UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2005
OR
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
transition Period from to
Commission File No. 001-32141
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter)
Bermuda |
|
98-0429991 |
(State or other jurisdiction of incorporation) |
|
(I.R.S. employer identification no.) |
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
(address of principal executive office)
(441) 296-4004
(Registrants 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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES o NO ý
The number of registrants Common Shares ($0.01 par value) outstanding as of May 1, 2005 was 74,980,919 .
ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
Assured Guaranty Ltd.
Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)
(Unaudited)
|
|
March 31, |
|
December 31, |
|
||
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Assets |
|
|
|
|
|
||
Fixed maturity securities, at fair value (amortized cost: $2,021,248 in 2005 and $1,873,450 in 2004) |
|
$ |
2,083,399 |
|
$ |
1,965,051 |
|
Short-term investments, at cost which approximates fair value |
|
63,528 |
|
175,837 |
|
||
Total investments |
|
2,146,927 |
|
2,140,888 |
|
||
Cash and cash equivalents |
|
21,723 |
|
16,978 |
|
||
Accrued investment income |
|
23,130 |
|
21,924 |
|
||
Deferred acquisition costs |
|
192,199 |
|
186,354 |
|
||
Prepaid reinsurance premiums |
|
14,280 |
|
15,204 |
|
||
Reinsurance recoverable on ceded losses |
|
118,332 |
|
120,220 |
|
||
Premiums receivable |
|
42,732 |
|
40,819 |
|
||
Goodwill |
|
85,417 |
|
85,417 |
|
||
Unrealized gains on derivative financial instruments |
|
46,973 |
|
43,901 |
|
||
Other assets |
|
17,965 |
|
22,306 |
|
||
Total assets |
|
$ |
2,709,678 |
|
$ |
2,694,011 |
|
|
|
|
|
|
|
||
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Unearned premium reserves |
|
$ |
548,735 |
|
$ |
521,271 |
|
Reserves for losses and loss adjustment expenses |
|
218,425 |
|
226,503 |
|
||
Profit commissions payable |
|
43,881 |
|
61,671 |
|
||
Reinsurance balances payable |
|
28,999 |
|
25,112 |
|
||
Deferred income taxes |
|
39,828 |
|
40,053 |
|
||
Funds held by Company under reinsurance contracts |
|
52,399 |
|
50,768 |
|
||
Long-term debt |
|
197,323 |
|
197,356 |
|
||
Other liabilities |
|
42,418 |
|
43,665 |
|
||
Total liabilities |
|
1,172,008 |
|
1,166,399 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
Shareholders equity |
|
|
|
|
|
||
Common stock ($0.01 par value, 500,000,000 shares authorized; 75,198,075 and 75,678,792 shares issued and outstanding in 2005 and 2004) |
|
752 |
|
757 |
|
||
Treasury stock held in trust, at cost (436,000 shares outstanding) |
|
(7,850 |
) |
(7,850 |
) |
||
Additional paid-in capital |
|
888,951 |
|
894,219 |
|
||
Unearned stock grant compensation |
|
(11,228 |
) |
(6,729 |
) |
||
Retained earnings |
|
610,329 |
|
568,255 |
|
||
Accumulated other comprehensive income |
|
56,716 |
|
78,960 |
|
||
Total shareholders equity |
|
1,537,670 |
|
1,527,612 |
|
||
Total liabilities and shareholders equity |
|
$ |
2,709,678 |
|
$ |
2,694,011 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Assured Guaranty Ltd.
Consolidated Statements of
Operations
and Comprehensive Income
(in thousands of U.S. dollars except per share amounts)
(Unaudited)
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
Revenues |
|
|
|
|
|
||
Gross written premiums |
|
$ |
78,097 |
|
$ |
(1,544 |
) |
Ceded premiums |
|
(1,628 |
) |
(5,327 |
) |
||
Net written premiums |
|
76,469 |
|
(6,871 |
) |
||
(Increase) decrease in net unearned premium reserves |
|
(28,379 |
) |
93,538 |
|
||
Net earned premiums |
|
48,090 |
|
86,667 |
|
||
Net investment income |
|
23,132 |
|
24,385 |
|
||
Net realized investment gains |
|
1,791 |
|
1,182 |
|
||
Unrealized gains on derivative financial instruments |
|
3,072 |
|
7,349 |
|
||
Other income |
|
283 |
|
532 |
|
||
Total revenues |
|
76,368 |
|
120,115 |
|
||
|
|
|
|
|
|
||
Expenses |
|
|
|
|
|
||
Loss and loss adjustment expenses |
|
(9,396 |
) |
23,668 |
|
||
Profit commission expense |
|
987 |
|
5,486 |
|
||
Acquisition costs |
|
10,216 |
|
13,108 |
|
||
Other operating expenses |
|
14,508 |
|
12,621 |
|
||
Goodwill impairment |
|
|
|
1,645 |
|
||
Interest expense |
|
3,296 |
|
1,434 |
|
||
Total expenses |
|
19,611 |
|
57,962 |
|
||
|
|
|
|
|
|
||
Income before provision for income taxes |
|
56,757 |
|
62,153 |
|
||
Provision for income taxes |
|
|
|
|
|
||
Current |
|
5,083 |
|
2,179 |
|
||
Deferred |
|
7,326 |
|
13,081 |
|
||
Total provision for income taxes |
|
12,409 |
|
15,260 |
|
||
Net income |
|
44,348 |
|
46,893 |
|
||
Other comprehensive income, net of taxes |
|
|
|
|
|
||
Unrealized holding (losses) gains on fixed maturity securities arising during the year |
|
(20,638 |
) |
14,845 |
|
||
Reclassification adjustment for realized (gains) losses included in net income |
|
(1,501 |
) |
3,375 |
|
||
Change in net unrealized gains on fixed maturity securities |
|
(22,139 |
) |
18,220 |
|
||
Comprehensive income |
|
$ |
22,209 |
|
$ |
65,113 |
|
|
|
|
|
|
|
||
Earnings per share: |
|
|
|
|
|
||
Basic |
|
$ |
0.60 |
|
$ |
0.63 |
|
Diluted |
|
$ |
0.59 |
|
$ |
0.63 |
|
Dividends per share |
|
$ |
0.03 |
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Assured Guaranty Ltd.
Consolidated Statements of
Shareholders
Equity
For the Three Months Ended March 31, 2005
(in thousands of U.S. dollars except per share amounts)
(Unaudited)
|
|
Common
|
|
Treasury
|
|
Additional
|
|
Unearned
|
|
Retained
|
|
Accumulated
|
|
Total
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance, January 1, 2005 |
|
$ |
757 |
|
$ |
(7,850 |
) |
$ |
894,219 |
|
$ |
(6,729 |
) |
$ |
568,255 |
|
$ |
78,960 |
|
$ |
1,527,612 |
|
Net income |
|
|
|
|
|
|
|
|
|
44,348 |
|
|
|
44,348 |
|
|||||||
Dividends ($0.03 per share) |
|
|
|
|
|
|
|
|
|
(2,274 |
) |
|
|
(2,274 |
) |
|||||||
Restricted stock issuance, net |
|
3 |
|
|
|
5,862 |
|
|
|
|
|
|
|
5,865 |
|
|||||||
Common stock repurchases |
|
(8 |
) |
|
|
(15,189 |
) |
|
|
|
|
|
|
(15,197 |
) |
|||||||
Tax benefit for options exercised |
|
|
|
|
|
4,059 |
|
|
|
|
|
|
|
4,059 |
|
|||||||
Cash flow hedge, net of tax of $(56) |
|
|
|
|
|
|
|
|
|
|
|
(105 |
) |
(105 |
) |
|||||||
Unrealized loss on fixed maturity securities, net of tax of $(7,507) |
|
|
|
|
|
|
|
|
|
|
|
(22,139 |
) |
(22,139 |
) |
|||||||
Unearned stock grant compensation, net |
|
|
|
|
|
|
|
(4,499 |
) |
|
|
|
|
(4,499 |
) |
|||||||
Balance, March 31, 2005 |
|
$ |
752 |
|
$ |
(7,850 |
) |
$ |
888,951 |
|
$ |
(11,228 |
) |
$ |
610,329 |
|
$ |
56,716 |
|
$ |
1,537,670 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Assured
Guaranty Ltd.
