Material
Adverse Effect or (ii) the Majority Lenders have provided their prior written
consent to such procedure.

 28
 

 

4.12                     ERISA

The Obligor contributes
to Single Employer Plans maintained by its ERISA Affiliate but does not
contribute to a Multiemployer Plan. 
There exists no Unfunded Pension Liability with respect to any Single
Employer Plans, except as would not have a Material Adverse Effect.

For the purposes of this
Clause 4.12, “Unfunded Pension Liability”
means the excess of an Employee Plan’s liabilities under Section 4001(a)(16) of
ERISA, over the current value of that plan’s assets, determined in accordance
with the assumptions used for funding an Employee Plan pursuant to Section 412
of the Code for the applicable plan year and “ERISA
Affiliate” means, with respect to a company, any Person that would
be deemed at any relevant  time to be a
single employer with the company pursuant to Section 414(b), (c), (m) or (o) of
the Code or Section 4001 of ERISA.

4.13                     Margin Stock

4.13.1                      The Obligor is not engaged nor
will it engage principally, or as one of its important activities, in the
business of owning or extending credit for the purpose of “buying” or “carrying”
any Margin Stock.

4.13.2                      None of the extensions of credit
under this Agreement will be used, directly or indirectly, for the purpose of
buying or carrying any Margin Stock, for the purpose of reducing or retiring
any Indebtedness that was originally incurred to buy or carry any Margin Stock
or for any other purpose which might cause all or extensions of credit under
this Agreement to be considered a “purpose credit” within the meaning of
Regulation U or Regulation X.

4.13.3                      Neither the Obligor nor any agent
acting on its behalf has taken or will take any action which might cause the
Fundamental Documents to violate any regulation of the Board of Governors of
the Federal Reserve System of the United States.

4.14                     Anti-Terrorism Laws

4.14.1                      Neither the Obligor nor any of
its Affiliates is in violation of any laws relating to terrorism or money laundering
(“Anti-Terrorism Laws”), including
Executive Order No. 13224 on Terrorist Financing effective September 24, 2001
(the “Executive Order”) and the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, Public Law 107-56.

4.14.2                      Neither the Obligor nor any of
its Affiliates is any of the following:

(a)                     a person or entity that is listed
in the annex to, or is otherwise subject to the provisions of, the Executive
Order;

 29
 

 

(b)                    a person or entity owned or
controlled by, or acting for or on behalf of, any person or entity that is
listed in the annex to, or is otherwise subject to the provisions of, the
Executive Order;

(c)                     a person or entity with which the
Agent or any Lender is prohibited from dealing or otherwise engaging in any
transaction by any Anti-Terrorism law;

(d)                    a person or entity that commits,
threatens or conspires to commit or supports “terrorism” as defined in the
Executive Order; or

(e)                     a person or entity that is named
as a “specially designated national and blocked person” on the most current
list published by the U.S. Treasury Department Office of Foreign Asset Control
at its official website or any replacement website or other replacement
official publication of such list.

4.14.3                      The Obligor does not (i) to the
best of its knowledge, conduct any business or engage in making or receiving
any contribution of funds, goods or services to or for the benefit of any
person described in paragraph (b) above, (ii) to the best of its knowledge,
deal in, or otherwise engage in any transaction relating to, any property or
interests in property blocked pursuant to the Executive Order or (iii) engage
in or conspire to engage in any transaction that evades or avoids, or has the
purpose of evading or avoiding, or attempt to violate, any of the prohibitions
set forth in any Anti-Terrorism Law.

4.15                     Custodian

The Custodian has not
resigned as Custodian without a successor Custodian satisfactory to the Agent
being appointed.

4.16                     Insurance
Licenses

There is (a) no Insurance
License of the Obligor or any of its Subsidiaries that is the subject of a
proceeding for suspension, revocation or limitation or any similar proceedings,
(b) no sustainable basis for such a suspension, revocation or limitation, and
(c) no such suspension, revocation or limitation threatened by any Applicable
Insurance Regulatory Authority, that, in each instance under (a), (b) and (c)
above has had, or would reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect. 
Neither the Obligor nor any of its Subsidiaries transacts any insurance
business, directly or indirectly, in any jurisdiction where such business
requires any Insurance License other than in those jurisdictions in which the
Obligor or such Subsidiary has obtained such Insurance License.

 30

 

4.17                     No Section 32 Direction

The Obligor has not
received any direction or other notification from the Bermuda Monetary
Authority pursuant to Section 32 of the Insurance Act, 1978 of Bermuda.

4.18                     Investment Company Act

Neither the Parent nor
the Obligor is an “investment company” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.

4.19                     Repeating Representations

Each of the Repeating
Representations will be correct and complied with in all material respects on
each Issue Date and each date that a Letter of Credit is renewed, reissued and
extended as if repeated then by reference to the then existing circumstances.

5.                                 COVENANTS

5.1                           Affirmative Covenants

The Obligor for itself
covenants and agrees that so long as any Letter of Credit is outstanding:

5.1.1                            Maintenance of Corporate Existence:  The Obligor shall maintain its corporate
existence.

5.1.2                            Reporting Requirements: 
The Obligor shall furnish to the Agent (with sufficient copies for each
Lender):

(a)                     Annual
GAAP Financial Statements: 
Within 90 days following the end of the Parent’s fiscal year (or, if a
registered company, such earlier date as the Parent’s Form 10-K is filed with
the SEC) copies of:

(i)                       the consolidated and consolidating
balance sheet of the Parent and its Subsidiaries as at the close of such fiscal
year, and

(ii)                    the consolidated and consolidating
statements of income, changes in shareholders’ equity and cash flows of the
Parent and its Subsidiaries for such fiscal year,

in each case setting
forth in comparative form the consolidated figures for the preceding fiscal
year and prepared in accordance with GAAP, all in reasonable detail and
accompanied by an opinion thereon of PricewaterhouseCoopers LLP or other firm
of independent public accountants of recognized national standing selected by
the Parent and reasonably acceptable to the Agent, to the effect that the
financial statements 

 31
 

 

have been prepared in
accordance with GAAP (except for changes in application in which such
accountants concur) and present fairly in all material respects in accordance
with GAAP the financial condition of the Parent and its Subsidiaries as of the
end of such fiscal year and the consolidated results of operations and cash
flows of the Parent and its Subsidiaries for the fiscal year then ended and
that the examination of such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards applied on a basis consistent with other prior years (except as
otherwise specified in such report; provided
that any exceptions or qualifications thereto must be acceptable to
the Majority Lenders) and, accordingly, included such tests of the accounting
records and such other auditing procedures as were considered necessary under
the circumstances.

(b)                    Quarterly
GAAP Financial Statements:  As
soon as available, and in any event within 60 days after the end of each
quarterly fiscal period of the Parent (other than the fourth fiscal quarter of
any fiscal year), copies of:

(i)                       the consolidated balance sheet
of the Parent and its Subsidiaries as at the end of such fiscal quarter, and

(ii)                    the related consolidated statements
of income, changes in shareholders’ equity and cash flows of the Parent and its
Subsidiaries for such fiscal quarter and the portion of such fiscal year ended
with such fiscal quarter,

in each case setting
forth in comparative form the figures for the preceding fiscal year and
prepared in accordance with GAAP, all in reasonable detail and certified as
presenting fairly in accordance with GAAP applied on a basis consistent with
other prior years (except as otherwise specified in such report; provided that any exceptions or
qualifications thereto must be acceptable to the Majority Lenders) the
financial condition of the Parent as of the end of such period and the results
of operations for such period by a senior officer of the Parent, subject only
to normal year-end accruals and audit adjustments and the absence of footnotes.

(c)                     Annual/Quarterly
Reports:  Concurrently with the delivery of the
financial statements required pursuant to paragraphs (a), (b), (f) and (g) of
this Clause, copies of all reports required to be filed with any Applicable
Insurance Regulatory Authority in connection with the filing of such financial
statements.

(d)                    Management
Letters:  Subject to the consent of the independent
certified public accountant in connection with an examination of the financial 

 32
 

 

                                   statements
of the Parent or the Obligor, promptly upon receipt thereof, copies of any
reports or management letters relating to the internal financial controls and
procedures delivered to the Parent and the Obligor by any independent certified
public accountant in connection with an examination of the financial statements
of the Parent or the Obligor, as applicable.

(e)                     Additional
Information:  Such additional information as the Agent may
reasonably request concerning the Parent or the Obligor and for that purpose
all pertinent books and other documents relating to its business, affairs and
Properties, including Investments as shall from time to time be designated by
the Agent.

(f)                       Annual
Obligor Financial Statements:  As soon as available, and in any event within
90 days after the close of each fiscal year of the Obligor, the summary
consolidated balance sheet of the Obligor and its Subsidiaries as at the end of
such fiscal year and the related summary consolidated statement of income of
the Obligor and its Subsidiaries for such fiscal year, setting forth in comparative
form the consolidated figures for the fiscal year, all in form and scope
consistent in all material respects with the financial statements of the
Obligor previously delivered and certified by the chief financial officer or
controller of the Obligor, which certificate shall state that such consolidated
financial statements present fairly in all material respects the consolidated
financial position of the Obligor and its Subsidiaries as at the dates
indicated (subject to normal year-end audit adjustments and the absence of full
footnote disclosure).  As soon as
available and in any event within 90 days after the close of each fiscal year
or such later date as may be required by the Bermuda Companies Law, the SAP Financial
Statements for the Obligor for such fiscal year.

(g)                    Quarterly
Obligor Statements:  As soon as available, and in any event within
60 days after the close of each of the first three quarterly accounting periods
in each fiscal year of the Obligor, a summary consolidated balance sheet of the
Obligor and its Subsidiaries as at the end of such period and the related
summary consolidated statement of income of the Obligor and its Subsidiaries
for such period and (in the case of the second and third quarterly periods) for
the period from the beginning of the current fiscal year to the end of such
quarterly period, setting forth in each case in comparative form the
consolidated figures for the corresponding periods of the previous fiscal year,
all in form and scope consistent in all material respects with the financial
statements of the Obligor previously provided and certified by the chief
financial officer or controller of the Obligor, as presenting fairly in all
material respects, on a basis consistent with such prior fiscal periods, the
information contained therein, subject to changes 

 33
 

 

                                   resulting
from normal year-end audit adjustments and the absence of full footnote
disclosure.

(h)                    Custodial
Account Certificate:  The Obligor shall furnish to the Agent a
Custodial Account Certificate substantially in the form of Exhibit D hereto (i)
no later than the tenth Business Day of each month, (ii) upon the occurrence of
a Default or an Event of Default, and (iii) at any time and from time to time
upon the request of the Agent.

(i)                        Compliance Certificate: The Obligor shall supply to the
Agent, with each set of financial statements delivered pursuant to paragraphs
(a), (b) (f) and (g) of this clause, a Compliance Certificate setting out (in
reasonable detail) computations as to compliance with sub-clauses 6.1.2 and
6.1.3 of Clause 6 (Events of Default Defined)
as at the date as at which those financial statements were drawn up.  Each Compliance Certificate shall be signed
by the chief financial officer or controller of the Obligor.

(j)                        Notification of Default:  The
Obligor shall notify the Agent of the occurrence of any Default (and of any
action taken or proposed to be taken to remedy it) or Event of Default promptly
after becoming aware of it.

(k)                     Material
Litigation:  The Obligor shall
notify the Agent of any litigation proceedings current, or to its knowledge
pending or threatened, in writing which are likely to have a Material Adverse
Effect.

(l)                        Insurance Reports and Filings:

(i)                       Promptly following the delivery
or receipt, as the case may be, by the Obligor, copies of (a) each material
registration, filing or submission made by or on behalf of the Obligor with any
Applicable Insurance Regulatory Authority, except for policy form or rate
filings, (b) each material examination and/or audit report submitted to the
Obligor by any Applicable Insurance Regulatory Authority, (c) all material
information which the Lenders may from time to time request with respect to the
nature or status of any material deficiencies or violations reflected in any
examination report or other similar report, and (d) each material report,
order, direction, instruction, approval, authorization, license or other notice
which the Obligor may at any time receive from any Applicable Insurance
Regulatory Authority.  For the purpose of
this clause (ii) only, determinations of “material” shall be made by the
Obligor in good faith.

(ii)                    As soon as available and in any
event within 120 days after the end of each fiscal year of the Parent, a report
by an independent actuarial consulting firm of recognized national standing
reviewing the 

 34
 

 

                                  adequacy
of loss and loss adjustment expense reserves as at the end of the last fiscal
year of the Parent and its Subsidiaries on a consolidated basis, determined in
accordance with SAP and stating that the Parent has maintained adequate
reserves, it being agreed that in each case such independent firm will be
provided access to or copies of all relevant valuations relating to the
insurance business of the Parent in the possession of or available to the
Parent and that the furnishing by the Obligor of such report shall be subject
to the consent of such independent firm.

(iii)                 Promptly following notification
thereof from a governmental authority, notification of the suspension,
limitation, termination or non-renewal of, or the taking of any other material
adverse action in respect of, any Insurance License.

(m)                  Section
32 Direction:  Promptly
following receipt thereof by the Obligor, notice of any direction or other
notification by the Obligor from the Bermuda Monetary Authority pursuant to
Section 32 of the Insurance Act, 1978 of Bermuda.

(n)                    Know
Your Customer:  Promptly upon
the reasonable request of the Agent (for itself or on behalf of any Lender),
supply, or procure the supply of, such documentation and other evidence as is
reasonably requested by the Agent  in
order for the Agent or a Lender to carry out and be satisfied with the results
of all necessary “know your customer” or other similar checks under all
applicable laws and regulations pursuant to the transactions contemplated in
the Fundamental Documents.

(o)                    Delivery
of Information:  The Obligor
and each Lender hereby acknowledges and agrees that the Agent and/or the
Obligor may make available to the Lenders material and/or information provided
by or on behalf of the Obligor under this Agreement or any other Fundamental
Document by posting such materials and/or information on IntraLinks or another
similar electronic system reasonably acceptable to the Agent and the Obligor
(it being understood and agreed that the posting of such materials and/or
information on IntraLinks or another similar electronic system shall not be
deemed a violation of Clause 9.11 (Confidentiality)
of this Agreement.

5.1.3                            Minimum Rating:  The
Obligor shall at all times maintains a minimum AM Best Financial Strength
Rating of B++.

5.1.4                            Maintenance of Adjusted Collateral Value: 
The Obligor shall at all times maintain Collateral in the Custodial
Account maintained in its name in an amount 

 35
 

 

                                                    such
that the Adjusted Collateral Value (determined on a daily basis) is not less
than the sum of all amounts then outstanding with respect to the sum of the
Letter of Credit Obligations and Reimbursement Obligations, taking into account
the calculations set forth in this sub-clause 5.1.4 (Maintenance of Adjusted Collateral Value) which provide for
Adjusted Collateral Value and issuance of Letter(s) of Credit in pounds
sterling, euros or U.S. Dollars as applicable. 
If the Obligor requests that the Agent issue on behalf of the Lenders
Letter(s) of Credit in a currency other than U.S. Dollars, the Obligor shall
deposit Collateral in the Custodial Account the Adjusted Collateral Value of
which, in the same currency as the Letter of Credit requested, shall be the
equivalent of the face amount of the requested non-U.S. Dollar Letter(s) of
Credit.  If, at any time, the Obligor
requests a Letter of Credit and deposits into the Custodial Account Investments
which are not the same currency as the requested Letter of Credit, the Obligor
must maintain an Adjusted Collateral Value of not less than 110% of the Dollar
Equivalent of the face amount of such requested Letter of Credit.  The Obligor agrees that if the required
Adjusted Collateral Value of the Collateral in the Custodial Account is less
than the sum of the Letter of Credit Obligations and the Reimbursement
Obligations, the Obligor shall immediately, and in no event no later than 5:00
p.m. (New York time) on the Business Day immediately following the date of
notice by any Finance Party, pay to the Custodian the amount of any such
deficiency, which payment shall be deposited by the Custodian into the
applicable Custodial Account in the form of cash or Investments.  At any time, other than after the occurrence
and during the continuation of a Default or an Event of Default, the Obligor
may substitute Collateral to the extent such substitution arises from normal
trade activities within the Custodial Account in accordance with the provisions
of Clause 1 of the Security Agreement between the Obligor and the Security
Agent.

5.1.5                            ERISA:  The Obligor
shall not:

(a)                     allow, or permit any of its ERISA
Affiliates which are Subsidiaries of the Obligor to allow (i) any Single
Employer Plan with respect to which the Obligor or its ERISA Affiliates which
are Subsidiaries of the Obligor may have any liability to terminate, (ii) the
Obligor or any of its ERISA Affiliates which are Subsidiaries of the Obligor to
withdraw from any Single Employer Plan and, if applicable, a Multiemployer
Plan, or (iii) any Accumulated Funding Deficiency (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, to exist involving
any of its Single Employer Plans, to the extent that any of the events
described in (i), (ii) or (iii), singly or in the aggregate, could have a
Material Adverse Effect; or

 36
 

 

(b)                    fail, or permit any of its ERISA
Affiliates which are Subsidiaries of the Obligor to fail, to comply with ERISA
or other related provisions of the Code, if any such non-compliance, singly or
in the aggregate, would be reasonably likely to have a Material Adverse Effect.

5.1.6                            Financial Testing: The financial covenants set out in
sub-clauses 5.6.1(b)(xx), 5.6.3(c)(ii)(11), 6.1.2 and 6.1.3 below shall be
tested by reference to each of the financial statements and/or each Compliance
Certificate delivered pursuant to sub-clause 5.1.2(i) (Compliance Certificate).

5.2                           Books,
Records and Inspections

The Obligor shall (i)
keep, and will cause each of its Subsidiaries to keep, proper books of record
and account in which full, true and correct entries in conformity with GAAP or
SAP, as applicable, shall be made of all dealings and transactions in relation
to its business and activities; and (ii) subject to binding contractual
confidentiality obligations of the Obligor and its Subsidiaries to third
parties and to Clause 9.11 (Confidentiality),
permit, and will cause each of its Subsidiaries to permit, representatives of
any Lender (at such Lender’s expense prior to the occurrence of an Event of
Default and at the Obligor’s expense after an Event of Default has occurred and
is continuing) to visit and inspect any of their respective properties, to
examine their respective books and records and to discuss their respective
affairs, finances and accounts with their respective officers, employees and
independent public accountants, in each case at such reasonable times and as
often as may be reasonably desired.  The
Obligor agrees to cooperate and assist in such visits and inspections.

5.3                           Payment of Taxes

The Obligor will pay and
discharge, and will cause each of its Subsidiaries to pay and discharge, all
income taxes and all other material taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits, or upon any properties
belonging to it, in each case, on a timely basis to the date on which penalties
attach thereto, and all lawful claims which, if unpaid, might become a Lien or
charge upon any properties of the Obligor or any of its Subsidiaries; provided that neither the Obligor nor any
Subsidiary of the Obligor shall be required to pay any such tax, assessment,
charge, levy or claim which is being contested in good faith and by proper
proceedings if it has maintained adequate reserves with respect thereto in
accordance with GAAP.

5.4                           Compliance with Statutes, etc.

The Obligor will, and
will cause each Subsidiary to, comply with all applicable statues, regulations
and orders of, and all applicable restrictions imposed by, all governmental
bodies, domestic or foreign, in respect of the conduct of its business and the
ownership of its property (including applicable statutes, regulations, orders
and restrictions relating to environmental standards and controls) other than
those the non-compliance with which 

 37
 

 

would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.

5.5                           Maintenance of Licenses and Permits

The Obligor will, and
will cause each of its Subsidiaries, to maintain all permits, licenses and
consents as may be required for the conduct of its business by any state,
federal or local government agency or instrumentality, except where failure to
maintain the same would not reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect.

