SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | |
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2003 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File No. 1-12644
Financial Security Assurance Holdings Ltd.
(Exact name of registrant as specified in its charter)
New York | 13-3261323 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) |
350 Park Avenue
New York, New York 10022
(Address of principal executive offices)
(212) 826-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
At August 12, 2003, there were 33,220,337 outstanding shares of Common Stock of the registrant (excludes 297,658 shares of treasury stock).
Item 1. Financial Statements
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
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June 30,
2003 |
December 31,
2002 |
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ASSETS | ||||||||||
Bonds at market value (amortized cost of $2,999,595 and $2,615,173) | $ | 3,269,906 | $ | 2,829,763 | ||||||
Short-term investments | 243,091 | 375,688 | ||||||||
Guaranteed investment contract bond portfolio at market value (amortized cost of $2,292,658 and $1,840,949) | 2,287,560 | 1,827,312 | ||||||||
Guaranteed investment contract bond portfolio pledged as collateral at market value (amortized cost of $108,066) | 102,428 | |||||||||
Guaranteed investment contract short-term investment portfolio | 134,626 | 4,632 | ||||||||
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Total investments | 6,037,611 | 5,037,395 | ||||||||
Cash | 13,187 | 31,368 | ||||||||
Securitized loans | 424,860 | 437,462 | ||||||||
Securities purchased under agreements to resell | 20,000 | 90,000 | ||||||||
Deferred acquisition costs | 261,249 | 253,777 | ||||||||
Prepaid reinsurance premiums | 630,799 | 557,659 | ||||||||
Reinsurance recoverable on unpaid losses | 78,459 | 75,950 | ||||||||
Investment in unconsolidated affiliates | 127,215 | 115,833 | ||||||||
Other assets | 451,953 | 428,039 | ||||||||
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TOTAL ASSETS | $ | 8,045,333 | $ | 7,027,483 | ||||||
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LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS' EQUITY | ||||||||||
Deferred premium revenue | $ | 1,641,271 | $ | 1,450,211 | ||||||
Losses and loss adjustment expenses | 237,885 | 223,618 | ||||||||
Guaranteed investment contracts | 2,888,633 | 2,449,033 | ||||||||
Deferred federal income taxes | 152,068 | 124,310 | ||||||||
Securities sold under agreements to repurchase | 96,340 | |||||||||
Ceded reinsurance balances payable | 64,178 | 79,870 | ||||||||
Notes payable | 430,000 | 430,000 | ||||||||
Deferred compensation | 94,684 | 83,031 | ||||||||
Minority interest | 57,561 | 52,841 | ||||||||
Payable for securities purchased | 124,331 | 10,490 | ||||||||
Accrued expenses and other liabilities | 220,188 | 255,709 | ||||||||
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TOTAL LIABILITIES AND MINORITY INTEREST | 6,007,139 | 5,159,113 | ||||||||
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Common stock (200,000,000 shares authorized; 33,517,995 issued; par value of $.01 per share) | 335 | 335 | ||||||||
Additional paid-in capital | 900,484 | 903,494 | ||||||||
Accumulated other comprehensive income (net of deferred income taxes of $85,972 and $66,270) | 173,603 | 134,683 | ||||||||
Accumulated earnings | 963,772 | 829,858 | ||||||||
Deferred equity compensation | 23,445 | 23,445 | ||||||||
Less treasury stock at cost (297,658 shares held) | (23,445 | ) | (23,445 | ) | ||||||
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TOTAL SHAREHOLDERS' EQUITY | 2,038,194 | 1,868,370 | ||||||||
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TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS' EQUITY | $ | 8,045,333 | $ | 7,027,483 | ||||||
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See notes to condensed consolidated financial statements.
1
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Dollars in thousands)
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Three Months Ended
June 30, |
Six Months Ended
June 30, |
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2003
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2002
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2003
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2002
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Revenues: | ||||||||||||||||
Net premiums written | $ | 187,884 | $ | 125,186 | $ | 280,069 | $ | 220,427 | ||||||||
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Net premiums earned | 88,158 | 77,053 | 168,248 | 146,751 | ||||||||||||
Net investment income | 37,776 | 35,100 | 74,309 | 68,498 | ||||||||||||
Net realized gains | 2,829 | 22,874 | 3,893 | 23,957 | ||||||||||||
Guaranteed investment contract net interest income | 11,949 | 5,143 | 19,906 | 8,175 | ||||||||||||
Guaranteed investment contract net realized losses | (1,058 | ) | (1,096 | ) | ||||||||||||
Net realized and unrealized gains (losses) on derivative instruments | 2,365 | (16,470 | ) | 2,140 | (24,698 | ) | ||||||||||
Other income | 451 | 1,036 | 1,627 | 1,182 | ||||||||||||
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TOTAL REVENUES | 142,470 | 124,736 | 269,027 | 223,865 | ||||||||||||
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Expenses: | ||||||||||||||||
Losses and loss adjustment expenses | 6,595 | 39,207 | 12,895 | 42,119 | ||||||||||||
Interest expense | 7,085 | 5,881 | 14,171 | 11,742 | ||||||||||||
Policy acquisition costs | 13,537 | 13,512 | 26,936 | 25,877 | ||||||||||||
Guaranteed investment contract net interest expense | 6,916 | 2,844 | 14,229 | 5,523 | ||||||||||||
Other operating expenses | 17,339 | 10,721 | 32,939 | 20,984 | ||||||||||||
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TOTAL EXPENSES | 51,472 | 72,165 | 101,170 | 106,245 | ||||||||||||
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Minority interest | (2,293 | ) | (2,155 | ) | (4,720 | ) | (4,215 | ) | ||||||||
Equity in earnings of unconsolidated affiliates | 58 | 5,836 | 9,386 | 12,880 | ||||||||||||
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INCOME BEFORE INCOME TAXES | 88,763 | 56,252 | 172,523 | 126,285 | ||||||||||||
Provision for income taxes | 20,674 | 10,847 | 38,609 | 26,760 | ||||||||||||
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NET INCOME | 68,089 | 45,405 | 133,914 | 99,525 | ||||||||||||
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Other comprehensive income, net of tax: | ||||||||||||||||
Unrealized gains on securities: | ||||||||||||||||
Holding gains arising during period | 38,703 | 40,435 | 41,398 | 34,920 | ||||||||||||
Less: reclassification adjustment for gains included in net income | 2,152 | 16,779 | 2,478 | 17,555 | ||||||||||||
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Other comprehensive income | 36,551 | 23,656 | 38,920 | 17,365 | ||||||||||||
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COMPREHENSIVE INCOME | $ | 104,640 | $ | 69,061 | $ | 172,834 | $ | 116,890 | ||||||||
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See notes to condensed consolidated financial statements.
2
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
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Common
Stock |
Additional
Paid-In Capital |
Accumulated
Other Comp- rehensive Income |
Accumulated
Earnings |
Deferred
Equity Compen- sation |
Treasury
Stock |
Total
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BALANCE, December 31, 2002 | $ | 335 | $ | 903,494 | $ | 134,683 | $ | 829,858 | $ | 23,445 | $ | (23,445 | ) | $ | 1,868,370 | |||||||
Net income | 133,914 | 133,914 | ||||||||||||||||||||
Capital issuance costs | (3,010 | ) | (3,010 | ) | ||||||||||||||||||
Net unrealized gain on investments, net of tax | 38,920 | 38,920 | ||||||||||||||||||||
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BALANCE, June 30, 2003 | $ | 335 | $ | 900,484 | $ | 173,603 | $ | 963,772 | $ | 23,445 | $ | (23,445 | ) | $ | 2,038,194 | |||||||
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See notes to condensed consolidated financial statements.
3
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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Six Months Ended June 30,
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2003
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2002
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Cash flows from operating activities: | |||||||||
Premiums received, net | $ | 267,276 | $ | 221,449 | |||||
Policy acquisition and other operating expenses paid, net | (103,881 | ) | (90,760 | ) | |||||
Recoverable advances recovered | 683 | 3,341 | |||||||
Losses and loss adjustment expenses paid, net | (1,490 | ) | (4,018 | ) | |||||
Net investment income received | 96,902 | 76,412 | |||||||
Federal income taxes paid | (39,320 | ) | (52,718 | ) | |||||
Interest paid | (13,102 | ) | (9,233 | ) | |||||
Interest paid on guaranteed investment contracts | (19,490 | ) | (12,347 | ) | |||||
Other | 15,914 | 10,896 | |||||||
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Net cash provided by operating activities | 203,492 | 143,022 | |||||||
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Cash flows from investing activities: | |||||||||
Proceeds from sales of bonds | 523,963 | 541,205 | |||||||
Proceeds from sales of guaranteed investment contract bonds | 527,949 | ||||||||
Purchases of bonds | (861,484 | ) | (671,825 | ) | |||||
Purchases of guaranteed investment contract bonds | (1,009,110 | ) | (1,085,600 | ) | |||||
Purchases of property and equipment | (677 | ) | (4,531 | ) | |||||
Securities purchased under agreements to resell | 70,000 | ||||||||
Net decrease (increase) in guaranteed investment contract short-term investments | (129,994 | ) | 224,640 | ||||||
Net decrease in short-term investments | 133,006 | 8,927 | |||||||
Net decrease (increase) in other investments | 32,811 | (1,340 | ) | ||||||
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Net cash used for investing activities | (713,536 | ) | (988,524 | ) | |||||
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Cash flows from financing activities: | |||||||||
Dividends paid | (11,709 | ) | |||||||
Capital issuance costs | (3,010 | ) | |||||||
Proceeds from securities sold under agreements to repurchase | 96,340 | 165,408 | |||||||
Repayment of guaranteed investment contracts | (546,087 | ) | (167,897 | ) | |||||
Proceeds from issuance of guaranteed investment contracts | 944,620 | 877,846 | |||||||
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Net cash provided by financing activities | 491,863 | 863,648 | |||||||
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Net increase (decrease) in cash | (18,181 | ) | 18,146 | ||||||
Cash at beginning of period | 31,368 | 7,784 | |||||||
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Cash at end of period | $ | 13,187 | $ | 25,930 | |||||
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See notes to condensed consolidated financial statements.
4
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance holding company incorporated in the State of New York. The Company is primarily engaged (through its insurance company subsidiaries, collectively known as FSA) in the business of providing financial guaranty insurance on asset-backed and municipal obligations. The Company also offers guaranteed investment contracts (GICs) through its wholly owned subsidiaries, FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, CMS). The Company is an indirect subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The accompanying condensed consolidated financial statements have not been audited by independent accountants in accordance with auditing standards generally accepted in the United States of America but, in the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2003 and for all periods presented, have been made. The December 31, 2002 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2003 and 2002 are not necessarily indicative of the operating results for the full year. Certain prior-year balances have been reclassified to conform to the 2003 presentation.
3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company establishes a case basis reserve for unpaid losses and loss adjustment expenses for the present value of the estimated loss when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using the then current risk-free rates ranging from 4.77% to 6.1%. For collateralized debt obligations, a case basis reserve is recorded to the extent that the overcollateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100% and there is a projected loss when calculating the present value of cash flows.
The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case basis reserves or to new case basis reserves to be established in the future. The general reserve is calculated by applying loss factors to the Company's total net par underwritten and discounting the result at the then current risk-free rates. The loss factors used for this purpose has been determined based upon an independent rating agency study of bond defaults and the Company's portfolio characteristics and history.
Management of the Company periodically evaluates its estimates for losses and loss adjustment expenses and establishes reserves that management believes are adequate to cover the net present value of the ultimate net cost of claims.
5
4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
FSA has insured a number of credit default swaps that it intends, in each case, to hold for the full term of the agreement. It considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred and to record changes in fair value as incurred. The Company recorded $12.5 million and $23.7 million in net earned premium under these agreements for the three months and six months ended June 30, 2003, respectively and $8.3 million and $15.3 million in net earned premium for the three and six months ended June 30, 2002, respectively. The changes in fair value, which were gains of $2.6 million and $4.1 million for the three and six months ended June 30, 2003, respectively, and losses of $0.5 million and $4.9 million for the three and six months ended June 30, 2002, respectively, were recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income and in other assets or liabilities. The losses or gains recognized by recording these contracts at fair value will be determined each quarter based upon market pricing of Super Triple-A (defined as having first-loss protection of 1.3 times the level required for a Triple-A rating) swap guarantees. The Company does not believe the fair value adjustments are an indication of potential claims under FSA's guarantees. The inception-to-date net unrealized loss was recorded in other liabilities and was $40.1 million and $44.2 million at June 30, 2003 and December 31, 2002, respectively.
Derivative instruments, which are primarily designated as fair-value hedges, are entered into to manage the interest rate exposure of the Company's GICs and GIC bond portfolio and are recorded at fair value. These derivatives generally include interest rate futures and interest rate swap agreements, which are primarily utilized to convert the Company's fixed-rate obligations on its GICs and GIC bond portfolio into floating-rate obligations. The gains and losses relating to these fair-value hedges are included in guaranteed investment contract net interest income and net interest expense, as appropriate, along with the offsetting change in fair value of the hedged item attributable to the risk being hedged, in the consolidated statements of operations and comprehensive income. For the three months and six months ended June 30, 2003, the Company recorded a net loss of $1.9 million and $6.4 million, respectively and for the three and six months ended June 30, 2002, the Company recorded a net gain of $1.6 million and $2.2 million, respectively, relating to the ineffectiveness of these hedges. In addition, there are derivatives that were purchased for the purpose of hedging the interest rate risk on GICs that have not yet been designated to specific GICs and as a result hedge accounting is not permitted. The change in fair-value of these derivatives was a loss of $2.5 million for the three and six months ended June 30, 2003 and was recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income.
5. OUTSTANDING EXPOSURE
The Company limits its exposure to losses from writing financial guarantees by underwriting investment-grade obligations, diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations, as well as through reinsurance. The principal amounts of insured obligations in the asset-backed insured portfolio are backed by the following types of collateral (in millions) at June 30, 2003 and December 31, 2002:
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Net of Amounts Ceded
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Ceded
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2003
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2002
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2003
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2002
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Residential mortgages | $ | 19,609 | $ | 23,379 | $ | 4,607 | $ | 5,480 | |||||
Consumer receivables | 15,593 | 19,454 | 5,108 | 5,954 | |||||||||
Pooled corporate obligations | 79,871 | 78,113 | 12,572 | 13,007 | |||||||||
Investor-owned utility obligations | 545 | 619 | 312 | 348 | |||||||||
Other asset-backed obligations (1) | 4,483 | 4,528 | 3,662 | 3,225 | |||||||||
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Total asset-backed obligations | $ | 120,101 | $ | 126,093 | $ | 26,261 | $ | 28,014 | |||||
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6
Net of amounts ceded and ceded amounts are not necessarily reflective of the risk retained by FSA since FSA employs first loss reinsurance on a material portion of its asset-backed business.
The principal amount of insured obligations in the municipal insured portfolio includes the following types of issues (in millions) at June 30, 2003 and December 31, 2002:
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Net of Amounts Ceded
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Ceded
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Types of Issues
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2003
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2002
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2003
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2002
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General obligation bonds | $ | 61,127 | $ | 54,563 | $ | 18,986 | $ | 18,388 | |||||
Housing revenue bonds | 6,934 | 5,833 | 1,848 | 1,687 | |||||||||
Municipal utility revenue bonds | 27,431 | 23,442 | 13,827 | 13,468 | |||||||||
Health care revenue bonds | 6,005 | 5,970 | 6,625 | 6,683 | |||||||||
Tax-supported (non-general obligation) bonds | 30,203 | 27,556 | 12,773 | 12,391 | |||||||||
Transportation revenue bonds | 9,622 | 7,640 | 6,865 | 5,748 | |||||||||
Other municipal bonds | 13,559 | 12,173 | 6,755 | 5,761 | |||||||||
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Total municipal obligations | $ | 154,881 | $ | 137,177 | $ | 67,679 | $ | 64,126 | |||||
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6. GUARANTEED INVESTMENT CONTRACTS
As of June 30, 2003, the interest rates on these GICs were between 0.915% and 5.95% per annum.
Payments due under these GICs, excluding mark-to-market adjustments and prepaid interest of $44.3 million, in the remainder of 2003 and each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, are as follows (in millions):
Expected
Withdrawal Date |
Principal
Amount |
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2003 | $ | 109.6 | |
2004 | 531.7 | ||
2005 | 593.0 | ||
2006 | 140.9 | ||
2007 | 562.2 | ||
2008 | 147.8 | ||
Thereafter | 759.1 | ||
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Total | $ | 2,844.3 | |
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7. SEGMENT REPORTING
The Company operates in two business segments, financial guaranty and financial products. The financial guaranty segment is primarily in the business of providing financial guaranty insurance on asset-backed and municipal obligations. The financial products segment presently consists of the Company's GIC operations. The GICs provide for the return of principal and the payment of interest at a guaranteed rate. The following table is a summary of the financial information (in thousands) by segment as of and for the six months ended June 30, 2003 and 2002:
7
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For the Six Months Ended June 30, 2003
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Financial
Guaranty |
Financial
Products |
Inter-segment
Eliminations |
Total
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Revenues: | |||||||||||||
External | $ | 262,095 | $ | 6,932 | $ | $ | 269,027 | ||||||
Inter-segment | 2,916 | 11,995 | (14,911 | ) | |||||||||
Expenses: |
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External | 77,668 | 23,502 | 101,170 | ||||||||||
Inter-segment | 11,995 | 2,916 | (14,911 | ) | |||||||||
Income (loss) before income taxes |
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180,014 |
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(7,491 |
) |
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172,523 |
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Segment assets |
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5,483,940 |
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3,073,854 |
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(512,461 |
) |
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8,045,333 |
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For the Six Months Ended
June 30, 2002 |
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Financial
Guaranty |
Financial
Products |
Total
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Revenues | $ | 215,690 | $ | 8,175 | $ | 223,865 | |||
Expenses | 94,913 | 11,332 | 106,245 | ||||||
Income (loss) before income taxes | 129,442 | (3,157 | ) | 126,285 |
The inter-segment assets are intercompany loans that are in the financial products investment portfolio. The inter-segment revenues relate to premiums charged by the financial guaranty segment for insuring GICs, and interest income and interest expense on the inter-segment loans.