Consolidated Statements of
Cash Flows
(in thousands of U.S. dollars)
(Unaudited)
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
Operating activities |
|
|
|
|
|
||
Net income |
|
$ |
44,348 |
|
$ |
46,893 |
|
Adjustments to reconcile net income to net cash flows provided by operating activities: |
|
|
|
|
|
||
Non-cash interest and operating expenses |
|
1,493 |
|
932 |
|
||
Net amortization of premium on fixed maturity securities |
|
1,673 |
|
2,797 |
|
||
Goodwill impairment |
|
|
|
1,645 |
|
||
Provision for deferred income taxes |
|
7,326 |
|
13,081 |
|
||
Net realized investment gains |
|
(1,791 |
) |
(1,182 |
) |
||
Change in unrealized gains on derivative financial instruments |
|
(3,072 |
) |
(7,349 |
) |
||
Change in deferred acquisition costs |
|
(5,845 |
) |
(7,594 |
) |
||
Change in accrued investment income |
|
(1,206 |
) |
(544 |
) |
||
Change in premiums receivable |
|
(1,913 |
) |
28,864 |
|
||
Change in due from affiliate |
|
|
|
115,000 |
|
||
Change in prepaid reinsurance premiums |
|
924 |
|
(6,038 |
) |
||
Change in unearned premium reserves |
|
27,464 |
|
(87,499 |
) |
||
Change in reserves for losses and loss adjustment expenses, net |
|
(2,303 |
) |
(75,303 |
) |
||
Change in profit commissions payable |
|
(17,790 |
) |
(14,432 |
) |
||
Change in value of reinsurance business assumed |
|
|
|
2,311 |
|
||
Change in funds held by Company under reinsurance contracts |
|
1,631 |
|
(346 |
) |
||
Other |
|
6,242 |
|
1,168 |
|
||
Net cash flows provided by operating activities |
|
57,181 |
|
12,404 |
|
||
|
|
|
|
|
|
||
Investing activities |
|
|
|
|
|
||
Fixed maturity securities: |
|
|
|
|
|
||
Purchases |
|
(317,195 |
) |
(172,821 |
) |
||
Sales |
|
169,515 |
|
179,638 |
|
||
Maturities |
|
|
|
160 |
|
||
Sales (purchases) of short-term investments, net |
|
112,309 |
|
(16,838 |
) |
||
Net cash flows used in investing activities |
|
(35,371 |
) |
(9,861 |
) |
||
|
|
|
|
|
|
||
Financing activities |
|
|
|
|
|
||
Repurchases of common stock |
|
(14,740 |
) |
|
|
||
Dividends paid |
|
(2,274 |
) |
|
|
||
Net cash flows used in financing activities |
|
(17,014 |
) |
|
|
||
Effect of exchange rate changes |
|
(51 |
) |
1,346 |
|
||
Increase in cash and cash equivalents |
|
4,745 |
|
3,889 |
|
||
Cash and cash equivalents at beginning of period |
|
16,978 |
|
32,365 |
|
||
Cash and cash equivalents at end of period |
|
$ |
21,723 |
|
$ |
36,254 |
|
|
|
|
|
|
|
||
Supplementary cash flow information |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Income taxes |
|
$ |
|
|
$ |
6,802 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Assured
Guaranty Ltd.
March 31, 2005
(Unaudited)
1. Business and Organization
On April 28, 2004, subsidiaries of ACE Limited (ACE), completed an initial public offering (IPO) of 49,000,000 of their 75,000,000 common shares, par value $0.01 per share, of Assured Guaranty Ltd. (the Company), formerly AGC Holdings Ltd. Assured Guaranty Ltd.s common shares are traded on the New York Stock Exchange under the symbol AGO. The IPO raised approximately $840.1 million in net proceeds, all of which went to the selling shareholders. As part of the IPO, the Company and ACE entered into various agreements which govern various settlement issues. As part of these agreements all pre-IPO intercompany receivables and payables were settled with ACE on June 10, 2004. In connection with the IPO, the following transactions took place:
On April 15, 2004 Assured Guaranty Re Overseas Ltd. (AGRO) (an indirect subsidiary of Assured Guaranty Ltd.) sold 100% of the common stock of its subsidiary, ACE Capital Title Reinsurance Company (ACTR), to ACE Bermuda Insurance Ltd., a subsidiary of ACE, for $39.8 million. There was no gain or loss associated with the sale.
On April 28, 2004, AGRO commuted its remaining auto residual value reinsurance business and transferred assets with a market value of $108.3 million to a subsidiary of ACE. This transaction caused a $(6.5) million underwriting loss, offset by a $6.8 million realized gain from the asset transfer.
Assured Guaranty Ltd. is a Bermuda-based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets. Credit enhancement products are financial guarantees or other types of support, including credit derivatives, that improve the credit of underlying debt obligations. Assured Guaranty Ltd. applies its credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and derivative products that meet the credit enhancement needs of its customers. Under a reinsurance agreement, the reinsurer, in consideration of a premium paid to it, agrees to indemnify another insurer, called the ceding company, for part or all of the liability of the ceding company under one or more insurance policies that the ceding company has issued. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying security. Assured Guaranty Ltd. markets its products directly to and through financial institutions, serving the U.S. and international markets. Assured Guaranty Ltd.s financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. These segments are further discussed in Note 10.
Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. A loss event occurs upon existing or anticipated credit deterioration, while a payment under a policy occurs when the insured obligation defaults. This requires the Company to pay the required principal and interest when due in accordance with the underlying contract. The principal types of obligations covered by the Companys financial guaranty direct and financial guaranty assumed reinsurance businesses are structured finance obligations and public finance obligations. Because both businesses involve similar risks, the Company analyzes and monitors its financial guaranty direct portfolio and financial guaranty assumed reinsurance portfolio on a combined basis.
Mortgage guaranty insurance is a specialized class of credit insurance that provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan to value in excess of a specified ratio. Reinsurance in the mortgage guaranty insurance industry is used to increase the insurance capacity of the ceding company, to assist the ceding company in meeting applicable regulatory and rating agency requirements, to augment the financial strength of the ceding company, and to manage the ceding companys risk profile. The Company provides mortgage guaranty protection on an excess of loss basis.
7
The Company has participated in several lines of business that are reflected in its historical financial statements but that the Company has exited in connection with the IPO, including equity layer credit protection, trade credit reinsurance, title reinsurance, life, accident and health and auto residual value reinsurance. These lines of business make up the Companys other segment.
2. Basis of Presentation
The unaudited interim consolidated financial statements, which include the accounts of the Company, have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Companys financial condition, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements cover the three-month period ended March 31, 2005 and the three-month period ended March 31, 2004. Operating results for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results that may be expected for a full year. Certain items in the prior year consolidated financial statements have been reclassified to conform with the current period presentation. These unaudited interim consolidated financial statements should be read in conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission.
Amounts presented prior to April 28, 2004, the IPO date, were prepared on an historical combined basis, since Assured Guaranty Ltd. and its subsidiaries were included in the results of ACE. However, since the entities are the same for all periods presented, the financial statements have been prepared and reported on a consolidated basis. This presentation has no impact on the Companys results of operations or financial condition. Certain expenses reflected in the March 31, 2004 consolidated financial statements include allocations of corporate expenses incurred by ACE, related to general and administrative services provided to the Company, including tax consulting and preparation services, internal audit services and liquidity facility costs.
Certain of the Companys subsidiaries are subject to U.S. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (FAS) FAS No. 109, Accounting for Income Taxes. The Companys provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its derivative financial instruments. A discrete calculation of the provision is calculated for each interim period. The Companys tax sharing agreement is further discussed in Note 9.