5.6                           Negative Covenants

5.6.1                            Negative Pledge:

(a)                     Neither the Obligor nor any of its
Subsidiaries will permit, create, assume, incur or suffer to exist any Lien on
any asset tangible or intangible now owned or hereafter acquired by it, except
as set out in paragraph (b) below.

(b)                    Paragraph (a) above does not apply
to:

(i)                       Liens created pursuant to the
Security Documents;

(ii)                    Liens existing on the date hereof
and listed on Schedule 2 (Existing Encumbrances)
hereto;

(iii)                 Liens securing repurchase agreements
constituting a borrowing of funds by the Obligor or any of its Subsidiaries in
the ordinary course of business for liquidity purposes and in no event for a
period exceeding 90 days in each case;

(iv)                Liens arising pursuant to purchase
money mortgages, capital leases or security interests securing Indebtedness
representing the purchase price (or financing of the purchase price within 90
days after the respective purchase) of assets acquired after the Restatement
Date;

(v)                   Liens (x) on any asset of any Person
existing at the time such Person is merged or consolidated with or into the
Obligor or any of its Subsidiaries and not created in contemplation of such
event or (y) securing Acquired Indebtedness so long as such Lien existed prior
to the contemplated acquisition, was not created in contemplation of such
acquisition and only relates to assets of the Person so acquired;

(vi)                Liens securing obligations owed by the
Obligor or any of its Subsidiaries to the Parent or any other Subsidiary of the
Parent, in each case solely to the extent that such Liens are required by an 

 38
 

 

                                  Applicable
Insurance Regulatory Authority for such Person to maintain such obligations;

(vii)             Liens securing insurance obligations of
the Obligor or any of its Subsidiaries owed to the Parent or any other
Subsidiary of the Parent, in each case solely to the extent that such Liens are
required or requested by ratings agencies, clients or brokers for such Person
to maintain such insurance obligations;

(viii)          Liens on investments and cash balances of the
Obligor or any of its Subsidiaries securing obligations of the Obligor or such
Subsidiary in respect of trust or similar arrangements formed, letters of
credit issued or funds withheld balances established, in each case, in the
ordinary course of business for the benefit of cedents to secure reinsurance
recoverables owed to them by the Obligor or such Subsidiary;

(ix)                  inchoate Liens for taxes, assessments
or governmental charges or levies not yet due or Liens for taxes, assessments
or governmental charges or levies being contested in good faith and by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP;

(x)                     Liens in respect of property or
assets of the Obligor or any of its Subsidiaries imposed by law, which were
incurred in the ordinary course of business and do not secure Indebtedness for
borrowed money, such as carriers’, warehousemen’s, materialmen’s and mechanics’
Liens and other similar Liens arising in the ordinary course of business, and
(x) which do not in the aggregate materially detract from the value of the
Obligor’s or any such Subsidiary’s property or assets or materially impair the
use thereof in the operation of the business of the Obligor or any Subsidiary
of the Obligor or (y) which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the property or assets subject to any such Lien;

(xi)                  licenses, sublicenses, leases, or
subleases granted to other Persons not materially interfering with the conduct
of the business of the Obligor or any of its Subsidiaries;

(xii)               easements, rights-of-way, restrictions,
encroachments and other similar charges or encumbrances, and minor title
deficiencies, in each case not securing Indebtedness and not materially
interfering with the conduct of the business of the Obligor or any of its
Subsidiaries;

 39

 

(xiii)            Liens arising out of the existence of
judgments or awards not constituting an Event of Default under Clause 6.1 (Events of Default Defined);

(xiv)           Liens (other than Liens imposed under ERISA)
incurred in the ordinary course of business in connection with workers
compensation claims, unemployment insurance and social security benefits and
Liens securing the performance of bids, tenders, leases and contracts in the
ordinary course of business, statutory obligations, surety bonds, performance
bonds and other obligations of a like nature incurred in the ordinary course of
business and consistent with past practice (exclusive of obligations in respect
of the payment for borrowed money);

(xv)              bankers’ Liens, rights of setoff and
other similar Liens existing solely with respect to cash and Cash Equivalents
on deposit in one or more accounts maintained by the Obligor or any of its
Subsidiaries, in each case granted in the ordinary course of business in favor
of the bank or banks with which such accounts are maintained;

(xvi)           Liens arising out of the refinancing,
extension, renewal or refunding of any Indebtedness secured by any Lien
permitted by any of the sub-paragraphs of this sub-clause 5.6.1, provided that such Indebtedness is not increased and is not
secured by any additional assets;

(xvii)        Liens in respect of property or assets of the
Obligor or any of its Subsidiaries securing Indebtedness of the type described
in sub-paragraphs (6) or (10) of the definition of “Permitted Indebtedness” (as
hereinafter set forth);

(xviii)     Liens in respect of property or assets of any
Subsidiary of the Obligor securing Indebtedness of the type described in
paragraph (ix) of the definition of “Permitted Indebtedness”; provided that the aggregate amount of the Indebtedness secured
by such Liens shall not, when added to the aggregate amount of all outstanding
obligations of the Parent secured by Liens incurred pursuant to paragraph
(b)(xx) of sub-clause 5.6.1 exceed at any time 10% of Net Worth of the Parent
at the time of incurrence of any new Liens under this paragraph (xviii);

(xix)             Liens arising in connection with
securities lending arrangements entered into by the Obligor or any of its
Subsidiaries with financial institutions in the ordinary course of business so
long as any securities subject to any such securities lending arrangements do
not constitute collateral under any security document; and

 40
 

 

(xx)                in addition to the Liens described in
sub-paragraphs (i) through (xix) above, Liens securing obligations of the
Parent; provided that the aggregate amount of
the obligations secured by such Liens shall not, when added to the aggregate
amount of outstanding Indebtedness of the Obligor and its Subsidiaries pursuant
to paragraph (11) of the definition of “Permitted Indebtedness”, exceed at
any time 10% of Net Worth of the Parent at the time of incurrence of any Liens
under this sub-clause 5.6.1.

5.6.2                            Disposals:

(a)                     The Obligor shall not nor will it
permit any of its Subsidiaries to sell, convey, assign, lease, abandon or
otherwise transfer or dispose of, voluntarily or involuntarily (any of the
foregoing being referred to in this paragraph (a) as a “Disposition”
and any series of related Dispositions constituting but a single Disposition),
any of its properties or assets, tangible or intangible (including but not
limited to sale, assignment, discount or other disposition of accounts,
contract rights, chattel paper or general intangibles with or without
recourse), except as set forth in paragraph (b) below.

(b)                    Paragraph (a) above does not apply
to:

(i)                       any Disposition of used, worn
out, obsolete or surplus property of the Obligor or any of its Subsidiaries in
the ordinary course of business;

(ii)                    license (as licensor) of
intellectual property so long as such license does not materially interfere
with the business of the Obligor or any of its Subsidiaries;

(iii)                 the Disposition of cash, Cash
Equivalents and investment securities;

(iv)                the release, surrender or waiver of
contract, tort or other claims of any kind as a result of the settlement of any
litigation or threatened litigation;

(v)                   the granting or existence of Liens
(and foreclosure thereon) not prohibited by this Agreement;

(vi)                the lease or sublease of real property
so long as such lease or sublease does not materially interfere with the
business of the Obligor or any of its Subsidiaries;

(vii)             dividends;

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(viii)          any ceding of insurance or reinsurance in the
ordinary course of business;

(ix)                  any Disposition by the Obligor or any
of its Subsidiaries of any non-core asset or as set forth in Schedule 4 (Dispositions);

(x)                     Dispositions by the Obligor or any
of its Subsidiaries of properties or assets having an aggregate fair value (as
determined in good faith by the board of directors of the Obligor) of less than
USD$1,000,000;

(xi)                  Dispositions by the Obligor or any of
its Subsidiaries of any of its respective properties or assets to the Parent,
to any wholly-owned Subsidiary of the Parent or (except as to property or
assets consisting of the capital stock of Subsidiaries) to Alternative Re
Holdings Limited; and

(xii)               other Dispositions to the extent that
the fair market value of the assets the subject thereof (as determined in good
faith by the board of directors or senior management of the Obligor), when
added to the fair market value of the assets the subject of any such other
Disposition or Dispositions under this paragraph (xii) previously consummated
during the same fiscal year of the Obligor (as determined in good faith by the
board of directors or senior management of the Obligor), does not constitute
more than 20% of the consolidated assets of the Group as of the last day of the
most recently ended fiscal year of the Group.

5.6.3                            Financial Indebtedness:

(a)                     The Obligor shall not incur or
permit to subsist, and shall not permit any of its Subsidiaries to incur or
subsist, any Indebtedness except Permitted Indebtedness (as hereinafter
defined).

(b)                    The Obligor shall not, nor will it
permit any of its Subsidiaries to, create, incur, assume or permit to exist any
Indebtedness, or agree, become or remain liable (contingent or otherwise) to do
any of the foregoing, except for Indebtedness incurred by the Obligor or any of
its Subsidiaries hereunder and other Indebtedness which is either pari passu with, or subordinated in right
of payments to, the Indebtedness incurred by the Obligor hereunder and the
other obligations owing hereunder and under the Fundamental Documents.

(c)                     Definitions:  In this Clause 5.6 the following terms have
the following meanings.

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(i)                       “Acquired
Indebtedness” means Indebtedness of the Obligor or any of its
Subsidiaries acquired pursuant to an acquisition not prohibited under this
Agreement (or Indebtedness assumed at the time of such acquisition of an asset
securing such Indebtedness), provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such acquisition.

(ii)                    “Permitted Indebtedness” means:

(1)                    Indebtedness of the Obligor or any
of its Subsidiaries incurred pursuant to this Agreement or the JPMorgan Credit
Agreement (as defined in item 2 of Schedule 2 (Existing
Encumbrances));

(2)                    Indebtedness of the Obligor or any
of its Subsidiaries existing on the date hereof and listed on Schedule 3 (Existing Indebtedness) and refinancings by
the Obligor or any of its Subsidiaries thereof; provided
that the aggregate principal amount of any such refinancing
Indebtedness is not greater than the aggregate principal amount of the
Indebtedness being refinanced plus the amount of any premiums required to be
paid thereof and fees and expenses associated therewith;

(3)                    Indebtedness of the Obligor or any
of its Subsidiaries under any Rate Hedging Obligations, in each case entered
into to protect the Obligor or such Subsidiary against fluctuations in interest
rates, currency exchange rates or other rate fluctuations and not entered into
for speculative purposes;

(4)                    any Indebtedness owed by the
Obligor or any of its Subsidiaries to the Parent or any of its Subsidiaries;

(5)                    Indebtedness in respect of purchase
money obligations and Capital Lease Obligations of the Obligor or any of its
Subsidiaries, and refinancings thereof; provided that
the aggregate principal amount of all such Capital Lease Obligations does not
exceed at any time outstanding USD$25,000,000 at the time of incurrence of any
new Indebtedness under this sub-paragraph (5);

(6)                    Indebtedness of the Obligor or any
of its Subsidiaries in respect of letters of credit issued to reinsurance
cedents, or to lessors of real property in lieu of security deposits in
connection with leases of the Obligor or such Subsidiary, in each case in the
ordinary course of business;

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(7)                    Indebtedness of the Obligor or any
of its Subsidiaries incurred in the ordinary course of business in connection
with workers’ compensation claims, self-insurance obligations, unemployment
insurance or other forms of governmental insurance or benefits and pursuant to
letters of credit or other security arrangements entered into in connection
with such insurance or benefit;

(8)                    Acquired Indebtedness of the
Obligor or any of its Subsidiaries;

(9)                    Indebtedness incurred under
securities lending arrangements entered into in the ordinary course of
business;

(10)              Indebtedness incurred under Credit
Protection Arrangements entered into in the ordinary course of business;

(11)              additional Indebtedness of the Obligor or
any of its Subsidiaries not otherwise permitted under sub-paragraph (1) through
(10) of this definition which, when added to the aggregate amount of all
outstanding Indebtedness obligations secured by Liens incurred by the Obligor
or any of its Subsidiaries pursuant to sub-clause 5.6.1(b)(xx), shall not
exceed at any time outstanding 5% of the Net Worth of the Parent at the time of
incurrence of any new Indebtedness under this paragraph (11); and

(12)              Indebtedness arising from Guarantees made
by the Obligor or any of its Subsidiaries of Indebtedness of the type described
in sub-paragraphs (1) through (12) of this definition.

5.6.4                            Consolidations, Mergers, Sales of Assets and Acquisitions.

(a)                     The Obligor shall not, and shall
not permit any of its Subsidiaries to, consolidated or merge with or into any
other Person; provided that (i) the Obligor may
merge with another Person if (A) the Obligor is the corporation surviving such
merger and (B) immediately after giving effect to such merger, no Default or
Event of Default shall have occurred and be continuing, and (ii) Subsidiaries
of the Obligor may merge with one another.

(b)                    The Obligor shall not, and shall
not permit any of its Subsidiaries to, acquire all or substantially all of the
capital stock or assets of another Person unless at such time and immediately
after giving effect thereto no Default or Event of Default exists or would
result therefrom.

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5.6.5                            Transactions with Affiliates:  The Obligor shall not, and shall not permit
any of its Subsidiaries to, enter into or be a party to a transaction with any
Affiliate of the Obligor or any of its Subsidiaries (which Affiliate is not the
Parent) except:

(a)                     transactions with Affiliates on
terms no less favorable to the Obligor or such Subsidiary than those that could
have been obtained in a comparable transaction on an arm’s length basis from an
unrelated Person;

(b)                    transactions and payments pursuant
to agreements and arrangements disclosed in, or listed as an exhibit to, the
Parent’s annual report on Form 10-K filed with the SEC on March 13, 2006 or any
subsequent other filing with the SEC through the Restatement Date or any such
agreement or arrangement as thereafter amended, extended or replaced on terms
that are, in the aggregate, no less favorable to the Obligor and its
Subsidiaries than the terms of such agreement on the Restatement Date, as the
case may be;

(c)                     dividends; and

(d)                    fees and compensation paid to and
indemnities provided on behalf of officers and directors of the Obligor or any
of its Subsidiaries as reasonably determined in good faith by the board of
directors or senior management of the Obligor.

5.6.6                            Amendments:  The
Obligor shall not amend or otherwise change the terms of the Custodian
Agreement other than in favor of the Obligor and not adverse to the Lenders.

5.6.7                            Conduct of Business: 
The Obligor shall not, and shall not permit any of its Subsidiaries to,
engage in any business other than the businesses engaged in by the Obligor and
its Subsidiaries on the Restatement Date and similar or related businesses.

6.                                 EVENTS OF DEFAULT AND REMEDIES

6.1                           Events of Default Defined

Each of the following is
an “Event of Default”:

6.1.1                            with respect to the
Obligor:

(a)                     failure by the Obligor to pay any
amount payable by it hereunder on the date due;

(b)                    if any representation or warranty
made by or on behalf of the Obligor in this Agreement, in any other Fundamental
Document or in any certificate, report or financial or other statement
furnished to the Agent at any time under or in connection with this Agreement,
any other Fundamental 

 45
 

 

                                   Document
or any other such document or agreement shall have been untrue in any material
respect when made or deemed to have been made;

(c)                     default by the Obligor in the
observance or performance of its covenants set forth in (i) Clause 5 (Covenants); or (ii) default by the Obligor
in the observance or performance of its obligation to maintain the value of the
Custodial Account maintained in its name in accordance with sub-clause 5.1.4 (Maintenance of Adjusted Collateral Value)
hereof and Clause 1 of the Security Agreement between it and the Security
Agent;

6.1.2                            failure by the Parent to
maintain a minimum Consolidated Tangible Net Worth that is at any time less
than the sum of: (i) USD$1,950,000,000; (ii) 25% of the aggregate Net Cash
Proceeds received from any issuance of common or preferred equity interests of
the Parent consummated on or after August 30, 2006; and (iii) 25% of its
Consolidated Net Income (if positive) for each fiscal quarter ended after
June 30, 2006.  For purposes of this
sub-clause 6.1.2, “Net Cash Proceeds”
means for any issuance of equity, the gross cash proceeds (including any cash
received by way of deferred payment pursuant to a promissory note, receivable
or otherwise, but only as and when received) received from such issuance, net
of reasonable transaction costs (including, as applicable, any underwriting,
brokerage or other customary commissions and reasonable legal, advisory and
other fees and expenses associated therewith).

6.1.3                            the Parent Leverage Ratio
on the last day of any fiscal quarter or fiscal year of the Parent is greater
than 0.35:1.00.  For purposes of this
sub-clause 6.1.3:

(a)                     “Parent
Leverage Ratio” means, at any time, the ratio of (i) Parent
Consolidated Indebtedness at such time to (ii) Parent Consolidated Total
Capital at such time;

(b)                    “Parent
Consolidated Indebtedness” means, as of any date of determination,
(i) all Indebtedness of the Group which at such time would appear on the liability
side of a balance sheet of such Persons prepared on a consolidated basis in
accordance with GAAP plus (ii) any Indebtedness for borrowed money of any other
Person (other than any member of the Group) as to which any member of the Group
has created a Guarantee (but only to the extent of such Guarantee).  For the avoidance of doubt, “Parent Consolidated Indebtedness” shall not include any
Guarantees of any Person under or in connection with letters of credit or
similar facilities so long as no unreimbursed drawings or payments have been
made in respect thereof; and

 46
 

 

(c)                     “Parent
Consolidated Total Capital” means, as of any date of determination,
the sum of (i) Parent Consolidated Indebtedness and (ii) Net Worth of the
Parent at such time;

6.1.4                            the Parent permits,
creates, assumes, incurs or suffers to exist any Lien on any asset, tangible or
intangible, now owned or hereafter acquired, other than in the same manner, and
subject to the same limitations, as otherwise permitted under paragraph (b) of
sub-clause 5.6.1 (Negative Pledge)
and except as set out on Schedule 2 (Existing
Encumbrances); for the avoidance of doubt for this purpose,
reference to “Subsidiaries” (including in the definition of “Permitted Indebtedness”) shall include Subsidiaries of the Parent;

6.1.5                            the Parent making a
Disposition (as defined in paragraph (a) of sub-clause 5.6.2 (Disposals)) of any of its properties or
assets, tangible or intangible, other than in the same manner, and subject to
the same limitations, as otherwise permitted under paragraph (b) of sub-clause
5.6.2 (Disposals) and except as
set out in Schedule 4 (Dispositions);
for the avoidance of doubt for this purpose, references to “Subsidiaries”
includes Subsidiaries of the Parent;

6.1.6                            non-compliance by the
Parent or its ERISA Affiliates of the covenant set forth in sub-clause 5.1.5 (ERISA);

6.1.7                            default by the Obligor in
the observance or performance of any covenant or agreement contained in this
Agreement or any other Fundamental Document (other than those referred to in
Clause 6.1.1) and the continuance thereof unremedied for 28 days after the
earlier of (a) an officer of the Obligor or the Parent becoming aware of such
default or (b) receipt by the Obligor of written notice of the default from the
Agent;

6.1.8                            an order shall be made by a
competent court or a resolution shall be passed for the winding up or
dissolution or rehabilitation of the Parent or the Obligor save for the
purposes of amalgamation, merger, consolidation, reorganization or other
similar arrangement on terms approved by the Majority Lenders (not involving
the insolvency of the Parent or the Obligor) and save that if any such order or
resolution is sought in an involuntary proceeding against any the Person, such
Person shall have 30 days from the commencement of such proceeding to obtain an
order staying, vacating or dismissing such proceedings, or a petition shall be
presented to, or an order shall be made by a competent court for the
appointment of, an administrator of the Parent or the Obligor and such petition
or order shall not have been stayed, vacated or dismissed within 30 days after
the presentation of such petition or the making of such order;