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company owns a minority interest in Fairbanks Capital Holding Corp., the parent company of Fairbanks Capital Corp. (collectively with its parent, Fairbanks). Fairbanks is a servicer of single-family residential mortgage loans originated by unaffiliated third parties. Most of the mortgage loans serviced by Fairbanks are considered "sub-prime", reflecting the lower than "prime" credit quality of the borrower/homeowner. Fairbanks is owned 56.8% by The PMI Group Inc. and 29.8% by the Company, with the remainder owned by certain founders of Fairbanks. At June 30, 2003, the Company's interest in Fairbanks had a book value of $61.7 million, of which $7.5 million represented goodwill. The Company's equity in the earnings from Fairbanks for the six months ended June 30, 2003 and 2002 was $1.7 million and $5.4 million, respectively. The decrease in the Company's equity in the earnings of Fairbanks for the quarter was largely a result of restructuring and litigation settlement charges.
Fairbanks' business is subject to regulation, supervision and licensing by various federal, state and local authorities, which have recently increased their focus on lending and servicing practices in the sub-prime lending industry. In October 2002, the Federal Trade Commission (the FTC) informed Fairbanks that it was investigating whether Fairbanks' loan servicing or other practices violated the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act or other laws enforced by the FTC. The Company understands that, in March 2003, the U.S. Department of Housing and Urban Development initiated a criminal investigation into Fairbanks' servicing practices. Certain of Fairbanks' shareholders, including the Company, have received civil investigative demands from the FTC relating to their investments in Fairbanks and their knowledge of Fairbanks' servicing operations.
Fairbanks is also subject to private litigation, including a number of putative class action suits, alleging violations of federal and/or state laws. The publicity surrounding sub-prime lending and servicing practices may result in the filing of other putative class action suits against Fairbanks.
Fairbanks
is highly leveraged and dependent upon credit facilities to make servicing and delinquency advances in the regular course of its business, to finance the acquisition of
mortgage servicing rights and for other business purposes. In May 2003, Moody's Investors Service, Inc. and Standard & Poor's Ratings Services downgraded their loan servicer
rankings for Fairbanks from strong to below average. These actions constituted potential events of
8
default under Fairbanks' credit facilities, which led to a restructuring of and amendments to the credit facilities in June 2003.
In order to address alleged violations of various federal and state laws, Fairbanks is reimbursing certain fees allegedly collected improperly, and is changing certain of its loan servicing practices, including the types and amounts of fees collected, without admitting any violations. Due to these developments, future income from Fairbanks' operations is expected to be reduced. While the impairment test done by the Company did not result in a write-down of the investment, future developments are uncertain due to the ongoing investigation and private litigation.
9. CAPITAL RESOURCES
In June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the CPS Securities, investing the proceeds in high quality commercial paper and providing FSA with put options for selling to the trusts non-cumulative redeemable perpetual preferred stock (the Preferred Stock) of FSA. If a put option were to be exercised by FSA, the applicable trust would use the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, and transfer such proceeds to FSA in exchange for Preferred Stock of FSA. FSA pays a floating put premium to the trusts. The cost of the structure was $3.0 million in the second quarter of 2003 and was recorded in equity. The trusts are vehicles for providing FSA access to new capital at its sole discretion through the exercise of the put options.
The Company does not consider itself to be the primary beneficiary of the trusts under Financial Accounting Standards Board (FASB) Interpretation No. 46 "Consolidation of Variable Interest Entities" (FIN No. 46) because it does not retain the majority of the residual benefits or expected losses.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". FIN No. 46 addresses consolidation of variable interest entities (VIEs) which have one or both of the following characteristics: (i) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity; and (ii) the equity investors lack the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights,
the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions of FIN No. 46 will be
effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest
that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. The implementation of FIN
No. 46, will cause the Company to consolidate for financial reporting purposes, for the first time commencing in the third quarter of 2003, FSA Global Funding Limited (FSA Global) and Canadian
Global Funding Corporation (Canadian Global). FIN No. 46 requires that, upon consolidation, the Company shall initially measure the VIE's assets, liabilities and minority interest at their
carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation will be
reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in
accounting principle is not expected to have a material impact on the results of operations of the Company. In addition, on July 1, 2003, the Company obtained control provisions of another VIE,
Premier International Funding Co. (Premier), which will cause the Company to consolidate Premier beginning July 1, 2003. At June 30, 2003, FSA Global had total assets and total
liabilities of approximately $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be
eliminated with assets and liabilities of Premier, when consolidated. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Global's net income is determined
net of FSA Global's premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to
FSA Global are included in the Company's outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were
no case basis reserves required for any transactions related to FSA Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which
$97.6 million has been invested in GICs issued by CMS. As of June 30, 2003, the Company was carrying
9
gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. The Company will continue to analyze the effects of FIN No. 46, considering the complexity of practical application to the Company's transactions.
11. SUBSEQUENT EVENT
On July 31, 2003, the Company issued $100.0 million of 5.60% Notes due July 15, 2103 and callable on or after July 31, 2008. Debt issuance costs of approximately $3.3 million will be amortized over the life of the Notes. The Company expects to use the proceeds of the new debt offering to discharge the indenture with respect to all of its outstanding 6.950% Senior Quarterly Income Debt Securities (Senior QUIDS) due November 1, 2098 during the third quarter of 2003, and to redeem all the outstanding Senior QUIDS on or about November 1, 2003. The Senior QUIDS are callable, without premium or penalty, on or after November 1, 2003.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Management and investors consider the following measures important in analyzing the financial results of the Company: operating earnings and gross present value of originations (PV originations). However, neither of these measures is promulgated in accordance with accounting principles generally accepted in the United States of America and should not be considered a substitute for net income and gross premiums written.
2003 and 2002 Second Quarter Results
The Company's second quarter 2003 net income was $68.1 million, compared with net income of $45.4 million for the same period in 2002. Operating earnings were $66.3 million for the second quarter of 2003, compared with $45.7 million for the second quarter of 2002. In the second quarter of 2003, net income was positively affected by $1.8 million of mark-to-market adjustments for pooled credit default swaps (CDS) under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). In the second quarter of 2002, net income was negatively affected by $0.3 million of mark-to-market adjustments for CDS under SFAS No. 133.
In December 2002, the Company revised its definition of operating earnings from that used in prior periods. Operating earnings is now defined as net income before the after-tax effects of SFAS No. 133 mark-to-market adjustments for pooled CDS. For purposes of calculating operating earnings, pooled CDS are defined as FSA-insured credit default swaps that reference pools of financial obligations and require payments by the Company if losses exceed a defined deductible providing an investment-grade level of protection to the Company. Management considers operating earnings a key measure of normal operating results, as the SFAS No. 133 adjustments for each guaranteed CDS are expected to sum to zero over the life of the transaction. Operating earnings for 2002 disclosed in this discussion differ from those previously disclosed due to the revised definition of operating earnings.
The table below shows a reconciliation of net income to operating earnings for the quarters ended June 30, 2003 and 2002:
|
2003
|
2002
|
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
Net Income | $ | 68.1 | $ | 45.4 | |||
Less mark-to-market of pooled CDS (1) | 1.8 | (0.3 | ) | ||||
|
|
||||||
Operating Earnings (1) | $ | 66.3 | $ | 45.7 |
The Company employs two measures of gross premiums originated for a given period. Gross premiums written captures premiums collected in the period, whether collected up front for business originated in the period or in installments for business originated in prior periods. An alternative measure, gross present value of premiums written (PV premiums), reflects future installment premiums discounted to their present value, as well as upfront premiums, but only for business originated in the period. Business ceded through reinsurance placed by a third party is excluded from PV premiums. The Company considers PV premiums to be the better indicator of a given period's insurance origination activity because a substantial portion of the Company's premiums is collected in installments, a practice typical of the asset-backed business. To calculate PV premiums, management estimates the life of each transaction that has installment premiums and discounts the future installment premium payments. The present value of the future net interest margin from the Company's financial products business represents the present value of the difference between the estimated interest to be received on the investments of the Company's guaranteed investment contract (GIC) operations and the estimated interest to be paid on GICs issued over the estimated life of each transaction, giving effect to swaps and other derivatives which convert fixed-rate assets and liabilities to floating rates. PV premiums and the present value of the future net interest margin from the Company's financial products segment are collectively referred to as PV originations . The Company calculates the discount rate for PV originations as the average pre-tax yield on its investment portfolio for the previous three years. Accordingly, year-to-year comparisons of PV originations are affected by the application of different discount factors. The rate for both 2003 and 2002 was 5.91%. Management intends to revise the discount rate in future years according to the same formula, in order to reflect interest rate changes.
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Gross premiums written increased 72.5% to $294.8 million in the second quarter of 2003 from $170.8 million for the second quarter of 2002. PV originations increased 65.5% to $330.9 million in the second quarter of 2003 from the second quarter result of $199.9 million in 2002.
The table below shows the components of PV originations for the second quarter of 2003 and 2002:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(in millions)
|
|||||
U.S municipal obligations (1) | $ | 144.5 | $ | 74.9 | ||
U.S. asset-backed obligations (1)(2) | 65.7 | 55.7 | ||||
International obligations (1) | 105.4 | 61.4 | ||||
Financial products (3) | 15.3 | 7.9 | ||||
|
|
|||||
Total | $ | 330.9 | $ | 199.9 | ||
|
|
For the second quarter of 2003, the Company guaranteed a par amount of $15.8 billion of U.S. primary and secondary municipal obligations, an increase of 29.4% over the amount insured in the prior year's comparable period. FSA's U.S. municipal PV premium originations were $144.5 million for the quarter, up 92.9% from the $74.9 million produced in the second quarter of 2002. Average premium rates were strong, reflecting higher spreads and a healthy appetite for bond insurance.
For the second quarter of 2003, the Company's U.S. asset-backed par originated was $4.5 billion, compared with $12.2 billion in the second quarter of last year, while asset-backed PV premiums increased 18.0%. While the decline in volume reflects FSA's selective approach to the collateralized debt obligation (CDO) and consumer receivable sectors in the current credit environment, FSA found increasing opportunities to insure transactions that met its underwriting standards at favorable returns. The average premium rate was boosted in part by premiums related to amendments of existing business.
For the second quarter of 2003, the Company insured $2.7 billion par of international obligations, generating $105.4 million of PV premiums, versus $6.5 billion of par and $61.4 million of PV premiums in the second quarter of 2002. In the United Kingdom, the Company closed three infrastructure transactions. In the largest of these, the Company insured £515 million of public-private partnership bonds issued to finance improvements to the London Underground. The Company also completed a number of international asset-backed transactions. PV premiums increased despite the decline in par insured primarily because of a shift in the business mix. Long-tenor public infrastructure transactions represented a greater portion of par insured.
Net premiums written were $187.9 million for the second quarter of 2003, an increase of 50.1% over the comparable period in 2002. Net premiums earned for the second quarter of 2003 were $88.2 million, compared with $77.1 million in the second quarter of 2002. Net premiums earned from refundings and prepayments were $7.5 million for the second quarter of 2003 and $7.0 million for the same period of 2002, contributing $4.0 million and $3.6 million, respectively, to after-tax earnings. Net premiums earned for the quarter grew 15.2% relative to the same period in 2002, if the effects of refundings and prepayments are eliminated.
Net investment income was $37.8 million for the second quarter of 2003 and $35.1 million for the comparable period in 2002, an increase of 7.6%. The Company's effective tax rate on investment income was 9.6% for the second quarter of 2003, compared with 11.3% for the same period in 2002. In the second quarter of 2003, the Company realized $2.8 million in net capital gains, compared with $22.9 million for the same period in 2002. Capital gains and losses are generally a by-product of the normal investment management process and could vary substantially from period to period.
The provision for losses and loss adjustment expenses during the second quarter of 2003 was $6.6 million compared with $39.2 million in the second quarter of 2002. The decrease occurred primarily because reserves were increased by $31.0 million in the second quarter of 2002 to reflect adverse experience in the CDO market. Since the reserves are based upon estimates, there can be no assurance that the ultimate liability will not differ from such
12
estimates. The Company will continue, on an ongoing basis, to monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business and future economic conditions. At June 30, 2003, the general reserve totaled $89.5 million and the total losses and loss adjustment expense liability totaled $237.9 million.
Total policy acquisition and other operating expenses were $30.9 million for the second quarter of 2003 compared with $24.2 million for the same period in 2002. Excluding the effects of refundings, total policy acquisition and other operating expenses were $29.5 million for the second quarter of 2003 compared with $22.8 million for the same period in 2002. Expenses increased primarily as a result of the lowering of the percentage of expenses deferred, based upon a study performed by the Company of its origination costs, and higher personnel costs.
As of June 30, 2003, the Company's financial products group had recorded principal on GICs outstanding of $2,844.3 million. For the second quarters of 2003 and 2002, these transactions resulted in a net interest margin of $1.5 million and $2.3 million, respectively.
A portion of FSA's business has been in the form of insured CDS referencing diversified pools of corporate obligations. Many of these require periodic adjustments to reflect an estimate of fair value under SFAS No. 133. These transactions have generally been underwritten with Triple-A or higher levels of credit protection before our guaranty. For the second quarter of 2003 and 2002, these mark-to-market adjustments resulted in a benefit to net income of $1.8 million and a net charge to income of $0.3 million, respectively. The gain or loss created by estimated fair value adjustments will rise or fall each quarter based on estimated market pricing of highly rated swap guarantees and is not expected to be an indication of potential claims under FSA's guaranty. Fair value is defined as the amount at which an asset or a liability could be bought or sold in a current transaction between willing parties. The fair value is determined based upon quoted market prices, if available. If quoted market prices are not available, as is the case primarily with CDS on pools of assets, then the determination of fair value is based upon internally developed estimates. Management applies judgment when developing these estimates and considers factors such as current prices charged for similar agreements, performance of underlying assets, changes in internal shadow ratings, the level at which the deductible has been set and FSA's ability to obtain reinsurance for its insured obligations. Due to changes in these factors, the gain or loss from derivative instruments can vary substantially from period to period. Absent any claims under FSA's guaranty, any "losses" recorded in marking a guaranty to market will be reversed by an equivalent mark-to-market "gain" at or prior to the expiration of the guaranty. The gain recorded in the second quarter of 2003 was a reversal of losses recorded in prior periods. In addition, in the first half of 2002, FSA was party to a credit default swap referencing a highly diversified portfolio of 100 corporate names, with $10 million of exposure per name, to which the Company had first-loss exposure. For the second quarter of 2002, this transaction resulted in a $10.8 million after-tax charge to income as a result of marking the transaction to market. The Company terminated its exposure to this transaction in the third quarter of 2002. These amounts are included in net realized and unrealized gains (losses) on derivative instruments in the consolidated statements of operations and comprehensive income.
Total equity in earnings of unconsolidated affiliates was $0.1 million and $5.8 million for the second quarter of 2003 and 2002, respectively. The decrease is primarily related to the equity earnings in Fairbanks Capital Holding Corp. The Company owns a minority interest in Fairbanks Capital Holding Corp., the parent company of Fairbanks Capital Corp. (collectively with its parent, "Fairbanks"). Fairbanks is a servicer of single-family residential mortgage loans originated by unaffiliated third parties. Most of the mortgage loans serviced by Fairbanks are considered "sub-prime", reflecting the lower than "prime" credit quality of the borrower/homeowner. Fairbanks is owned 56.8% by The PMI Group Inc. and 29.8% by the Company, with the remainder owned by certain founders of Fairbanks. At June 30, 2003, the Company's interest in Fairbanks had a book value of $61.7 million, of which $7.5 million represented goodwill. The Company's equity in the earnings from Fairbanks for the quarter ended June 30, 2003 and 2002 was a loss of $1.7 million and income of $2.9 million, respectively. The decrease in the Company's equity in the earnings of Fairbanks for the quarter was largely a result of restructuring and litigation settlement charges.
Fairbanks' business is subject to regulation, supervision and licensing by various federal, state and local authorities, which have recently increased their focus on lending and servicing practices in the sub-prime lending industry. In October 2002, the Federal Trade Commission (the "FTC") informed Fairbanks that it was investigating whether Fairbanks' loan servicing or other practices violated the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act or other laws enforced by the FTC. The Company understands that, in March 2003, the U.S. Department of Housing and Urban Development initiated a criminal
13
investigation into Fairbanks' servicing practices. Certain of Fairbanks' shareholders, including the Company, have received civil investigative demands from the FTC relating to their investments in Fairbanks and their knowledge of Fairbanks' servicing operations.
Fairbanks is also subject to private litigation, including a number of putative class action suits, alleging violations of federal and/or state laws. The publicity surrounding sub-prime lending and servicing practices may result in the filing of other putative class action suits against Fairbanks.
Fairbanks is highly leveraged and dependent upon credit facilities to make servicing and delinquency advances in the regular course of its business, to finance the acquisition of mortgage servicing rights and for other business purposes. In May 2003, Moody's Investors Service, Inc. and Standard & Poor's Ratings Services downgraded their loan servicer rankings for Fairbanks from strong to below average. These actions constituted potential events of default under Fairbanks' credit facilities, which led to a restructuring of and amendments to the credit facilities in June 2003.
In order to address alleged violations of various federal and state laws, Fairbanks is reimbursing certain fees allegedly collected improperly, and is changing certain of its loan servicing practices, including the types and amounts of fees collected, without admitting any violations. Due to these developments, future income from Fairbanks' operations is expected to be reduced. While the impairment test done by the Company did not result in a write-down of the investment, future developments are uncertain due to the ongoing investigation and private litigation.
The Company's effective tax rate for the second quarter of 2003 was 23.3% compared with 19.3% for the same period in 2002. In 2003 and 2002, the effective tax rate differs from the statutory rate of 35% due primarily to tax-exempt interest income and income from Financial Security Assurance International Ltd (FSA International). Although FSA International is subject to U.S. income taxes as a controlled foreign corporation, it nonetheless benefits from a lower overall effective tax rate than the Company's domestic insurance company subsidiaries.