3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FAS No. 123 (revised 2004), Share-Based Payment (FAS 123R). FAS 123R replaces FAS No.123, Accounting for Stock-Based Compensation (FAS 123) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). As permitted by FAS 123, the Company currently accounts for share-based payments to employees using APB 25s intrinsic value method and, as such, generally recognizes no compensation expense for employee stock options. Accordingly, the adoption of FAS 123Rs fair value method will impact the Companys results of operations, although it will have no impact on its overall financial position. The impact of adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FAS 123R in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 7. FAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because
8
they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in the First Quarter 2005 and First Quarter 2004 for such excess tax deductions were $4.1 million and $5.4 million, respectively. In April 2005, the Securities and Exchange Commission delayed the effective date for adoption of FAS 123R for the Company until January 1, 2006.
In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments (EITF 03-1), which provides guidance on recognizing other-than-temporary impairments on several types of investments including debt securities classified as held-to-maturity and available-for-sale under FAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. In September 2004, FASB Staff Position (FSP) EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments was issued, delaying the effective date for the recognition and measurement guidance of EITF 03-1, as contained in paragraphs 10-20, until certain implementation issues are addressed and a final FSP providing implementation guidance is issued. The disclosure requirements of the consensus remain in effect. The Company will continue to monitor this project and, once the final FSP is issued, will evaluate its potential effects on its results of operations.
4. Reinsurance
To limit its exposure on assumed risks, at the time of the IPO, the Company entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE, to cede a portion of the risk underwritten by the Company. The Company has also entered into other reinsurance agreements with non-affiliated companies.
In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. Direct, assumed, and ceded reinsurance amounts were as follows:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in thousands of U.S. dollars) |
|
||||
Premiums Written |
|
|
|
|
|
||
Direct |
|
$ |
23,755 |
|
$ |
(91,043 |
) |
Assumed |
|
54,342 |
|
89,499 |
|
||
Ceded |
|
(1,628 |
) |
(5,327 |
) |
||
Net |
|
$ |
76,469 |
|
$ |
(6,871 |
) |
|
|
|
|
|
|
||
Premiums Earned |
|
|
|
|
|
||
Direct |
|
$ |
21,230 |
|
$ |
17,512 |
|
Assumed |
|
29,412 |
|
71,674 |
|
||
Ceded |
|
(2,552 |
) |
(2,519 |
) |
||
Net |
|
$ |
48,090 |
|
$ |
86,667 |
|
|
|
|
|
|
|
||
Loss and Loss Adjustment Expenses |
|
|
|
|
|
||
Direct |
|
$ |
(2,067 |
) |
$ |
(8,523 |
) |
Assumed |
|
(9,189 |
) |
33,211 |
|
||
Ceded |
|
1,860 |
|
(1,020 |
) |
||
Net |
|
$ |
(9,396 |
) |
$ |
23,668 |
|
During First Quarter 2005 the Company recovered $6.8 million relating to a reinsurance claim incurred in 1998 and 1999. This recovery was received in connection with the completion of two settlements and is shown in the statements of operations and comprehensive income in loss and loss adjusted expenses. Recovery efforts relating to this and other claims are continuing. In addition, the Company recovered $1.1 million relating to its equity layer credit protection business. These recoveries are the primary driver of the $(9.4) million of net loss and loss adjustment expenses.
9
In 2004, net premiums written, net earned premiums and net loss and loss adjustment expenses (LAE) were impacted $(97.8) million, $41.3 million and $(19.0) million, respectively, from the close out of transaction types the Company no longer participates in.
Reinsurance recoverable on ceded losses and LAE as of March 31, 2005 and December 31, 2004 are $118.3 million and $120.2 million, respectively and are all related to our other segment. Of these amounts, $96.0 million and $97.8 million, respectively, relate to reinsurance agreements with ACE.
For three months ended March 31, 2005, $22.2 million, $10.7 million and $4.6 million of our gross written premiums was ceded by Financial Security Assurance Inc. (FSA), Ambac Assurance Corporation (Ambac) and MBIA Insurance Corporation (MBIA), respectively. For three months ended March 31, 2004, $28.1 million, $11.2 million and $9.9 million of our gross written premiums was ceded by FSA, Ambac and MBIA, respectively.
5. Commitments and Contingencies
Lawsuits arise in the ordinary course of the Companys business. It is the opinion of the Companys management, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys financial position, results of operations or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Companys results of operations or liquidity in a particular quarter or fiscal year.
In April, Assured Guaranty Corp. (AGC) received a Notice of Order to Preserve (Order) from the Office of the Commissioner of Insurance, State of Georgia (Commissioner). The Order was directed to ACE Limited, and all affiliates and requires the preservation of documents and other items related to finite insurance and a broad group of other insurance and reinsurance agreements. Also in April, AGC, and numerous other insurers, received a subpoena from the Commissioner related to the initial phase of the Commissioner's investigation into finite-risk transactions. The subpoena requests information on AGC's assumed and ceded reinsurance contracts in force during 2004. AGC is cooperating with the Commissioner.
In the ordinary course of their respective businesses, certain of the Companys subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although recoveries in any one or more of these proceedings during any quarter or fiscal year could be material to the Companys results of operations in that particular quarter or fiscal year. See Note 4 for information on a reinsurance recovery due to the Companys legal proceedings against third parties.
The Company is party to reinsurance agreements with most of the major monoline primary financial guaranty insurance companies. The Companys facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
6. Long-Term Debt and Credit Facilities
The Companys unaudited interim consolidated financial statements include long-term debt used to fund the Companys insurance operations, and related interest expense, as described below.
Senior Notes
On May 18, 2004, Assured Guaranty US Holdings Inc., a subsidiary of the Company, issued $200.0 million of 7.0% Senior Notes due 2034 for net proceeds of $197.3 million. The proceeds of the offering were used to repay a $200.0 million promissory note issued to a subsidiary of ACE in April 2004 as part of the IPO related formation transactions. The coupon on the Senior Notes is 7.0%, however, the effective rate will be approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004. The Company recorded interest expense of $3.3 million, including $0.2 million of amortized gain on the cash flow hedge, for the
10
three-month period ended March 31, 2005. These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.
Credit Facilities
On April 29, 2004, the Company entered into a $250.0 million unsecured credit facility ($250.0 million credit facility) to replace its general corporate purpose credit facilities, with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America are acting as co-arrangers. Each of Assured Guaranty Ltd., AGC and Assured Guaranty (UK) Ltd. (AG (UK)), is a party, as borrower. The $250.0 million credit facility was a 364-day facility and any amounts outstanding under the facility at its expiration will be due and payable one year following the facilitys expiry. Under the $250.0 million credit facility, AGC can borrow up to $250.0 million, Assured Guaranty Ltd. has a borrowing limit not to exceed $50.0 million, and Assured Guaranty (UK) Ltd. has a borrowing limit not to exceed $12.5 million. As of March 31, 2005 and December 31, 2004, no amounts had been drawn under this credit facility. The $250.0 million credit facility has been replaced by the $300.0 million credit facility discussed below.
As of December 31, 2004, the Company was party to a $175.0 million non-recourse credit facility with a syndicate of banks. This facility was specifically designed to provide rating agency qualified capital to further support the Companys claim paying resources. This agreement is due to expire December 2010. As of March 31, 2005 and December 31, 2004, no amounts had been drawn under this credit facility.