6.1.9                            the Parent or the Obligor
shall cease to carry on the whole or substantially the whole of its business,
save for the purposes of amalgamation, merger, 

 47
 

 

                                                    consolidation,
reorganization or other similar arrangement (not involving or arising out of
the insolvency of the Parent or the Obligor) which is permitted hereunder, or
the Parent or the Obligor shall suspend payment of its debts generally or shall
be unable to, or shall admit inability to, pay its debts as they fall due, or
shall be adjudicated or found bankrupt or insolvent by any competent court in a
voluntary or involuntary bankruptcy or insolvency proceeding and, in the case
of an involuntary proceeding, such adjudication or finding is not stayed,
vacated or dismissed for 30 days, or shall enter into any composition or other
similar arrangement with its creditors generally;

6.1.10                      a receiver, administrator,
liquidator or other similar official shall be appointed in relation to the
Parent or the Obligor or in relation to the whole or a substantial part of its
assets or to the Collateral or a distress, execution or other process shall be
levied or enforced upon or out against, or any encumbrance shall take
possession of, the whole or a substantial part of its assets or the Collateral
and in any of the foregoing cases, such action or person shall not be
discharged, dismissed, vacated, stayed or bonded within 30 days;

6.1.11                      any seizure, vesting or
intervention by or under authority of a government occurs, by which the Parent’s
or the Obligor’s management is displaced or its authority in the conduct of its
business is curtailed;

6.1.12                      default by the Parent or the
Obligor in (i) any payment of principal of or interest of any Indebtedness
beyond the period of grace, if any, provided in the instrument or agreement
under which such Indebtedness was created; or (ii) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or contained in any instrument or agreement evidencing, securing
or relating thereto, or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause, or to permit
the holder or holders of such Indebtedness (or a trustee or agent on behalf of
such holder or holders) to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity, provided
that the aggregate principal amount of
all Indebtedness under paragraphs (i) and (ii) of this sub-clause 6.1.12 which
would then become due and payable would equal or exceed, in the case of the
Parent or the Obligor, USD$50,000,000;

6.1.13                      one or more judgments or decrees
shall be entered against the Parent or the Obligor involving in the aggregate a
liability (to the extent not paid or covered by insurance) of, in the case of
the Parent or the Obligor, USD$50,000,000 or more, and all such judgments or decrees
shall not have been vacated, discharged, stayed or bonded pending appeal within
60 days after the entry thereof;

6.1.14                      if the validity or enforceability
of any Security Document to which the Obligor is a party shall be contested by
any Person or the security interest created in favor 

 48
 

 

                                                    of
the Security Agent pursuant to any Security Document shall cease to be valid
and binding or to constitute a fully perfected security interest in the
collateral described in such security document, superior in right to any other
lien;

6.1.15                      it is or becomes unlawful for the
Obligor to perform any of its obligations under this Agreement or any other
Fundamental Document;

6.1.16                      the Obligor (or any other
relevant party) rescinds or purports to rescind or repudiates or purports to
repudiate this Agreement, any other Fundamental Document or any Lien created
pursuant to the Security Documents or evidences an intention to rescind or
repudiate this Agreement, any other Fundamental Document or any Lien created
pursuant to the Security Documents;

6.1.17                      receipt by the Obligor of any
direction or other notification from the Bermuda Monetary Authority pursuant to
Section 32 of the Insurance Act, 1978 of Bermuda; or

6.1.18                      a Change in Control shall occur.

6.2                           Remedies

6.2.1                            Without limiting any other
rights or remedies of the Agent or any Lender provided for elsewhere in this
Agreement or any other Fundamental Document, or by applicable law, or in
equity, or otherwise, (i) if any Event of Default shall occur and be continuing
with respect to the Obligor, the Agent may (and shall if so instructed by the
Majority Lenders), by notice to the Obligor, declare all amounts owing under
this Agreement and any Letters of Credit (whether or not such Letter of Credit
Obligations be contingent or unmatured) issued at the request of the Obligor to
be forthwith due and payable, whereupon all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Obligor,
and (ii) if any Event of Default shall occur and be continuing with respect to
the Parent, the Agent may (and shall if so instructed by the Majority Lenders),
by notice to the Obligor, declare all amounts owing under this Agreement and
any Letters of Credit (whether or not such Letter of Credit Obligations be
contingent or unmatured) issued at the request of the Obligor to be forthwith
due and payable, whereupon all such amounts shall become and be forthwith due
and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Obligor.  The Agent may immediately take any and all
remedies with respect to the Collateral permitted by the Security Documents.

6.2.2                            Upon declaration as
provided for above, the Obligor shall, as specified in written notice by the
Agent, either (i) immediately deliver to the Agent, any amounts required to be
paid in accordance with sub-clause 6.2.1 hereof (the “Letter of 

 49
 

 

                                                    Credit
Amount”), or (ii) with the consent of the Beneficiary or Beneficiaries
thereof, cause any Letters of Credit to be cancelled forthwith in a manner
satisfactory to the Agent.  In addition
to providing the Letter of Credit Amount, the Obligor shall provide the Agent
with any documentation as the Agent may from time to time request to perfect
its rights in the Letter of Credit Amount, including, without limitation,
pledge agreements and financing statements in form and substance satisfactory
to the Agent.  The Agent shall hold the
Letter of Credit Amount in its own name, for the exclusive purpose of applying
such Letter of Credit Amount toward the immediate payment of amounts which are
thereafter drawn under any Letter of Credit, and, to the extent of such
payment, the Reimbursement Obligations shall be deemed to be satisfied.  Upon the expiry date of all Letters of
Credit, any Letter of Credit Amount remaining after satisfaction of all
Reimbursement Obligations shall be remitted to the order of the Obligor.  The Obligor shall remain liable for the
relevant amount of any deficiency in respect of its Letter of Credit
Obligations and Reimbursement Obligations.

6.2.3                            Upon the occurrence and
during the continuation of any Default or Event of Default under this
Agreement, no Letter of Credit shall be issued, renewed or extended under this
Agreement without the consent of each Lender.

7.                                CHANGES
TO PARTIES

7.1                           Changes to the Lenders

7.1.1                            Assignments and Transfers by the Lenders

Subject to this Clause
7.1, a Lender (the “Existing Lender”)
may:

(a)                     assign any of its rights; or

(b)                    transfer by novation any of its
rights and obligations,

to an Eligible Assignee
(the “New Lender”).

7.1.2                            Conditions of Assignment or Transfer

(a)                     So long as no Event of Default has
occurred and is continuing, the consent of the Obligor is required for an
assignment or transfer by an Existing Lender, unless the assignment or transfer
is to another Lender or an Affiliate of a Lender.

(b)                    The consent of the Obligor to an
assignment or transfer must not be unreasonably withheld or delayed.  The Obligor will be deemed to have given its
consent seven Business Days after the Existing Lender has requested it in
writing unless consent is expressly refused by the Obligor within that time.

 50

 

(c)                     An assignment will only be
effective on:

(i)                       receipt by the Agent of an
Assignment and Assumption from the New Lender (in form and substance
satisfactory to the Agent) stating that the New Lender will assume the same
obligations to the other Finance Parties as it would have been under if it was
an Original Lender;

(ii)                    receipt by the Agent of a signed
copy from the New Lender of the New Lender’s Authorization Letter substantially
in the form of Part B of Exhibit A hereto executed by the New Lender;

(iii)                 issuance by the Agent of an amendment
to each outstanding Letter of Credit replacing the Existing Lender with the New
Lender and acceptance thereof by each Beneficiary; and

(iv)                performance by the Agent of all
necessary “know your customer” or other similar checks under all applicable
laws and regulations in relation to such assignment to a New Lender, the
completion of which the Agent shall promptly notify to the Existing Lender and
the New Lender.

(d)                    If:

(i)                       a Lender assigns or transfers
any of its rights or obligations under the Fundamental Documents or changes its
Facility Office; and

(ii)                    as a result of circumstances
existing at the date the assignment, transfer or change occurs, an Obligor
would be obliged to make a payment to the New Lender or Lender acting through
its new Facility Office under sub-clause 2.9.2 or Clause 2.7 (Regulatory Requirements; Additional Costs),

then the New Lender or
Lender acting through its new Facility Office is only entitled to receive
payment under those Clauses to the same extent as the Existing Lender or Lender
acting through its previous Facility Office would have been if the assignment,
transfer or change had not occurred.

7.1.3                            Assignment or Transfer Fee

The New Lender shall, on
the date upon which an assignment or transfer takes effect, pay to the Agent
(for its own account) a fee of USD$2,500.

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7.1.4                            Limitation of Responsibility of Existing Lenders

(a)                     Unless expressly agreed to the
contrary, an Existing Lender makes no representation or warranty and assumes no
responsibility to a New Lender for:

(i)                       the legality, validity,
effectiveness, adequacy or enforceability of the Fundamental Documents or any
other documents;

(ii)                    the financial condition of any
Obligor;

(iii)                 the performance and observance by any
Obligor of its obligations under the Fundamental Documents or any other
documents; or

(iv)                the accuracy of any statements (whether
written or oral) made in or in connection with any Fundamental Document or any
other document,

and any representations
or warranties implied by law are excluded.

(b)                    Each New Lender confirms to the
Existing Lender and the other Finance Parties that it:

(i)                       has made (and shall continue to
make) its own independent investigation and assessment of the financial
condition and affairs of each Obligor and its related entities in connection
with its participation in this Agreement and has not relied exclusively on any
information provided to it by the Existing Lender in connection with any
Fundamental Document; and

(ii)                    will continue to make its own
independent appraisal of the creditworthiness of each Obligor and its related
entities whilst any amount is or may be outstanding under the Fundamental
Documents or any Commitment is in force.

(c)                     Nothing in any Fundamental
Document obliges an Existing Lender to:

(i)                       accept a re-transfer from a New
Lender of any of the rights and obligations assigned or transferred under this
Clause 7.1; or

(ii)                    support any losses directly or
indirectly incurred by the New Lender by reason of the non-performance by any Obligor
of its obligations under the Fundamental Documents or otherwise.

7.1.5                            Procedure for Transfer

(a)                     Subject to the conditions set out
in sub-clause 7.1.2 (Conditions of
Assignment or Transfer) a transfer is effected in accordance with
paragraph (c) below when the Agent executes an otherwise duly completed
Assignment and Assumption delivered to it by the Existing Lender and the New
Lender.  

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                                   The
Agent shall, subject to paragraph (b) below, as soon as reasonably practicable
after receipt by it of a duly completed Assignment and Assumption appearing on
its face to comply with the terms of this Agreement and delivered in accordance
with the terms of this Agreement, execute such Assignment and Assumption.

(b)                    The Agent shall only be obliged to
execute an Assignment and Assumption delivered to it by the Existing Lender and
the New Lender once it is satisfied it has complied with all necessary “know
your customer” or other similar checks under all applicable laws and
regulations in relation to the transfer to such New Lender.

(c)                     On the Transfer Date:

(i)                       to the extent that in the
Assignment and Assumption the Existing Lender seeks to transfer by novation its
rights and obligations under the Fundamental Documents, the Obligor and the
Existing Lender shall be released from further obligations towards one another
under the Fundamental Documents and their respective rights against one another
under the Fundamental Documents shall be cancelled (being the “Discharged Rights and Obligations”);

(ii)                    the Obligor and the New Lender
shall assume obligations towards one another and/or acquire rights against one
another which differ from the Discharged Rights and Obligations only insofar as
the Obligor and the New Lender have assumed and/or acquired the same in place
of that Obligor and the Existing Lender;

(iii)                 the Agent, the New Lender and other
Lenders shall acquire the same rights and assume the same obligations between
themselves as they would have acquired and assumed had the New Lender been an
original Lender with the rights and/or obligations acquired or assumed by it as
a result of the transfer and to that extent the Agent and the Existing Lender
shall each be released from further obligations to each other under the
Fundamental Documents; and

(iv)                the New Lender shall become a Party as
a “Lender”.

7.1.6                            Copy of Assignment and Assumption to Obligor

The Agent shall, as soon
as reasonably practicable after it has executed an Assignment and Assumption,
send to the Obligor a copy of such Assignment and Assumption.

 53
 

 

7.1.7                            Disclosure of information

Any Lender may disclose
to any of its Affiliates and the directors, officers, employees, agents,
including accounts, legal counsel and other advisors of the Lender and its
Affiliates (subject to Clause 9.11 (Confidentiality)
hereof) and any other person:

(a)                     to (or through) whom that Lender
assigns or transfers (or may potentially assign or transfer) all or any of its
rights and obligations under this Agreement;

(b)                    with (or through) whom that Lender
enters into (or may potentially enter into) any sub-participation in relation
to, or any other transaction under which payments are to be made by reference
to, this Agreement or the Obligor; or

(c)                     to whom, and to the extent that,
information is required to be disclosed by any applicable law or regulation,

any information about the
Obligor, the Group and the Fundamental Documents as that Lender shall consider
appropriate.

7.2                           Changes to the Obligors

The Obligor may not
assign any of its rights or transfer any of its rights or obligations under the
Fundamental Documents.

8.                                THE
FINANCE PARTIES

8.1                           Role of the Agent and Security Agent

8.1.1                            Appointment of the Agent and Security Agent

(a)                     Each other Finance Party appoints
the Agent and Security Agent to act as its agent under and in connection with
the Fundamental Documents.

(b)                    Each other Finance Party authorizes
the Agent and Security Agent to exercise the rights, powers, authorities and
discretions specifically given to the Agent under or in connection with the
Fundamental Documents together with any other incidental rights, powers,
authorities and discretions.

8.1.2                            Duties of the Agent

(a)                     The Agent shall promptly forward
to a Party the original or a copy of any document which is delivered to the
Agent for that Party by any other Party.

 54
 

 

(b)                    Except where a Fundamental Document
specifically provides otherwise, the Agent is not obliged to review or check
the adequacy, accuracy or completeness of any document it forwards to another
Party.

(c)                     If the Agent receives notice from
a Party referring to this Agreement, describing a Default and stating that the
circumstance described is a Default, it shall promptly notify the other Finance
Parties.

(d)                    If the Agent is aware of the
non-payment of any principal, interest, commitment fee or other fee payable to
a Finance Party (other than the Agent) under this Agreement it shall promptly
notify the other Finance Parties.

(e)                     The Agent’s duties under the
Fundamental Documents are solely mechanical and administrative in nature.

8.1.3                            Role of the Arranger

Except as specifically
provided in the Fundamental Documents, the Arranger has no obligations of any
kind to any other party under or in connection with any Fundamental Document.

8.1.4                            No Fiduciary Duties

(a)                     Nothing in this Agreement
constitutes the Agent or the Arranger as a trustee or fiduciary of any other
person.

(b)                    Neither the Agent nor the Arranger
shall not be bound to account to any Lender for any sum or the profit element
of any sum received by it for its own account.

8.1.5                            Business with the Group

The Agent and the
Arranger may accept deposits from, lend money to and generally engage in any
kind of banking or other business with any member of the Group.

8.1.6                            Rights and Discretions of the Agent

(a)                     The Agent may rely on:

(i)                       any representation, notice or
document believed by it to be genuine, correct and appropriately authorized;
and

(ii)                    any statement made by a director,
authorized signatory or employee of any person regarding any matters which may
reasonably be assumed to be within his knowledge or within his power to verify.

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(b)                    The Agent may assume (unless it has
received notice to the contrary in its capacity as agent for the Lenders) that:

(i)                       no Default has occurred (unless
it has actual knowledge of a Default arising under sub-clause (a));

(ii)                    any right, power, authority or
discretion vested in any Party or the Majority Lenders has not been exercised;
and

(iii)                 any notice or request made by the
Obligor is made on behalf of and with the consent and knowledge of the Parent.

(c)                     The Agent may engage, pay for and
rely on the advice or services of any lawyers, accountants, surveyors or other
experts.

(d)                    The Agent may act in relation to
the Fundamental Documents through its personnel and agents.

(e)                     The Agent may disclose to any
other Party any information it reasonably believes it has received as agent
under this Agreement.

(f)                       Notwithstanding any other
provision of any Fundamental Document to the contrary, the Agent is not obliged
to do or omit to do anything if it would or might in its reasonable opinion
constitute a breach of any law or regulation or a breach of a fiduciary duty or
duty of confidentiality.

8.1.7                            Majority Lenders’ Instructions

(a)                     Unless a contrary indication
appears in a Fundamental Document, the Agent shall (i) exercise any right,
power, authority or discretion vested in it as Agent in accordance with any
instructions given to it by the Majority Lenders (or, if so instructed by the
Majority Lenders, refrain from exercising any right, power, authority or
discretion vested in it as Agent) and (ii) not be liable for any act (or
omission) if it acts (or refrains from taking any action) in accordance with an
instruction of the Majority Lenders.

(b)                    Unless a contrary indication
appears in a Fundamental Document, any instructions given by the Majority
Lenders will be binding on all the Finance Parties.

(c)                     The Agent may refrain from acting
in accordance with the instructions of the Majority Lenders (or, if
appropriate, the Lenders) until it has received such security as it may require
for any cost, loss or liability which it may incur in complying with the
instructions.

 56
 

 

(d)                    In the absence of instructions from
the Majority Lenders, (or, if appropriate, the Lenders) the Agent may act (or
refrain from taking action) as it considers to be in the best interest of the
Lenders.

(e)                     The Agent is not authorized to act
on behalf of a Lender (without first obtaining that Lender’s consent) in any
legal or arbitration proceedings relating to any Fundamental Document.

8.1.8                            Responsibility for Documentation

Neither the Agent nor the
Arranger is:

(a)                     responsible for the adequacy,
accuracy and/or completeness of any information (whether oral or written)
supplied by the Agent, the Arranger, the Obligor or any other person given in
or in connection with any Fundamental Document; or

(b)                    responsible for the legality,
validity, effectiveness, adequacy or enforceability of any Fundamental Document
or any other agreement, arrangement or document entered into, made or executed
in anticipation of or in connection with any Fundamental Document.

8.1.9                            Exclusion of Liability

(a)                     Without limiting paragraph (b)
below, the Agent will not be liable (including, without limitation, for
negligence or any other category of liability whatsoever) for any action taken
by it under or in connection with any Fundamental Document, unless directly
caused by its gross negligence or willful misconduct.

(b)                    No Party (other than the Agent) may
take any proceedings against any officer, employee or agent of the Agent in
respect of any claim it might have against the Agent or in respect of any act
or omission of any kind by that officer, employee or agent in relation to any
Fundamental Document and any officer, employee or agent of the Agent may rely
on this Clause.

(c)                     The Agent will not be liable for
any delay (or any related consequences) in crediting an account with an amount
required under the Fundamental Documents to be paid by the Agent if the Agent
has taken all necessary steps as soon as reasonably practicable to comply with
the regulations or operating procedures of any recognized clearing or
settlement system used by the Agent for that purpose.

(d)                    Nothing in this Agreement shall
oblige the Agent to carry out any “know your customer” or other checks in
relation to any person on behalf of any Lender and each Lender confirms to the
Agent that it is solely responsible 

 57
 

 

                                   for
any such checks it is required to carry out and that it may not rely on any
statement in relation to such checks made by the Agent.

8.1.10                      Lenders’ Indemnity to the Agent

Each Lender shall (in
proportion to its Ratable Share) indemnify the Agent, within ten Business Days
of demand, against any cost, loss or liability (including, without limitation,
for negligence or any other category of liability whatsoever) incurred by the
Agent (otherwise than by reason of the Agent’s gross negligence or willful
misconduct) in acting as Agent under the Fundamental Documents (unless the
Agent has been reimbursed by the Obligor pursuant to a Fundamental Document).