2003 and 2002 First Six Months Results
The Company's 2003 first half net income was $133.9 million, compared with net income of $99.5 million for the same period in 2002. Operating earnings were $131.1 million for the first half of 2003, compared with $102.7 million for the first half of 2002. In the first half of 2003, net income was positively affected by $2.8 million of mark-to-market adjustments for pooled CDS under SFAS No. 133. In the first half of 2002, net income was negatively affected by $3.2 million of mark-to-market adjustments for CDS under SFAS No. 133.
The table below shows a reconciliation of net income to operating earnings for the first half of 2003 and 2002:
|
2003
|
2002
|
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
Net Income | $ | 133.9 | $ | 99.5 | |||
Less mark-to-market of pooled CDS (1) | 2.8 | (3.2 | ) | ||||
|
|
||||||
Operating Earnings (1) | $ | 131.1 | $ | 102.7 | |||
|
|
Gross premiums written increased 34.5% to $424.4 million in the first half of 2003 from $315.4 million for the first half of 2002. PV originations increased 15.5% to $432.7 million in the first half of 2003 from the first half result of $374.7 million in 2002.
14
The table below shows the components of PV originations for the first half of 2003 and 2002:
|
2003
|
2002
|
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
U.S municipal obligations (1) | $ | 208.6 | $ | 150.5 | |||
U.S. asset-backed obligations (1)(2) | 87.1 | 112.9 | |||||
International obligations (1) | 118.7 | 84.7 | |||||
Financial products (2) | 18.3 | 26.6 | |||||
|
|
||||||
Total | $ | 432.7 | $ | 374.7 | |||
|
|
For the first half of 2003, FSA insured $26.6 billion par amount of U.S. primary and secondary municipal obligations, an increase of 11.0% from the amount insured in the comparable period of the prior year. FSA's first half U.S. municipal PV premiums were $208.6 million, a 38.6% increase from U.S. municipal PV premiums in the first half of 2002.
For the first half of 2003, the Company's U.S. asset-backed par originated was $6.6 billion, compared with $23.6 billion in the first half of last year. U.S. asset-backed PV premiums declined 22.9% to $87.1 million for the first half of 2003 as compared to the first half of 2002.
For the first half of 2003, FSA insured $3.5 billion par of international obligations, generating $118.7 million of PV premiums, versus $11.6 billion of par and $84.7 million of PV premiums for the first half of 2002.
Net premiums written were $280.1 million for the first half of 2003, an increase of 27.1% when compared with the comparable period result in 2002. Net premiums earned for the first half of 2003 were $168.2 million, compared with $146.8 million for the first half of 2002. Net premiums earned from refundings and prepayments were $11.9 million for the first half of 2003 and $9.3 million for the same period of 2002, contributing $6.0 million and $4.7 million, respectively, to after-tax earnings. Net premiums earned for the first half grew 13.8% relative to the same period in 2002, if the effects of refundings and prepayments are eliminated.
Net investment income was $74.3 million for the first half of 2003 and $68.5 million for the comparable period in 2002, an increase of 8.5%. The Company's effective tax rate on investment income was 9.4% for the first half of 2003, compared with 11.1% for the same period in 2002. For the first half of 2003, the Company realized $3.9 million in net capital gains, compared with $24.0 million for the same period in 2002. Capital gains and losses are generally a by-product of the normal investment management process and could vary substantially from period to period.
The provision for losses and loss adjustment expenses during the first half of 2003 was $12.9 million compared with $42.1 million in the first half of 2002.
Total policy acquisition and other operating expenses were $59.9 million for the first half of 2003 compared with $46.9 million for the same period in 2002. Excluding the effects of refundings, total policy acquisition and other operating expenses were $57.3 million for the first half of 2003 compared with $44.9 million for the same period in 2002.
For the first half of 2003 and 2002, the Company's financial products group produced a net interest margin of $2.1 million and $2.7 million, respectively.
For the first half of 2003 and 2002, the mark-to-market adjustments for CDS resulted in a benefit to net income of $2.8 million and a net charge to income of $3.2 million, respectively. In addition, in the first half of 2002, FSA was party to a credit default swap referencing a highly diversified portfolio of 100 corporate names, with $10.0 million of exposure per name, to which the Company had first-loss exposure. For the first half of 2002, this transaction resulted in a $13.4 million after-tax charge to income as a result of marking the transaction to market. The Company terminated its exposure to this transaction in the third quarter of 2002 at a loss. These amounts are
15
included in net realized and unrealized gains (losses) on derivative instruments in the consolidated statements of operations and comprehensive income.
The Company's effective tax rate for the first half of 2003 was 22.4% compared with 21.2% for the same period in 2002. In 2003 and 2002, the effective tax rate differs from the statutory rate of 35% due primarily to tax-exempt interest income and income from FSA International. Although FSA International is subject to U.S. income taxes as a controlled foreign corporation, it nonetheless benefits from a lower overall effective tax rate than the Company's domestic insurance company subsidiaries.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash at June 30, 2003, net of unsettled security transactions, was $5,914.5 million, compared with the December 31, 2002 balance of $5,027.2 million. These balances include the change in the market value of the investment portfolio, which had an unrealized gain position of $259.6 million at June 30, 2003 and $201.0 million at December 31, 2002.
At June 30, 2003, the Company had, at the holding company level, an investment portfolio of $19.0 million available to fund the liquidity needs of its activities outside of its insurance operations. Because the majority of the Company's operations are conducted through FSA, the long-term ability of the Company to service its debt will largely depend upon the receipt of dividends or surplus note payments from FSA and upon external financings.
FSA's ability to pay dividends is dependent upon FSA's financial condition, results of operations, cash requirements, maintenance of FSA's ratings and other related factors, and is also subject to restrictions contained in the insurance laws and related regulations of New York and other states. Under the New York insurance law, FSA may pay dividends out of statutory earned surplus, provided that, together with all dividends declared or distributed by FSA during the preceding 12 months, the dividends do not exceed the lesser of (i) 10% of policyholders' surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the New York Superintendent) or (ii) adjusted net investment income during this period. FSA paid no dividends in the first half of 2003 or 2002. Based upon FSA's statutory statements for June 30, 2003, the maximum amount available for payment of dividends by FSA without regulatory approval over the following 12 months would be approximately $113.7 million.
At March 31, 2003, the Company held $212.9 million of surplus notes of FSA. During the second quarter of 2003, FSA repaid $12.5 million of such surplus notes. At June 30, 2002, the Company held $200.4 million of FSA surplus notes. Payments of principal and interest on such notes may be made only with the approval of the New York Superintendent. FSA paid $4.7 million and $4.6 million in surplus note interest in the first half of 2003 and 2002, respectively.
The Company paid no dividends in the first half of 2003. In the first half of 2002, the Company paid dividends of $11.7 million.
FSA's primary uses of funds are to pay operating expenses and to pay dividends to, or principal of or interest on surplus notes held by, its parent. FSA's funds are also required to satisfy claims under insurance policies in the event of default by an issuer of an insured obligation and the unavailability or exhaustion of other payment sources in the transaction, such as the cash flow or collateral underlying the obligations. FSA seeks to structure asset-backed transactions to address liquidity risks by matching insured payments with available cash flow or other payment sources within the transactions. The insurance policies issued by FSA provide, in general, that payments of principal, interest and other amounts insured by FSA may not be accelerated by the holder of the obligation but are paid by FSA in accordance with the obligation's original payment schedule or, at FSA's option, on an accelerated basis. These policy provisions prohibiting acceleration of certain claims absent consent of the insurer are mandatory under Article 69 of the New York insurance law and serve to reduce FSA's liquidity requirements.
FSA had a credit arrangement, aggregating $150.0 million at June 30, 2003, provided by commercial banks and intended for general application to transactions insured by FSA and its insurance company subsidiaries. At June 30, 2003, there were no borrowings under this arrangement, which expires April 23, 2004, unless extended.
FSA has a standby line of credit in the amount of $325.0 million with a group of international banks to provide loans to FSA after it has incurred, during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $325.0 million or the average annual debt service of the covered portfolio multiplied by
16
5.00%, which amounted to $792.5 million at June 30, 2003. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral. This commitment has a seven-year term that will expire on April 30, 2010 and contains an annual renewal provision subject to approval by the banks. No amounts have been utilized under this commitment as of June 30, 2003.
In June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the CPS Securities, investing the proceeds in high quality commercial paper and providing FSA with put options for selling to the trusts non-cumulative redeemable perpetual preferred stock (the Preferred Stock) of FSA. If a put option were to be exercised by FSA, the applicable trust would use the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, and transfer such proceeds to FSA in exchange for Preferred Stock of FSA. FSA pays a floating put premium to the trusts. The cost of the structure was $3.0 million in the second quarter of 2003 and was recorded in equity. The trusts are vehicles for providing FSA access to new capital at its sole discretion through the exercise of the put options.
The Company's financial products group has a $100 million line of credit with UBS AG, Stamford Branch, which expires December 12, 2003, unless extended. This line of credit provides an additional source of liquidity should there be unexpected draws on GICs issued by the Company. There were no borrowings under this arrangement as of June 30, 2003.
In August 1994, FSA entered into a facility agreement with Canadian Global Funding Corporation (Canadian Global) and Hambros Bank Limited. Canadian Global was established to provide a source of liquidity to refinance FSA-insured transactions that experience difficulty in meeting debt service obligations. The amount of the facility is $186.9 million, of which $125.2 million was unutilized at June 30, 2003. The facility expires in 2004.
Standard & Poor's Ratings Services (S&P), Moody's Investors Service, Inc. (Moody's) and Fitch Ratings each periodically assess the capital adequacy of FSA and other financial guarantors rated by them, and publish such assessments along with associated ratings confirmations or ratings changes. Given the importance of its ratings to its ongoing business, management of FSA considers the impact on rating agency capital adequacy an important factor in evaluating the types of risks it may insure and other activities it may pursue. In assessing the capital adequacy of a financial guarantor, rating agencies consider a number of factors, including claims-paying resources, "worst case" loss potential of the insured portfolio, and the quality and liquidity of the investment portfolio. Claims-paying resources include qualified statutory capital (policyholders' surplus and contingency reserves determined in accordance with statutory accounting principles), unearned premium reserves, loss reserves and the present value of future installment premiums, as well as credit allowed for recoveries of ceded losses from reinsurers and other capital support arrangements. The rating agencies base their estimates of "worst case" insured losses on evaluations of the default frequency and loss severity of individual insured risks in a period of severe economic stress. Credit allowed for reinsurance under these capital adequacy models is generally a function of the rating of the reinsurer providing the reinsurance, as well as any collateral provided by the reinsurer. Estimates of "worst case" losses and reinsurer ratings are subject to change by the rating agencies at any time. Any downgrade of reinsurers, increase in "worst case" loss estimates on insured transactions or other adverse changes in the factors that determine capital adequacy ratios may prompt the Company to augment FSA's paid-in capital and other capital support arrangements to maintain its rating agency capital adequacy and Triple-A ratings. In 2002 and 2003, a number of the reinsurers used by FSA were downgraded by one or more rating agencies and "worst case" loss estimates were generally increased in the CDO sector, including transactions in FSA's insured portfolio. Giving effect to these changes, FSA continues to satisfy the Triple-A standards of the rating agencies. FSA expects to augment its claims-paying resources from time to time to the extent management considers it appropriate to maintain sufficient rating agency capital adequacy.
FSA-insured GICs subject the Company to risk associated with early withdrawal of principal allowed by the terms of the GICs. The majority of municipal GICs insured by FSA relate to debt service reserve funds and construction funds in support of municipal bond transactions. Debt service reserve fund GICs may be drawn unexpectedly upon a payment default by the municipal issuer. Construction fund GICs may be drawn unexpectedly when construction of the underlying municipal project does not proceed as expected. The proceeds of FSA-insured GICs may be invested in FSA-insured obligations, including FSA-insured securities issued to refinance poorly performing transactions. Most FSA-insured GICs allow for withdrawal of GIC funds in the event of a downgrade of FSA, typically below AA- by S&P or Aa3 by Moody's, unless the GIC provider posts collateral or otherwise enhances its credit. Some FSA-insured GICs also allow for withdrawal of GIC funds in the event of a downgrade of
17
FSA below A- by S&P or A3 by Moody's, with no right of the GIC provider to avoid such withdrawal by posting collateral or otherwise enhancing its credit. The Company manages this risk through the maintenance of liquid collateral and bank liquidity facilities.
The Company has made no material commitments for capital expenditures as of June 30, 2003.
Variable Interest Entities
Asset-backed and, to a lesser extent, municipal transactions insured by FSA may employ variable interest entities (VIEs) for a variety of purposes. A typical asset-backed transaction, for example, employs a VIE as the purchaser of the securitized assets and as the issuer of the obligations insured by FSA. FSA's participation is typically requested by the sponsor of the VIE or the underwriter, either via a bid process or on a sole source basis. VIEs are typically owned by transaction sponsors or charitable trusts, although FSA may have an ownership interest in some cases. FSA maintains certain contractual rights and exercises varying degrees of influence over VIE issuers of FSA-insured obligations. FSA also bears some of the "risks and rewards" associated with the performance of the VIE's assets, but in most situations FSA's financial guaranty policy will not expose it to significant variability due to the significant level of other credit protection. Specifically, as issuer of a financial guaranty insurance policy insuring the VIE's obligations, FSA bears the risk of asset performance (typically, but not always, after a significant depletion of overcollateralization, excess spread, a deductible or other credit protection). FSA's underwriting policy is to insure only obligations that are otherwise investment grade. In addition, the VIE typically pays a periodic premium to FSA in consideration of the issuance by FSA of its insurance policy, with the VIE's assets typically serving as the source of such premium, thus providing some of the "rewards" of the VIE's assets to FSA. VIEs are also employed by FSA in connection with "repackaging" of outstanding securities into new securities insured by FSA and with refinancing underperforming non-investment grade transactions insured by FSA. The degree of influence exercised by FSA over these VIEs varies from transaction to transaction, as does the degree to which "risks and rewards" associated with asset performance are assumed by FSA. While all transactions insured by FSA are included in the Company's outstanding exposure, and losses under these obligations are reflected in the Notes to Consolidated Financial Statements for June 30, 2003, the assets and liabilities of these VIEs have not been consolidated with those of the Company for financial reporting purposes and are considered "off-balance sheet" obligations. Two such VIEs, Canadian Global and FSA Global Funding Limited (FSA Global), will be consolidated with the Company for financial accounting purposes beginning in the third quarter of 2003 under the consolidation guidance recently issued by the Financial Accounting Standards Board (FASB) under FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN No. 46). In addition, on July 1, 2003, the Company obtained control provisions of another VIE, Premier International Funding Co. (Premier), which will cause the Company to consolidate Premier beginning July 1, 2003.
In August 1994, Canadian Global was capitalized with $180.6 million of debt securities (which were effectively converted to U.S. dollar LIBOR rate through a cross-currency swap with terms matching the underlying debt instrument) and $6.3 million in preferred equity sold to third-party investors. Under the agreement, FSA pays an annual fee to Canadian Global to compensate it for making its liquidity available and can arrange financing for transactions subject to certain conditions. When Canadian Global purchases an FSA-insured obligation, the new obligation is insured by FSA for a premium, and case basis reserves are established when required. As of June 30, 2003, FSA was carrying gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which $97.6 million has been invested in a GIC issued by CMS.
The Company owns 29% of the equity of FSA Global, a Cayman Islands domiciled issuer of FSA-insured notes and other obligations sold in international markets (generally referred to as medium term notes or "MTNs"). FSA Global issues securities at the request of interested purchasers in a process known as "reverse inquiry," which generally results in lower interest rates and borrowing costs than would apply to direct borrowings. FSA Global also issues securities in traditional private placements to institutional investors and to participants in lease financings in which Company affiliates may play a number of financing roles. FSA Global is managed as a "matched funding vehicle," in which the proceeds from the sale of FSA Global notes are invested in obligations chosen to provide cash flows substantially matched to those of the FSA Global notes (taking into account, in some cases, dedicated third- party liquidity). The matched funding structure minimizes the market risks borne by FSA Global and FSA. FSA Global raises funds in U.S. dollars at LIBOR-based floating borrowing rates and invests its funds in obligations insured by FSA, maturing prior to the maturity of the related FSA Global notes and paying a higher interest rate than the interest rate on the related FSA Global notes. At June 30, 2003, FSA Global had total assets and total liabilities of $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be eliminated with assets and liabilities of Premier, when both FSA Global and Premier are
18
consolidated with the Company. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Global's net income is determined net of FSA Global's premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to FSA Global are included in the Company's outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were no case basis reserves required for any transactions related to FSA Global.
In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN No. 46 addresses consolidation of VIEs that have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions for FIN No. 46 will be effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. FIN No. 46 requires that, upon consolidation, the Company initially measure the VIEs' assets, liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation on July 1, 2003 will be reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle is not expected to have a material impact on the results of operations of the Company. The Company will continue to analyze the effects of the standard, considering the complexity of practical application to the Company's transactions.
Subsequent Events
On July 31, 2003, the Company issued $100.0 million of 5.60% Notes due July 15, 2103 and callable on or after July 31, 2008. Debt issuance costs of approximately $3.3 million will be amortized over the life of the Notes. The Company expects to use the proceeds of the new debt offering to discharge the indenture with respect to all of its outstanding 6.950% Senior Quarterly Income Debt Securities (Senior QUIDS) due November 1, 2098 during the third quarter of 2003, and to redeem all the outstanding Senior QUIDS on or about November 1, 2003 . The Senior QUIDS are callable, without premium or penalty, on or after November 1, 2003.
On August 12, 2003, FSA, with the approval of the New York Superintendent, repaid $37.5 million of surplus notes to the Company.
Forward-Looking Statements
The Company relies upon the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. This safe harbor requires that the Company specify important factors that could cause actual results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. Accordingly, forward-looking statements by the Company and its affiliates are qualified by reference to the following cautionary statements.