On November 8, 2004 Assured Guaranty Ltd., Assured Guaranty Re International Ltd. (AGRI) and AGRO entered into a standby letter of credit agreement (the LOC Agreement) with KeyBank National Association (KeyBank). Under the LOC Agreement, KeyBank has agreed to issue up to $50.0 million in letters of credit on the Companys behalf. The obligations of Assured Guaranty Ltd., AGRI and AGRO under the LOC Agreement are joint and several. The letters of credit will be used to satisfy AGRIs or AGROs obligations under certain reinsurance agreements and for general corporate purposes. The LOC Agreement contains covenants that limit debt, liens, guaranties, loans and investments, dividends, liquidations, mergers, consolidations, acquisitions, sales of assets or subsidiaries and affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. The LOC Agreement also contains financial covenants that require the Company: (i) to maintain the ratio of consolidated debt to total capitalization at not greater than 0.30 to 1.0; (ii) to maintain consolidated net worth of at least seventy-five percent (75%) of its consolidated net worth as of June 30, 2004; and (iii) to maintain the consolidated interest coverage ratio for any test period ending on the last day of a fiscal quarter at not less than 2.50 to 1.0. In addition, the LOC Agreement provides that the obligations of KeyBank to issue letters of credit may be terminated, and the Companys obligations under the agreement may be accelerated, upon an event of default. As of March 31, 2005 and December 31, 2004, no amounts were payable under any letter of credit issued under this facility. The LOC Agreement was replaced by the $300.0 million credit facility discussed below.
On April 15, 2005, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million three-year unsecured revolving credit facility (the $300.0 million credit facility) with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as lead arrangers and KeyBank National Association (KeyBank) acted as syndication agent. Under the $300.0 million credit facility, each of AGC, AG (UK) and, subject to AGRI and AGRO entering into the guaranties discussed below, Assured Guaranty Ltd., AGRI and AGRO are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.
The $300.0 million credit facility is intended to replace (1) the $250.0 million credit facility and (2) the LOC Agreement. The $250.0 million credit facility was terminated as of the closing of the $300.0 million credit facility. Under the LOC Agreement, KeyBank has issued two letters of credit, both on behalf of AGRO, with an aggregate stated amount of approximately $20.7 million. The LOC agreement expired effective April 28, 2005. The parties to the LOC Agreement have agreed that no additional letters of credit would be issued, extended or renewed from and after the date of the closing of the $300.0 million credit facility and letters of credit that were outstanding on such date will, unless cancelled and surrendered by the respective beneficiaries thereof, remain outstanding until their respective stated expiration dates of December 31, 2005.
11
Of the $300.0 million available to be borrowed, no more than $100.0 million may be borrowed by Assured Guaranty Ltd., AGRI or AGRO, individually or in the aggregate, and no more than $12.5 million may be borrowed by AG (UK). The stated amount of all outstanding letters of credit and the amount of all unpaid drawings in respect of all letters of credit cannot, in the aggregate, exceed $100.0 million.
The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.
At the closing of the $300.0 million credit facility, (i) AGC guaranteed the obligations of AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AGRI and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG (UK) under such facility and (iii) Assured Guaranty Overseas US Holdings Inc., as a Material Non-AGC Subsidiary (as defined in the related credit agreement), guaranteed the obligations of Assured Guaranty Ltd., AGRI and AGRO under such facility. It was further agreed that none of Assured Guaranty Ltd., AGRI or AGRO would be able to borrow under the $300.0 million credit facility until AGRI and AGRO, as Material Non-AGC Subsidiaries, have both guaranteed the obligations of the other and of Assured Guaranty Ltd. under such facility.
The $300.0 million credit facilitys financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of $1.2 billion, (b) maintain an interest coverage ratio of at least 2.5:1, and (c) maintain a maximum debt-to-capital ratio of 30%. In addition, the $300.0 million credit facility requires that AGC: (x) maintain qualified statutory capital of at least 80% of its statutory capital as of the fiscal quarter prior to the closing date of the facility and (y) maintain a ratio of aggregate net par outstanding to qualified statutory capital of not more than 150:1. Furthermore, the $300.0 million credit facility contains restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding.
7. Employee Benefit Plans and Stock Based Compensation
Employee Benefit Plans
Prior to the IPO, Assured Guaranty Ltd.s officers and employees participated in ACEs long-term incentive plans providing options to purchase shares and restricted share unit awards.
Upon completion of the IPO, any unvested options to purchase ACE ordinary shares granted to the Companys officers or employees under the ACE employee long term incentive plan immediately vested and any unvested restricted ACE ordinary shares were forfeited. These officers and employees generally had 90 days from the date of the IPO to exercise any vested options to acquire ACE ordinary shares. The acceleration of vesting of options to purchase ordinary shares resulted in a pre-tax charge to the Company of approximately $3.5 million. Based upon a price of $42.79 per ACE ordinary share, the Company incurred a pre-tax charge of $7.8 million and contributed cash in the same amount to fund a trust, with a trustee, for the value of the restricted ACE ordinary shares forfeited by all of the Companys officers and employees. These pre-tax charges took place during Second Quarter 2004. The trust purchased common shares of Assured Guaranty Ltd. and allocated to each such individual common shares having the approximate value of the ACE ordinary shares forfeited by such individual. Based on the initial public offering price of $18.00 per common share, the trust purchased approximately 436,000 common shares. This transaction is reported in shareholders equity as treasury stock and unearned stock grant compensation. The common shares will be deliverable to each individual on the 18-month anniversary of the IPO so long as during that 18-month period the individual was not employed, directly or indirectly, by any designated financial guaranty company. (The forfeiture restriction has been waived for one former employee of the Company.) Any forfeited common shares will be delivered to us. The trustees do not have any beneficial interest in the trust. Since completion of the IPO, the Companys officers and employees are no longer eligible to participate in ACEs
12
employee long-term incentive plans. In connection with these events, Assured Guaranty received $4.5 million from ACE, for the book value of unrestricted compensation, which it recorded in unearned stock grant compensation, which is included in shareholders equity.
Stock Based Compensation
The Company accounts for stock-based compensation plans in accordance with APB 25 and related interpretations. No compensation expense for options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Pro forma information regarding net income and earnings per share is required by FAS 123. In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS 148). FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosure in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.
For restricted stock awards, the Company records the market value of the shares awarded at the time of the grant as unearned stock grant compensation and includes it as a separate component of shareholders equity. The unearned stock grant compensation is amortized into income ratably over the vesting period.
The following table outlines the Companys net income, basic and diluted earnings per share for the three-month period ended March 31, 2005, had the compensation expense been determined in accordance with the fair value method recommended in FAS 123.
(in thousands of U.S. dollars, except per share amounts) |
|
Three Months Ended
|
|
|
Net income as reported |
|
$ |
44,348 |
|
Add: Stock-based compensation expense included in reported net income, net of income tax |
|
1,208 |
|
|
Deduct: Compensation expense, net of income tax |
|
2,307 |
|
|
Pro forma net income |
|
$ |
43,249 |
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
As reported |
|
$ |
0.60 |
|
Pro forma |
|
$ |
0.58 |
|
Diluted Earnings Per Share: |
|
|
|
|
As reported |
|
$ |
0.59 |
|
Pro forma |
|
$ |
0.58 |
|
Since the Company was a subsidiary of ACE during the three-month period ended March 31, 2004, management has determined that disclosing amounts related to these periods would not be meaningful, as the compensation expense determined under FAS 123 would be based on ACEs ordinary share price. The amount of stock-based compensation expense included in reported net income, net of income tax, was $0.4 million for the three months ended March 31, 2004.
13
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
Three Months Ended March 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in thousands of U.S. dollars except per share amounts) |
|
||||
Net income |
|
$ |
44,348 |
|
$ |
46,893 |
|
Basic shares(1) |
|
74,458 |
|
75,000 |
|
||
Effect of dilutive securities: |
|
|
|
|
|
||
Stock awards |
|
445 |
|
|
|
||
Diluted shares(1)(2) |
|
74,903 |
|
75,000 |
|
||
Basic EPS |
|
$ |
0.60 |
|
$ |
0.63 |
|
Diluted EPS |
|
$ |
0.59 |
|
$ |
0.63 |
|
(1) Since the shares held as treasury stock are required to be settled by delivery of employer stock, those shares are included in the calculation of basic and diluted EPS.
(2) 2004 shares based on shares outstanding immediately prior to the IPO.