8.1.11                      Resignation of the Agent

(a)                     The Agent may resign and appoint
one of its Affiliates as a successor by giving notice to the other Finance
Parties and the Obligor.

(b)                    Alternatively the Agent may resign
by giving notice to the other Finance Parties and the Obligor, in which case
the Majority Lenders (after consultation with the Obligor) may appoint a
successor Agent with the consent of the Obligor (such consent not to be
unreasonably withheld or delayed).

(c)                     If the Majority Lenders have not
appointed a successor Agent in accordance with paragraph (b) above within 30
days after notice of resignation was given, the Agent may appoint a successor
Agent with the consent of the Obligor (such consent not to be unreasonably
withheld or delayed).

(d)                    The retiring Agent shall, at its own
cost, make available to the successor Agent such documents and records and
provide such assistance as the successor Agent may reasonably request for the
purposes of performing its functions as Agent under the Fundamental Documents.

(e)                     The Agent’s resignation notice
shall only take effect upon the appointment of a successor and the acceptance
by such successor to assume all responsibilities of the Agent hereunder.

(f)                       Upon the appointment of a
successor, the retiring Agent shall be discharged from any further obligation
in respect of the Fundamental Documents but shall remain entitled to the
benefit of this Clause 8.1.  Its
successor and each of the other Parties shall have the same rights and
obligations amongst themselves as they would have had if such successor had
been an original Party.

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(g)                    After consultation with the
Obligor, the Majority Lenders may, by notice to the Agent, require it to resign
in accordance with paragraph (b) above. 
In this event, the Agent shall resign in accordance with paragraph (b)
above.

8.1.12                      Confidentiality

(a)                     In acting as agent for the Finance
Parties, the Agent shall be regarded as acting through its agency division
which shall be treated as a separate entity from any other of its divisions or
departments.

(b)                    If information is received by
another division or department of the Agent, it may be treated as confidential
to that division or department and the Agent shall not be deemed to have notice
of it.

8.1.13                      Relationship with the Lenders

The Agent may treat each
Lender as a Lender, entitled to payments under this Agreement and acting
through its Facility Office unless it has received not less than five Business
Days’ prior notice from that Lender to the contrary in accordance with the
terms of this Agreement.

8.1.14                      Credit Appraisal by the Lenders

(a)                     Without affecting the
responsibility of the Obligor for information supplied by it or on its behalf
in connection with any Fundamental Document, each Lender confirms to the Agent
and the Arranger that it has been, and will continue to be, solely responsible
for making its own independent appraisal and investigation of all risks arising
under or in connection with any Fundamental Document including but not limited
to:

(i)                       the financial condition, status
and nature of each member of the Group;

(ii)                    the legality, validity,
effectiveness, adequacy or enforceability of any Fundamental Document and any
other agreement, arrangement or document entered into, made or executed in
anticipation of, under or in connection with any Fundamental Document;

(iii)                 whether that Lender has recourse, and
the nature and extent of that recourse, against any Party or any of its
respective assets under or in connection with any Fundamental Document, the
transactions contemplated by the Fundamental Documents or any other agreement,
arrangement or document entered into, made or executed in anticipation of,
under or in connection with any Fundamental Document; and

 59

 

(iv)                the adequacy, accuracy and/or
completeness of any information provided by the Agent, the Arranger, any Party
or by any other person under or in connection with any Fundamental Document,
the transactions contemplated by the Fundamental Documents or any other
agreement, arrangement or document entered into, made or executed in
anticipation of, under or in connection with any Fundamental Document.

8.1.15                      Reference Bank

If the Reference Bank
ceases to be the Agent or a Lender, the Agent shall (in consultation with the
Obligor) appoint another Lender or an Affiliate of a Lender to replace that
Reference Bank.

8.1.16                      Deduction from Amounts Payable by the Agent

If any Party owes an
amount to the Agent under the Fundamental Documents the Agent may, after giving
notice to that Party, deduct an amount not exceeding that amount from any
payment to that Party which the Agent would otherwise be obliged to make under
the Fundamental Documents and apply the amount deducted in or towards
satisfaction of the amount owed.  For the
purposes of the Fundamental Documents that Party shall be regarded as having
received any amount so deducted.

8.2                           Conduct of Business by the Finance Parties

8.2.1                            No provision of this
Agreement will:

(a)                     interfere with the right of any
Finance Party to arrange its affairs (tax or otherwise) in whatever manner it
thinks fit;

(b)                    oblige any Finance Party to
investigate or claim any credit, relief, remission or repayment available to it
or the extent, order and manner of any claim; or

(c)                     oblige any Finance Party to
disclose any information relating to its affairs (tax or otherwise) or any
computations in respect of Tax.

8.3                           Sharing Among the Finance Parties

8.3.1                            Payments to Finance Parties

If a Finance Party (a “Recovering Finance Party”) receives or
recovers any amount from the Obligor other than in accordance with Clause 9.1 (Payment Mechanics) and applies that amount
to a payment due under the Fundamental Documents then:

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(a)                     the Recovering Finance Party
shall, within three Business Days, notify details of the receipt or recovery,
to the Agent;

(b)                    the Agent shall determine whether
the receipt or recovery is in excess of the amount the Recovering Finance Party
would have been paid had the receipt or recovery been received or made by the
Agent and distributed in accordance with Clause 9.1 (Payment Mechanics), without taking account of any tax which
would be imposed on the Agent in relation to the receipt, recovery or
distribution; and

(c)                     the Recovering Finance Party
shall, within three Business Days of demand by the Agent, pay to the Agent an
amount (the “Sharing Payment”) equal to such
receipt or recovery less any amount which the Agent determines may be retained
by the Recovering Finance Party as its share of any payment to be made, in
accordance with sub-clause 9.1.5 (Partial
Payments).

8.3.2                            Redistribution of Payments

The Agent shall treat the
Sharing Payment as if it had been paid by the Obligor and distribute it between
the Finance Parties (other than the Recovering Finance Party) in accordance with
sub-clause 9.1.5 (Partial payments).

8.3.3                            Recovering Finance Party’s Rights

(a)                     On a distribution by the Agent
under sub-clause 8.3.2 (Redistribution of
Payments), the Recovering Finance Party will be subrogated to the
rights of the Finance Parties which have shared in the redistribution.

(b)                    If and to the extent that the
Recovering Finance Party is not able to rely on its rights under paragraph (a)
above, the Obligor shall be liable to the Recovering Finance Party for a debt
equal to the Sharing Payment which is immediately due and payable.

8.3.4                            Reversal of Redistribution

If any part of the
Sharing Payment received or recovered by a Recovering Finance Party becomes
repayable and is repaid by that Recovering Finance Party, then:

(a)                     each Finance Party which has
received a share of the relevant Sharing Payment pursuant to sub-clause 8.3.2 (Redistribution of Payments) shall, upon
request of the Agent, pay to the Agent for account of that Recovering Finance
Party an amount equal to the appropriate part of its share of the  Sharing Payment (together with an amount as
is necessary to reimburse that 

 61
 

 

                                   Recovering
Finance Party for its proportion of any interest on the Sharing Payment which
that Recovering Finance Party is required to pay); and

(b)                    that Recovering Finance Party’s
rights of subrogation in respect of any reimbursement shall be cancelled and
the Obligor will be liable to the reimbursing Finance Party for the amount so
reimbursed.

8.3.5                            Exceptions

(a)                     This Clause 8.3 shall not apply to
the extent that the Recovering Finance Party would not, after making any
payment pursuant to this Clause, have a valid and enforceable claim against the
Obligor.

(b)                    A Recovering Finance Party is not
obliged to share with any other Finance Party any amount which the Recovering
Finance Party has received or recovered as a result of taking legal or
arbitration proceedings, if:

(i)                       it notified that other Finance
Party of the legal or arbitration proceedings; and

(ii)                    that other Finance Party had an
opportunity to participate in those legal or arbitration proceedings but did
not do so as soon as reasonably practicable having received notice and did not
take separate legal or arbitration proceedings.

9.                                 MISCELLANEOUS

9.1                           Payment Mechanics

9.1.1                            Payments to the Agent

(a)                     On each date on which the Obligor
or a Lender is required to make a payment under a Fundamental Document, the
Obligor or Lender shall make the same available to the Agent (unless a contrary
indication appears in a Fundamental Document) for value on the due date at the
time and in such funds specified by the Agent as being customary at the time
for settlement of transactions in the relevant currency in the place of
payment.

(b)                    Payment shall be made to such
account in the principal financial center of the country of that currency with
such bank as the Agent specifies.

9.1.2                            Distributions by the Agent

Each payment received by
the Agent under the Fundamental Documents for another Party shall, subject to
sub-clause 9.1.3 (Distributions to the
Obligor), sub-clause 9.1.4 (Clawback)
and sub-clause 8.1.16 (Deduction from
Amounts Payable by the Agent), be made available by the Agent as
soon as practicable 

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after receipt to the
Party entitled to receive payment in accordance with this Agreement (in the
case of a Lender, for the account of its Facility Office), to such account as
that Party may notify to the Agent by not less than five Business Days’ notice
with a bank in the principal financial center of the country of that currency.

9.1.3                            Distributions to the Obligor

The Agent may (with the
consent of the Obligor or in accordance with Clause 9.6 (Right of Set-off)) apply any amount
received by it for the Obligor in or towards payment (on the date and in the
currency and funds of receipt) of any amount due from the Obligor under the
Fundamental Documents or in or towards purchase of any amount of any currency
to be so applied.

9.1.4                            Clawback

(a)                     Where a sum is to be paid to the
Agent under the Fundamental Documents for another Party, the Agent is not
obliged to pay that sum to that other Party (or to enter into or perform any
related exchange contract) until it has been able to establish to its
satisfaction that it has actually received that sum.

(b)                    If the Agent pays an amount to
another Party and it proves to be the case that the Agent had not actually
received that amount, then the Party to whom that amount (or the proceeds of
any related exchange contract) was paid by the Agent shall on demand refund the
same to the Agent together with interest on that amount from the date of
payment to the date of receipt by the Agent, calculated by the Agent to reflect
its cost of funds.

9.1.5                            Partial Payments

(a)                     If the Agent receives a payment
that is insufficient to discharge all the amounts then due and payable by the
Obligor under the Fundamental Documents, the Agent shall apply that payment
towards the obligations of the Obligor under the Fundamental Documents in the
following order:

(i)                       first, in or towards payment pro
rata of any unpaid fees, costs and expenses of the Agent under the Fundamental
Documents;

(ii)                    secondly, in or towards payment pro
rata of any accrued interest, fee or commission due but unpaid under this
Agreement;

(iii)                 thirdly, in or towards payment pro
rata of any principal due but unpaid under this Agreement; and

(iv)                fourthly, in or towards payment pro
rata of any other sum due but unpaid under the Fundamental Documents.

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(b)                    The Agent shall, if so directed by
the Majority Lenders, vary the order set out in paragraphs (a)(ii) to (iv)
above.

(c)                     Paragraphs (a) and (b) above will
override any appropriation made by the Obligor.

9.1.6                            No set-off by Obligors

All payments to be made
by the Obligor under the Fundamental Documents shall be calculated and be made
without (and free and clear of any deduction for) set-off or counterclaim.

9.1.7                            Business Days

(a)                     Any payment which is due to be
made on a day that is not a Business Day shall be made on the next Business Day
in the same calendar month (if there is one) or the preceding Business Day (if
there is not).

(b)                    During any extension of the due
date for payment of any principal or Unpaid Sum under this Agreement interest
is payable on the principal or Unpaid Sum at the rate payable on the original
due date.

9.1.8                            Currency of Account

(a)                     Subject to paragraphs (b) to (e)
below, the Base Currency is the currency of account and payment for any sum due
from the Obligor under any Fundamental Document.

(b)                    A repayment of an Unpaid Sum shall
be made in the currency in which that Unpaid Sum is denominated on its due
date.

(c)                     Each payment of interest shall be
made in the currency in which the sum in respect of which the interest is
payable was denominated when that interest accrued.

(d)                    Each payment in respect of costs,
expenses or taxes shall be made in the currency in which the costs, expenses or
taxes are incurred.

(e)                     Any amount expressed to be payable
in a currency other than the Base Currency shall be paid in that other
currency.

9.1.9                            Change of Currency

(a)                     Unless otherwise prohibited by
law, if more than one currency or currency unit are at the same time recognized
by the central bank of any country as the lawful currency of that country,
then:

 64
 

 

(i)                       any reference in the Fundamental
Documents to, and any obligations arising under the Fundamental Documents in,
the currency of that country shall be translated into, or paid in, the currency
or currency unit of that country designated by the Agent (after consultation
with the Obligor); and

(ii)                    any translation from one currency
or currency unit to another shall be at the official rate of exchange
recognized by the central bank for the conversion of that currency or currency
unit into the other, rounded up or down by the Agent (acting reasonably).

(b)                    If a change in any currency of a
country occurs, this Agreement will, to the extent the Agent (acting reasonably
and after consultation with the Obligor) specifies to be necessary, be amended
to comply with any generally accepted conventions and market practice in the
relevant interbank market and otherwise to reflect the change in currency.

9.1.10                      Disruption to Payment Systems etc.

If either the Agent
determines (in its reasonable discretion) that a Disruption Event has occurred
or the Agent is notified by the Obligor (in its reasonable discretion) that a
Disruption Event has occurred:

(a)                     the Agent may, and shall if
requested to do so by the Obligor, consult with the Obligor with a view to
agreeing with the Obligor such changes to the operation or administration of
the Facility as the Agent may deem necessary in the circumstances;

(b)                    the Agent shall not be obliged to
consult with the Obligor in relation to any changes mentioned in paragraph (a)
if, in its opinion, it is not practicable to do so in the circumstances and, in
any event, shall have no obligation to agree to such changes;

(c)                     the Agent may consult with the
Finance Parties in relation to any changes mentioned in paragraph (a) but shall
not be obliged to do so if, in its opinion, it is not practicable to do so in
the circumstances;

(d)                    any such changes agreed upon by the
Agent and the Obligor shall (whether or not it is finally determined that a
Disruption Event has occurred) be binding upon the Parties as an amendment to
(or, as the case may be, waiver of) the terms of the Fundamental Documents
notwithstanding the provisions of Clause 9.2 (Amendments
and Waivers);

(e)                     the Agent shall not be liable for
any damages, costs or losses whatsoever 
(including, without limitation for negligence, gross negligence or any
other 

 65
 

 

                                   category
of liability whatsoever but not including any claim based on the fraud of the
Agent) arising as a result of its taking, or failing to take, any actions
pursuant to or in connection with this Clause 9.1; and

(f)                       the Agent shall notify the
Finance Parties of all changes agreed pursuant to paragraph (d) above.

9.2                           Amendments and Waivers

9.2.1                            No amendment or waiver of
any provision of this Agreement or any other Fundamental Document, nor consent
to any departure by the Obligor therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Agent, the Majority
Lenders and the Obligor and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given; provided that no such amendment, waiver or consent shall:

(a)                     increase the maximum aggregate
amount of the Letters of Credit without the written consent each Lender;

(b)                    increase the Commitment of any
Lender without the written consent of such Lender;

(c)                     reduce the amount, waive, excuse
or postpone the due date of any amount payable in respect of any Letter of
Credit or reduce the rate of interest thereon, or reduce any fees payable
hereunder, without the written consent of each Lender affected thereby;

(d)                    postpone the scheduled date of
expiration of any Commitment, without the written consent of each Lender
affected thereby;

(e)                     extend the expiration date of any
Letter of Credit beyond the Facility Termination Date without the written
consent of each Lender affected thereby;

(f)                       change in any manner the
obligations of the Lenders relating to the purchase of participations in
Letters of Credit without the written consent of each Lender;

(g)                    change any provision of this Clause
9.2.1 or the definition of “Majority Lenders” or any other provision hereof
specifying the number or percentage of Lenders required to waive, amend or
modify any rights hereunder or make any determination or grant any consent
hereunder, without the written consent of each Lender;

 66

 

(h)                    release any Lien granted in favor
of the Security Agent with respect to all or substantially all of the
Collateral without the written consent of each Lender; or

(i)                        amend, modify or otherwise
affect the rights or duties of the Agent 
or the Arranger hereunder without the prior written consent of the Agent
or the Arranger, as the case may be.

9.2.2                            In the event that the
Obligor wishes to deposit an Investment in the Custodial Account which is rated
by a nationally or internationally-recognized ratings agency other than
S&P, Moody’s or Fitch, the Agent agrees to reasonably consider on a timely
basis whether the rating of such Investment may be considered the equivalent of
a rating provided by S&P, Moody’s or Fitch for purposes of the relevant
provisions of this Agreement and, if instructed to do so by the Lenders, to
execute any amendment, waiver or other writing relating thereto on a timely
basis.

9.3                           Addresses for Notices

All notices and other
communications provided for hereunder shall be in writing unless otherwise
stated herein and shall be delivered by e-mail, fax, hand delivery, or
recognized courier service that provides delivery within two (2) Business Days:

if to Arch Reinsurance
Ltd., at:

Wessex House, 3rd Floor

45 Reid Street

Hamilton HM 12

Bermuda

Attn:  Controller

Telephone:  +1 (441) 278-9200

Facsimile:  +1 (441) 278-9230

E-mail: 
michelle.seymour@archreinsurance.bm

if to the Agent, at

5 The North Colonnade

London E14 4BB

England

Attn:  Karen Somerville, Loan Operations
- Agency Desk

Telephone:  +44 (0)20 7773 6417

Facsimile:  +44 (0)20 7773 6808

E-mail: Karen.Somerville@barcap.com

 67
 

 

if to an Original Lender,
at the address set forth under such Original Lender’s name on its signature
page hereto

and shall be effective
when delivered at the address specified in or pursuant to this Clause 9.3, or
such other address notified to the other party in writing.

9.4                           Successors and Assigns

This Agreement is a
continuing obligation of the Obligor and shall, until the date on which all
amounts due and owing hereunder are paid in full (i) be binding upon the
Obligor, its successors and assigns and (ii) inure to the benefit of and be
enforceable by the Agent and the Lenders and its successors and assigns, provided that any
assignment of this Agreement or any part hereof by the Obligor shall be void.

9.5                           Payment of Expenses and Taxes; Indemnities

9.5.1                            The Obligor hereby agrees
to pay or reimburse the Agent and each Lender for all their respective
out-of-pocket costs and expenses incurred in connection with the development,
preparation and attention to the execution of the Fundamental Documents, and of
documents embodying or relating to amendments, waivers or consents with respect
to any of the foregoing, including the reasonable fees and out-of-pocket costs
and expenses of counsel to the Agent and each Lender, (ii) the Obligor agrees
to pay and to save the Agent and each Lender from all registration, recording
and filing fees and all liabilities with respect to, or resulting from, any
delay by the Obligor in paying stamp and other Taxes, if any, which may be
payable or determined to be payable in connection with the execution and
delivery of, any of the Fundamental Documents or any amendment, waiver or
consent with respect thereto or the consummation of any of the transactions
contemplated thereby, (iii) the Obligor agrees to pay or reimburse the Agent
and each Lender for all its out-of-pocket costs and expenses incurred in
connection with the preparation and attention to the execution and issuance of
Letters of Credit issued at the request of the Obligor and (iv) the Obligor
agrees to pay or reimburse the Agent and each Lender for all out-of-pocket
costs and expenses incurred by it in connection with the enforcement or
preservation of any rights against the Obligor under or in respect of this
Agreement and the other Fundamental Documents (including the fees and expenses
of lawyers retained by the Agent and each Lender, including the allocated costs
of internal counsel, and remuneration paid to agents and experts not in the
full-time employ of the Agent and each Lender for services rendered on behalf
of the Agent and each Lender) on a full indemnity basis.  All such amounts will be paid by the Obligor
on demand.