In its filings with the SEC, reports to investors, press releases and other written and oral communications, the Company from time to time makes forward-looking statements. Such forward-looking statements include, but are not limited to, (i) projections of revenues, income (or loss), earnings (or loss), dividends, market share or other financial forecasts; (ii) statements of plans, objectives or goals of the Company or its management, including those related to growth in adjusted book value or return on equity; and (iii) expected losses on, and adequacy of loss reserves for, insured transactions. Words such as "believes", "anticipates", "expects", "intends" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
The Company cautions that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in forward-looking statements made by the Company. These factors include: (i) changes in capital requirements or other criteria of securities rating agencies applicable to financial guaranty insurers in general or to FSA specifically; (ii) competitive forces, including the conduct of other financial guaranty insurers in general; (iii) changes in domestic or foreign laws or regulations applicable to the Company, its competitors or its clients; (iv) changes in accounting principles or practices that may result in a decline in securitization transactions; (v) an economic downturn or other economic conditions (such as a rising interest rate environment) adversely affecting transactions insured by FSA or its investment portfolio; (vi) inadequacy of loss reserves established by the Company; (vii) temporary or permanent disruptions in cash flow on FSA-insured structured transactions attributable to legal challenges to such structures; (viii) downgrade or default of
19
one or more of FSA's reinsurers; (ix) the amount and nature of business opportunities that may be presented to the Company; (x) market conditions, including the credit quality and market pricing of securities issued; (xi) capacity limitations that may impair investor appetite for FSA-insured obligations; (xii) market spreads and pricing on insured credit default swap exposures, which may result in gain or loss due to mark-to-market accounting requirements; (xiii) prepayment speeds on FSA-insured asset-backed securities and other factors that may influence the amount of installment premiums paid to FSA; (xiv) changes in the value or performance of strategic investments made by the Company; and (xv) other factors, most of which are beyond the Company's control. The Company cautions that the foregoing list of important factors is not exhaustive. In any event, such forward-looking statements made by the Company speak only as of the date on which they are made, and the Company does not undertake any obligation to update or revise such statements as a result of new information, future events or otherwise.
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2003. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. Such evaluation did not identify any change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
20
Item 4. Submission of Matters to a Vote of Securities Holders
On May 16, 2003, the Company's shareholders executed a Written Consent of Shareholders in Lieu of Annual Meeting. Under the Written Consent, the Company's shareholders unanimously approved:
(1) the number of directors constituting the Board of Directors being fixed at ten, and the election of the following persons to serve as members of the Board of Directors of the Company until the later of the next annual meeting of shareholders or their successors having been duly elected and qualified:
Robert
P. Cochran
Pierre Richard
Dirk Bruneel
Bruno Deletre
Robert N. Downey
Jacques Guerber
David O. Maxwell
Séan W. McCarthy
Roger K. Taylor
Rembert von Lowis;
(2) the approval of the selection by the Company's Board of Directors of PricewaterhouseCoopers LLP as the independent public accountants of the Company to audit the accounts of the Company for the year 2003; and
(3) the approval of the Company's 1993 Equity Participation Plan, as amended, and the Company's Director Share Purchase Program.
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
On April 8, 2003, the Company filed with the Securities and Exchange Commission (the "SEC") a current report on Form 8-K dated April 2, 2003, pursuant to which it furnished to the SEC (i) an Investor Relations Presentation intended primarily for fixed-income investors, entitled "Financial Security Assurance Investors' Overview dated April 2, 2003", and (ii) its Quarterly Operating Supplement for the quarterly period ended December 31, 2002; and stating that the Company was posting such documents to its website, http://www.fsa.com .
On May 7, 2003, the Company filed with the SEC a current report on Form 8-K dated May 5, 2003, pursuant to which it furnished to the SEC (i) a press release announcing its first quarter 2003 results; (ii) the Company's current Quarterly Operating Supplement; and (iii) a quarterly letter from its Chairman and Chief Executive Officer; and stating that the Company was posting such materials on May 5, 2003, to its website, http://www.fsa.com .
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. | ||||
|
|
By |
|
/s/ JEFFREY S. JOSEPH |
August 13, 2003 |
Jeffrey S. Joseph
Managing Director & Controller (Chief Accounting Officer) |
23
Exhibit No.
|
Exhibit
|
|
---|---|---|
99.1 |
|
Condensed consolidated financial statements of Financial Security Assurance Inc. ("FSA") for the six month period ended June 30, 2003. |
99.2 |
|
Amendment No. 5 to the Credit Agreement, dated as of April 25, 2003, among FSA, the additional borrowers party thereto, various banks, ABN AMRO Bank N.V., The Bank of Nova Scotia, Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch, KeyBank National Association and Deutsche Bank AG, New York Branch, as agent (providing, among other things, for The Bank of New York to become the successor Agent). |
99.3 |
|
Fourth Amendment to Second Amended and Restated Credit Agreement dated April 30, 2003 among FSA and FSA Insurance Company, the Banks party thereto and Bayerische Landesbank, acting through its New York Branch in its capacity as Agent. |
99.4 |
|
Deferred Compensation Plan (amended and restated as of May 16, 2003). |
99.5 |
|
Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust I. |
99.6 |
|
Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust II. |
99.7 |
|
Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust III. |
99.8 |
|
Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust IV. |
99.9 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
99.10 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
99.11 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.12 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
24
EXHIBIT 99.1
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
June 30, 2003
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2003 and 2002
INDEX
FINANCIAL STATEMENTS: |
|
Condensed Consolidated Statements of Operations and Comprehensive Income |
|
The New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the New York Insurance Law, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the New York State Insurance Department to financial statements prepared in accordance with accounting principles generally accepted in the United States of America in making such determinations.
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
June 30,
|
|
December
31,
|
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Bonds at market value (amortized cost of $2,990,157 and $2,597,599) |
|
$ |
3,259,781 |
|
$ |
2,811,747 |
|
Short-term investments |
|
235,592 |
|
364,565 |
|
||
|
|
|
|
|
|
||
Total investments |
|
3,495,373 |
|
3,176,312 |
|
||
Cash |
|
9,443 |
|
27,560 |
|
||
Securitized loans at cost |
|
408,475 |
|
431,718 |
|
||
Deferred acquisition costs |
|
261,249 |
|
253,777 |
|
||
Prepaid reinsurance premiums |
|
630,799 |
|
557,659 |
|
||
Reinsurance recoverable on unpaid losses |
|
78,459 |
|
75,950 |
|
||
Investment in unconsolidated affiliate |
|
59,848 |
|
52,206 |
|
||
Other assets |
|
247,006 |
|
206,458 |
|
||
|
|
|
|
|
|
||
TOTAL ASSETS |
|
$ |
5,190,652 |
|
$ |
4,781,640 |
|
|
|
|
|
|
|
||
LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
Deferred premium revenue |
|
$ |
1,641,271 |
|
$ |
1,450,211 |
|
Losses and loss adjustment expenses |
|
237,885 |
|
223,618 |
|
||
Deferred federal income taxes |
|
181,024 |
|
153,333 |
|
||
Ceded reinsurance balances payable |
|
64,178 |
|
79,870 |
|
||
Notes payable to affiliate |
|
407,613 |
|
431,360 |
|
||
Surplus notes |
|
200,350 |
|
212,850 |
|
||
Minority interest |
|
57,561 |
|
52,841 |
|
||
Accrued expenses and other liabilities |
|
248,223 |
|
206,232 |
|
||
|
|
|
|
|
|
||
TOTAL LIABILITIES AND MINORITY INTEREST |
|
3,038,105 |
|
2,810,315 |
|
||
|
|
|
|
|
|
||
Preferred stock (5,000.1 and 0 shares authorized; 0 shares issued and outstanding; par value of $1,000 per share) |
|
|
|
|
|
||
Common stock (400 shares authorized, issued and outstanding; par value of $37,500 per share) |
|
15,000 |
|
15,000 |
|
||
Additional paid-in capital |
|
814,818 |
|
813,002 |
|
||
Accumulated other comprehensive income (net of deferred income taxes of $89,489 and $70,889) |
|
180,135 |
|
143,260 |
|
||
Accumulated earnings |
|
1,142,594 |
|
1,000,063 |
|
||
|
|
|
|
|
|
||
TOTAL SHAREHOLDERS EQUITY |
|
2,152,547 |
|
1,971,325 |
|
||
|
|
|
|
|
|
||
TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS EQUITY |
|
$ |
5,190,652 |
|
$ |
4,781,640 |
|
See notes to condensed consolidated financial statements.
1
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Dollars in thousands)
|
|
Six Months Ended June 30, |
|
||||
|
|
2003 |
|
2002 |
|
||
REVENUES: |
|
|
|
|
|
||
Net premiums written |
|
$ |
282,985 |
|
$ |
220,427 |
|
Net premiums earned |
|
171,164 |
|
146,751 |
|
||
Net investment income |
|
74,006 |
|
67,644 |
|
||
Net realized gains |
|
4,615 |
|
24,077 |
|
||
Net realized and unrealized gains (losses) on derivative instruments |
|
4,195 |
|
(24,698 |
) |
||
Other income |
|
10,554 |
|
532 |
|
||
TOTAL REVENUES |
|
264,534 |
|
214,306 |
|
||
|
|
|
|
|
|
||
EXPENSES: |
|
|
|
|
|
||
Losses and loss adjustment expenses |
|
12,895 |
|
42,119 |
|
||
Interest expense |
|
14,946 |
|
3,604 |
|
||
Policy acquisition costs |
|
26,936 |
|
25,877 |
|
||
Other operating expenses |
|
26,756 |
|
19,914 |
|
||
TOTAL EXPENSES |
|
81,533 |
|
91,514 |
|
||
|
|
|
|
|
|
||
Minority interest |
|
(4,720 |
) |
(4,216 |
) |
||
Equity in earnings of unconsolidated affiliate |
|
7,641 |
|
3,522 |
|
||
INCOME BEFORE INCOME TAXES |
|
185,922 |
|
122,098 |
|
||
Provision for income taxes |
|
43,391 |
|
25,293 |
|
||
NET INCOME |
|
142,531 |
|
96,805 |
|
||
|
|
|
|
|
|
||
Other comprehensive income, net of tax: |
|
|
|
|
|
||
Unrealized gains on securities: |
|
|
|
|
|
||
Holding gains arising during period |
|
39,936 |
|
36,307 |
|
||
Less: reclassification adjustment for gains included in net income |
|
3,061 |
|
17,630 |
|
||
Other comprehensive income |
|
36,875 |
|
18,677 |
|
||
COMPREHENSIVE INCOME |
|
$ |
179,406 |
|
$ |
115,482 |
|
See notes to condensed consolidated financial statements.
2
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
Six Months Ended June 30, |
|
||||
|
|
2003 |
|
2002 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Premiums received, net |
|
$ |
270,567 |
|
$ |
221,449 |
|
Policy acquisition and other operating expenses paid, net |
|
(98,969 |
) |
(89,958 |
) |
||
Recoverable advances recovered |
|
683 |
|
3,341 |
|
||
Loss and loss adjustment expenses paid, net |
|
(1,490 |
) |
(4,018 |
) |
||
Net investment income received |
|
68,497 |
|
64,055 |
|
||
Federal income taxes paid |
|
(40,645 |
) |
(45,477 |
) |
||
Interest paid |
|
(14,393 |
) |
(4,562 |
) |
||
Other, net |
|
9,300 |
|
(3,856 |
) |
||
Net cash provided by operating activities |
|
193,550 |
|
140,974 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Proceeds from sales of bonds |
|
502,385 |
|
525,741 |
|
||
Purchases of bonds |
|
(828,076 |
) |
(651,050 |
) |
||
Purchases of property and equipment |
|
(348 |
) |
(4,440 |
) |
||
Net decrease in short-term securities |
|
129,366 |
|
5,752 |
|
||
Other investments, net |
|
516 |
|
295 |
|
||
Net cash used for investing activities |
|
(196,157 |
) |
(123,702 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Repayment of surplus notes |
|
(12,500 |
) |
|
|
||
Capital issuance cost |
|
(3,010 |
) |
|
|
||
Net cash used for financing activities |
|
(15,510 |
) |
|
|
||
Net increase (decrease) in cash |
|
(18,117 |
) |
17,272 |
|
||
|
|
|
|
|
|
||
Cash at beginning of period |
|
27,560 |
|
5,882 |
|
||
|
|
|
|
|
|
||
Cash at end of period |
|
$ |
9,443 |
|
$ |
23,154 |
|
(a) In the first six months of 2003 and 2002, the Company received a tax benefit of $4,826 and $2,859, respectively, by utilizing its Parents losses. These amounts were recorded as capital contributions.
See notes to condensed consolidated financial statements.
3
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance company domiciled in the State of New York. The Company and its subsidiaries are primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. In addition, the Company insures guaranteed investment contracts (GICs) issued by FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, CMS), wholly owned subsidiaries of the Parent.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2003 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Companys December 31, 2002 consolidated financial statements and notes thereto. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2003 and 2002 are not necessarily indicative of the operating results for the full year. Certain prior-year balances have been reclassified to conform to the 2003 presentation.
3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company establishes a case basis reserve for unpaid losses and loss adjustment expenses for the present value of the estimated loss when, in managements opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using the then current risk-free rates ranging from 4.77% to 6.1%. For collateralized debt obligations, a case basis reserve is recorded to the extent that the overcollateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100%.
The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case basis reserves or to new case basis reserves to be established in the future. The general reserve is calculated by applying a loss factor to the Companys total net par underwritten and discounting the result at the then current risk-free rates. The loss factor used for this purpose has been determined based upon an independent rating agency study of bond defaults and the Companys portfolio characteristics and history.
Management of the Company periodically evaluates its estimates for losses and loss adjustment expenses and establishes reserves that management believes are adequate to cover the net present value of the ultimate net cost of claims.
4
4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
The Company has insured a number of credit default swaps that it intends, in each case, to insure for the full term of the swap agreements. It considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred and to record changes in fair value as incurred. The Company recorded $23.7 million and $15.3 million in net earned premium under these agreements for the first half of 2003 and 2002, respectively. The changes in fair value, which were gains of $4.1 million and losses of $4.9 million for the first half of 2003 and 2002, respectively, were recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income and in other assets or liabilities. The losses or gains recognized by recording these contracts at fair value will be determined each quarter based upon market pricing of Super Triple-A (defined as having first-loss protection of 1.3 times the level required for a Triple-A rating) swap guarantees. The Company does not believe the fair value adjustments are an indication of potential claims under FSAs guarantees.
5. SECURITIZED LOANS AND NOTES PAYABLE TO AFFILIATE
In 2002, the Company exercised certain rights available under its financial guaranty policies and the indentures relating to certain loan-backed notes issued by trusts. Those rights allowed the Company to accelerate the insured notes and pay claims under its insurance policies on an accelerated basis. Refinancing vehicles reimbursed the Company in whole for its claims payment in exchange for an assignment of certain of the Companys rights against the capital of the trusts. The refinancing vehicles secured the funds to purchase the notes by issuing refinanced notes, with interest rates ranging from 2.898% to 5.718%. These notes were purchased by FSA Asset Management LLC (AMC), a wholly owned subsidiary of the Parent. The Company maintains significant reinsurance, first loss and quota share, in respect of these transactions.
Principal payments due under these refinanced notes for the remainder of 2003 and each of the next five years ending December 31 and thereafter, are as follows (in millions):
Year |
|
Principal
|
|
|
2003 |
|
$ |
|
|
2004 |
|
40.8 |
|
|
2005 |
|
37.1 |
|
|
2006 |
|
35.0 |
|
|
2007 |
|
33.0 |
|
|
2008 |
|
32.2 |
|
|
Thereafter |
|
229.5 |
|
|
Total |
|
$ |
407.6 |
|
6. OUTSTANDING EXPOSURE
The Company limits its exposure to losses from writing financial guaranties by underwriting investment-grade obligations, diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations, as well as through reinsurance. The principal amounts of insured obligations in the asset-backed insured portfolio are backed by the following types of collateral (in millions) at June 30, 2003 and December 31, 2002:
5
|
|
Net of Amounts Ceded |
|
Ceded |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Residential mortgages |
|
$ |
19,609 |
|
$ |
23,379 |
|
$ |
4,607 |
|
$ |
5,480 |
|
Consumer receivables |
|
15,593 |
|
19,454 |
|
5,108 |
|
5,954 |
|
||||
Pooled corporate obligations |
|
79,871 |
|
78,113 |
|
12,572 |
|
13,007 |
|
||||
Investor-owned utility obligations |
|
545 |
|
619 |
|
312 |
|
348 |
|
||||
Other asset-backed obligations(1) |
|
7,493 |
|
6,958 |
|
3,662 |
|
3,225 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total asset-backed obligations |
|
$ |
123,111 |
|
$ |
128,523 |
|
$ |
26,261 |
|
$ |
28,014 |
|
(1) Includes $3,010 million and $2,430 million, in 2003 and 2002, respectively, in Net of Amounts Ceded relating to FSA-insured GICs issued by CMS.
Net of amount ceded and ceded amounts are not necessarily reflective of the risk retained by FSA since FSA employs first loss reinsurance on a material portion of its asset-backed business.
The principal amount of insured obligations in the municipal insured portfolio includes the following types of issues (in millions) at June 30, 2003 and December 31, 2002:
|
|
Net of Amounts Ceded |
|
Ceded |
|
||||||||
Types of Issues |
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
General obligation bonds |
|
$ |
61,127 |
|
$ |
54,563 |
|
$ |
18,986 |
|
$ |
18,388 |
|
Housing revenue bonds |
|
6,934 |
|
5,833 |
|
1,848 |
|
1,687 |
|
||||
Municipal utility revenue bonds |
|
27,431 |
|
23,442 |
|
13,827 |
|
13,468 |
|
||||
Health care revenue bonds |
|
6,005 |
|
5,970 |
|
6,625 |
|
6,683 |
|
||||
Tax-supported bonds (non-general obligation) |
|
30,203 |
|
27,556 |
|
12,773 |
|
12,391 |
|
||||
Transportation revenue bonds |
|
9,622 |
|
7,640 |
|
6,865 |
|
5,748 |
|
||||
Other municipal bonds |
|
13,559 |
|
12,173 |
|
6,755 |
|
5,761 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total municipal obligations |
|
$ |
154,881 |
|
$ |
137,177 |
|
$ |
67,679 |
|
$ |
64,126 |
|
7. CAPITAL RESOURCES
In June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the CPS Securities, investing the proceeds in high quality commercial paper and providing the Company with a put option for selling to the trust non-cumulative redeemable perpetual preferred stock (the Preferred Stock) of the Company. If a put option were to be exercised by the Company, the applicable trust would use the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, and transfer such proceeds to the Company in exchange for Preferred Stock of the Company. The Company pays a floating put premium to the trusts. The cost of the structure was $3.0 million in the second quarter of 2003 and was recorded in equity. The trusts are vehicles for providing the Company access to new capital at its sole discretion through the exercise of the put option.