9. Tax Allocation Agreement
In connection with the IPO, the Company and ACE Financial Services Inc. (AFS) entered into a tax allocation agreement, whereby the Company and AFS will make a Section 338 (h)(10) election that will have the effect of increasing the tax basis of certain affected subsidiaries tangible and intangible assets to fair value. Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.
As a result of the election, the Company has adjusted its net deferred tax liability, to reflect the new tax basis of the Companys affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Companys affected subsidiaries actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15-year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.
The Company recorded a $49.0 million reduction of its existing deferred tax liability, based on an estimate of the ultimate resolution of the Section 338(h)(10) election. Under the tax allocation agreement, the Company estimates that as of the IPO date, it will pay $20.9 million to AFS and accordingly has established this amount as a liability, which is included in other liabilities on the balance sheet. The difference, which is attributable to the change in the tax basis of certain liabilities for which there is no associated step-up in the tax basis of its assets and no amounts due to AFS, resulted in an increase to additional paid-in capital of $28.1 million during 2004.
10. Segment Reporting
The Company has four principal business segments: (1) financial guaranty direct, which includes transactions whereby the Company provides an unconditional and irrevocable guaranty that indemnifies the holder of a financial obligation against non-payment of principal and interest when due, and includes credit support for credit default swaps; (2) financial guaranty reinsurance, which includes agreements whereby the Company is a reinsurer and agrees to indemnify a primary insurance company against part or all of the loss which the latter may sustain under a policy it has issued; (3) mortgage guaranty, which includes mortgage guaranty insurance and reinsurance whereby the Company provides protection against the default of borrowers on mortgage loans; and (4) other, which includes several lines of business in which the Company is no longer active, including trade credit reinsurance, title reinsurance, auto residual value reinsurance and the credit protection of equity layers of collateralized debt obligations (CDOs).
The Company does not segregate assets and liabilities at a segment level since management reviews and controls these assets and liabilities on a consolidated basis. The Company allocates operating expenses to each segment
14
based on a comprehensive cost study. The other segment received its proportional share of operating expenses up to the IPO date. From the IPO date, the other segment was not allocated operating expenses. Management uses underwriting gains and losses as the primary measure of each segments financial performance.
The following table summarizes the components of underwriting gain for each reporting segment:
|
|
Three Months Ended March 31, 2005 |
|
|||||||||||||
|
|
Financial
|
|
Financial
|
|
Mortgage
|
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
Gross written premiums |
|
$ |
23.8 |
|
$ |
34.0 |
|
$ |
19.4 |
|
$ |
0.9 |
|
$ |
78.1 |
|
Net written premiums |
|
23.1 |
|
34.0 |
|
19.4 |
|
|
|
76.5 |
|
|||||
Net earned premiums |
|
20.4 |
|
23.0 |
|
4.6 |
|
|
|
48.1 |
|
|||||
Loss and loss adjustment expenses |
|
(1.5 |
) |
(7.1 |
) |
0.2 |
|
(1.1 |
) |
(9.4 |
) |
|||||
Profit commission expense |
|
|
|
|
|
1.0 |
|
|
|
1.0 |
|
|||||
Acquisition costs |
|
1.5 |
|
8.1 |
|
0.5 |
|
|
|
10.2 |
|
|||||
Other operating expenses |
|
9.4 |
|
4.4 |
|
0.7 |
|
|
|
14.5 |
|
|||||
Underwriting gain |
|
$ |
11.0 |
|
$ |
17.6 |
|
$ |
2.2 |
|
$ |
1.1 |
|
$ |
31.9 |
|
|
|
Three Months Ended March 31, 2004 |
|
|||||||||||||
|
|
Financial
|
|
Financial
|
|
Mortgage
|
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
Gross written premiums |
|
$ |
25.6 |
|
$ |
52.4 |
|
$ |
14.0 |
|
$ |
(93.6 |
) |
$ |
(1.5 |
) |
Net written premiums |
|
25.3 |
|
52.4 |
|
14.0 |
|
(98.5 |
) |
(6.9 |
) |
|||||
Net earned premiums |
|
40.7 |
|
20.4 |
|
8.4 |
|
17.2 |
|
86.7 |
|
|||||
Loss and loss adjustment expenses |
|
13.4 |
|
3.9 |
|
(1.2 |
) |
7.5 |
|
23.7 |
|
|||||
Profit commission expense |
|
|
|
0.1 |
|
5.0 |
|
0.4 |
|
5.5 |
|
|||||
Acquisition costs |
|
1.4 |
|
7.1 |
|
0.9 |
|
3.6 |
|
13.1 |
|
|||||
Other operating expenses |
|
5.5 |
|
3.0 |
|
0.6 |
|
3.5 |
|
12.6 |
|
|||||
Underwriting gain |
|
$ |
20.4 |
|
$ |
6.3 |
|
$ |
3.1 |
|
$ |
2.1 |
|
$ |
31.9 |
|
The following is a reconciliation of total underwriting gain to income before provision for income taxes for the periods ended:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Total underwriting gain |
|
$ |
31.9 |
|
$ |
31.9 |
|
Net investment income |
|
23.1 |
|
24.4 |
|
||
Net realized investment gains |
|
1.8 |
|
1.2 |
|
||
Unrealized gains on derivative financial instruments |
|
3.1 |
|
7.4 |
|
||
Other income |
|
0.3 |
|
0.5 |
|
||
Goodwill impairment |
|
|
|
(1.6 |
) |
||
Interest expense |
|
(3.3 |
) |
(1.4 |
) |
||
Income before provision for income taxes |
|
$ |
56.8 |
|
$ |
62.2 |
|
15
The following table provides the lines of businesses from which each of the Companys four reporting segments derive their net earned premiums:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Financial guaranty direct: |
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
20.4 |
|
$ |
40.7 |
|
|
|
|
|
|
|
||
Financial guaranty reinsurance: |
|
|
|
|
|
||
Public finance |
|
11.0 |
|
12.6 |
|
||
Structured finance |
|
12.0 |
|
7.8 |
|
||
Total |
|
23.0 |
|
20.4 |
|
||
|
|
|
|
|
|
||
Mortgage guaranty: |
|
|
|
|
|
||
Mortgage guaranty |
|
4.6 |
|
8.4 |
|
||
|
|
|
|
|
|
||
Other: |
|
|
|
|
|
||
Equity layer credit protection |
|
|
|
5.4 |
|
||
Trade credit reinsurance |
|
|
|
9.3 |
|
||
Title reinsurance |
|
|
|
2.5 |
|
||
Total |
|
|
|
17.2 |
|
||
Total net earned premiums |
|
$ |
48.1 |
|
$ |
86.7 |
|
The Companys other segment consists of certain non-core lines of business that the Company has stopped writing in connection with the IPO, including equity layer credit protection, trade credit reinsurance, title reinsurance, and auto residual value reinsurance. The Company manages these exited lines of business by focusing on the net earned premiums and the underwriting gain (loss).
16
The following table provides underwriting gain (loss) by line of business for the other segment.