9.5.2                            The Obligor agrees to
indemnify the Agent and any Lender, and their respective directors, officers,
employees, agents and Affiliates from, and hold each of them 

 68
 

 

harmless
against, any and all claims, damages, losses, liabilities, costs and expenses
(including without limitation, reasonable fees and disbursements of counsel)
arising as a consequence of (i) any failure by the Obligor to pay the Agent or
any Lender, as required under this Agreement, punctually on the due date
thereof, any amount payable by the Obligor to the Agent or any Lender or (ii)
the acceleration, in accordance with the terms of this Agreement, of the time
of payment of any of the Reimbursement Obligations, except to the extent caused
by the Agent’s or such Lender’s negligence or willful misconduct or breach of
this Agreement.  Such losses, costs or
expenses may include, without limitation, (i) any costs incurred by the Agent
or any Lender in carrying funds to cover any overdue principal, overdue
interest, or any other overdue sums payable by the Obligor to the Agent or any
Lender or (ii) any losses incurred or sustained by the Agent or any Lender in
liquidating or reemploying funds acquired by the Lender from third parties.

9.5.3                            The Obligor agrees to
indemnify the Agent, the Arranger and any Lender, and their respective
directors, officers, employees, agents and Affiliates from, and hold each of
them harmless against, any and all claims, damages, liabilities, losses, costs
and expenses (including without limitation, reasonable fees and disbursements
of counsel) arising out of or by reason of any investigation or litigation or
other proceedings (including any threatened investigation or litigation or
other proceedings) with respect to the Obligor relating to any transaction
contemplated by this Agreement or any other Fundamental Document, any actions
or omissions of the Obligor or any of the Obligor’s directors, officers,
employees or agents in connection with this Agreement or any other Fundamental
Document, including without limitation, the reasonable fees and disbursements
of counsel incurred in connection with any such investigation or litigation or
other proceedings (but excluding any such losses, liabilities, claims, damages
or expenses incurred by reason of the gross negligence or willful misconduct of
the Person to be indemnified).

9.6                           Right of Set-Off

The Obligor agrees that,
in addition to (and without limitation of) any right of setoff, banker’s Lien
or counterclaim a Finance Party may otherwise have, such Finance Party shall be
entitled, at its option, to offset balances (general or special, time or
demand, provisional or final, and regardless of whether such balances are then
due to the Obligor) held by it for the account of the Obligor at any of such
Finance Party’s offices, in U.S. Dollars or in any other currency, against any
amount payable by the Obligor under this Agreement or any Letter of Credit that
is not paid when due, taking into account any applicable grace period, in which
case it shall promptly notify the Obligor thereof, provided  that such Finance Party’s failure to give such notice shall
not affect the validity thereof.  In
furtherance thereof, the Obligor hereby grants to such Finance Party, a 

 69
 

 

continuing Lien, security
interest and right of setoff as security for all liabilities and obligations to
such Finance Party, whether now existing or hereafter arising, upon and against
all deposits, credits, collateral and property of the Obligor, now or hereafter
in the possession, custody, safekeeping or control of such Finance Party or any
entity under the control of the Custodian and its successors and assigns or in
transit to any of them.  At any time
after the occurrence of an Event of Default, without demand or notice (any such
notice being expressly waived by the Obligor), each Finance Party may setoff
the same or any part thereof and apply the same to any liability or obligation
of the Obligor even though unmatured and regardless of the adequacy of any
other collateral securing the Obligor’s obligations hereunder.  ANY AND ALL RIGHTS TO REQUIRE A FINANCE PARTY
TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH
SECURES THE OBLIGOR’S OBLIGATIONS HEREUNDER, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE OBLIGOR,
ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

9.7                           Governing Law

This Agreement, and the
rights and obligations of the parties hereunder, shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the choice of law or conflicts of law principles thereof.

9.8                           Consent to Jurisdiction

The Obligor hereby
expressly submits to the non-exclusive jurisdiction of all federal and state
courts sitting in the State of New York, and agrees that any process or notice
of motion or other application to any of said courts or a judge thereof may be
served upon the Obligor within or without such court’s jurisdiction by
registered or certified mail, return receipt requested, or by personal service,
at the Obligor’s address (or at such other address as the Obligor shall specify
by a prior notice in writing to the Agent), provided reasonable time for
appearance is allowed.  The Obligor
hereby irrevocably waives any objection which it may now or hereafter have to
the laying of venue to any suit, action or proceeding arising out or relating
to this Agreement brought in any federal or state courts sitting in the State
of New York and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient forum.  Notwithstanding the
foregoing, the Agent and the Lenders may sue the Obligor in any jurisdiction
where the Obligor or any of its assets may be found and may serve legal process
upon the Obligor in any other manner permitted by law.

9.9                           Waiver of Jury Trial

EACH PARTY HERETO
MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A
TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN

 70
 

 

CONNECTION WITH THIS
AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN
CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT
LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF
THE AGENT RELATING TO THE ADMINISTRATION OF THIS AGREEMENT OR ENFORCEMENT OF
THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NO PARTY WILL SEEK TO CONSOLIDATE ANY
SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT
BEEN WAIVED.  EXCEPT AS PROHIBITED BY
LAW, THE OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY
DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  THE OBLIGOR CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF THE AGENT HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
THE AGENT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER.  THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR THE AGENT TO ENTER INTO THIS AGREEMENT AND THE OTHER
FUNDAMENTAL DOCUMENTS.

9.10                     Interest

All agreements between
the Agent, the Lenders and the Obligor are hereby expressly limited so that in
no contingency or event whatsoever shall the amount paid or agreed to be paid
to the Agent or the Lenders for the use or the forbearance of the indebtedness
evidenced hereby exceed the maximum permissible under applicable law.  As used herein, the term “applicable law”
shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the
law which results in a higher permissible rate of interest, then this Agreement
shall be governed by such new law as of its effective date.  In this regard, it is expressly agreed that
it is the intent of the Agent, the Lenders and the Obligor in the execution,
delivery and acceptance of this Agreement to contract in strict compliance with
the laws of the State of New York from time to time in effect.  If, under or from any circumstances
whatsoever, fulfillment of any provision hereof or of any of the agreements
executed herewith at the time of performance of such provision shall be due,
shall involve transcending the limit of such validity prescribed by applicable
law, then the obligation to be fulfilled shall automatically be reduced to the
limits of such validity, and if under or from circumstances whatsoever the
Agent or a Lender should ever receive as interest an amount which would exceed
the highest lawful rate, such amount which would be excessive interest shall be
applied to the reduction of the principal balance evidenced hereby and not to
the payment of interest.  This provision
shall control every other provision of all agreements between the Obligor and
the Agent and the Lenders.

 71
 

 

9.11                     Confidentiality

The Agent and the Lenders
agree to maintain the confidentiality of the Information (as defined below),
except that Information may be disclosed (a) to their respective (and their
respective Affiliates’) directors, officers, employees and agents, including
accountants, legal counsel and other advisors (it being understood that the
Persons to whom such disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such Information confidential
in accordance with the terms of this Agreement, (b) to the extent requested by
any regulatory authority or self-regulatory body, (c) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (d)
to any other party to this Agreement, (e) in connection with the exercise of
any remedies hereunder or any suit, action or proceeding relating to this
Agreement or the enforcement of rights hereunder, (f) with the consent of the
Obligor or (g) to the extent such Information becomes publicly available other
than as a result of a breach of this Clause 9.11.  For the purposes of this Clause 9.11, “information”
means all information received by the Agent and the Lenders relating to the
Parent or Obligor or any Subsidiary of the Parent or Obligor or their
respective businesses, other than any such information that is available to the
Agent and the Lenders on a non-confidential basis prior to disclosure by the
Parent or Obligor.  Any Person required
to maintain the confidentiality of Information as provided in this Clause 9.11
shall be considered to have complied with its obligation to do so if such
Person has exercised the same degree of care to maintain the confidentiality of
such Information as such Person would accord to its own confidential
information or the Agent and the Lenders have treated such Information in a
manner consistent with banking industry standards for the treatment of
confidential information. 
Notwithstanding anything herein to the contrary, each party to this
Agreement (and any employee, representative or other agent of each such party)
may disclose to any and all Persons, without limitation of any kind, the U.S.
federal income tax treatment and the U.S. federal income tax structure of the
transactions contemplated hereby and all materials of any kind (including
opinions or other tax analyses) that are provided to it relating to such tax
treatment and tax structure.  However, no
disclosure of any information relating to such tax treatment or tax structure
may be made to the extent nondisclosure is reasonably necessary in order to
comply with applicable securities laws. 
The provisions of this Clause 9.11 shall survive the Facility
Termination Date and the Letter of Credit Obligations hereunder.

9.12                     Table of Contents and Captions

The Table of Contents
hereof and captions herein are included for convenience of reference only and
shall not constitute a part of this Agreement for any other purpose.

9.13                     Integration

This Agreement is
intended by the parties as the final, complete and exclusive statement of the
transactions evidenced by this Letter of Credit and Reimbursement
Agreement.  All 

 72
 

 

prior or contemporaneous
promises, agreements and understandings, whether oral or written, are deemed to
be superseded by this Agreement, and no party is relying on any promise,
agreement or understanding not set forth in this Agreement. 

9.14                     Counterparts

This Agreement may be
executed in multiple counterparts each of which shall be an original and all of
which when taken together shall constitute but one and the same Agreement.

 73

 

 

IN
WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered by their respective officers, as an instrument
under seal, as of the date first above written.

ARCH
REINSURANCE LTD., as Obligor

By:  /s/ Nicolas Papadopoulo

Name:  Nicolas Papadopoulo

Title:  President & CEO

 

 

 

BARCLAYS
BANK PLC, 

as Agent

By:  /s/ Roger Cosby

Name:  Roger Cosby

Title:  Manager

 

 

 

BARCLAYS
BANK PLC, 

as an Original Lender

By:  /s/ Roger Cosby

Name:  Roger Cosby

Title:   Manager

Address:  5 The North Colonnade, London E14 4BB

 

 

ING BANK
N.V., LONDON BRANCH, as an Original Lender

By:  /s/ Nick J. Marchant, /s/ M.E.R. Sharman
(Managing Director)

Name:  N.J. Marchant

Title:  Director

Address:  60 London Wall, London EC2M 5TQ

 

 

 

LLOYDS
TSB BANK PLC, as an Original Lender

By:  /s/ Sebastian Kafetz

Name:  Sebastian Kafetz

Title:  Relationship Manager

Address:  25 Gresham Street, London EC2V 7HN

 

 

 

BARCLAYS
CAPITAL, 

as Arranger

By:  /s/ Roger Cosby

Name:  Roger Cosby

Title:  Manager

Address:  5 The North Colonnade, London E14 4BB

 

 

SCHEDULE 1

LENDER COMMITMENTS

	
  Name of Original Lender

  	
   

  	
   

  	
   

  	
  Commitment

  (in U.S. Dollars)

  	
   

  	
  Ratable Share

  	
   

  
	
  Barclays Bank
  PLC

  	
   

  	
  $

  	
  50,000,000

  	
   

  	
  33.33333334

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ING Bank N.V.,
  London Branch

  	
   

  	
  $

  	
  50,000,000

  	
   

  	
  33.33333333

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lloyds TSB Bank
  plc

  	
   

  	
  $

  	
  50,000,000

  	
   

  	
  33.33333333

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  $

  	
  150,000,000

  	
   

  	
  100.00000000

  	
  %Exhibit 10.1

 

EXECUTION COPY

INVESTMENT
NUMBER 24346

Subscription Agreement

by and among

BPZ ENERGY, INC.

and

INTERNATIONAL FINANCE CORPORATION

Dated December 18, 2006

SUBSCRIPTION AGREEMENT

This SUBSCRIPTION AGREEMENT (this “Agreement”),
dated December 18, 2006, is made by and between BPZ Energy, Inc., a Colorado
corporation (the “Company”), and International Finance Corporation, an
international organization established by Articles of Agreement among its
member countries, including the United States (“IFC”).

RECITALS

WHEREAS, the Company proposes to issue and sell to
IFC, and IFC desires to purchase from the Company, shares of the Company’s
common stock, no par value (the “Common Stock”), on the terms set forth herein.

AGREEMENT

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

Section 1.  Purchase

1.1           Purchase
and Sale of Stock.

(a)           Subject to the terms
and conditions of this Agreement, the Company will issue and sell to IFC, and
IFC agrees to purchase from the Company, 6,500,000 shares of the Company’s
authorized but unissued Common Stock (the “Shares”), at a price per share equal
to $3.00 for an aggregate purchase price of US$19,500,000.  The closing (the “Closing”) of the sale of
the Shares shall be effected at the offices of White & Case LLP in Washington,
D.C. on December 18, 2006, or as soon as practicable thereafter upon the
satisfaction of the conditions set forth in Section 4, or at such other time
and place as may be agreed to by IFC and the Company but in no event later than
December 29, 2006 (the “Closing Date”). At the Closing, subject to the terms
and conditions hereof, the Company shall cause the issuance of the Shares,
against payment of the full amount of IFC’s aggregate purchase price by wire
transfer of immediately available funds to the Company’s bank account.

(b)           Notwithstanding
anything contained in this Agreement, IFC may, at any time in its sole
discretion and without request by the Company, subscribe for the Shares by
providing three (3) days’ prior notice to the Company. Upon the date specified
in such notice, the Company shall cause the issuance of the Shares against
payment of the full amount of IFC’s aggregate purchase price by wire transfer
of immediately available funds to the Company’s bank account.

1.2           Legends.  All certificates representing the Shares
shall bear the following legend (in addition to any legend required by the blue
sky or securities laws of any state or jurisdiction to the extent such laws are
applicable to the shares represented by the certificate so legended):

 

“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION
TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS, PROVIDED THAT THE
SELLER DELIVERS TO THE COMPANY AN OPINION OF COUNSEL (WHICH OPINION AND COUNSEL
ARE REASONABLY SATISFACTORY TO THE COMPANY) CONFIRMING THE AVAILABILITY OF SUCH
EXEMPTION.”

The legend set forth above shall be removed and the
Company shall issue a certificate without such legend to the holder of the
Shares upon which it is stamped, if, unless otherwise required by state
securities laws, (i) such Shares are registered for resale under the
Securities Act of 1933, as amended (the “Securities Act”), (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, reasonably satisfactory to the Company, to
the effect that such sale, assignment or transfer of the Shares may be made
without registration under the applicable requirements of the Securities Act,
or (iii) such holder provides the Company with reasonable assurance that
the Shares can be sold, assigned or transferred pursuant to Rule 144 or
Rule 144A promulgated under the Securities Act.

1.3           Stop Transfer Orders.  All certificates representing the Shares will
be subject to a stop transfer order with the Depository Trust Company or with
the Company’s transfer agent that restricts the transfer of such shares except
in compliance with this Agreement.

Section 2.  Representations and Warranties of the
Company.  The Company hereby makes
the following representations and warranties to IFC:

2.1           Organization, etc. 
The Company is a corporation, duly organized, and validly existing and
in good standing under the laws of the State of Colorado, and is qualified or
licensed to do business and is in good standing as a foreign corporation in
each other jurisdiction in which the conduct of its business or the ownership
of property requires such qualification or licensing, except where failure to
be so qualified or licensed could not reasonably be expected to have a Material
Adverse Effect.  Each company listed on
Schedule 2.1 hereof is duly organized, and validly existing and in good
standing under the laws of the jurisdiction of its organization, and is
qualified or licensed to do business and is in good standing as a foreign corporation
in each other jurisdiction in which the conduct of its business or the
ownership of property requires such qualification or licensing, except where
failure to be so qualified or licensed could not reasonably be expected to have
a Material Adverse Effect.  Except for
the Subsidiaries listed on Schedule 2.1, the Company does not own, or control,
directly or indirectly, any interest in any other corporation, partnership,
trust, joint venture, association or other entity.

2.2           Authority. 
The Company has the corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder, and such action has
been duly authorized by all necessary action of the Company’s Board of
Directors and no other corporate action on the part of the Company is necessary
to authorize the execution, delivery and

 2
 

 

performance of this Agreement.  The issuance and sale of the Shares has been
duly authorized and if, as and when issued in accordance with the terms of this
Agreement and delivered to IFC, the Shares will be duly and validly issued and
outstanding, fully paid and non-assessable and will be free of any Encumbrance
and will not be subject to preemptive rights, rights of first refusal or other
restrictions on transfer, other than those imposed pursuant to this Agreement
and securities laws of general application. 
The issuance and sale of the Shares will not be subject to preemptive or
other similar rights of any holder of the Company’s securities.

2.3           Enforceability. 
This Agreement and all other Transaction Documents to be executed and
delivered by the Company, when delivered in accordance with the terms hereof,
shall have been duly executed and delivered by the Company and constitute a
legal, valid and binding agreement and obligation of the Company enforceable
against it in accordance with their terms subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
generally relating to or affecting creditors’ rights.

2.4           No Violation. 
Except as set forth on Schedule 2.4, the execution and the delivery
by the Company of this Agreement and the performance by the Company of its
obligations hereunder, including the issuance and sale of the Shares, does not
and will not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under,
(iii) result in a violation of, or (iv) require any authorization,
consent or approval not heretofore obtained pursuant to, (x) any material written
or oral agreement or instrument, including, without limitation, trust
instrument, indenture or evidence of indebtedness, lease, contract or other
obligation or commitment (each, a “Contractual Obligation”) binding upon the
Company or any Subsidiary or any of their respective properties or assets, to
the extent such conflict, default, violation or unobtained authorization,
consent or approval could reasonably be expected to have Material Adverse
Effect, (y) any federal, state, or local law, rule, regulation or ordinance, or
any restriction, order, writ, judgment, award, determination, injunction or
decree of any court or government, or any decision or ruling of any arbitrator
(each, a “Requirement of Law”) binding upon or applicable to the Company or any
Subsidiary or any of their respective properties or assets, or (z) any
provision of the Certificate of Incorporation, Bylaws or comparable
organizational documents of the Company or any of its Subsidiaries.

2.5           Litigation. 
Except as set forth in Schedule 2.5 or in the November Registration
Statement, there are no pending or to the Company’s knowledge after due inquiry
overtly threatened actions, claims, orders, decrees, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could reasonably be expected to have a Material
Adverse Effect, and no judgment or order has been issued which could reasonably
be expected to have a Material Adverse Effect.

2.6           Charter.  The
Company has delivered to IFC a true and correct copy of its Certificate of
Incorporation and Bylaws and such Certificate of Incorporation and Bylaws have
not been amended since October 18, 1996.

2.7           Capitalization. The authorized capital stock of the
Company consists of 250,000,000 shares of Common Stock, no par value,
47,352,217 shares of which have been validly issued and are outstanding as of
December 15, 2006 and are owned beneficially and legally of record by the
Persons indicated on Schedule 2.7 (and such issued shares are fully paid

 3
 

 

and non-assessable), and 25,000,000 shares of
preferred stock, no par value, none of which are issued or outstanding as of
December 15, 2006.  Except as set forth
on Schedule 2.7, the Company owns 100% of the capital stock of each of the
Subsidiaries. Except as set forth on Schedule 2.7, there do not exist any
other authorized or outstanding securities, options, warrants, calls,
commitments, rights to subscribe or other instruments, agreements or rights of
any character, or any pre-emptive rights, convertible into or exchangeable for,
or requiring or relating to the issuance, transfer or sale of, any shares of
capital stock or other securities of the Company or any Subsidiary. Schedule
2.7 contains a capitalization table showing the number of shares of Common Stock
and Stock Equivalents owned by each category of holders of Common Stock and/or
Stock Equivalents of the Company both before and after the subscription by IFC
for the Shares.