The Company does not consider itself to be the primary beneficiary of the trusts under Financial Accounting Standards Board (FASB) Interpretation No. 46 Consolidation of Variable Interest Entities (FIN No. 46) because it does not retain the majority of the residual benefits or expected losses.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN No. 46 addresses consolidation of VIEs which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the
6
direct or indirect ability to make decisions about the entitys activities through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions of FIN No. 46 will be effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. The implementation of FIN No. 46, will require the Company to consolidate for financial reporting purposes, for the first time, FSA Global Funding Limited (FSA Global) and Canadian Global Funding Corporation (Canadian Global). FIN No. 46 requires that, upon consolidation, the Company shall initially measure the VIEs assets, liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation will be reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle is not expected to have a material impact on the results of operations of the Company. In addition, on July 1, 2003, the Company obtained control provisions of another VIE, Premier International Funding Co. (Premier), which will require the Company to consolidate Premier beginning July 1, 2003. At June 30, 2003, FSA Global had total assets and total liabilities of approximately $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be eliminated with assets and liabilities of Premier, when consolidated. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Globals net income is determined net of FSA Globals premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to FSA Global are included in the Companys outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were no case basis reserves required for any transactions related to FSA Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which $97.6 million has been invested in GICs issued by CMS. As of June 30, 2003, the Company was carrying gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. The Company will continue to analyze the effects of FIN No. 46, considering the complexity of practical application to the Companys transactions.
9. SUBSEQUENT EVENT
On August 12, 2003, the Company, with the approval of the Superintendent of Insurance of the State of New York, repaid $37.5 million of surplus notes to the Parent.
7
Exhibit 99.2
AMENDMENT NO. 5 TO THE CREDIT AGREEMENT
AMENDMENT NO. 5 TO THE CREDIT AGREEMENT (this Amendment), dated as of April 25, 2003, among Financial Security Assurance Inc. (FSA), the additional borrowers party hereto (together with FSA, the Borrowers), various banks (the Banks), ABN AMRO Bank N.V. (ABN), The Bank of Nova Scotia (Scotia), Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch (NordLB), KeyBank National Association (KeyBank and, together with ABN, Scotia and NordLB, the New Banks) and Deutsche Bank AG, New York Branch, as agent (the Agent). All capitalized terms defined in the hereinafter defined Credit Agreement shall have the same meaning when used herein unless otherwise defined herein.
W I T N E S S E T H :
WHEREAS, the Borrowers, the Banks and the Agent entered into a Credit Agreement, dated as of August 31, 1998 (as amended to date, the Credit Agreement); and
WHEREAS, each of the New Banks desires to become a Bank, and KeyBank desires to become the syndication agent, under the Credit Agreement; and
WHEREAS, the Borrowers, the Banks and the Agent desire that The Bank of New York become the successor Agent with respect to the Credit Agreement; and
WHEREAS, The Bank of New York desires to become the successor Agent with respect to the Credit Agreement; and
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows:
1. New Banks; Syndication Agent . Upon execution and delivery of this Amendment by the parties hereto, each of the New Banks shall become a Bank, and KeyBank shall become the syndication agent, for all purposes of the Credit Agreement.
2. Exiting Banks . As of the open of business on April 25, 2003, neither Bayerische Landesbank Girozentrale, New York Branch, nor Deutsche Bank AG, New York and Cayman Islands Branches (each an Exiting Bank), shall have any further obligations under, or be a Bank for purposes of, the Credit Agreement. Each Exiting Bank shall, however, be entitled to receive its Commitment Commission to, but excluding, April 25, 2003, and any other amounts, if any, owing to it under the Credit Agreement, including, without limitation, any indemnities it may be entitled to pursuant to Section 12.01 of the Credit Agreement at any time in the future.
3. Successor Agent . Effective upon the execution and delivery of this Amendment, Deutsche Bank AG, New York Branch, shall cease to be, and The Bank of New
York shall become, the Agent under the Credit Facility, all references in the Credit Facility or any Exhibit or Schedule thereto to Deutsche Bank AG, New York Branch shall be deemed references to The Bank of New York and all references in any Exhibit to the address 31 West 52 nd Street, New York, New York 10019 shall be deemed references to the address 1 Wall Street, New York, New York 10286.
4. Amendments to the Credit Agreement . (a) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term Notice Office and replacing it with the following:
Notice Office shall mean the office of the Agent located at 1 Wall Street, New York, New York 10286, Attention: Ms. Susan Baratta and Mr. David Trick, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto.
(b) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term Payment Office and replacing it with the following:
Payment Office shall mean the office of the Agent located at 1 Wall Street, New York, New York 10286, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto.
(c) The defined term Prime Lending Rate in Section 1.01 of the Credit Agreement is hereby amended by deleting the words Deutsche Bank AG, New York Branch each time they appear, and in each instance replacing them with the words The Bank of New York.
(d) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term Reference Banks and replacing it with the following:
Reference Banks shall mean The Bank of New York, KeyBank National Association and WestLB AG.
(e) The first sentence of Section 2.01(a) of the Credit Agreement is hereby amended by adding the words , but excluding, immediately prior to the words the Revolving Loan Expiry Date.
(f) The first sentence of Section 3.01(a) of the Credit Agreement is hereby amended in its entirety to read as follows:
FSA agrees to pay to the Agent for distribution to each Bank a commitment commission (the Commitment Commission) for the period from (and including) the Effective Date to (but excluding) the Expiry Date (or such earlier date as the Total Commitment shall have been terminated), computed at a rate equal to 0.125% per annum on the daily average Unutilized Commitment of such Bank.
(g) The first sentence of Section 3.04(a) of the Credit Agreement is hereby amended in its entirety to read as follows:
2
The expiration of the Commitments of the Banks to make Revolving Loans shall be April 23, 2004 (the Revolving Loan Expiry Date); provided, however, that before (but not earlier than 60 days nor later than 30 days before) the Revolving Loan Expiry Date then in effect, FSA may make a written request (an Extension Request) to the Agent at its Notice Office and to each of the Banks that the Revolving Loan Expiry Date be extended by 364 days.
(h) Section 10.03 of the Credit Agreement is hereby amended by deleting the word on the penultimate time it appears therein and replacing it with the word or.
(i) Section 11.01 of the Credit Agreement is hereby amended by deleting the first sentence thereof in its entirety, and replacing it with the following:
The Banks hereby designate The Bank of New York as Agent to act as specified herein and in the other Credit Documents.
(j) Section 12.03 of the Credit Agreement is hereby amended by inserting the words (with telephonic confirmation in the case of any notice to the Agent) immediately following the word telecopied the first time it appears therein.
(k) Section 12.04(c) of the Credit Agreement is hereby amended by inserting the words and payment of a $3,500 assignment fee to the Agent by the relevant assignor or assignee, immediately following the words subject to the restrictions of, Section 12.04(b),.
(l) Section 12.12 of the Credit Agreement is hereby amended by adding FSA, immediately following the words in writing signed by.
(m) Schedule II of the Credit Agreement is hereby deleted in its entirety and replaced with Exhibit A hereto attached.
(n) Schedule III of the Credit Agreement is hereby deleted in its entirety and replaced with Exhibit B hereto attached.
(o) Exhibit A of the Credit Agreement is hereby amended by deleting the addressee block in its entirety and replacing it with the following:
The Bank of New York, as Agent
1 Wall Street
New York, New York 10286
Attention: Ms. Susan Baratta and Mr. David Trick
5. Representations and Warranties . In order to induce the Banks, the New Banks, the Agent and the successor Agent to enter into this Amendment, each Borrower hereby represents and warrants that:
(a) no Default or Event of Default exists or will exist as of the date hereof and after giving effect to this Amendment; and
3
(b) as of the date hereof, and after giving effect to this Amendment, all representations, warranties and agreements of such Borrower contained in the Credit Agreement will be true and correct in all material respects.
6. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PROVISIONS THEREOF.
7. Agreement Not Otherwise Amended . This Amendment is limited precisely as written and shall not be deemed to be an amendment, consent, waiver or modification of any other term or condition of the Credit Agreement or any of the instruments or agreements referred to therein, or prejudice any right or rights which the Banks, the New Banks, the Agent, the successor Agent or any of them may now have or may have in the future under or in connection with the Credit Agreement or any of the instruments or agreements referred to therein. Except as expressly modified hereby, the terms and provisions of the Credit Agreement shall continue in full force and effect. Whenever the Credit Agreement is referred to in the Credit Agreement or any of the instruments, agreements or other documents or papers executed and delivered in connection therewith, it shall be deemed to be a reference to the Credit Agreement as modified hereby.
8. Counterparts . This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the date first above written.
|
FINANCIAL SECURITY ASSURANCE INC. |
||
|
|
||
|
|
||
|
By |
|
/s/ Joseph W. Simon |
|
|
Name: |
Joseph W. Simon |
|
|
Title: |
Chief Financial Officer |
|
|
||
|
|
||
|
FSA INSURANCE COMPANY |
||
|
|
||
|
|
||
|
By |
|
/s/ Joseph W. Simon |
|
|
Name: |
Joseph W. Simon |
|
|
Title: |
Chief Financial Officer |
4
|
FINANCIAL SECURITY ASSURANCE
|
||
|
|
||
|
|
||
|
By |
|
/s/ Bruce E. Stern |
|
|
Name: |
Bruce E. Stern |
|
|
Title: |
Senior Manager |
|
|
||
|
|
||
|
THE BANK OF NEW YORK,
|
||
|
|
||
|
|
||
|
By |
|
/s/ Evan Glass |
|
|
Name: |
Evan Glass |
|
|
Title: |
Vice President |
|
|
||
|
|
||
|
DEUTSCHE BANK AG, NEW YORK BRANCH,
|
||
|
|
||
|
|
||
|
By |
|
/s/ Ruth Leung |
|
|
Name: |
Ruth Leung |
|
|
Title: |
Director |
|
|
||
|
|
||
|
By |
|
/s/ Clinton M. Johnson |
|
|
Name: |
Clinton M. Johnson |
|
|
Title: |
Managing Director |
|
|
||
|
|
||
|
ABN AMRO BANK N.V. |
||
|
|
||
|
|
||
|
By |
|
/s/ Neil R. Stein |
|
|
Name: |
Neil R. Stein |
|
|
Title: |
Group Vice President |
|
|
||
|
|
||
|
By |
|
/s/ Michael DeMarco |
|
|
Name: |
Michael DeMarco |
|
|
Title: |
Assistant Vice President |
5
|
KBC BANK N.V. |
||
|
|
||
|
|
||
|
By |
|
/s/ Robert Snauffer |
|
|
Name: |
Robert Snauffer |
|
|
Title: |
First Vice President |
|
|
||
|
|
||
|
By |
|
/s/ Edward Eijlers |
|
|
Name: |
Edward Eijlers |
|
|
Title: |
Assistant Vice President |
|
|
||
|
|
||
|
KEYBANK NATIONAL ASSOCIATION |
||
|
|
||
|
|
||
|
By |
|
/s/ Mary K. Young |
|
|
Name: |
Mary K. Young |
|
|
Title: |
Vice President |
|
|
||
|
|
||
|
NORDDEUTSCHE LANDESBANK
|
||
|
|
||
|
|
||
|
By |
|
/s/ Georg L. Peters |
|
|
Name: |
Georg L. Peters |
|
|
Title: |
Vice President |
|
|
||
|
|
||
|
By |
|
/s/ Jan de Jonge |
|
|
Name: |
Jan de Jonge |
|
|
Title: |
Vice President |
|
|
||
|
|
||
|
THE BANK OF NOVA SCOTIA |
||
|
|
||
|
|
||
|
By |
|
/s/ J. W. Campbell |
|
|
Name: |
J. W. Campbell |
|
|
Title: |
Managing Director |
6
|
WESTLB AG, NEW YORK BRANCH |
||
|
|
||
|
|
||
|
By |
|
/s/ Lillian Tung Lum |
|
|
Name: |
Lillian Tung Lum |
|
|
Title: |
Executive Director |
|
|
||
|
|
||
|
By |
|
/s/ David J. Sellers |
|
|
Name: |
David J. Sellers |
|
|
Title: |
Director |
7
EXHIBIT A
SCHEDULE II
SCHEDULE OF COMMITMENTS
Bank |
|
Commitment |
|
|
|
|
|
|
|
The Bank of New York |
|
$ |
25,000,000 |
|
|
|
|
|
|
KBC Bank N.V. |
|
25,000,000 |
|
|
|
|
|
|
|
KeyBank National Association |
|
25,000,000 |
|
|
|
|
|
|
|
WestLB AG, New York Branch |
|
25,000,000 |
|
|
|
|
|
|
|
The Bank of Nova Scotia |
|
20,000,000 |
|
|
|
|
|
|
|
ABN AMRO Bank N.V. |
|
15,000,000 |
|
|
|
|
|
|
|
Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch |
|
15,000,000 |
|
|
|
|
|
|
|
Total |
|
$ |
150,000,000 |
|
EXHIBIT B
SCHEDULE III
LENDING OFFICES
Bank |
|
Bank Rate Office |
|
Eurodollar Lending Office |
|
|
|
|
|
The Bank of New York |
|
1 Wall
Street
|
|
1 Wall
Street
|
|
|
|
|
|
KBC Bank N.V. |
|
125 West 55
th
Street
|
|
125 West 55
th
Street
|
|
|
|
|
|
KeyBank National
|
|
127 Public
Square
|
|
127 Public
Square
|
|
|
|
|
|
WestLB AG, New York
|
|
1211 Avenue
of the Americas
|
|
1211 Avenue
of the Americas
|
|
|
|
|
|
The Bank of Nova Scotia |
|
One Liberty
Plaza
|
|
One Liberty
Plaza
|
|
|
|
|
|
ABN AMRO Bank N.V. |
|
208 South
LaSalle Street
|
|
208 South
LaSalle Street
|
|
|
|
|
|
Norddeutsche Landesbank
|
|
NORD/LB New
York Branch
|
|
NORD/LB
Cayman Islands Branch
|
Exhibit 99.3
FOURTH AMENDMENT TO SECOND AMENDED
AND
RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (the Fourth Amendment) dated as of the 30th day of April, 2003 is entered into among FINANCIAL SECURITY ASSURANCE INC. (FSA) and FSA INSURANCE COMPANY (FSAIC) (each a Borrower and collectively, the Borrowers), the BANKS party hereto and BAYERISCHE LANDESBANK (formerly known as Bayerische Landesbank Girozentrale), acting through its New York Branch in its capacity as Agent pursuant to Article XI of the Second Amended and Restated Credit Agreement (as hereinafter defined).
W I T N E S S E T H :
WHEREAS, Bayerische Landesbank Girozentrale (now known as Bayerische Landesbank), in its capacity as Bank and as Agent, Financial Security Assurance Inc., Financial Security Assurance of Maryland Inc. and Financial Security Assurance of Oklahoma, Inc. have previously entered into that Credit Agreement dated as of April 30, 1996 (the 1996 Credit Agreement);
WHEREAS, Bayerische Landesbank Girozentrale (now known as Bayerische Landesbank), in its capacity as Bank and as Agent, Financial Security Assurance Inc., Financial Security Assurance of Maryland Inc., Financial Security Assurance of Oklahoma, Inc., Landesbank Hessen-Thüringen Girozentrale and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank Nederland, New York Branch (RaboBank) have entered into that First Amended and Restated Credit Agreement dated as of April 30, 1997 (the First Amended and Restated Credit Agreement), thereby amending and restating the 1996 Credit Agreement, and that First Amendment to First Amended and Restated Credit Agreement dated as of April 30, 1998 (the First Amendment which together with the First Amended and Restated Credit Agreement is herein referred to as the 1997 Credit Agreement);
WHEREAS, Bayerische Landesbank Girozentrale (now known as Bayerische Landesbank), acting through its New York Branch acting in its capacity as Bank (BLB) and as Agent (Agent), FSA and FSAIC, Landesbank Hessen-Thüringen Girozentrale, acting through its New York Branch (Helaba), RaboBank, Westdeutsche Landesbank Girozentrale (now known as WestLB AG), New York Branch (WestLB), Deutsche Bank AG, New York Branch (DB), KBC Bank N.V. (KBC), First Union National Bank of North Carolina (First Union) and Norddeutsche Landesbank Girozentrale, New York Branch (NordLB) have entered into that Second Amended and Restated Credit Agreement dated as of April 30, 1999 (the Second Amended and Restated Credit Agreement), thereby amending and restating the 1997 Credit Agreement;
WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, First Union and NordLB entered into the First Amendment to Second Amended and Restated Credit Agreement dated as of April 30, 2000 (the First Amendment);
WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, First Union, NordLB, Landesbank Baden-Württemberg, acting through its New York Branch (LBBW) and The Bank of New York (BNY) entered into the Second Amendment to Second Amended and Restated Credit Agreement dated as of April 30, 2001 (the Second Amendment) to further amend the Second Amended and Restated Credit Agreement in order to terminate the commitment of First Union, to establish commitments by LBBW and BNY, to adjust the commitments of RaboBank and DB and to adjust the Contingent Commitments of the Part C Banks;
WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, NordLB, LBBW and BNY entered into the Third Amendment to Second Amended and Restated Credit Agreement dated as of April 30,2002 (the Third Amendment) to further amend the Second Amended and Restated Credit Agreement in order to amend the definition of Loss Threshold Amount and extend the Expiry Date; and
WHEREAS, the parties hereto wish to further amend the Second Amended and Restated Credit Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Second Amended and Restated Credit Agreement as follows:
SECTION 1. AMENDMENTS .