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Underwriting gain (loss): |
|
|
|
|
|
||
Equity layer credit protection |
|
$ |
1.1 |
|
$ |
2.5 |
|
Trade credit reinsurance |
|
|
|
1.4 |
|
||
Title reinsurance |
|
|
|
0.7 |
|
||
Auto residual value reinsurance |
|
|
|
(2.5 |
) |
||
Total |
|
$ |
1.1 |
|
$ |
2.1 |
|
17
11. Subsidiary Information
The following tables present the unaudited condensed consolidated financial information for Assured Guaranty Ltd, Assured Guaranty US Holdings Inc. and other subsidiaries as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total investments and cash |
|
$ |
208 |
|
$ |
1,234,604 |
|
$ |
933,838 |
|
$ |
|
|
$ |
2,168,650 |
|
Investment in subsidiaries |
|
1,534,989 |
|
|
|
|
|
(1,534,989 |
) |
|
|
|||||
Deferred acquisition costs |
|
|
|
139,796 |
|
52,403 |
|
|
|
192,199 |
|
|||||
Reinsurance recoverable |
|
|
|
33,371 |
|
88,738 |
|
(3,777 |
) |
118,332 |
|
|||||
Goodwill |
|
|
|
85,417 |
|
|
|
|
|
85,417 |
|
|||||
Premiums receivable |
|
|
|
23,739 |
|
27,735 |
|
(8,742 |
) |
42,732 |
|
|||||
Other |
|
4,553 |
|
112,400 |
|
38,647 |
|
(53,252 |
) |
102,348 |
|
|||||
Total assets |
|
$ |
1,539,750 |
|
$ |
1,629,327 |
|
$ |
1,141,361 |
|
$ |
(1,600,760 |
) |
$ |
2,709,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Unearned premium reserves |
|
$ |
|
|
$ |
363,503 |
|
$ |
228,186 |
|
$ |
(42,954 |
) |
$ |
548,735 |
|
Reserves for losses and loss adjustment expenses |
|
|
|
109,944 |
|
111,893 |
|
(3,412 |
) |
218,425 |
|
|||||
Profit commissions payable |
|
|
|
4,166 |
|
39,715 |
|
|
|
43,881 |
|
|||||
Deferred income taxes |
|
|
|
57,175 |
|
(17,347 |
) |
|
|
39,828 |
|
|||||
Long-term debt |
|
|
|
197,323 |
|
|
|
|
|
197,323 |
|
|||||
Other |
|
2,080 |
|
65,609 |
|
75,532 |
|
(19,405 |
) |
123,816 |
|
|||||
Total liabilities |
|
2,080 |
|
797,720 |
|
437,979 |
|
(65,771 |
) |
1,172,008 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total shareholders equity |
|
1,537,670 |
|
831,607 |
|
703,382 |
|
(1,534,989 |
) |
1,537,670 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities and shareholders equity |
|
$ |
1,539,750 |
|
$ |
1,629,327 |
|
$ |
1,141,361 |
|
$ |
(1,600,760 |
) |
$ |
2,709,678 |
|
18
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total investments and cash |
|
$ |
75 |
|
$ |
1,263,906 |
|
$ |
893,885 |
|
$ |
|
|
$ |
2,157,866 |
|
Investment in subsidiaries |
|
1,511,778 |
|
|
|
|
|
(1,511,778 |
) |
|
|
|||||
Deferred acquisition costs |
|
|
|
140,333 |
|
46,021 |
|
|
|
186,354 |
|
|||||
Reinsurance recoverable |
|
|
|
36,379 |
|
88,418 |
|
(4,577 |
) |
120,220 |
|
|||||
Goodwill |
|
|
|
85,417 |
|
|
|
|
|
85,417 |
|
|||||
Premiums receivable |
|
|
|
36,407 |
|
56,938 |
|
(52,518 |
) |
40,827 |
|
|||||
Other |
|
19,630 |
|
106,350 |
|
46,109 |
|
(68,762 |
) |
103,327 |
|
|||||
Total assets |
|
$ |
1,531,483 |
|
$ |
1,668,792 |
|
$ |
1,131,371 |
|
$ |
(1,637,635 |
) |
$ |
2,694,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Unearned premium reserves |
|
$ |
|
|
$ |
369,320 |
|
$ |
195,545 |
|
$ |
(43,594 |
) |
$ |
521,271 |
|
Reserves for losses and loss adjustment expenses |
|
|
|
118,403 |
|
112,312 |
|
(4,212 |
) |
226,503 |
|
|||||
Profit commissions payable |
|
|
|
4,181 |
|
57,490 |
|
|
|
61,671 |
|
|||||
Deferred income taxes |
|
|
|
57,924 |
|
(17,871 |
) |
|
|
40,053 |
|
|||||
Long-term debt |
|
|
|
197,356 |
|
|
|
|
|
197,356 |
|
|||||
Other |
|
3,871 |
|
103,795 |
|
89,930 |
|
(78,051 |
) |
119,545 |
|
|||||
Total liabilities |
|
3,871 |
|
850,979 |
|
437,406 |
|
(125,857 |
) |
1,166,399 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total shareholders equity |
|
1,527,612 |
|
817,813 |
|
693,965 |
|
(1,511,778 |
) |
1,527,612 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities and shareholders equity |
|
$ |
1,531,483 |
|
$ |
1,668,792 |
|
$ |
1,131,371 |
|
$ |
(1,637,635 |
) |
$ |
2,694,011 |
|
19
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net premiums written |
|
$ |
|
|
$ |
25,929 |
|
$ |
50,540 |
|
$ |
|
|
$ |
76,469 |
|
Net premiums earned |
|
|
|
31,087 |
|
17,003 |
|
|
|
48,090 |
|
|||||
Net investment income |
|
|
|
13,280 |
|
9,852 |
|
|
|
23,132 |
|
|||||
Net realized investment gains |
|
|
|
162 |
|
1,629 |
|
|
|
1,791 |
|
|||||
Unrealized gains (losses) on derivative financial instruments |
|
|
|
4,923 |
|
(1,851 |
) |
|
|
3,072 |
|
|||||
Equity in earnings of subsidiaries |
|
47,944 |
|
|
|
|
|
(47,944 |
) |
|
|
|||||
Other revenues |
|
|
|
|
|
283 |
|
|
|
283 |
|
|||||
Total revenues |
|
47,944 |
|
49,452 |
|
26,916 |
|
(47,944 |
) |
76,368 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss and loss adjustment expenses |
|
|
|
(1,828 |
) |
(7,568 |
) |
|
|
(9,396 |
) |
|||||
Acquisition costs and other operating expenses |
|
3,596 |
|
16,631 |
|
5,484 |
|
|
|
25,711 |
|
|||||
Other |
|
|
|
3,326 |
|
(30 |
) |
|
|
3,296 |
|
|||||
Total expenses |
|
3,596 |
|
18,129 |
|
(2,114 |
) |
|
|
19,611 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before provision for income taxes |
|
44,348 |
|
31,323 |
|
29,030 |
|
(47,944 |
) |
56,757 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total provision for income taxes |
|
|
|
8,205 |
|
4,204 |
|
|
|
12,409 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
$ |
44,348 |
|
$ |
23,118 |
|
$ |
24,826 |
|
$ |
(47,944 |
) |
$ |
44,348 |
|
20
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net premiums written |
|
$ |
|
|
$ |
47,565 |
|
$ |
(54,436 |
) |
$ |
|
|
$ |
(6,871 |
) |
Net premiums earned |
|
|
|
37,933 |
|
48,734 |
|
|
|
86,667 |
|
|||||
Net investment income |
|
|
|
12,742 |
|
11,643 |
|
|
|
24,385 |
|
|||||
Net realized investment gains |
|
|
|
|
|
1,182 |
|
|
|
1,182 |
|
|||||
Unrealized gains (losses) on derivative financial instruments |
|
|
|
9,931 |
|
(2,582 |
) |
|
|
7,349 |
|
|||||
Equity in earnings of subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|||||
Other revenues |
|
|
|
|
|
1,218 |
|
(686 |
) |
532 |
|
|||||
Total revenues |
|
|
|
60,606 |
|
60,195 |
|
(686 |
) |
120,115 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss and loss adjustment expenses |
|
|
|
8,713 |
|
14,955 |
|
|
|
23,668 |
|
|||||
Acquisition costs and other operating expenses |
|
|
|
20,405 |
|
11,496 |
|
(686 |
) |
31,215 |
|
|||||
Other |
|
|
|
1,645 |
|
|
|
1,434 |
|
3,079 |
|
|||||
Total expenses |
|
|
|
30,763 |
|
26,451 |
|
748 |
|
57,962 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before provision for income taxes |
|
|
|
29,843 |
|
33,744 |
|
(1,434 |
) |
62,153 |
|
|||||
Total provision for income taxes |
|
|
|
8,428 |
|
7,334 |
|
(502 |
) |
15,260 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
$ |
|
|
$ |
21,415 |
|
$ |
26,410 |
|
$ |
(932 |
) |
$ |
46,893 |
|
21
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
Net cash flows provided by (used in) operating activities |
|
$ |
(1,293 |
) |
$ |
(10,949 |
) |
$ |
69,423 |
|
$ |
|
|
$ |
57,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchases |
|
|
|
(59,545 |
) |
(257,650 |
) |
|
|
(317,195 |
) |
|||||
Sales |
|
|
|
41,823 |
|
127,692 |
|
|
|
169,515 |
|
|||||
Maturities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Dividends received from subsidiaries |
|
18,440 |
|
|
|
(18,440 |
) |
|
|
|
|
|||||
Sales (purchases) of short-term investments, net |
|
(133 |
) |
32,531 |
|
79,911 |
|
|
|
112,309 |
|
|||||
Net cash flows (used in) provided by investing activities |
|
18,307 |
|
14,809 |
|
(68,487 |
) |
|
|
(35,371 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Repurchases of common stock |
|
(14,740 |
) |
|
|
|
|
|
|
(14,740 |
) |
|||||
Dividends paid |
|
(2,274 |
) |
|
|
|
|
|
|
(2,274 |
) |
|||||
Net cash flows used in financing activities |
|
(17,014 |
) |
|
|
|
|
|
|
(17,014 |
) |
|||||
Effect of exchange rate changes |
|
|
|
(26 |
) |
(25 |
) |
|
|
(51 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase in cash and cash equivalents |
|
|
|
3,834 |
|
911 |
|
|
|