2.8           Financial Statements.  All of the consolidated financial statements
included in the November Registration Statement (the “Company Financial
Statements”): (i) have been prepared from and on the basis of, and are in
accordance with, the books and records of the Company and with United States
generally accepted accounting principles (“GAAP”) applied on a basis consistent
with prior accounting periods; (ii) fairly and accurately present in all
material respects the consolidated financial condition of the Company as of the
date of each such Company Financial Statement and the results of its operations
for the periods therein specified; and (iii) in the case of the annual
financial statements, are accompanied by the audit opinion of the Company’s
independent public accountants. Except as set forth in Schedule 2.8 or in
the Company Financial Statements, as of the date hereof and as of the Closing
Date, the Company has no liabilities other than (i) liabilities which are
reflected or reserved against in the Company Financial Statements and which
remain outstanding and undischarged as of the date hereof,
(ii) liabilities arising in the ordinary course of business of the Company
since September 30, 2006, (iii) liabilities incurred as a result of
the transactions described on Schedule 2.8, or (iv) liabilities which
were not required by GAAP to be reflected or reserved on the Company Financial
Statements.  Since September 30,
2006, except as set forth on Schedule 2.8, there has not been any event or
change which has had or could reasonably be expected to have a Material Adverse
Effect and the Company has no knowledge of any event or circumstance that would
reasonably be expected to result in such a Material Adverse Effect.

2.9           Absence of Certain Changes.  Since September 30, 2006 (the “Balance
Sheet Date”), except as set forth on Schedule 2.8 hereto, and in the
November Registration Statement, neither the Company nor any of its
Subsidiaries has:

(a)           redeemed,
purchased or otherwise acquired directly or indirectly any shares of any class
or series of its capital stock, or any instrument or security which consists of
or includes a right to acquire such shares;

(b)           paid,
discharged or satisfied any claim, liability or obligation (whether absolute,
accrued, contingent or otherwise) other than the payment, discharge or
satisfaction in the ordinary course of business and consistent with past
practice of liabilities and obligations reflected or reserved against in the
Company Financial Statements in the November Registration Statement or incurred
in the ordinary course of business and consistent with past practice since the
Balance Sheet Date;

 4
 

 

(c)           permitted
or allowed any of its material properties or assets (real, personal or mixed,
tangible or intangible) to be subjected to any mortgage, pledge, claim, lien,
security interest, encumbrance, restriction or charge of any kind outside of
the ordinary course of business;

(d)           cancelled
any debt or waived any claim or right of substantial value;

(e)           sold,
transferred, licensed, leased, pledged, mortgaged or otherwise disposed of any
of its material properties or assets (real, personal or mixed, tangible or
intangible) or any material amount of property or assets, except in the
ordinary course of business;

(f)            disposed
of or permitted to lapse any right to the use of any Proprietary Rights, or
disposed of or disclosed to any person or entity, other than representatives of
IFC and persons subject to a nondisclosure agreement, any trade secret,
formula, process, know-how or other Proprietary Right not yet a matter of
public knowledge;

(g)           granted
any material increase or accrual in or accelerated, any benefit or compensation
payable or to become payable to any officer, director, employee or consultant,
including any such increase, accrual or acceleration pursuant to any benefit
plan except in connection with a promotion or job change or any general
increase in the compensation payable or to become payable to officers,
employees or directors in the ordinary course of business, or entered into or
amended in any material way any employment, material consulting, severance, termination
or material benefit plan agreement or arrangement other than in the ordinary
course of business;

(h)           declared,
paid or set aside for payment any dividend or other distribution in respect of
its capital stock or redeemed, purchased or otherwise acquired, directly or
indirectly, any shares of capital stock or other securities of the Company or
any of its Subsidiaries;

(i)            made
any change in any method of tax or financial statement accounting or accounting
practice that would or would reasonably be expected to result in any material
change in the Company Financial Statements;

(j)            paid,
loaned or advanced any amount to, or sold, transferred or leased any material
properties or assets (real, personal or mixed, tangible or intangible) to, or
entered into any agreement or arrangement with, any of its officers or
directors or employees or any Affiliate of any of its officers or directors or
employees, except for directors’ fees and compensation to officers in the
ordinary course of business;

(k)           amended
its certificate of incorporation or by-laws or similar organizational
documents;

(l)            issued,
sold, transferred, pledged, disposed of or encumbered any shares of any class
or series of its capital stock, or securities convertible into or exchangeable
for, or options, warrants, calls, commitments or rights of any kind to acquire,
any shares of any class

 5
 

 

or series of its capital stock, other than shares of Common Stock
reserved for issuance on the date of this Agreement pursuant to the Company’s
2005 Long-Term Incentive Compensation Plan, the exercise of any warrants or
options to purchase Common Stock described on Schedule 2.7 or existing
agreements described on Schedule 2.7 that require the Company to issue shares
of Common Stock;

(m)          terminated
or materially modified or amended any of its material contracts or waived,
released or assigned any material rights under any material contract or claims,
except in the ordinary course of business and consistent with past practice;

(n)           revalued
in any material respect any of its assets, including writing down the value of
inventory or writing-off notes or accounts receivable, other than in the
ordinary course of business consistent with past practice or as required by
GAAP;

(o)           adopted
a plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or any
of its Subsidiaries; or

(p)           agreed,
whether in writing or otherwise, to take any action described in this section.

2.10         Income Tax Returns. 
Except as set forth on Schedule 2.10, the Company and the
Subsidiaries have filed all federal and state income tax returns which are
required to be filed, and have paid, or made provision for the payment of all
taxes which have become due pursuant to said returns or pursuant to any
assessment received by the Company or any Subsidiary, except such taxes, if
any, as are being contested in good faith and as to which adequate reserves
have been provided. The Company has no knowledge of any pending assessments or
adjustments of the income tax payable by the Company or its Subsidiaries with
respect to any year.

2.11         Permits; Compliance With Law.  Except as disclosed on Schedule 2.4, the
Company and each Subsidiary possesses, and will hereafter possess, all permits,
consents, approvals, franchises and licenses required and rights to all
trademarks, trade names, patents, and fictitious names, if any, necessary to
enable them to conduct the business in which it is now engaged in compliance
with applicable law and comply with the obligations under this Agreement.  To the Company’s knowledge after due inquiry,
the Company and each Subsidiary are in compliance with all Requirements of Law
in the conduct of its business and corporate affairs, except where failure to comply,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.  Neither the
Company nor any of its Subsidiaries has received any written notice that any
violation of the foregoing is being or may be alleged.

2.12         Prohibited Payments. 
Neither the Company nor any Affiliates, nor any Person acting on its or
their behalf, has made, with respect to the business of the Company or any
transaction contemplated by this Agreement, any Prohibited Payment.

2.13         Insurance.  The
Company’s insurance policies cover such risks and contain such policy limits,
types of coverage and deductibles as are, in the Company’s judgment, adequate
to insure fully (subject to the deductibles and retention amounts described in
Schedule

 6
 

 

2.13) against risks to which the Company and
its employees, business, properties and other assets may be exposed in the
operation of the business as currently conducted.  All of the Company’s insurance policies are
valid and enforceable policies, all premiums due and payable under all such
policies have been paid and the Company is otherwise in compliance in all
material respects with the terms of such policies.  The Company has no knowledge of any
threatened termination of, or material change with respect to the terms and
conditions of such policies.

2.14         Restrictions on Business Activities.  There is no agreement, judgment, injunction
order or decree binding upon the Company which has or could reasonably be
expected to have the effect of prohibiting or impairing in any material respect
any of its current or future business practices, its acquisition of property or
the conduct of its business as it is currently conducted or as proposed to be
conducted.

2.15         ERISA.  Except
as set forth on Schedule 2.15, the Company and each Subsidiary is in
compliance in all material respects with any applicable provisions of ERISA;
the Company and each Subsidiary has not violated any provision of any Plan
maintained or contributed to by it; no Reportable Event (as defined in ERISA)
has occurred and is continuing with respect to any employee benefit plan (“Plan”)
initiated by the Company or any Subsidiary; the Company and each Subsidiary has
met its minimum funding requirements under ERISA with respect to any Plan; and
any Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under GAAP. Schedule 2.15 describes
each Plan maintained by the Company and each of its Subsidiaries; provided each
description is intended as a summary and is subject to the terms and conditions
of each Plan.

2.16         Contracts. 
Schedule 2.16 sets forth a description of each Contractual
Obligation to which the Company or any Subsidiary is a party (except
Contractual Obligations filed as exhibits to the November Registration
Statement) that provides for payments to or by the Company or any Subsidiary in
excess of $1,000,000, or is otherwise material to the operations of the Company
or any Subsidiary.  With respect to each
Contractual Obligation to which the Company or any Subsidiary is a party or to
which any of its properties are subject (i) the agreement is legal, valid,
binding and enforceable and in full force and effect, in each case except for
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditor’s rights generally; (ii) the agreement will
continue to be legal, valid, binding and enforceable and in full force and
effect immediately following the date hereof in accordance with the terms
thereof as in effect prior to the date hereof; (iii) to the knowledge of the
Company after due inquiry, the Company and each Subsidiary has performed all
the obligations required to be performed by it and is entitled to all benefits
thereunder, in each case, except where failure to perform individually or in
the aggregate could not reasonably be expected to have a Material Adverse
Effect, and except for bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor’s rights generally; and (iv)
neither the Company nor, to the knowledge of the Company, any other party is in
breach or default, and no event has occurred which with notice or lapse of time
would constitute a breach or default by the Company or, to the knowledge of the
Company, by any such other party, or permit termination, modification or
acceleration, under the agreement.

 7

 

2.17         Environmental Matters.

(a)           To
the best of the Company’s knowledge and belief, after due inquiry, there are no
material social or environmental risks or issues in respect of the Company’s or
any Subsidiaries’ Operations other than those identified by the S&EA.

(b)           The
Company has not received nor is aware of (i) any existing or threatened
complaint, order, directive, claim, citation or notice from any Authority or
(ii) any material written communication from any Person, in either case,
concerning the Operations’ failure to comply with any matter covered by the IFC
Performance Standards which has, or could reasonably be expected to have, a
Material Adverse Effect or any material impact on the implementation or
operation of the Operations in accordance with the IFC Performance Standards.

2.18         Trademarks, etc. 
The Company and the Subsidiaries own, have sufficient title to, or have
the right to use (or can obtain the right to use on reasonable commercial
terms), all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other proprietary rights (collectively, the “Proprietary
Rights”) necessary to their business as now conducted without infringing upon
the right of any person. Except for employee confidentiality agreements with
employees and consultants, there are no outstanding material options, licenses
or agreements relating to intellectual property rights of the Company or any
Subsidiary necessary to their business as now conducted, nor is the Company or
any Subsidiary bound by or a party to any material options, licenses or
agreements with respect to the Proprietary Rights of any other person or
entity. To the Company’s knowledge, neither the Company nor any Subsidiary has
violated or is in current violation of, and neither the Company nor any
Subsidiary has received any communications alleging that the Company or any
Subsidiary has violated or, by conducting its business as proposed, would
violate, any of the Proprietary Rights of any other person or entity. The
Company and the Subsidiaries are not aware of any material violation by a third
party of any of their Proprietary Rights necessary to their business as now
conducted.

2.19         Employees. 
Except as set forth on Schedule 2.19, all employees of the Company
and each Subsidiary are employed “at will” and may be terminated without
payment of severance or incurrence of any other liability of the Company or the
Subsidiaries; no employee of the Company is in violation of any material term
of any employment contract, confidentiality agreement or any other material
Contractual Obligation relating to the right of any such employee to be
employed by the Company or any Subsidiary; and neither the Company nor any
Subsidiary has any employee severance agreement covering any of its employees.  Except as set forth on Schedule 2.19, neither
the Company nor any Subsidiary is a party to any collective bargaining
agreement or other labor union contract, nor are any union organization
proceedings pending or threatened against the Company or any of the
Subsidiaries.  There is no labor strike,
slowdown or work stoppage or lockout against the Company or any of the
Subsidiaries.

2.20         Title to Properties. 
The assets owned or leased by the Company and its Subsidiaries are all
of the assets necessary to conduct the business of the Company and its
Subsidiaries as currently being conducted. 
The Company and its Subsidiaries have good and marketable title to
substantially all of the assets they own, real and personal, movable and
immovable, tangible and intangible, free and clear of any charge, claim, lien,
pledge, security

 8
 

 

interest or other encumbrance, except for:
(a) liens for taxes not yet due and payable, (b) artisan’s or
mechanic’s liens arising in the ordinary course of business,
(c) encumbrances described on Schedule 2.20 hereto, or (d) minor
imperfections of title and encumbrances, if any, which (i) are not
substantial in amount, (ii) do not detract from the value of the property
subject thereto, impair the operations of the business of the Company, or the
use or license of certain of the assets of the Company, and (iii) have
arisen in the ordinary course of business consistent with past practice.

2.21         Books and Records. 
Since September 10, 2004, the books and records of the Company,
including, without limitation, its stock record books and minute books, are
complete and correct in all material respects and accurately and fairly reflect
all meetings and other corporate actions of the Company’s stockholders and its
Board of Directors and committees thereof and all material information relating
to its business, the nature, acquisition, maintenance, location and character
of its assets, and the nature of all transactions giving rise to its
obligations or accounts receivable.

2.22         Related Party Transactions.  Except for those contracts described in the
November Registration Statement or on Schedule 2.22 hereto, no existing
Contractual Obligation of the Company or its Subsidiaries is with or for the
direct benefit of (i) any party owning, or formerly owning, beneficially
or of record, directly or indirectly, in excess of five percent (5%) of the
outstanding capital stock of the Company, (ii) any director, officer or
similar representative of the Company, (iii) any natural person related by
blood, adoption or marriage to any party described in (i) or (ii), or
(iv) any entity in which any of the foregoing parties has, directly or
indirectly, at least a five percent (5%) beneficial interest (a “Related Party”).
Without limiting the generality of the foregoing, no Related Party, directly or
indirectly, owns or controls any material assets or material properties which
are used in the Company’s business and to the actual knowledge of the Company,
no Related Party, directly or indirectly, engages in or has any significant
interest in or connection with any business which is, or has been within the
last two years, a competitor, customer or supplier of the Company or has done
business with the Company or which currently sells or provides products or
services which are similar or related to the products or services sold or
provided in connection with the business of the Company.

2.23         Brokers.  The
Company has not agreed to pay or incurred any obligation in respect of any
finder’s fee, brokerage fee or other commission in connection with the sale of
Shares contemplated by this Agreement.

2.24         Securities Law Matters.  Except as set forth on Schedule 2.8,
since January 1, 2005, the Company has filed in a timely manner all
reports, registration statements, proxy statements and other materials,
together with any amendments required to be made with respect thereto (the “Public
Filings”), that were required to be filed with (i) the SEC under the
Securities Act, or the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and (ii) any applicable state securities authorities (the “Public
Filing Rules”). The Public Filings complied as to form in all material respects
with the Public Filing Rules as of their respective filing dates, and the
information contained therein as of the date thereof did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
that information contained in any such document has

 9
 

 

been revised or superseded by a later filed
Public Filing. The Company is in compliance in all material respects with the
applicable requirements of the Public Filing Rules, as amended, and the rules
and regulations thereunder.  Subject to
the accuracy of the representations and warranties of IFC set forth in Section
3, the offer, sale and issuance of the Shares to IFC will be exempt from registration
under the Securities Act.

2.25         Registration Statement; AMEX Listing.  The Company has filed a Registration
Statement with the SEC on Form S-1 (the “November Registration Statement”) for
the Common Stock issued in connection with the July 19, 2005, March 10, 2006
and June 30, 2006 private placements, and for which Notice of Effectiveness was
received by the Company on November 8, 2006. 
The Company has further filed a Registration Statement with the SEC on
Form S-1 on November 30, 2006 (as amended on December 7, 2006) for securities
issued to shareholders of the Company prior to September 9, 2004, along with
certain other shareholders, and for which Notice of Effectiveness was received
by the Company on December 15, 2006.  The
Company has submitted an application for listing its Common Stock on the
American Stock Exchange.

2.26         No Anti-Dilution Rights.  Except as set forth on Schedule 2.26,
the transactions contemplated hereby will not trigger any anti-dilution
provisions contained in any existing agreements.

2.27         Full Disclosure. 
None of this Agreement, any schedule, exhibit or certificate of the
Company made or delivered pursuant to this Agreement contains or will contain
any untrue statement of fact, or omits or will omit to state a material fact
the absence of which makes such representation, warranty or other statement
misleading.

Section 3.  Representations and Warranties of IFC.  IFC hereby makes the following
representations and warranties:

3.1           Organization. 
IFC is duly organized and validly existing.

3.2           Authority. 
IFC has the corporate authority to execute and deliver this Agreement
and to perform its obligations hereunder.

3.3           Investment Intent. 
IFC is acquiring the Shares for its own account for investment and not
with a view to, or for resale in connection with, any “distribution” thereof
for purposes of the Securities Act.  IFC
is an “accredited investor” as such term is defined in Regulation D under
the Securities Act.  IFC acknowledges
that the Shares shall be “restricted securities” within the meaning of
Rule 144 (“Rule 144”) under the Securities Act, will contain a
transfer restriction legend and may only be resold pursuant to an effective
registration statement filed with the SEC under the Securities Act, or pursuant
to Rule 144 or another valid exemption from the registration requirements
of the Act as established by an opinion of counsel reasonably acceptable to the
Company.

3.4           Investigation. 
IFC acknowledges that it has been given full access by the Company to
all information concerning the business and financial condition, properties,
operations and prospects of the Company that IFC has deemed relevant for
purposes of making the investment contemplated by this Agreement. By reason of
IFC’s knowledge and experience

 10
 

 

in financial and business matters in general,
the business of the Company and investments of the type contemplated by this
Agreement in particular, IFC is capable of evaluating the merits and risks of
making the investment in the Shares and is able to bear the economic risk of
the investment (including a complete loss of its investment in the Shares).
Subject to the truth and accuracy of the representations and warranties made by
the Company hereunder (which IFC has relied upon in entering into this
Agreement), IFC has conducted such investigation as it deems relevant in
connection with its consummation of the transactions contemplated by this
Agreement.

Section 4.  Conditions to the Obligations of IFC.  The obligations of IFC to consummate the
transactions under this Agreement on the Closing Date shall be subject to the
satisfaction of each of the conditions set forth in this Section 4, unless
waived by IFC, on or prior to the Closing Date.

4.1           Representations and Warranties.  The representations and warranties of the
Company set forth in Section 2 shall be true and correct in all respects
as of the Closing Date as though made on and as of such date; the Company shall
have performed all obligations and complied with all covenants required to be
performed or complied with by the Company under this Agreement on or prior to
the Closing Date, and no breach (or any event which would, with notice, lapse
of time, the making of a determination or any combination thereof, become a
breach) under any Transaction Document shall have occurred and be continuing;
and IFC shall have received on the Closing Date from the Company a certificate
or certificates, dated the Closing Date, to such effect, which certificate or
certificates shall be signed by an authorized officer of the Company.

4.2           No Proceedings. 
No order, injunction, decree or other action or legal, administrative,
arbitration or other proceeding by any person or investigation by any Authority
shall be pending or, to the knowledge of the Company, threatened, challenging
or imposing a material limitation on the execution, delivery or performance of
this Agreement, the consummation of any of the transactions contemplated
thereby or the operation by the Company of its businesses as now conducted.