1.1. Loss Threshold Amount Definition . The definition of Loss Threshold Amount in the Second Amended and Restated Credit Agreement is hereby amended by deleting $240 Million in the second line and inserting $325 Million in its place.
1.2 Establishment of Commitment of The Bank of Nova Scotia . The signature of The Bank of Nova Scotia, New York Agency (Scotia) attached hereto is hereby added to the Second Amended and Restated Credit Agreement following the signature page thereto of BNY. Scotia shall be a Bank under the Second Amended and Restated Credit Agreement with the commitment reflected in Schedule I thereto as hereby amended.
1.3. Amendments to Commitments . Schedule I to the Second Amended and Restated Credit Agreement is hereby deleted and in place thereof Schedule I hereto is inserted. On the date hereof the Borrowers shall execute and deliver Notes in the form of Exhibits A, B, C, D, E, F and G hereto to BLB, Helaba, RaboBank, Scotia, WestLB, NordLB and DB respectively, such Notes constituting Notes under the Second Amended and Restated Credit Agreement. Promptly following such delivery BLB, Helaba, RaboBank, WestLB, NordLB and DB shall return to the Borrowers the Notes previously made by the Borrowers in their favor pursuant to the Second Amended and Restated Credit Agreement.
2
SECTION 2. EXTENSION OF EXPIRY DATE .
By executing this Fourth Amendment each Bank agrees to extend the Expiry Date to April 30, 2010 and the Expiry Date is hereby so extended.
SECTION 3. FULL FORCE AND EFFECT .
The Second Amended and Restated Credit Agreement, as heretofore amended, is hereby amended to the extent provided in this Fourth Amendment and, except as specifically provided herein, the Second Amended and Restated Credit Agreement shall remain in full force and effect in accordance with its terms.
SECTION 4. DEFINITIONS .
All capitalized terms used in this Fourth Amendment and not otherwise defined shall have the meanings set forth in the Second Amended and Restated Credit Agreement, as amended.
SECTION 5. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE .
(a) This Fourth Amendment and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York. Any legal action or proceeding against any Borrower with respect to this Fourth Amendment or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Fourth Amendment, any Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrowers irrevocably consent to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrowers at their addresses set forth opposite its signature below, such service to become effective 30 days after such mailing. Except as otherwise provided in Section 4.05 of the Second Amended and Restated Credit Agreement, nothing herein shall affect the right of the Agent or any Bank under this Fourth Amendment to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Borrower in any other jurisdiction.
(b) Each Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Fourth Amendment or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.
3
SECTION 6. HEADINGS .
Section headings in this Fourth Amendment are included herein for convenience of reference only and shall not have any effect for purposes of interpretation or construction of the terms of this Fourth Amendment.
SECTION 7. COUNTERPARTS .
This Fourth Amendment may be signed in any number of counterpart copies, but all such copies shall constitute one and the same instrument.
SECTION 8. REPRESENTATIONS .
Each party hereto hereby represents and warrants to the other that this Fourth Amendment has been duly authorized and validly executed by it and that the Second Amended and Restated Credit Agreement as heretofore amended and as hereby amended constitutes its valid obligation enforceable in accordance with its terms.
SECTION 9. CONDITIONS PRECEDENT .
As conditions precedent to the effectiveness of this Fourth Amendment, the Borrower shall:
(a) execute and deliver to the Agent the Notes referred to herein in Section 1.3; and
(b) pay an upfront fee in the amount of $21,250, for distribution by the Agent to the following Banks in the amounts set forth opposite the names of such Bank:
Bank |
|
Upfront Fee |
|
|
|
|
|
|
|
BLB |
|
$ |
2,500 |
|
Helaba |
|
$ |
1,250 |
|
WestLB |
|
$ |
2,500 |
|
DB |
|
$ |
6,250 |
|
NordLB |
|
$ |
3,750 |
|
Scotia |
|
$ |
5,000 |
|
SECTION 10. EXPENSES.
FSA shall pay to the Agent the fees and expenses of counsel to the Agent in connection with this Fourth Amendment.
[Remainder of Page Left Intentionally Blank]
4
IN WITNESS WHEREOF , the parties hereto have caused this Fourth Amendment to be duly executed and delivered as of the date and year first written above.
|
BORROWERS: |
||
|
|
||
|
FINANCIAL SECURITY ASSURANCE INC. |
||
|
|
||
|
|
||
|
By |
|
/s/ Joseph W. Simon |
|
Name: |
Joseph W. Simon |
|
|
Title: |
Managing Director and |
|
|
|
Chief Financial Officer |
|
|
|
||
|
|
||
|
FSA INSURANCE COMPANY |
||
|
|
||
|
|
||
|
By |
|
/s/ Joseph W. Simon |
|
Name: |
Joseph W. Simon |
|
|
Title: |
Managing Director and
|
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
AGENT: |
||
|
|
||
|
BAYERISCHE
LANDESBANK, Acting
|
||
|
|
||
|
|
||
|
By |
|
/s/ Scott M. Allison |
|
Name: |
Scott M. Allison |
|
|
Title: |
First Vice President |
|
|
|
||
|
|
||
|
By |
|
/s/ Robert J. Albano |
|
Name: |
Robert J. Albano |
|
|
Title: |
Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
BANKS: |
||
|
|
||
|
BAYERISCHE LANDESBANK,
Acting
|
||
|
|
||
|
|
||
|
By |
|
/s/ Scott M. Allison |
|
Name: |
Scott M. Allison |
|
|
Title: |
Vice President |
|
|
|
||
|
|
||
|
By |
|
/s/ Robert J. Albano |
|
Name: |
Robert J. Albano |
|
|
Title: |
Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
LANDESBANK
HESSEN-THÜRINGEN
|
||
|
|
||
|
|
||
|
By |
|
/s/ Bill Dorante |
|
Name: |
Bill Dorante |
|
|
Title: |
Senior Vice President |
|
|
|
Public Finance |
|
|
|
||
|
|
||
|
By |
|
/s/ Irina Rakhlis |
|
Name: |
Irina Rakhlis |
|
|
Title: |
Credit Analyst |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
COÖPERATIEVE
CENTRALE
|
|||
|
|
|||
|
|
|||
|
By |
|
/s/ Raymond K. Miller |
|
|
Name: |
Raymond K. Miller |
||
|
Title: |
Managing Director |
||
|
|
|
CMT & Credit |
|
|
|
|||
|
|
|||
|
By |
|
/s/ Angela R. Reilly |
|
|
Name: |
Angela R. Reilly |
||
|
Title: |
Executive Director |
||
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
DEUTSCHE BANK
AG, NEW YORK
|
||
|
|
||
|
|
||
|
By |
|
/s/ Ruth Leung |
|
Name: |
Ruth Leung |
|
|
Title: |
Director |
|
|
|
||
|
|
||
|
By |
|
/s/ Clinton Johnson |
|
Name: |
Clinton Johnson |
|
|
Title: |
Managing Director |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
WESTLB AG, NEW YORK BRANCH |
||
|
|
||
|
|
||
|
By |
|
/s/ Lillian Tung Lum |
|
Name: |
Lillian Tung Lum |
|
|
Title: |
Executive Director |
|
|
|
||
|
|
||
|
By |
|
/s/ David J. Sellers |
|
Name: |
David J. Sellers |
|
|
Title: |
Director |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
KBC BANK N.V. |
||
|
|
||
|
|
||
|
By |
|
/s/ Jean Pierre Diels |
|
Name: |
Jean Pierre Diels |
|
|
Title: |
First Vice President |
|
|
|
||
|
|
||
|
By |
|
/s/ Eric Raskin |
|
Name: |
Eric Raskin |
|
|
Title: |
Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
NORDDEUTSCHE
LANDESBANK
|
||
|
|
||
|
|
||
|
By |
|
/s/ Josef Haas |
|
Name: |
Josef Haas |
|
|
Title: |
Vice President |
|
|
|
||
|
|
||
|
By |
|
/s/ Stephen K. Hunter |
|
Name: |
Stephen K. Hunter |
|
|
Title: |
Senior Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
LANDESBANK
BADEN-WÜRTTEMBERG,
|
||
|
|
||
|
By |
|
/s/ Ronald Bertolini |
|
Name: |
Ronald Bertolini |
|
|
Title: |
General Manager |
|
|
|
||
|
By |
|
/s/ Robert F. OBrien |
|
Name: |
Robert F. OBrien |
|
|
Title: |
Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
|
THE BANK OF NEW YORK |
||
|
|
||
|
|
||
|
By |
|
/s/ Evan Glass |
|
Name: |
Evan Glass |
|
|
Title: |
Vice President |
[Signatures continued on following page]
[Signature page to Fourth Amendment]
SCHEDULE I
COMMITMENTS
PART A
Name |
|
Commitment |
|
|
|
|
|
|
|
Bayerische Landesbank, New York Branch |
|
$ |
45,000,000 |
|
|
|
|
|
|
Landesbank Hessen-Thüringen Girozentrale, New York Branch |
|
35,000,000 |
|
|
|
|
|
|
|
Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank Nederland, New York Branch |
|
30,000,000 |
|
|
|
|
|
|
|
WestLB AG, New York Branch |
|
45,000,000 |
|
|
|
|
|
|
|
Deutsche Bank AG, New York Branch |
|
50,000,000 |
|
|
|
|
|
|
|
KBC Bank N.V. |
|
25,000,000 |
|
|
|
|
|
|
|
Landesbank Baden-Württemberg New York Branch |
|
20,000,000 |
|
|
|
|
|
|
|
The Bank of New York |
|
20,000,000 |
|
|
|
|
|
|
|
Norddeutsche Landesbank Girozentrale, New York Branch |
|
35,000,000 |
|
|
|
|
|
|
|
The Bank of Nova Scotia, New York Agency |
|
20,000,000 |
|
|
|
|
|
|
|
Total |
|
$ |
325,000,000 |
|
PART B
Part B Banks
Deutsche Bank AG, New York Branch
WestLB AG, New York Branch
KBC Bank N.V.
Norddeutsche Landesbank Girozentrale
The Bank of New York
The Bank of Nova Scotia, New York Agency
I-1
PART C
Part C Banks and Contingent Commitments
Name |
|
Contingent Commitment |
|
|
|
|
|
|
|
Bayerische Landesbank, New York Branch |
|
$ |
33,750,000 |
|
|
|
|
|
|
Coöperatieve Centrale
|
|
$ |
28,750,000 |
|
|
|
|
|
|
Total |
|
$ |
62,500,000 |
|
I-2
EXHIBIT A
NOTE
$78,750,000 |
|
New York, New York |
|
|
April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of BAYERISCHE LANDESBANK , (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $45,000,000 constituting the Banks Commitment under the Agreement (defined below) plus $33,750,000 constituting the Banks Contingent Commitment under the Agreement or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
|
FINANCIAL SECURITY ASSURANCE INC. |
|||
|
|
|||
|
|
|||
|
By |
|
||
|
Name |
|
||
|
Title |
|
||
|
|
|||
|
|
|||
|
FSA INSURANCE COMPANY |
|||
|
|
|||
|
|
|||
|
By |
|
||
|
Name |
|
||
|
Title |
|
||
A-2
GRID
Date |
|
Amount
|
|
Unpaid
|
|
Principal
|
|
Notation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
A-3
EXHIBIT B
NOTE
$35,000,000 |
|
New York, New York |
|
|
April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of LANDESBANK HESSEN-THÜRINGEN GIROZENTRALE , (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $35,000,000 constituting the Banks Commitment under the Agreement (defined below) or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
|
FINANCIAL SECURITY ASSURANCE INC. |
|||
|
|
|||
|
|
|||
|
By |
|
||
|
Name |
|
||
|
Title |
|
||
|
|
|||
|
|
|||
|
FSA INSURANCE COMPANY |
|||
|
|
|||
|
|
|||
|
By |
|
||
|
Name |
|
||
|
Title |
|
||
B-2
GRID
Date |
|
Amount
|
|
Unpaid
|
|
Principal
|
|
Notation
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
B-3
EXHIBIT C
NOTE
$58,750,000 |
|
New York, New York |
|
|
April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of COÖPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. RABOBANK NEDERLAND , New York Branch, (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $30,000,000 constituting the Banks Commitment under the Agreement (defined below) plus $28,750,000 constituting the Banks Contingent Commitment under the Agreement or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
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FINANCIAL SECURITY ASSURANCE INC. |
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FSA INSURANCE COMPANY |
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C-2
GRID
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C-3
EXHIBIT D
NOTE
$20,000,000 |
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New York, New York |
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April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of THE BANK OF NOVA SCOTIA , New York Agency, (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $20,000,000 constituting the Banks Commitment under the Agreement (defined below) or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
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FINANCIAL SECURITY ASSURANCE INC. |
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FSA INSURANCE COMPANY |
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D-2
GRID
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D-3
EXHIBIT E
NOTE
$45,000,000 |
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New York, New York |
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April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of WESTLB AG , New York Branch, (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $45,000,000 constituting the Banks Commitment under the Agreement (defined below) or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
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FINANCIAL SECURITY ASSURANCE INC. |
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FSA INSURANCE COMPANY |
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E-2
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E-3
EXHIBIT F
NOTE
$35,000,000 |
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New York, New York |
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April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of NORDDEUTSCHE LANDESBANK GIROZENTRALE , New York Branch, (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $35,000,000 constituting the Banks Commitment under the Agreement (defined below) or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
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FINANCIAL SECURITY ASSURANCE INC. |
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FSA INSURANCE COMPANY |
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F-3
EXHIBIT G
NOTE
$50,000,000 |
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New York, New York |
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April 30, 2003 |
FOR VALUE RECEIVED, FINANCIAL SECURITY ASSURANCE INC. and FSA INSURANCE COMPANY (the Borrowers) hereby jointly and severally promise to pay to the order of DEUTSCHE BANK AG , New York Branch, (the Bank), in lawful money of the United States of America in immediately available funds, at the office of Bayerische Landesbank, New York Branch, as Agent, located at 560 Lexington Avenue, New York, New York 10022, on the Expiry Date (as defined in the Agreement referred to below) the principal sum of $50,000,000 constituting the Banks Commitment under the Agreement (defined below) or, if less, the then unpaid principal amount of all Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrowers, jointly and severally, promise also to pay interest on the unpaid principal amount hereof in like money at said office at the rates and at the times provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Second Amended And Restated Credit Agreement, dated as of April 30, 1999, among the Borrowers and the Banks from time to time party thereto (including the Bank), and Bayerische Landesbank, acting through its New York Branch, as Agent (as amended, modified and supplemented from time to time, the Agreement), and is entitled to the benefits thereof. This Note is secured by the Security Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement.
Except as otherwise provided in the Agreement, the Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note.
The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Borrowers obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWERS UNDER THIS NOTE ARE LIMITED AS PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT .
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
THIS NOTE HAS BEEN DULY EXECUTED UNDER SEAL BY THE DULY AUTHORIZED REPRESENTATIVES OF THE BORROWERS AS OF THE DATE FIRST WRITTEN ABOVE.
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FINANCIAL SECURITY ASSURANCE INC. |
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FSA INSURANCE COMPANY |
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GRID
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G-3
Exhibit 99.4
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
DEFERRED COMPENSATION PLAN
as of May 16, 2003
TABLE OF CONTENTS
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CREDITING OF DEFERRAL AMOUNTS AND ACCRUAL OF INVESTMENT GAINS OR LOSSES |
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16 |
FINANCIAL SECURITY ASSURANCE HOLDINGS
LTD.
DEFERRED COMPENSATION PLAN
Unless the context otherwise requires, the following terms, when used herein, shall have the meaning assigned to them in this Article II.
1
2
3
4
5
6
(a) a Participant who previously elected a lump sum payment with respect to a Deferral Amount may select an installment payment option described in this Section 4.7 of the Plan; and
(b) a Participant who previously elected an installment payment option described in this Section 4.7 with respect to a Deferral Amount may select a different installment payment option described in this Section 4.7 which provides for the payment of the Deferral Amount over a longer, but not a shorter, period of time.
Any such change in payment options shall be made by the execution of a valid Deferred Compensation Plan Election Change Form, timely filed with the Company. If such previously elected Deferral Period ended upon termination of employment or directorship, then a Deferred Compensation Plan Election Change Form shall only be effective in respect of Deferral Amounts that would not otherwise have been distributed at least 12 months after the filing of such Form.
4.8 Anything in Section 4.6 or 4.7 to the contrary notwithstanding, on his or her Deferred Compensation Plan Election Form the Participant may elect that in the event of his or her death or Disability any Deferral Period or form of distribution election otherwise applicable to a Deferral Amount is nullified and: (i) distribution shall be made after the date of Disability or death; and (ii) distribution of his or her entire Account, or of any Deferral Amount, shall be made
7
either in a lump sum or in installments payable over a specified number of years, not longer than 15. Unless otherwise elected pursuant to the preceding sentence, in the event of the Participants death or Disability, payment of a Participants Account shall be made in the form of a lump sum as soon as administratively practicable following the date of death or Disability. Any election made pursuant to this Section 4.8 may be changed at any time prior to death or Disability by the execution of a valid Deferred Compensation Plan Election Change Form, timely filed with the Company.
8
9
10
The Participant may, at any time, designate a Beneficiary or Beneficiaries to receive the benefits payable in the event of his or her death (and may designate a successor Beneficiary or Beneficiaries to receive any benefits payable in the event of the death of any other Beneficiary). Each Beneficiary designation shall become effective only when filed in writing with the Company during the Participants lifetime on a form prescribed or accepted by the Company (a Beneficiary Designation Form). The filing of a new Beneficiary Designation Form will cancel any Beneficiary Designation Form previously filed. If no Beneficiary shall be designated by the Participant, or if the designated Beneficiary or Beneficiaries shall not survive the Participant, payment of the Participants Account shall be made to the Participants estate. If a Participant designated that payments be made in installments and did not designate a successor Beneficiary, the Beneficiary of such Participant may submit a Beneficiary Designation Form in respect of himself or herself and the provisions of the Plan shall apply to such Beneficiary as if the Beneficiary were the Participant hereunder.