4,745 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
12,096 |
|
4,882 |
|
|
|
16,978 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
15,930 |
|
$ |
5,793 |
|
$ |
|
|
$ |
21,723 |
|
22
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(in thousands of U. S. dollars)
|
|
Assured
|
|
Assured
|
|
Other
|
|
Consolidating
|
|
Assured
|
|
|||||
Net cash flows provided by (used in) operating activities |
|
$ |
|
|
$ |
27,013 |
|
$ |
(14,609 |
) |
$ |
|
|
$ |
12,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchases |
|
|
|
(46,882 |
) |
(125,939 |
) |
|
|
(172,821 |
) |
|||||
Sales |
|
|
|
20,816 |
|
158,822 |
|
|
|
179,638 |
|
|||||
Maturities |
|
|
|
|
|
160 |
|
|
|
160 |
|
|||||
Dividends received from subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales (purchases) of short-term investments, net |
|
|
|
4,040 |
|
(20,878 |
) |
|
|
(16,838 |
) |
|||||
Net cash flows (used in) provided by investing activities |
|
|
|
(22,026 |
) |
12,165 |
|
|
|
(9,861 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|||||
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net cash flows used in financing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Effect of exchange rate changes |
|
|
|
|
|
1,346 |
|
|
|
1,346 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
|
|
|
4,987 |
|
(1,098 |
) |
|
|
3,889 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
22,075 |
|
10,290 |
|
|
|
32,365 |
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
27,062 |
|
$ |
9,192 |
|
$ |
|
|
$ |
36,254 |
|
23
On April 8, 2005, AGC entered into four separate agreements with four different custodial trusts pursuant to which AGC may, at its option, cause each of the custodial trusts to purchase up to $50.0 million of perpetual preferred stock of AGC. The custodial trusts were created as a vehicle for providing capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose including the payment of claims. The further terms of this arrangement and the AGC Preferred Stock are discussed in the Companys Managements Discussion and Analysis of Financial Condition and Results of Operations.
Agreement with FSA
On April 6, 2005 AGC and AGRI entered into a binding letter of intent with Financial Security Assurance Inc. (FSA) pursuant to which substantially all of FSAs financial guaranty risks previously ceded to AGC (the Ceded Business) would be assumed by AGRI, effective as of January 1, 2005. As of December 31, 2004, the total par outstanding of the Ceded Business was approximately $20.6 billion. FSA has agreed it would release AGC from all liabilities with respect to the Ceded Business. FSA and AGRI have agreed that AGRI would assume all of AGCs liabilities with respect to the Ceded Business. FSA would receive a profit commission on the Ceded Business based on its future performance.
FSA has also agreed to reassume from AGRI approximately $800.0 million par value of healthcare related reinsurance business, which would include a transfer to FSA of approximately $12.0 million of unearned premium reserves, net of ceding commission. These transfers would take place at statutory book value, as of January 1, 2005.
The transaction is expected to be completed in the second quarter of 2005. The Company does not expect the transaction to have a material impact on its consolidated 2005 net income. The transaction is subject to final documentation and certain closing conditions, including regulatory approvals. There can be no assurance that this transaction will be consummated upon the terms specified above or at all.
24
Forward-Looking Statements
This Form 10-Q contains information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give Assured Guaranty Ltd.s (hereafter Assured Guaranty, we, our or the Company) expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.
Any or all of Assured Guarantys forward-looking statements herein may turn out to be wrong and are based on current expectations and the current economic environment. Assured Guarantys actual results may vary materially. Among factors that could cause actual results to differ materially are: (1) downgrades of the financial strength ratings assigned by the major rating agencies to any of our insurance subsidiaries at any time, which has occurred in the past; (2) our inability to execute our business strategy; (3) reduction in the amount of reinsurance ceded by one or more of our principal ceding companies; (4) contract cancellations; (5) developments in the worlds financial and capital markets that adversely affect our loss experience, the demand for our products or our investment returns; (6) more severe or frequent losses associated with our insurance products; (7) changes in regulation or tax laws applicable to us, our subsidiaries or customers; (8) dependence on customers; (9) decreased demand for our insurance or reinsurance products or increased competition in our markets; (10) loss of key personnel; (11) technological developments; (12) the effects of mergers, acquisitions and divestitures; (13) changes in accounting policies or practices; (14) changes in general economic conditions, including interest rates and other factors; (15) other risks and uncertainties that have not been identified at this time; and (16) managements response to these factors . Assured Guaranty is not obligated to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in Assured Guarantys reports to the Securities and Exchange Commission.
Executive Summary
We are a Bermuda-based holding company providing, through our operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets. We apply our credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that meet the credit enhancement needs of our customers. We market our products directly and through financial institutions. We serve the U.S. and international markets.
Our financial results include three operating segments: financial guaranty direct, financial guaranty reinsurance and mortgage guaranty. For financial reporting purposes, we have a fourth segment, which we refer to as other. The other segment consists of a number of businesses that we have exited including equity layer credit protection, trade credit reinsurance, title reinsurance, and auto residual value reinsurance. Our results of operations for the period ended March 31, 2004 reflect the results of operations of these businesses since we had not completely exited them by that time.
We derive our revenues principally from premiums from our insurance, reinsurance and credit derivative businesses, net investment income, net realized gains and losses from our investment portfolio and unrealized gains and losses on derivative financial instruments. Our premiums are a function of the amount and type of contracts we write as well as prevailing market prices. We receive premiums on an upfront basis when the policy is issued or the contract is executed and/or on an installment basis over the life of the applicable transaction.
Investment income is a function of invested assets and the yield that we earn on those assets. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of our invested assets. In addition, we could realize capital gains or losses on securities in our investment portfolio from other than temporary declines in market value as a result of changing market conditions, including changes in market interest rates, and changes in the credit quality of our invested assets.
25
Unrealized gains and losses on derivative financial instruments are a function of changes in the estimated fair value of our credit derivative contracts. We expect these unrealized gains and losses to fluctuate primarily based on changes in credit spreads and the credit quality of the referenced entities. We generally hold these derivative contracts to maturity. Where we hold a derivative contract to maturity, the cumulative unrealized gains and losses will net to zero if we incur no credit losses on that contract.