4.3           Authorizations. 
All authorizations, approvals, consents or permits, if any, of any
Authority or any third party that are required in connection with the lawful
issuance and sale of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing Date.

4.4           Compliance with Laws.  The purchase of the Shares by IFC hereunder
shall be legally permitted by all laws and regulations to which IFC or the
Company is subject.

4.5           No Material Adverse Change.  Except as described in Schedule 2.8, there
shall have been no event that has had or could reasonably be expected to have a
Material Adverse Effect since December 31, 2005.

4.6           Opinion of Counsel. 
IFC shall have received an opinion of counsel to the Company covering
the matters set forth in Annex D hereto and in form reasonably satisfactory to
IFC.

 11
 

 

4.7           Expenses. 
IFC shall have received the reimbursement of all fees and expenses of
IFC, and the invoiced fees and expenses of its counsel, as provided in
Section 8.4 of this Agreement, or confirmation that those fees and expenses
have been paid directly to that counsel.

4.8           Insurance. 
IFC shall have received copies of all insurance policies which are
appropriate and necessary to the Company’s business operations as of the
Closing pursuant to Section 5.8 of this Agreement, and a certification of the
Company’s insurers or insurance agents confirming that those policies are in
full force and effect and all premiums then due and payable under those
policies have been paid.

4.9           Transaction Documents.  IFC shall have received each of the Transaction
Documents, duly executed and delivered by the parties thereto.

4.10         Proceedings; Documents.  IFC shall have received all documents
incident to all corporate and other proceedings in connection with the
transactions contemplated in relation to the subscription by  IFC contemplated in this Agreement, in form
and substance satisfactory to IFC and its legal counsel.

4.11         Use of Proceeds. 
The Company shall have certified to IFC in writing that the proceeds of
the subscription of the Shares by IFC shall not be used in reimbursement of,
nor shall be used for, expenditures in the territories of any country which is
not a member of the World Bank or for goods produced in or services supplied
from any such country.

4.12         S&EA; Action Plan.  The Company has completed an S&EA and
delivered to IFC an Action Plan, each in form and substance acceptable to IFC,
(ii) the Company and IFC have agreed on the form of Annual Monitoring Report
and (iii) the Company has implemented an S&EA Management System acceptable
to IFC.

Section 5.  Certain
Covenants of the Company.

5.1           Listing of Common Stock.  The Company shall use its reasonable best
efforts to cause the Common Stock to be listed on the American Stock Exchange
(or, if such listing cannot be obtained, upon NASDAQ or another exchange
acceptable to IFC) as soon as practicable following the date hereof.  The Company shall use its reasonable best
efforts to cause the Shares to be listed or included on each securities
exchange or automated quotation system on which similar securities issued by
the Company are then listed or included.

5.2           Shelf Registration. 
The Company shall prepare and file or cause to be prepared and filed
with the SEC, as soon as practicable but in any event no later than sixty
(60) days after the Closing Date (the “Registration Statement Filing
Deadline”), a Registration Statement on Form S-1 (or such other form as the
Company is then eligible to use) for an offering to be made on a delayed or
continuous basis pursuant to Rule 415 of the Securities Act registering
the resale from time to time by IFC of the Shares pursuant to plans of
distribution acceptable to IFC (the “Registration Statement”). IFC agrees to
promptly provide to the Company, in writing, such information as the Company
may reasonably request for inclusion in the Registration Statement. The Company
shall use its reasonable best efforts to cause the Registration Statement to be
declared effective under the Securities Act no later than sixty

 12
 

 

(60) days after its filing date or in
the event of SEC review, ninety (90) days from the date of filing (the “Effectiveness
Deadline”), and to keep such Registration Statement continuously effective
under the Securities Act until the earlier of (i) the date on which all
Shares covered by the Registration Statement may be sold without volume
restrictions pursuant to either Rule 144 or Rule 144(k) as determined by
counsel to the Company pursuant to a written opinion letter to such effect,
addressed to the Company’s transfer agent and to IFC, or (ii) such date as
all Shares registered on such Registration Statement have been resold (the
earlier to occur of (i) or (ii) is the “Registration Termination Date”).

(a)           If
a Registration Statement ceases to be effective for any reason at any time
prior to the applicable Registration Termination Date, the Company shall use
its reasonable best efforts to reinstate the effectiveness thereof.

(b)           The
Company shall supplement and amend the Registration Statement if required by
the rules, regulations or instructions applicable to the registration form used
by the Company for such Registration Statement, if required by the Securities
Act or, to the extent to which the Company does not reasonably object, as
requested by IFC.

(c)           All
Registration Expenses incurred in connection with the registrations pursuant to
this Section 5.2 shall be borne by the Company. “Registration Expenses”
shall mean all expenses incurred by the Company in complying with this
Section 5.2  including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company and Selling Expenses, as defined
hereinafter). All Selling Expenses incurred in connection with any
registrations hereunder, shall be borne by IFC. “Selling Expenses” shall mean
all brokerage and selling commissions applicable to a sale of the Shares
pursuant to the Registration Statement.

(d)           The
Company may suspend sales of Shares pursuant to the Registration Statement for
a period of not more than thirty (30) days during any six (6) month
period in the event it determines in good faith that such Registration
Statement contains or may contain an untrue statement of material fact or omits
or may omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided that the Company shall
promptly amend such Registration Statement in order to correct any untrue
statement and/or ensure that such Registration Statement is not misleading;
provided further that subject to the time limitations set forth above, the Company
may delay such amendment if the Company determines that such delay is in the
best interest of the Company in order to avoid premature public announcements
of potential acquisitions or other extraordinary transactions. At the time the
Registration Statement is declared effective, IFC shall be named as a selling
securityholder in the Registration Statement and the related prospectus in such
a manner as to permit IFC to deliver such prospectus to purchasers of Shares in
accordance with applicable law.

(e)           The
Company shall promptly furnish to IFC, upon request and without charge, (A) any
correspondence from the SEC or the staff of the SEC to the Company or its
representatives relating to any Registration Statement, and (B) after the
same is prepared and filed with the SEC, one copy of any Registration Statement
and any amendment(s) thereto,

 13
 

 

including financial statements and schedules, all documents
incorporated therein by reference and all exhibits.

(f)            The
Company shall furnish to IFC such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as it may reasonably request in order to
facilitate the disposition of the Shares owned by it.

(g)           The
Company shall use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by IFC,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.

(h)           The
Company shall immediately notify IFC at any time when a prospectus relating to
a Registration Statement which covers the Shares is required to be delivered
under the Securities Act regarding the happening of any event as a result of
which the prospectus included in such Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
provided, however, that, subject to Section 5.2(d) the Company shall
promptly amend such Registration Statement in order to correct any untrue
statement and/or ensure that such Registration Statement is not misleading.

5.3           Piggyback Registration.

(a)           Whenever
the Company proposes to file a registration statement under the Securities Act
with respect to an offering of Common Stock (i) following the first anniversary
of the Closing Date, for the Company’s own account (other than a registration
statement on Form S-4 or S-8 (or any substitute form that may be adopted by the
SEC)), or (ii) at any time, for the account of any of its holders of Common
Stock, the Company shall give notice of such proposed filing to IFC as soon as
practicable (but in no event less than thirty (30) days before the anticipated
filing date); provided, however, if any Person other than the Company is
permitted to participate in an offering described in clause (i) prior to the
first anniversary of the Closing Date, the Company shall give notice of such
proposed filing to IFC.  Such notice shall
offer to IFC the opportunity to register such Shares as IFC may request on the
same terms and conditions as the Company’s or such holders’ Common Stock.  At the request of IFC received by the Company
within twenty days after the receipt of such notice by the Company, the Company
shall include, subject to the terms and conditions hereof, the number of Shares
that IFC shall have requested to be so included (a “Piggyback Registration”).  The Company shall require the lead or
managing underwriter, if any, of any proposed underwritten offering to permit
the Shares requested to be included in the Piggyback Registration to include
such securities on the same terms and conditions as are applicable to the other
securities included therein.

(b)           If
the registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the IFC as a
part of the written notice given pursuant to Section 5.3(a).  In such event the right of IFC to

 14
 

 

registration pursuant to Section 5.3 shall be conditioned upon IFC’s
participation in such underwriting and the inclusion of IFC’s Shares in the
underwriting to the extent provided herein. 
IFC and all other Persons proposing to distribute their securities
through such under­writing shall (together with the Company and the other
Persons distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with a nation­ally recognized
underwriter selected for underwriting by the Company.  Notwithstanding anything to the contrary
contained herein, if the managing underwriter or underwriters of an offering
described in Section 5.3(a) shall advise the Company that the size of the
offering that IFC, the Company and/or any other Persons intend to make is such
that the success of the offering would be materially and adversely affected,
then the amount of securities to be offered for the account of IFC and for the
account of Persons other than the Company shall be reduced pro  rata
to the extent necessary to reduce the total amount of securities to be included
in such offering to the amount recommended by such managing underwriter or
underwriters.

5.4           Termination of Registration Rights.  All rights and obligations provided for in
Section 5.2 shall terminate on the date on which the Company has no
obligation to maintain the effectiveness of the Registration Statement;
provided that the rights of IFC under Section 5.2 shall terminate on the
earlier of (i) the date on which all Shares covered by the Registration
Statement may be sold without volume restrictions pursuant to either
Rule 144 or Rule 144(k) as determined by counsel to the Company pursuant
to a written opinion letter to such effect, addressed to the Company’s transfer
agent and to IFC, or (ii) such date as all Shares registered on such
Registration Statement have been resold.

5.5           Reports Under Securities Exchange Act of 1934.  With a view to making available to IFC the
benefits of Rule 144 and any other rule or regulation of the SEC that may
at any time permit IFC to sell securities of the Company to the public without
registration or pursuant to a Registration Statement, the Company agrees to:

(a)           use
its reasonable best efforts to make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times so
long as the Company remains subject to the periodic reporting requirements
under Sections 13 or 15(d) of the Exchange Act;

(b)           use
its reasonable best efforts to take such action as is necessary to enable IFC
to utilize Form S-1 or such other registration statement form as may be
applicable for the sale of its Shares;

(c)           use
its reasonable best efforts to file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and

(d)           furnish
to IFC, so long as IFC owns any Shares, forthwith upon request (i) a
written statement by the Company that it has complied with the reporting
requirements of the Securities Act and the Exchange Act, or that it qualifies
as a registrant whose securities may be resold pursuant to Form S-1 (or such
other form as the Company is then eligible to use), (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as
may be

 15
 

 

reasonably requested in availing IFC of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.

5.6           Preemptive Right. 
IFC shall have the right to purchase its pro rata share of New
Securities (as defined in this Section 5.6) which the Company may, from time to
time, propose to sell and issue.  IFC’s
pro rata share, for purposes of this right, is the ratio of the Common Stock
and Stock Equivalents owned by it immediately prior to the issuance of New
Securities to all Common Stock and Stock Equivalents outstanding immediately
prior to the issuance of New Securities. 
This pre-emptive right shall be subject to the following provisions:

(a)           “New
Securities” shall mean any Common Stock or Stock Equivalents of the Company
whether now authorized or not, and securities of any type whatsoever that are,
or may become, convertible into, or exchangeable or exercisable for, Common
Stock or Stock Equivalents; provided that the term “New Securities” does not
include: (i) the Shares and any Common Stock issuable upon conversion, exercise
or exchange of Stock Equivalents issued as of the date hereof; (ii) Common
Stock issued or issuable in connection with any pro rata stock split or stock
dividend of the Company; (iii) Common Stock or Stock Equivalents issued
pursuant to the acquisition of another Person by the Company by merger,
purchase of all or substantially all of the assets of such Person or other
transaction whereby the Company shall become directly or indirectly the owner
of more than 50% of the voting power of such Person; or (iv) Common Stock
issued or issuable under the Company’s current Long-Term Incentive Compensation
Plan.

(b)           In
the event the Company proposes to undertake an issuance of New Securities, it
shall give to IFC certified written notice of its intention, describing the
type of New Securities, and their price and the general terms upon which the
Company proposes to issue the same.  IFC
shall have forty-five (45) days after any such notice is mailed or delivered to
agree to purchase its pro rata share of such New Securities for the price and
upon the terms specified in such notice by giving written notice to the Company
and stating therein the quantity of New Securities to be purchased.

5.7           IFC Policy Covenants.

(a)           The
Company and its Subsidiaries shall:

(i)            undertake
their Operations in compliance with (i) the Action Plan and (ii) the IFC
Performance Standards;

(ii)           periodically
review the form of the Annual Monitoring Report and advise IFC as to whether
revision of the form is necessary or appropriate in light of changes to the
Operations of the Company or any Subsidiary, or in light of environmental or social
risks identified by the Company’s S&E Management System, and revise the
form as agreed with IFC;

(iii)          use
all reasonable efforts to ensure the continuing operation of the S&E
Management System to assess and manage the social and environmental performance
of the Operations in compliance with the IFC Performance Standards;

 16

 

(iv)          within
sixty (60) days after the end of each fiscal year, deliver to IFC an Annual
Monitoring Report confirming compliance with the Action Plan, the social and
environmental covenants set forth in this Section 5.7 and Applicable S&E
Law or, as the case may be, identifying any non-compliance or failure, and the
actions taken to remedy any such deficiency, in form and substance satisfactory
to IFC; provided the Company may supplement any Annual Monitoring Report with
such information as may be useful to enhance its clarity and/or to better
illustrate the Company’s performance over time (e.g., charts, graphs);

(v)           within
three days after its occurrence, notify IFC of any social, labor, health and
safety, security or environmental incident, accident or circumstance having, or
which could reasonably be expected to have, any material impact on the
implementation or operation of the Operations in compliance with the IFC
Performance Standards or a Material Adverse Effect, specifying in each case the
nature of the incident, accident, or circumstance and the impact or effect
arising or likely to arise therefrom, and the measures the Company is taking or
plans to take to address them and to prevent any future similar event; and keep
IFC informed of the on-going implementation of those measures;

(vi)          not
amend the Action Plan in any material respect without the prior written consent
of IFC; and

(vii)         not
undertake, or invest in any Person engaged in, any of the activities set forth
on Annex B.

(b)           The
Company hereby agrees that no party hereto shall make (and no party hereto
shall authorize or permit any Affiliate or any other Person acting on its
behalf to make) any Prohibited Payment. 
Each of the parties hereto further covenants that should IFC notify the
Company of its concern that there has been a violation of the provisions of
this paragraph, the Company shall cooperate in good faith with it and its
representatives in determining whether such a violation has occurred, and shall
respond promptly and in reasonable detail to any notice from IFC, and shall
furnish documentary support for such response upon IFC’s request.

(c)           The
Company will disclose the tax, royalty and other material payments made
annually by the Company or any Affiliate to local and/or national governments
in the Republic of Peru or the Republic of Ecuador under the applicable
upstream license contracts.

5.8           Minimum Insurance. 
The Company shall cause its operations in Peru to effect and maintain
the insurance coverage specified in Annex C at all appropriate and necessary
times during the period in which the IFC owns Common Stock, under forms of
policies and with insurers and reinsurers acceptable to IFC.

5.9           Minority
Rights.  So long as IFC holds Shares comprising 5% or
more of the Common Stock, neither the Company nor its Subsidiaries shall
approve, authorize or enter into a transaction with respect to any of the
following without the prior written consent of IFC (such consent not to be
unreasonably withheld):

 17
 

 

(a)           the
consolidation or merger of the Company or any Subsidiary; provided that IFC’s
consent will not be required in the case of a merger of the Company if the
shareholders of the Company immediately preceding such merger continue to hold
more than 50% of the equity of the surviving entity, or in the case of a merger
of a Subsidiary of the Company, the surviving entity in such merger continues
to be a Subsidiary of the Company;

(b)            the
sale of all or substantially all of the assets of the Company or any
Subsidiary; provided that IFC’s consent will not be required in the case of the
sale of assets to a direct or indirect Subsidiary of the Company;

(c)           the
transformation of the Company or any Subsidiary into another form of entity; or

(d)            change
the nature of the Company’s or any of its Subsidiaries’ business as currently
conducted.

5.10         Most Favored Nation (MFN) Status.  If the Company enters into any subscription
agreement, stock purchase agreement or other agreement on or after the date
hereof and prior to the Closing to or with any Person that establishes rights
or benefits in favor of such Person with respect to the acquisition of Common
Stock or Stock Equivalents that are more favorable in any material respect to
such Person than the rights and benefits established in favor of IFC herein, the
Company will extend to IFC such rights and benefits established by such
subscription agreement, stock purchase agreement  or other agreement.

5.11         Use of Proceeds. 
The Company shall not use the proceeds of the subscription of the Shares
by IFC in reimbursement of, or for expenditures in the territories of any
country which is not a member of the World Bank or for goods produced in or
services supplied from any such country.

Section 6.  Indemnification.

6.1           Indemnification. 
The Company will indemnify and hold harmless IFC, its officers,
directors, employees, partners, affiliates, agents, representatives and legal
counsel (collectively, “IFC Agents”) with respect to which registration,
qualification or compliance has been effected pursuant to Section 5.2 or
5.3, against all claims, losses, damages and liabilities (or actions in respect
thereof) against or incurred by IFC or IFC Agents arising out of or based on
(A) (i) any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other similar document or any amendments or supplements thereto (including any
related registration statement and amendments or supplements thereto,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made, and will reimburse IFC and IFC Agents for any reasonable legal or any
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damages, liability or action, as incurred, or
(ii) any violation by the Company of any federal, state or common law rule
or regulation applicable to the Company in connection with any such
registration, qualification or

 18
 

 

compliance, and will reimburse IFC, and IFC
Agents, for any legal and any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action; and (B) any breach of any covenant, agreement, representation or
warranty of the Company in this Agreement; provided, however, that the
Company shall not be liable under this Section 6: (a) in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by an instrument duly executed by
IFC and stated to be specifically for use in a Registration Statement,
(b) for any amount paid in settlement of claims without the Company’s
written consent (which consent shall not be unreasonably withheld), or
(c) with respect to clause (B) of this Section 6.1, to the extent that it
is finally judicially determined that such claim, loss, damage, liability or
expense resulted primarily from the willful misconduct, gross negligence or bad
faith of IFC; provided, further, that if and to the extent that such
indemnification is held, by final judicial determination to be unenforceable,
in whole or in part, for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of such indemnified claim, loss,
damage, liability or expense.  In
connection with the obligation of the Company to indemnify for expenses as set
forth in clause (B) of this Section 6.1, if an indemnified party is reimbursed
hereunder for any expenses, such reimbursement of expenses shall be refunded to
the extent it is finally judicially determined that the claim, loss, damage,
liability or expense in question resulted primarily from the willful
misconduct, gross negligence or bad faith of such indemnified party.

6.2           Notification; Procedure.

(a)           IFC
shall give notice to the Company promptly after it has received written notice
of any claim as to which indemnity may be sought, and shall permit the Company
to assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Company, who shall conduct the defense of such
claim or litigation, shall be approved by IFC (whose approval shall not be
unreasonably withheld).  IFC may
participate in such defense with separate counsel at its expense; provided,
however, that the Company shall bear the expense of such separate counsel if
representation of both parties by the same counsel would be inappropriate due
to actual or potential conflicts of interest between the Company and IFC.  The failure of IFC to give notice within a
reasonable period of time as provided herein shall relieve the Company of its
obligations under this Section 6, with respect to any expenses incurred by
IFC or IFC’s Agents before the date of such notice and to the extent that such
failure to give notice shall materially adversely prejudice the Company in the
defense of any such claim or any such litigation.  The Company, in the defense of any such claim
or litigation, shall not, except with the consent of IFC, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to IFC of a
release from all liability in respect to such claim or litigation.