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18
Exhibit 99.5
PUT OPTION AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
SUTTON CAPITAL TRUST I
Dated June 23, 2003
Preamble
This Put Option Agreement, dated as of June 23, 2003 (this Agreement ), is by and between Financial Security Assurance Inc., a New York domestic stock insurance corporation ( FSA ), and Sutton Capital Trust I (the Trust ), a Delaware statutory trust.
Recitals
WHEREAS, FSA is authorized to issue 500.01 shares of non-cumulative, redeemable, perpetual preferred stock, par value $1,000 per share, designated as Series A Perpetual Preferred Shares , which shares have not been and will not be registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Preferred Stock ); and
WHEREAS, FSA and the Trust desire to enter into a binding agreement pursuant to which FSA will have the right to sell, at its option, the Preferred Stock to the Trust, and the Trust will have an obligation to purchase the Preferred Stock upon FSA s exercise of its option and upon the other terms and conditions agreed upon by the parties.
NOW, THEREFORE, the parties hereto agree as follows:
Agreement has the meaning set forth above in the Preamble.
Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Broker-Dealer has the meaning set forth in the Declaration.
Business Day has the meaning set forth in the Declaration.
CPS Securities has the meaning set forth in the Declaration.
Declaration means the Amended and Restated Declaration of Trust governing the Trust, dated as of the date hereof, as the same may be amended or restated from time to time.
Delayed Auction has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Put Option Premium has the meaning set forth in Section 5.1.
Delayed Put Option Premium Certificate has the meaning set forth in Section 5.2.
Distribution Payment Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Distribution Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Dividend has the meaning set forth in the Restated Charter.
Eligible Assets has the meaning set forth in the Declaration.
Expense Reimbursement Agreement has the meaning set forth in Section 3.2(a).
Federal Funds Effective Rate has the meaning set forth in the Declaration.
Fixed Rate Distribution Event has the meaning set forth in the Restated Charter.
Fixed Rate Election means an election by FSA to pay Dividends on the Preferred Stock at the rate described in clause (iii) of the definition of Dividend Rate set forth in the Restated Charter.
FSA has the meaning set forth above in the Preamble.
Holder has the meaning set forth in the Declaration.
Liquidation Preference has the meaning set forth in the Restated Charter.
Maximum Rate has the meaning set forth in the Restated Charter.
Overnight Rate of Return means the rate earned on the interest and on the principal of the Eligible Assets during the period from each Auction Date until the related Distribution Payment Date and during any Delayed Auction Period, which shall be equal to the Federal Funds Effective Rate then in effect.
2
Preferred Stock has the meaning set forth above in the Recitals.
Preferred Stock Payment Date has the meaning set forth in Section 3.2(a).
Preferred Stock Purchase Price has the meaning set forth in Section 4.1.
Put Notice means a written notice substantially in the form attached hereto as Annex A .
Put Option Premium has the meaning set forth in Section 5.1.
Put Option Premium Certificate has the meaning set forth in Section 5.2.
Redemption Price has the meaning set forth in the Restated Charter.
Restated Charter means the Restated Charter of FSA , a copy of which is attached hereto as Annex C .
Stated Yield means all amounts of interest (including accreted interest) and other payments due and payable (upon maturity or otherwise) on the principal amount of the Eligible Assets (excluding any repayment of principal) held by the Trust during a Distribution Period, plus the amount of interest to be earned based on the Overnight Rate of Return, as calculated on or prior to 11:00 a.m. on the Auction Date for each respective Distribution Period.
Tax Matters Partner has the meaning set forth in the Declaration.
Trust has the meaning set forth above in the Preamble.
Trustee has the meaning set forth in the Declaration.
In this Agreement, any reference to a company shall be construed so as to include any corporation, trust, partnership, limited liability company or other legal entity, wheresoever incorporated or established.
The Put Option Premium for each Distribution Period will be calculated on the Auction Date.
If as a result of losses of principal of or interest on Eligible Assets there is a Delayed Auction, FSA will pay to the Trust, in US dollars, on each Distribution Payment Date during which the put option remains in effect and is exercisable as set forth in Section 2.2 hereof, the Delayed Put Option Premium, in an amount equal to the product of (A) the Delayed Auction Rate on the CPS Securities for the Delayed Auction Period less the excess of (i) the Stated Yield for such Delayed Auction Period over (ii) the expenses of the Trust for such Delayed Auction Period, provided that such amount shall be annualized and expressed as an annual rate with respect to the face amount of the CPS Securities outstanding on the date the Put Option Premium is determined, (B) the aggregate face amount of the CPS Securities outstanding at the time the Delayed Put Option Premium is calculated and (C) a fraction, the numerator of which will be the actual number of calendar days in the respective Delayed Auction Period, and the denominator of which will be 360 days.
The Delayed Put Option Premium for each Delayed Auction Period will be calculated on the Delayed Auction Date.
provided , however , that, notwithstanding the provisions of this Section 6.1, the Trust shall have no further obligations under this Agreement after the termination of this Agreement. In addition, the breach of any covenant made in this Agreement by the Trust shall not terminate this Agreement or limit the rights of FSA hereunder.
If there is any inconsistency between any provision of this Agreement and any other agreement, the provisions of this Agreement shall prevail to the extent of such inconsistency but not otherwise.
If to FSA at:
Financial
Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Treasurer
Facsimile: (212) 339-0897
Copy to: General Counsel
Telephone: (212) 339-3482
Facsimile: (212) 339-0840
10
If to the Trust at:
The Bank of New
York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New
York
Corporate Trust Division
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Facsimile: (212) 437-6155
In the case of any event under Sections 2.3, 7.3 or 14 of the Agreement, FSA shall give notice to:
Standard & Poors Ratings Services at:
Standard & Poors Ratings Services
55 Water Street
New York, New York 10041
Moodys Investors Service, Inc. at:
Moodys Investors Service, Inc.
99 Church Street
New York, New York 10007
This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument.
This Agreement shall enure to the benefit of each party hereto and its successors and assigns and transferees; provided that neither party hereto may transfer its rights and obligations hereunder, by operation of law or otherwise, without the prior written consent of the other party.
11
IN WITNESS WHEREOF the parties hereto have caused this Put Option Agreement to be duly executed as of the day and year first above written.
14
ANNEX A
Form of Put Notice
To:
Sutton
Capital Trust I
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center Route
273 Newark, Delaware 19714
with a copy to:
The Bank of New York
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated as of June 23, 2003 (as heretofore amended, the Put Option Agreement ) entered into between us and you. Terms defined therein shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option Agreement. We hereby require you to pay the Preferred Stock Purchase Price on the Preferred Stock Payment Date, which shall be [ ], to the following account:
[ ] |
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Yours faithfully, |
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for and on behalf of |
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FINANCIAL SECURITY ASSURANCE INC. |
ANNEX B
Put
Option Premium Certificate/
Delayed
Put Option Premium Certificate
Financial
Security Assurance Inc.
Put Option Premium/Delayed Put Option Premium for the
Non-Cumulative Redeemable Perpetual
Preferred Stock of
Financial
Security
Assurance Inc.
1. Distribution Period: [first day of Period]-[last day of Period]: [number of days in period generally 28] |
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2. Auction Rate determined for the Distribution Period on [insert Auction Date]. |
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0.000000 |
% |
$ |
(0 |
) |
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3. Eligible Assets: |
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Issuer |
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Ratings |
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Purchase Price |
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Yield to Maturity |
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Interest |
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4. |
Applicable Federal Funds Effective Rate: 0.00% |
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0.0 |
% |
$ |
0.0 |
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5. |
Broker-Dealer Fees |
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0.0 |
% |
$ |
0.0 |
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6. |
Trustee and Custodian Fees |
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0.0 |
% |
$ |
0.0 |
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7. |
Investment Manager Fee |
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0.0 |
% |
$ |
0.0 |
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8. |
Tax Matters Partner Fee |
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0.0 |
% |
$ |
0.0 |
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9. |
Servicing Agent Fee |
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0.0 |
% |
$ |
0.0 |
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10. |
Rating Agency Fees |
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0.0 |
% |
$ |
0.0 |
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11. |
Tax Fees. Including preparation of returns |
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12. |
Other Fees and Expenses for the Distribution Period, if any [specify such Fees and Expenses, if any] |
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0.0 |
% |
$ |
0.0 |
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13. |
Computation of Put Premium Due on [insert Distribution Payment Date] by 11:00 a.m. New York Time: |
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0.0 |
% |
$ |
0.0 |
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14. |
The Investment Manager is in compliance with the Investment Management Agreement. |
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ANNEX C
Restated
Charter of
Financial Security Assurance Inc.
ANNEX D
Expense Reimbursement Agreement
Exhibit 99.6
PUT OPTION AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
SUTTON CAPITAL TRUST II
Dated June 23, 2003
Preamble
This Put Option Agreement, dated as of June 23, 2003 (this Agreement ), is by and between Financial Security Assurance Inc., a New York domestic stock insurance corporation ( FSA ), and Sutton Capital Trust II (the Trust ), a Delaware statutory trust.
Recitals
WHEREAS, FSA is authorized to issue 500.01 shares of non-cumulative, redeemable, perpetual preferred stock, par value $1,000 per share, designated as Series B Perpetual Preferred Shares , which shares have not been and will not be registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Preferred Stock ); and
WHEREAS, FSA and the Trust desire to enter into a binding agreement pursuant to which FSA will have the right to sell, at its option, the Preferred Stock to the Trust, and the Trust will have an obligation to purchase the Preferred Stock upon FSA s exercise of its option and upon the other terms and conditions agreed upon by the parties.
NOW, THEREFORE, the parties hereto agree as follows:
Agreement has the meaning set forth above in the Preamble.
Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Broker-Dealer has the meaning set forth in the Declaration.
Business Day has the meaning set forth in the Declaration.
CPS Securities has the meaning set forth in the Declaration.
Declaration means the Amended and Restated Declaration of Trust governing the Trust, dated as of the date hereof, as the same may be amended or restated from time to time.
Delayed Auction has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Put Option Premium has the meaning set forth in Section 5.1.
Delayed Put Option Premium Certificate has the meaning set forth in Section 5.2.
Distribution Payment Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Distribution Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Dividend has the meaning set forth in the Restated Charter.
Eligible Assets has the meaning set forth in the Declaration.
Expense Reimbursement Agreement has the meaning set forth in Section 3.2(a).
Federal Funds Effective Rate has the meaning set forth in the Declaration.
Fixed Rate Distribution Event has the meaning set forth in the Restated Charter.
Fixed Rate Election means an election by FSA to pay Dividends on the Preferred Stock at the rate described in clause (iii) of the definition of Dividend Rate set forth in the Restated Charter.
FSA has the meaning set forth above in the Preamble.
Holder has the meaning set forth in the Declaration.
Liquidation Preference has the meaning set forth in the Restated Charter.
Maximum Rate has the meaning set forth in the Restated Charter.
Overnight Rate of Return means the rate earned on the interest and on the principal of the Eligible Assets during the period from each Auction Date until the related Distribution Payment Date and during any Delayed Auction Period, which shall be equal to the Federal Funds Effective Rate then in effect.
2
Preferred Stock has the meaning set forth above in the Recitals.
Preferred Stock Payment Date has the meaning set forth in Section 3.2(a).
Preferred Stock Purchase Price has the meaning set forth in Section 4.1.
Put Notice means a written notice substantially in the form attached hereto as Annex A .
Put Option Premium has the meaning set forth in Section 5.1.
Put Option Premium Certificate has the meaning set forth in Section 5.2.
Redemption Price has the meaning set forth in the Restated Charter.
Restated Charter means the Restated Charter of FSA , a copy of which is attached hereto as Annex C .
Stated Yield means all amounts of interest (including accreted interest) and other payments due and payable (upon maturity or otherwise) on the principal amount of the Eligible Assets (excluding any repayment of principal) held by the Trust during a Distribution Period, plus the amount of interest to be earned based on the Overnight Rate of Return, as calculated on or prior to 11:00 a.m. on the Auction Date for each respective Distribution Period.
Tax Matters Partner has the meaning set forth in the Declaration.
Trust has the meaning set forth above in the Preamble.
Trustee has the meaning set forth in the Declaration.
In this Agreement, any reference to a company shall be construed so as to include any corporation, trust, partnership, limited liability company or other legal entity, wheresoever incorporated or established.
The Put Option Premium for each Distribution Period will be calculated on the Auction Date.
If as a result of losses of principal of or interest on Eligible Assets there is a Delayed Auction, FSA will pay to the Trust, in US dollars, on each Distribution Payment Date during which the put option remains in effect and is exercisable as set forth in Section 2.2 hereof, the Delayed Put Option Premium, in an amount equal to the product of (A) the Delayed Auction Rate on the CPS Securities for the Delayed Auction Period less the excess of (i) the Stated Yield for such Delayed Auction Period over (ii) the expenses of the Trust for such Delayed Auction Period, provided that such amount shall be annualized and expressed as an annual rate with respect to the face amount of the CPS Securities outstanding on the date the Put Option Premium is determined, (B) the aggregate face amount of the CPS Securities outstanding at the time the Delayed Put Option Premium is calculated and (C) a fraction, the numerator of which will be the actual number of calendar days in the respective Delayed Auction Period, and the denominator of which will be 360 days.
The Delayed Put Option Premium for each Delayed Auction Period will be calculated on the Delayed Auction Date.
provided , however , that, notwithstanding the provisions of this Section 6.1, the Trust shall have no further obligations under this Agreement after the termination of this Agreement. In addition, the breach of any covenant made in this Agreement by the Trust shall not terminate this Agreement or limit the rights of FSA hereunder.
If there is any inconsistency between any provision of this Agreement and any other agreement, the provisions of this Agreement shall prevail to the extent of such inconsistency but not otherwise.
If to FSA at:
Financial
Security
Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Treasurer
Facsimile: (212) 339-0897
Copy to: General Counsel
Telephone: (212) 339-3482
Facsimile: (212) 339-0849
10
If to the Trust at:
The Bank of New
York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New
York
Corporate Trust Division
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Facsimile: (212) 437-6155
In the case of any event under Sections 2.3, 7.3 or 14 of the Agreement, FSA shall give notice to:
Standard & Poors Ratings Services at:
Standard & Poors Ratings Services
55 Water Street
New York, New York 10041
Moodys Investors Service, Inc. at:
Moodys Investors Service, Inc.
99 Church Street
New York, New York 10007
This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument.
This Agreement shall enure to the benefit of each party hereto and its successors and assigns and transferees; provided that neither party hereto may transfer its rights and obligations hereunder, by operation of law or otherwise, without the prior written consent of the other party.
11
IN WITNESS WHEREOF the parties hereto have caused this Put Option Agreement to be duly executed as of the day and year first above written.
14
ANNEX A
Form of Put Notice
To:
Sutton
Capital Trust II
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center Route
273 Newark, Delaware 19714
with a copy to:
The Bank of New York
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated as of June 23, 2003 (as heretofore amended, the Put Option Agreement ) entered into between us and you. Terms defined therein shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option Agreement. We hereby require you to pay the Preferred Stock Purchase Price on the Preferred Stock Payment Date, which shall be [ ], to the following account:
[ ] |
|
|
|
Yours faithfully, |
|
|
|
|
|
for and on behalf of |
|
FINANCIAL SECURITY ASSURANCE INC. |
ANNEX B
Put
Option Premium Certificate/
Delayed
Put Option Premium Certificate
Financial
Security Assurance Inc.
Put Option Premium/Delayed Put Option Premium for the
Non-Cumulative Redeemable Perpetual
Preferred Stock of
Financial
Security
Assurance Inc.
1. Distribution Period: [first day of Period]-[last day of Period]: [number of days in period generally 28] |
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|||||||
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2. Auction Rate determined for the Distribution Period on [insert Auction Date]. |
|
0.000000 |
% |
$ |
(0 |
) |
||||
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3. Eligible Assets: |
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|
Issuer |
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Ratings |
|
Purchase Price |
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Yield to Maturity |
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Interest |
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4. |
Applicable Federal Funds Effective Rate: 0.00% |
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0.0 |
% |
$ |
0.0 |
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5. |
Broker-Dealer Fees |
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0.0 |
% |
$ |
0.0 |
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6. |
Trustee and Custodian Fees |
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0.0 |
% |
$ |
0.0 |
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7. |
Investment Manager Fee |
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0.0 |
% |
$ |
0.0 |
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8. |
Tax Matters Partner Fee |
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0.0 |
% |
$ |
0.0 |
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9. |
Servicing Agent Fee |
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0.0 |
% |
$ |
0.0 |
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10. |
Rating Agency Fees |
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0.0 |
% |
$ |
0.0 |
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11. |
Tax Fees. Including preparation of returns |
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12. |
Other Fees and Expenses for the Distribution Period, if any [specify such Fees and Expenses, if any] |
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0.0 |
% |
$ |
0.0 |
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13. |
Computation of Put Premium Due on [insert Distribution Payment Date] by 11:00 a.m. New York Time: |
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0.0 |
% |
$ |
0.0 |
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14. |
The Investment Manager is in compliance with the Investment Management Agreement. |
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ANNEX C
Restated
Charter of
Financial Security Assurance Inc.
ANNEX D
Expense Reimbursement Agreement
Exhibit 99.7
PUT OPTION AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
SUTTON CAPITAL TRUST III
Dated June 23, 2003
Preamble
This Put Option Agreement, dated as of June 23, 2003 (this Agreement ), is by and between Financial Security Assurance Inc., a New York domestic stock insurance corporation ( FSA ), and Sutton Capital Trust III (the Trust ), a Delaware statutory trust.
Recitals
WHEREAS, FSA is authorized to issue 500.01 shares of non-cumulative, redeemable, perpetual preferred stock, par value $1,000 per share, designated as Series C Perpetual Preferred Shares , which shares have not been and will not be registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Preferred Stock ); and
WHEREAS, FSA and the Trust desire to enter into a binding agreement pursuant to which FSA will have the right to sell, at its option, the Preferred Stock to the Trust, and the Trust will have an obligation to purchase the Preferred Stock upon FSA s exercise of its option and upon the other terms and conditions agreed upon by the parties.
NOW, THEREFORE, the parties hereto agree as follows:
Agreement has the meaning set forth above in the Preamble.
Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Broker-Dealer has the meaning set forth in the Declaration.
Business Day has the meaning set forth in the Declaration.
CPS Securities has the meaning set forth in the Declaration.
Declaration means the Amended and Restated Declaration of Trust governing the Trust, dated as of the date hereof, as the same may be amended or restated from time to time.
Delayed Auction has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Put Option Premium has the meaning set forth in Section 5.1.
Delayed Put Option Premium Certificate has the meaning set forth in Section 5.2.
Distribution Payment Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Distribution Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Dividend has the meaning set forth in the Restated Charter.
Eligible Assets has the meaning set forth in the Declaration.
Expense Reimbursement Agreement has the meaning set forth in Section 3.2(a).
Federal Funds Effective Rate has the meaning set forth in the Declaration.
Fixed Rate Distribution Event has the meaning set forth in the Restated Charter.
Fixed Rate Election means an election by FSA to pay Dividends on the Preferred Stock at the rate described in clause (iii) of the definition of Dividend Rate set forth in the Restated Charter.
FSA has the meaning set forth above in the Preamble.
Holder has the meaning set forth in the Declaration.
Liquidation Preference has the meaning set forth in the Restated Charter.
Maximum Rate has the meaning set forth in the Restated Charter.
Overnight Rate of Return means the rate earned on the interest and on the principal of the Eligible Assets during the period from each Auction Date until the related Distribution Payment Date and during any Delayed Auction Period, which shall be equal to the Federal Funds Effective Rate then in effect.
2
Preferred Stock has the meaning set forth above in the Recitals.
Preferred Stock Payment Date has the meaning set forth in Section 3.2(a).
Preferred Stock Purchase Price has the meaning set forth in Section 4.1.
Put Notice means a written notice substantially in the form attached hereto as Annex A .
Put Option Premium has the meaning set forth in Section 5.1.
Put Option Premium Certificate has the meaning set forth in Section 5.2.
Redemption Price has the meaning set forth in the Restated Charter.
Restated Charter means the Restated Charter of FSA , a copy of which is attached hereto as Annex C .
Stated Yield means all amounts of interest (including accreted interest) and other payments due and payable (upon maturity or otherwise) on the principal amount of the Eligible Assets (excluding any repayment of principal) held by the Trust during a Distribution Period, plus the amount of interest to be earned based on the Overnight Rate of Return, as calculated on or prior to 11:00 a.m. on the Auction Date for each respective Distribution Period.
Tax Matters Partner has the meaning set forth in the Declaration.
Trust has the meaning set forth above in the Preamble.
Trustee has the meaning set forth in the Declaration.
In this Agreement, any reference to a company shall be construed so as to include any corporation, trust, partnership, limited liability company or other legal entity, wheresoever incorporated or established.
The Put Option Premium for each Distribution Period will be calculated on the Auction Date.
If as a result of losses of principal of or interest on Eligible Assets there is a Delayed Auction, FSA will pay to the Trust, in US dollars, on each Distribution Payment Date during which the put option remains in effect and is exercisable as set forth in Section 2.2 hereof, the Delayed Put Option Premium, in an amount equal to the product of (A) the Delayed Auction Rate on the CPS Securities for the Delayed Auction Period less the excess of (i) the Stated Yield for such Delayed Auction Period over (ii) the expenses of the Trust for such Delayed Auction Period, provided that such amount shall be annualized and expressed as an annual rate with respect to the face amount of the CPS Securities outstanding on the date the Put Option Premium is determined, (B) the aggregate face amount of the CPS Securities outstanding at the time the Delayed Put Option Premium is calculated and (C) a fraction, the numerator of which will be the actual number of calendar days in the respective Delayed Auction Period, and the denominator of which will be 360 days.
The Delayed Put Option Premium for each Delayed Auction Period will be calculated on the Delayed Auction Date.
provided , however , that, notwithstanding the provisions of this Section 6.1, the Trust shall have no further obligations under this Agreement after the termination of this Agreement. In addition, the breach of any covenant made in this Agreement by the Trust shall not terminate this Agreement or limit the rights of FSA hereunder.
If there is any inconsistency between any provision of this Agreement and any other agreement, the provisions of this Agreement shall prevail to the extent of such inconsistency but not otherwise.
If to FSA at:
Financial
Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Treasurer
Facsimile: (212) 339-0897
Copy to: General Counsel
Telephone: (212) 339-3482
Facsimile: (212) 339-0849
10
If to the Trust at:
The Bank of New
York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New
York
Corporate Trust Division
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Facsimile: (212) 437-6155
In the case of any event under Sections 2.3, 7.3 or 14 of the Agreement, FSA shall give notice to:
Standard & Poors Ratings Services at:
Standard & Poors Ratings Services
55 Water Street
New York, New York 10041
Moodys Investors Service, Inc. at:
Moodys Investors Service, Inc.
99 Church Street
New York, New York 10007
This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument.
This Agreement shall enure to the benefit of each party hereto and its successors and assigns and transferees; provided that neither party hereto may transfer its rights and obligations hereunder, by operation of law or otherwise, without the prior written consent of the other party.
11
IN WITNESS WHEREOF the parties hereto have caused this Put Option Agreement to be duly executed as of the day and year first above written.
14
ANNEX A
Form of Put Notice
To:
Sutton
Capital Trust III
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center Route
273 Newark, Delaware 19714
with a copy to:
The Bank of New York
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated as of June 23, 2003 (as heretofore amended, the Put Option Agreement ) entered into between us and you. Terms defined therein shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option Agreement. We hereby require you to pay the Preferred Stock Purchase Price on the Preferred Stock Payment Date, which shall be [ ], to the following account:
[ ] |
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Yours faithfully, |
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for and on behalf of |
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FINANCIAL SECURITY ASSURANCE INC. |
ANNEX B
Put
Option Premium Certificate/
Delayed
Put Option Premium Certificate
Financial
Security Assurance Inc.
Put Option Premium/Delayed Put Option Premium for the
Non-Cumulative Redeemable Perpetual
Preferred Stock of
Financial
Security
Assurance Inc.
1. Distribution Period: [first day of Period]-[last day of Period]: [number of days in period generally 28] |
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2. Auction Rate determined for the Distribution Period on [insert Auction Date]. |
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0.000000 |
% |
$ |
(0 |
) |
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3. Eligible Assets: |
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Issuer |
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Ratings |
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Purchase Price |
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Yield to Maturity |
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Interest |
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4. |
Applicable Federal Funds Effective Rate: 0.00% |
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0.0 |
% |
$ |
0.0 |
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5. |
Broker-Dealer Fees |
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0.0 |
% |
$ |
0.0 |
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6. |
Trustee and Custodian Fees |
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0.0 |
% |
$ |
0.0 |
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7. |
Investment Manager Fee |
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0.0 |
% |
$ |
0.0 |
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8. |
Tax Matters Partner Fee |
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0.0 |
% |
$ |
0.0 |
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9. |
Servicing Agent Fee |
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0.0 |
% |
$ |
0.0 |
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10. |
Rating Agency Fees |
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0.0 |
% |
$ |
0.0 |
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11. |
Tax Fees. Including preparation of returns |
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12. |
Other Fees and Expenses for the Distribution Period, if any [specify such Fees and Expenses, if any] |
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0.0 |
% |
$ |
0.0 |
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13. |
Computation of Put Premium Due on [insert Distribution Payment Date] by 11:00 a.m. New York Time: |
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0.0 |
% |
$ |
0.0 |
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14. |
The Investment Manager is in compliance with the Investment Management Agreement. |
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ANNEX C
Restated
Charter of
Financial Security Assurance Inc.
ANNEX D
Expense Reimbursement Agreement
Exhibit 99.8
PUT OPTION AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
SUTTON CAPITAL TRUST IV
Dated June 23, 2003
Preamble
This Put Option Agreement, dated as of June 23, 2003 (this Agreement ), is by and between Financial Security Assurance Inc., a New York domestic stock insurance corporation ( FSA ), and Sutton Capital Trust IV (the Trust ), a Delaware statutory trust.
Recitals
WHEREAS, FSA is authorized to issue 500.01 shares of non-cumulative, redeemable, perpetual preferred stock, par value $1,000 per share, designated as Series D Perpetual Preferred Shares , which shares have not been and will not be registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Preferred Stock ); and
WHEREAS, FSA and the Trust desire to enter into a binding agreement pursuant to which FSA will have the right to sell, at its option, the Preferred Stock to the Trust, and the Trust will have an obligation to purchase the Preferred Stock upon FSA s exercise of its option and upon the other terms and conditions agreed upon by the parties.
NOW, THEREFORE, the parties hereto agree as follows:
Agreement has the meaning set forth above in the Preamble.
Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Broker-Dealer has the meaning set forth in the Declaration.
Business Day has the meaning set forth in the Declaration.
CPS Securities has the meaning set forth in the Declaration.
Declaration means the Amended and Restated Declaration of Trust governing the Trust, dated as of the date hereof, as the same may be amended or restated from time to time.
Delayed Auction has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Auction Rate has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Delayed Put Option Premium has the meaning set forth in Section 5.1.
Delayed Put Option Premium Certificate has the meaning set forth in Section 5.2.
Distribution Payment Date has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Distribution Period has the meaning set forth in the General Terms of the CPS Securities attached to the Declaration as Appendix A.
Dividend has the meaning set forth in the Restated Charter.
Eligible Assets has the meaning set forth in the Declaration.
Expense Reimbursement Agreement has the meaning set forth in Section 3.2(a).
Federal Funds Effective Rate has the meaning set forth in the Declaration.
Fixed Rate Distribution Event has the meaning set forth in the Restated Charter.
Fixed Rate Election means an election by FSA to pay Dividends on the Preferred Stock at the rate described in clause (iii) of the definition of Dividend Rate set forth in the Restated Charter.
FSA has the meaning set forth above in the Preamble.
Holder has the meaning set forth in the Declaration.
Liquidation Preference has the meaning set forth in the Restated Charter.
Maximum Rate has the meaning set forth in the Restated Charter.
Overnight Rate of Return means the rate earned on the interest and on the principal of the Eligible Assets during the period from each Auction Date until the related Distribution Payment Date and during any Delayed Auction Period, which shall be equal to the Federal Funds Effective Rate then in effect.
2
Preferred Stock has the meaning set forth above in the Recitals.
Preferred Stock Payment Date has the meaning set forth in Section 3.2(a).
Preferred Stock Purchase Price has the meaning set forth in Section 4.1.
Put Notice means a written notice substantially in the form attached hereto as Annex A .
Put Option Premium has the meaning set forth in Section 5.1.
Put Option Premium Certificate has the meaning set forth in Section 5.2.
Redemption Price has the meaning set forth in the Restated Charter.
Restated Charter means the Restated Charter of FSA , a copy of which is attached hereto as Annex C .
Stated Yield means all amounts of interest (including accreted interest) and other payments due and payable (upon maturity or otherwise) on the principal amount of the Eligible Assets (excluding any repayment of principal) held by the Trust during a Distribution Period, plus the amount of interest to be earned based on the Overnight Rate of Return, as calculated on or prior to 11:00 a.m. on the Auction Date for each respective Distribution Period.
Tax Matters Partner has the meaning set forth in the Declaration.
Trust has the meaning set forth above in the Preamble.
Trustee has the meaning set forth in the Declaration.
In this Agreement, any reference to a company shall be construed so as to include any corporation, trust, partnership, limited liability company or other legal entity, wheresoever incorporated or established.
The Put Option Premium for each Distribution Period will be calculated on the Auction Date.
If as a result of losses of principal of or interest on Eligible Assets there is a Delayed Auction, FSA will pay to the Trust, in US dollars, on each Distribution Payment Date during which the put option remains in effect and is exercisable as set forth in Section 2.2 hereof, the Delayed Put Option Premium, in an amount equal to the product of (A) the Delayed Auction Rate on the CPS Securities for the Delayed Auction Period less the excess of (i) the Stated Yield for such Delayed Auction Period over (ii) the expenses of the Trust for such Delayed Auction Period, provided that such amount shall be annualized and expressed as an annual rate with respect to the face amount of the CPS Securities outstanding on the date the Put Option Premium is determined, (B) the aggregate face amount of the CPS Securities outstanding at the time the Delayed Put Option Premium is calculated and (C) a fraction, the numerator of which will be the actual number of calendar days in the respective Delayed Auction Period, and the denominator of which will be 360 days.
The Delayed Put Option Premium for each Delayed Auction Period will be calculated on the Delayed Auction Date.
provided , however , that, notwithstanding the provisions of this Section 6.1, the Trust shall have no further obligations under this Agreement after the termination of this Agreement. In addition, the breach of any covenant made in this Agreement by the Trust shall not terminate this Agreement or limit the rights of FSA hereunder.
If there is any inconsistency between any provision of this Agreement and any other agreement, the provisions of this Agreement shall prevail to the extent of such inconsistency but not otherwise.
If to FSA at:
Financial
Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Treasurer
Facsimile: (212) 339-0897
Copy to: General Counsel
Telephone: (212) 339-3482
Facsimile: (212) 339-0849
10
If to the Trust at:
The Bank of New
York (Delaware)
P.O. Box 6973
White Clay Center
Route 273
Newark, Delaware 19714
Attention: Kristine Gullo
Facsimile: (302) 283-8279
Copies to:
The Bank of New
York
Corporate Trust Division
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Facsimile: (212) 437-6155
In the case of any event under Sections 2.3, 7.3 or 14 of the Agreement, FSA shall give notice to:
Standard & Poors Ratings Services at:
Standard & Poors Ratings Services
55 Water Street
New York, New York 10041
Moodys Investors Service, Inc. at:
Moodys Investors Service, Inc.
99 Church Street
New York, New York 10007
This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument.
This Agreement shall enure to the benefit of each party hereto and its successors and assigns and transferees; provided that neither party hereto may transfer its rights and obligations hereunder, by operation of law or otherwise, without the prior written consent of the other party.
11
IN WITNESS WHEREOF the parties hereto have caused this Put Option Agreement to be duly executed as of the day and year first above written.
14
ANNEX A
Form of Put Notice
To:
Sutton
Capital Trust IV
c/o Bank of New York (Delaware)
P.O. Box 6973
502 White Clay Center Route
273 Newark, Delaware 19714
with a copy to:
The Bank of New York
100 Church Street, 8
th
Floor
New York, New York 10286
Attention: Dealing and Trading Group
Date:
Ladies and Gentlemen:
We refer to the put option agreement dated as of June 23, 2003 (as heretofore amended, the Put Option Agreement ) entered into between us and you. Terms defined therein shall have the same respective meanings herein.
This notice is the notice for the purposes of Section 3.2(a) of the Put Option Agreement. We hereby require you to pay the Preferred Stock Purchase Price on the Preferred Stock Payment Date, which shall be [ ], to the following account:
[ ] |
|
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|
Yours faithfully, |
|
|
|
|
|
for and on behalf of |
|
FINANCIAL SECURITY ASSURANCE INC. |
ANNEX B
Put
Option Premium Certificate/
Delayed
Put Option Premium Certificate
Financial
Security Assurance Inc.
Put Option Premium/Delayed Put Option Premium for the
Non-Cumulative Redeemable Perpetual
Preferred Stock of
Financial
Security
Assurance Inc.
1. Distribution Period: [first day of Period]-[last day of Period]: [number of days in period generally 28] |
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2. Auction Rate determined for the Distribution Period on [insert Auction Date]. |
|
0.000000 |
% |
$ |
(0 |
) |
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3. Eligible Assets: |
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Issuer |
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Ratings |
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Purchase Price |
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Yield to Maturity |
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Interest |
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4. |
Applicable Federal Funds Effective Rate: 0.00% |
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0.0 |
% |
$ |
0.0 |
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5. |
Broker-Dealer Fees |
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0.0 |
% |
$ |
0.0 |
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6. |
Trustee and Custodian Fees |
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0.0 |
% |
$ |
0.0 |
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7. |
Investment Manager Fee |
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0.0 |
% |
$ |
0.0 |
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8. |
Tax Matters Partner Fee |
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0.0 |
% |
$ |
0.0 |
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9. |
Servicing Agent Fee |
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0.0 |
% |
$ |
0.0 |
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10. |
Rating Agency Fees |
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0.0 |
% |
$ |
0.0 |
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11. |
Tax Fees. Including preparation of returns |
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12. |
Other Fees and Expenses for the Distribution Period, if any [specify such Fees and Expenses, if any] |
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0.0 |
% |
$ |
0.0 |
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13. |
Computation of Put Premium Due on [insert Distribution Payment Date] by 11:00 a.m. New York Time: |
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0.0 |
% |
$ |
0.0 |
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14. |
The Investment Manager is in compliance with the Investment Management Agreement. |
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ANNEX C
Restated
Charter of
Financial Security Assurance Inc.
ANNEX D
Expense Reimbursement Agreement
Exhibit 99.9
I, Robert P. Cochran, Chief Executive Officer of Financial Security Assurance Holdings Ltd., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2003 of Financial Security Assurance Holdings Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
August 13, 2003 |
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/s/ Robert P. Cochran |
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Name: Robert P. Cochran |
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Title: Chief Executive Officer |
Exhibit 99.10
I, Joseph W. Simon, Chief Financial Officer of Financial Security Assurance Holdings Ltd., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2003 of Financial Security Assurance Holdings Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
August 13, 2003 |
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/s/ Joseph W. Simon |
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Name: Joseph W. Simon |
||
|
Title: Chief Financial Officer |
EXHIBIT 99.11
Certification of Chief Executive Officer
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, of Financial Security Assurance Holdings Ltd. (the Company), as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert P. Cochran, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: |
/s/ Robert P. Cochran |
|
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Chief Executive Officer |
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August 13, 2003 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.12
Certification of Chief Financial Officer
In connection with the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, of Financial Security Assurance Holdings Ltd. (the Company), as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Joseph W. Simon, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: |
/s/ Joseph W. Simon |
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Chief Financial Officer |
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August 13, 2003 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.