(b)           If
the indemnification provided for in this Section 6 is held to be
unavailable to IFC with respect to any loss, liability, claim, damage or
expense, then the Company, in lieu of indemnifying IFC hereunder, shall
contribute to the amount paid or payable by IFC as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the Company on the one hand and of IFC on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage or expense as well as any other relevant
equitable considerations; provided, that in no event shall

 19
 

 

any contribution by IFC under this Section 6 exceed the net
proceeds from the offering received by IFC. The relative fault of the Company
and of IFC shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state
a material fact relates to information supplied by the Company or by IFC and
the parties’ relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.

(c)           All
indemnification rights hereunder shall survive the execution and delivery of
the Transaction Documents and the subscription contemplated herein for the
applicable statute of limitations, notwithstanding any inquiry or examination
made for or on behalf of, or any knowledge of IFC or the acceptance by IFC of
any certificate or opinion.

(d)           IFC
shall furnish to the Company such information regarding IFC and the
distribution proposed by IFC as the Company may reasonably request in writing
and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Section 6.

Section 7.  Survival of Representations and Warranties.  All representations, warranties and
agreements made by the Company and IFC in this Agreement or in any certificate
or other instrument delivered pursuant hereto shall survive the Closing and any
investigation and discovery by the Company or by IFC, as the case may be, made
at any time with respect thereto.

Section 8.  Miscellaneous Provisions.

8.1           Deliveries. 
The Company and IFC hereby covenant and agree to use their respective
reasonable best efforts to perform each of their obligations hereunder, to
deliver all certificates and to satisfy all other conditions set forth in this
Agreement and to close the transactions contemplated by this Agreement on the
Closing Date.

8.2           Successors and Assigns.  This Agreement is executed by, and shall be
binding upon and inure to the benefit of, the parties hereto and each of their
respective successors and assigns; provided, however, that
neither this Agreement nor any right pursuant hereto nor interest herein shall
be assignable except (a) by the Company with the consent of IFC, (b) by
the Company in connection with a merger, consolidation or sale of all or
substantially all of its assets, (c) by IFC with the prior written consent
of the Company or (d) the assignment of the rights of IFC set forth in
Sections 5.1 through 5.6 by IFC in connection with a sale or other transfer of
the Shares.  None of the provisions of
this Agreement shall be for the benefit of or enforceable by any other person.

8.3           Notices.  All
notices, demands and other communications provided for or permitted hereunder
shall be made in writing and shall be by registered or certified first-class
mail, return receipt requested, telecopier, courier service or personal
delivery:

 20
 

 

if to IFC at the following address:

International Finance
Corporation

2121 Pennsylvania Avenue, N.W.

Washington, D.C. 20433

United States of America

Facsimile:  +1 (202) 974-4768 

Attention:  Director

Oil Gas, Mining and Chemicals Department

	
  if to the Company at the
  following address:

  	
   

  	
  with a copy to:

  
	
  BPZ Energy, Inc.

  	
   

  	
  Adams and Reese LLP

  
	
  580 Westlake
  Park Blvd., Suite 525

  	
   

  	
  4400 One Houston Center

  
	
  Houston, Texas
  77079

  	
   

  	
  1221 McKinney

  
	
  Attn: Vice
  President — Finance and Chief

  	
   

  	
  Houston, Texas 77010

  
	
  Accounting
  Officer, Corporate Secretary

  	
   

  	
  Attn: Mark W. Coffin

  
	
  Fax: (281) 556-6377

  	
   

  	
  Fax: (713) 652-5152

  

 

All such notices and
communications shall be deemed to have been duly given: when delivered by hand,
if personally delivered; when delivered by courier, if delivered by commercial
overnight courier service; five business days after being deposited in the
mail, postage prepaid, if mailed; and when receipt is acknowledged, if
telecopied.

8.4           Expenses. 
The Company shall pay to IFC or as IFC may direct the fees and expenses
of IFC and its counsel incurred in connection with:

(a)           the preparation and/or review,
execution and, where appropriate, registration of this Agreement and any other
documents related to this Agreement;

(b)           the giving of any legal opinions
expressly required by IFC in this Agreement; and

(c)           any amendment, supplement or
modification to, or waiver under, this Agreement.

8.5           Counterparts; Facsimile Signature Pages.  This Agreement may be executed by facsimile
signatures. This Agreement may be executed in any number of counterparts, and
each such counterpart will for all purposes be deemed an original, and all such
counterparts shall constitute one and the same instrument.

8.6           Governing Law; Forum.

(a)           This
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of New York applicable to contracts entered into and to
be wholly performed therein.

 21
 

 

(b)           Any
dispute, controversy or claim arising out of, relating to, or in connection
with this Agreement, including any question regarding its existence, validity
or termination, shall be referred to and finally resolved by arbitration.  The arbitration shall be conducted in
accordance with the Rules of Arbitration of the International Chamber of
Commerce (the “ICC”) in effect at the time the arbitration is initiated, except
as they may be modified herein or by mutual agreement of the parties.  The place of arbitration shall be New York,
New York.  The arbitration shall be
conducted in the English language.

(c)           The
arbitration shall be conducted by three arbitrators.  The claimant shall nominate one arbitrator
and the respondent shall nominate another arbitrator.  If either side fails to nominate an
arbitrator within 30 days of receipt of the request for arbitration,  then that arbitrator shall be nominated by
the ICC.  The first two arbitrators
nominated in accordance with this provision shall nominate a third arbitrator
within 30 days after the nomination of the later-nominated of those two
arbitrators.  When the third arbitrator
has accepted the nomination, the two arbitrators making the nomination shall
promptly notify the parties of the nomination. 
If the first two arbitrators nominated fail to (i) nominate a third
arbitrator within the time period prescribed above or (ii) notify the parties
of the acceptance of a third arbitrator within 10 days after the time period
prescribed above, then the ICC shall nominate the third arbitrator and shall
promptly notify the parties of the nomination. 
The third arbitrator shall act as chair of the tribunal.

(d)           The
arbitration tribunal shall have the authority to make such orders for interim
relief, including injunctive relief, as it may deem appropriate, and any
interim measures ordered by the arbitrators shall be specifically enforced by
any court of competent jurisdiction. 
Each party hereto retains the right to seek interim measures from a
judicial authority, and any such request shall not be deemed incompatible with
the agreement to arbitrate or a waiver of the right to arbitrate.  The parties agree that, to the extent
permitted by applicable law, any ruling by the arbitration tribunal on interim
measures shall be deemed to be a final award with respect to the subject matter
of the ruling and shall be fully enforceable as such.

(e)           Subject
to paragraph (h) below, the arbitration tribunal shall have the authority to
order such production of documents as may reasonably be requested by any party
or by the tribunal itself.

(f)            The
arbitration award shall be in writing, state the reasons for the award, and be
final and binding on the parties.  The
award may include an award of costs, including reasonable attorneys’ fees and
disbursements.  Judgment upon the award
may be entered by any court having jurisdiction thereof or having jurisdiction
over the relevant party or its assets.

(g)           Each
party shall use its commercially reasonable efforts to ensure the arbitration
is concluded as quickly and as efficiently as possible.

(h)           Notwithstanding
anything to the contrary contained in this Section 8.6, the parties acknowledge
and agree that neither any provision of this Section 8.6 nor the submission by
IFC to any courts of competent jurisdiction pursuant thereto shall constitute a
waiver either before any Authority or court of law of any of the privileges and
immunities set

 22
 

 

forth in IFC’s Articles of Agreement, including without limitation (i)
the immunity of all of the assets of IFC from all forms of seizure, attachment
or execution before the delivery of final judgment against IFC, (ii) the
immunity of all of the assets of IFC from search, requisition, confiscation,
expropriation or any other forms of seizure by executive or legislative action,
(iii) the inviolability of IFC’s archives and (iv) the freedom of IFC’s assets
from restrictions of any nature.

(i)            To
the extent that the Company may, in any proceeding brought arising out of or in
connection with this Agreement, or the breach, termination or invalidity
hereof, be entitled to the benefit of any provision requiring IFC in such suit,
action or proceeding to post security for the costs of such party or parties,
or to post a bond or to take similar action, the Company hereby irrevocably
waives such benefit, in each case to the fullest extent now or in the future
permitted under the applicable laws and regulations.

8.7           Attorneys’ Fees. 
If any party should institute any action to enforce or interpret any
term or provision of this Agreement, the party prevailing in such action, after
all appeals have been exhausted, shall be entitled to its reasonable attorneys’
fees, out-of-pocket disbursements and all other expenses from the
non-prevailing party in such action.

8.8           Entire Agreement. 
This Agreement (together with all Exhibits and Schedules hereto)
constitutes the entire understanding and agreement between the parties hereto
with respect to the subject matter hereof and supersedes all prior and
contemporaneous written and oral negotiations, discussions, agreements and
understandings with respect to such subject matter.

8.9           Section Headings.  The section and subsection headings contained
in this Agreement are included for convenience only and form no part of the
agreement between the parties.

8.10         Amendment.  Any
amendment of any provision of this Agreement shall be in writing and signed by
all parties.

8.11         Remedies and Waivers. 
No failure or delay by IFC in exercising any power, remedy, discretion,
authority or other rights under this Agreement shall waive or impair that or
any other right of IFC.  No single or
partial exercise of any right shall preclude its additional or future exercise.
No such waiver shall waive any other right under this Agreement.  All waivers or consents given under this
Agreement shall be in writing.

8.12         Interpretation. 
IFC and the Company have participated in the negotiation and drafting of
this Agreement. Accordingly, each of the parties hereby waives any statutory
provision, judicial precedent or other rule of law to the effect that
contractual ambiguities are to be construed against the party who shall have
drafted the same.

8.13         Severability. 
Whenever possible, each provision of this Agreement shall be interpreted
in such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be or become prohibited or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement, except to the

 23
 

 

extent that any provision would clearly be
contemplated by the parties to be conditioned upon the validity and
enforceability of such invalid or prohibited provision.

8.14         Public Announcements. 
The Company may, at its option, issue a press release regarding the
closing of this offering within a reasonable period after the Closing. Except
for such disclosure as the Company is advised by counsel is required to be
included in documents filed with the Securities and Exchange Commission or
otherwise required by law, the Company shall not use the name of, or make
reference to, IFC or any of its Affiliates in any press release or in any
public manner (including any reports or filings made by the Company under the
Exchange Act) without IFC’s prior written consent which consent shall not be
unreasonably withheld.

8.15         Additional Undertakings.  The Company hereby agrees to take whatever
additional action and to execute whatever additional documents IFC may
reasonably deem necessary or advisable in order to carry out or effect one or
more of the obligations or restrictions imposed on the parties hereto pursuant
to the express provisions of this Agreement.

8.16         English Language. 
All documents to be furnished or communications to be given or made
under this Agreement shall be in the English language or, if in another
language, shall be accompanied by a translation into English certified by an
authorized officer of the Company, which translations shall be the governing
version between the Company and IFC.

8.17         Definitions. 
Wherever used in this Agreement, unless the context otherwise requires,
terms defined in the Recitals shall have the same meanings unless otherwise
defined herein, and the terms set forth on Annex A hereto shall have meanings
indicated thereon.

 24
 

 

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

BPZ ENERGY, INC.,

a Colorado corporation

By:
         /s/ Manuel Pablo
Zúñiga-Pflücker    

Name:  Manuel Pablo Zúñiga-Pflücker

Title:  President and Chief Executive
Officer

580 Westlake Park Blvd., Suite 525

Houston, Texas 77079

INTERNATIONAL FINANCE
CORPORATION

By:
         /s/ Rashad-Rudolf Kaldany                

Name:  Rashad-Rudolf Kaldany

Title:  Director

Oil Gas, Mining and Chemicals Department

 25

 

ANNEX A

Definitions

“Action Plan” shall mean the plan or plans developed by the Company
setting out specific social and environmental measures to be undertaken by the
Company, to enable the Operations to comply with the IFC Performance Standards,
as such may be amended or supplemented from time to time with IFC’s consent.

“Affiliate” shall mean with respect to any Person, shall mean any
Person that, along or together with any other Person, directly or indirectly,
Controls, is Controlled by, or is under common Control with, such Person.

“Annual Monitoring Report” shall mean the annual monitoring report
setting forth the specific social, environmental and developmental impact
reporting requirements of the Company and its Subsidiaries in respect of their
Operations, as such may be amended or supplemented from time to time with IFC’s
consent.

“Applicable S&E Law” shall mean all applicable statutes, laws,
ordinances, rules and regulations of the Republic of Peru and Republic of
Ecuador, including but not limited to any license, permit or other governmental
Authority imposing liability or setting standards of conduct concerning any
environmental, social, labor, health and safety or security risks of the type
contemplated by the IFC Performance Standards.

“Authority” shall mean any
national, supranational, regional or local government or governmental,
administrative, fiscal, judicial, or government-owned body, department,
commission, authority, tribunal, agency or entity, or central bank (or any
Person, whether or not government owned and howsoever constituted or called,
that exercises the functions of a central bank).

“Control” shall mean the possession, directly or indirectly, by a
Person of the power to direct or cause the direction of the management and
policies of another Person through the ownership of voting securities or
otherwise; provided that the direct or indirect ownership of more than
twenty-five percent (25%) of the voting share capital of a Person is deemed to
constitute control of that Person, and “Controlling” and “Controlled” have
corresponding meanings; provided, further, that in no event shall
IFC be deemed to control the Company as a result of this definition or
otherwise.

“Co-Sale Agreement” shall mean the Co-Sale Agreement to be entered into
between IFC, the Company, Manuel Pablo Zúñiga-Pflücker and Fernando Zúñiga y
Rivero on the Closing Date.

“Encumbrance” shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right of way,
encroachment, private building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other
title.

 26
 

 

“IFC Performance Standards” shall mean IFC’s Performance Standards on
Social & Environmental Sustainability, dated April 30, 2006, copies of
which have been delivered to and receipt of which have been acknowledged by the
Company.

“Material Adverse Effect” shall mean a material adverse effect on (i)
the Company’s (on a fully consolidated basis) business prospects, results of
operations, or financial condition; or (ii) the validity or enforceability of,
or the ability of the Company (on a fully consolidated basis) to comply with
its obligations under this Agreement or any other Transaction Document.

“Official” shall mean any officer of a political party or candidate for
political office in the Republic of Peru or the Republic of Ecuador or any
officer or employee (i) of the central, state or local government (including
any legislative, judicial, executive or administrative department, agency or
instrumentality thereof) or (ii) of a public international organization.

“Operations” shall mean the operations, activities and facilities of
the Company and its Subsidiaries (including the design, construction,
operation, maintenance, management and monitoring thereof, as applicable).

“Person” shall mean any natural person, corporation, company,
partnership, firm, voluntary association, joint venture, trust, unincorporated
organization, Authority or any other entity whether acting in an individual,
fiduciary or other capacity.

“Prohibited Payments” shall mean any offer, gift, payment, promise to
pay or authorization of the payment of any money or anything of value, directly
or indirectly, to or for the use or benefit of any Official (including to or
for the use or benefit of any other Person if the Company knows, or has
reasonable grounds for believing, that the other Person would use such offer,
gift, payment, promise or authorization of payment for the benefit of any such
Official), for the purpose of influencing any act or decision or omission of
any Official in order to obtain, retain or direct business to, or to secure any
improper benefit or advantage for, the Company, its Affiliates or any other
Person; provided that any such offer, gift, payment, promise or authorization
of payment shall not be considered a Prohibited Payment if, in IFC’s reasonable
opinion, it (i) is lawful under applicable written laws and regulations or (ii)
is made for the purpose of expediting or securing the performance of a routine
governmental action (as such term is construed under applicable law).

“S&EA” shall mean the social and environmental assessment of the
Operations, prepared by the Company in accordance with the IFC Performance
Standards.

S&E Management System” shall mean the social and environmental
management system of the Company that enables the Company to identify, assess
and manage risks in respect of the Operations on an ongoing basis.

“Stock Equivalents” shall mean preference shares, bonds, loans,
warrants or other similar instruments or securities which are convertible into
or exercisable or exchangeable for, or which carry a right to subscribe for or
purchase, Common Stock of the Company convertible into or exercisable or
exchangeable for Common Stock, in each case, on an as converted basis.

 27
 

 

“Subsidiary” shall mean, with respect to any Person, (i) any
corporation more than 50% of whose stock of any class or classes having by the
terms thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time stock of any class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is owned by such Person directly or
indirectly through one or more Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
directly or indirectly through one or more Subsidiaries of such Person has more
than a 50% equity interest.

“Transaction Documents” shall mean the Articles of Incorporation of the
Company, the Co-Sale Agreement, this Agreement, and all exhibits, schedules,
and certificates attached or delivered pursuant thereto.

“World Bank” shall mean the International Bank for Reconstruction and
Development, an organization established by Articles of Agreement among its
member countries.

In addition to the terms defined above, the
following terms shall have the respective meanings assigned thereto in the
Sections indicated below.

	
  Defined Term

  	
   

  	
   

  	
   

  	
  Section

  	
   

  	
  Defined Term

  	
   

  	
   

  	
   

  	
  Section

  
	
  Agreement

  	
   

  	
  Preamble

  	
   

  	
  Piggyback Registration

  	
   

  	
  §5.3(a)

  
	
  Balance Sheet
  Date

  	
   

  	
  §2.9

  	
   

  	
  Plan

  	
   

  	
  §2.15

  
	
  Closing

  	
   

  	
  §1.1

  	
   

  	
  Proprietary Rights

  	
   

  	
  §2.18

  
	
  Closing Date

  	
   

  	
  §1.1

  	
   

  	
  Public Filings

  	
   

  	
  §2.24

  
	
  Common Stock

  	
   

  	
  Recitals

  	
   

  	
  Public Filing Rules

  	
   

  	
  §2.24

  
	
  Company

  	
   

  	
  Preamble

  	
   

  	
  Registration Expenses

  	
   

  	
  §5.2(c)

  
	
  Company
  Financial Statements

  	
   

  	
  §2.8

  	
   

  	
  Registration Statement

  	
   

  	
  §5.2

  
	
  Contractual
  Obligations

  	
   

  	
  §2.4

  	
   

  	
  Registration Statement
  Filing Deadline

  	
   

  	
  §5.2

  
	
  Effectiveness
  Deadline

  	
   

  	
  §5.2

  	
   

  	
  Registration
  Termination Date

  	
   

  	
  §5.2

  
	
  Exchange Act

  	
   

  	
  §2.24

  	
   

  	
  Related Party

  	
   

  	
  §2.22

  
	
  GAAP

  	
   

  	
  §2.8

  	
   

  	
  Requirement of Law

  	
   

  	
  §2.4

  
	
  ICC

  	
   

  	
  §8.6

  	
   

  	
  Rule 144

  	
   

  	
  §3.5

  
	
  IFC

  	
   

  	
  Preamble

  	
   

  	
  Selling Expenses

  	
   

  	
  §5.2(c)

  
	
  IFC Agents

  	
   

  	
  §6.1

  	
   

  	
  Shares

  	
   

  	
  §1.1

  
	
  Securities Act

  	
   

  	
  §1.2

  	
   

  	
  Subsidiary

  	
   

  	
  §2.1

  
	
  New Securities

  	
   

  	
  §5.6(a)

  	
   

  	
   

  	
   

  	
   

  
	
  November
  Registration Statement

  	
   

  	
  §2.25

  	
   

  	
   

  	
   

  	
   

  

 

 

 28

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