Our expenses consist primarily of losses and loss adjustment expenses (LAE), profit commission expense, acquisition costs, operating expenses, interest expense and income taxes. Losses and LAE are a function of the amount and types of business we write. Losses and LAE are based upon estimates of the ultimate aggregate losses inherent in the portfolio. The risks we take have a low expected frequency of loss and due to our revised underwriting strategy in connection with the IPO, are investment grade at the time we accept the risk. Prior to the IPO, the majority of the risks we underwrote were investment grade, however some risks accepted were below investment grade. Profit commission expense represents payments made to ceding companies generally based on the profitability of the business reinsured by us. Acquisition costs are related to the production of new business. Certain acquisition costs are deferred and recognized over the period in which the related premiums are earned. Operating expenses consist primarily of salaries and other employee-related costs. These costs do not vary with the amount of premiums written. Interest expense is a function of outstanding debt and the contractual interest rate related to that debt. Income taxes are a function of our profitability and the applicable tax rate in the various jurisdictions in which we do business.
Critical Accounting Estimates
Our unaudited interim consolidated financial statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the United States of America (GAAP), are determined using estimates and assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in our unaudited interim consolidated financial statements. We believe the items requiring the most inherently subjective and complex estimates to be reserves for losses and LAE, valuation of derivative financial instruments, valuation of investments, other than temporary impairments of investments, premium revenue recognition, deferred acquisition costs and deferred income taxes. An understanding of our accounting policies for these items is of critical importance to understanding our unaudited interim consolidated financial statements. The following discussion provides more information regarding the estimates and assumptions used for these items and should be read in conjunction with the notes to our unaudited interim consolidated financial statements.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses for non-derivative transactions in our financial guaranty direct, financial guaranty assumed reinsurance and mortgage guaranty business include case reserves and portfolio reserves. See the Valuation of Derivative Financial Instruments contained in these Critical Accounting Estimates section for more information on our derivative transactions. Case reserves are established when there is significant credit deterioration on specific insured obligations and the obligations are in default or default is probable, not necessarily upon non-payment of principal or interest by an insured. Case reserves represent the present value of expected future loss payments and LAE, net of estimated recoveries, but before considering ceded reinsurance. This reserving method is different from case reserves established by traditional property and casualty insurance companies, which establish case reserves upon notification of a claim and establish incurred but not reported (IBNR) reserves for the difference between actuarially estimated ultimate losses and recorded case reserves. Financial guaranty insurance and assumed reinsurance case reserves and related salvage and subrogation, if any, are discounted at 6%, which is the approximate taxable equivalent yield on our investment portfolio in all periods presented.
We record portfolio reserves in our financial guaranty direct, financial guaranty assumed reinsurance and mortgage guaranty business. Portfolio reserves are established with respect to the portion of our business for which case reserves have not been established. Portfolio reserves are not established for quota share mortgage insurance contract types, all of which are in run-off, rather IBNR reserves have been established for these contracts.
26
Portfolio reserves are not established based on a specific event, rather they are calculated by aggregating the portfolio reserve calculated for each individual transaction. Individual transaction reserves are calculated on a quarterly basis by multiplying the par in-force by the product of the ultimate loss and earning factors without regard to discounting. The ultimate loss factor is defined as the frequency of loss multiplied by the severity of loss, where the frequency is defined as the probability of default for each individual issue. The earning factor is inception to date earned premium divided by the estimated ultimate written premium for each transaction. The probability of default is estimated from historical rating agency data and is based on the transactions credit rating, industry sector and time until maturity. The severity is defined as the complement of historical recovery/salvage rates gathered by the rating agencies of defaulting issues and is based on the industry sector.
Portfolio reserves are recorded gross of reinsurance. To date our reinsurance programs have been made up of principally of excess of loss contracts. We have not ceded any amounts under these contracts, as our recorded portfolio reserves have not exceeded our contractual retentions.
The Company records an incurred loss that is reflected in the statement of operations and comprehensive income upon the establishment of portfolio reserves. When we initially record a case reserve, we reclassify the corresponding portfolio reserve already recorded for that specific credit within the balance sheet. The difference between the initially recorded case reserve and the reclassified portfolio reserve is recorded as a charge in our statement of operations and comprehensive income. It would be a remote occurrence when the case reserve is not greater than the reclassified portfolio reserve. Any subsequent change in portfolio reserves or the initial case reserves are recorded quarterly as a charge or credit in our statement of operations and comprehensive income in the period such estimates change. Due to the inherent uncertainties of estimating loss and LAE reserves, actual experience may differ from the estimates reflected in our unaudited interim consolidated financial statements, and the differences may be material.
The chart below demonstrates the portfolio reserves sensitivity to frequency and severity assumptions. The change in these estimates represent managements estimate of reasonably possible material changes and are based upon our analysis of historical experience. Portfolio reserves were recalculated with changes made to the default and severity assumptions. In all scenarios, the starting point used to test the portfolio reserves sensitivity to the changes in the frequency and severity assumptions was the weighted average frequency and severity of our insured portfolio. Overall the weighted average default frequency was 0.64% and the weighted average severity was 28.0% at March 31, 2005. For example, in the first scenario where the frequency was increased by 5.0%, each transactions contribution to the portfolio reserve was recalculated by adding 0.03% (i.e. 5.0% multiplied by 0.64%) to the individual transactions default frequency.
|
|
Portfolio
|
|
Reserve
|
|
Percentage Change |
|
|
Portfolio reserve as of March 31, 2005 |
|
$ |
66,242 |
|
|
|
|
|
5% Frequency Increase |
|
69,273 |
|
3,031 |
|
4.6 |
% |
|
10% Frequency Increase |
|
72,306 |
|
6,064 |
|
9.2 |
% |
|
5% Severity Increase |
|
69,165 |
|
2,924 |
|
4.4 |
% |
|
10% Severity Increase |
|
72,089 |
|
5,847 |
|
8.8 |
% |
|
5% Frequency and Severity Increase |
|
72,362 |
|
6,120 |
|
9.2 |
% |
|
In addition to analyzing the sensitivity of our portfolio reserves to possible changes in frequency and severity, we have also performed a sensitivity analysis on our financial guaranty and mortgage guaranty case reserves. Case reserves may change from our original estimate due to changes in severity factors. An actuarial analysis of the historical development of our case reserves shows that it is reasonably possible that our case reserves could develop by as much as ten percent. This analysis was performed by separately evaluating the historical development by comparing the initial case reserve established to the subsequent development in that case reserve, excluding the effects of discounting, for each sector in which we currently have significant case reserves, and estimating the possible future development. Based on this analysis management believes it is reasonably possible that our current financial guaranty and mortgage guaranty case reserves of $31.0 million could reasonably increase
27
by approximately $3.0 million to $4.0 million in the future. This would cause an increase in incurred losses in our statement of operations and comprehensive income.
A sensitivity analysis is not appropriate for our other segment reserves and our mortgage guaranty IBNR, since the amounts are fully reserved or reinsured and could not impact our net income, unless the reinsurance recoverable becomes uncollectible.
We record IBNR reserves for our mortgage guaranty and other segments. IBNR is an estimate of losses for which the insured event has occurred but the claim has not yet been reported to us. In establishing IBNR, we use traditional actuarial methods to estimate the reporting lag of such claims based on historical experience, claim reviews and information reported by ceding companies. We record IBNR for mortgage guaranty reinsurance on two specific quota-share contracts that are in run-off within our mortgage guaranty segment. We also record IBNR for title reinsurance, auto residual value reinsurance and trade credit reinsurance within our other segment. The other segment represents lines of business we have exited or sold prior to the IPO.
For all other mortgage guaranty transactions we record portfolio reserves in a manner consistent with our financial guaranty business. While other mortgage guaranty insurance companies do not record portfolio reserves, rather just case and IBNR reserves, we record portfolio reserves because we write business on an excess of loss basis, while other industry participants write quota share or first layer loss business. We manage and underwrite this business in the same manner as our financial guaranty insurance and reinsurance business because they have similar characteristics as insured obligations of mortgage-backed securities.
Statement of Financial Accounting Standards (FAS) No. 60, Accounting and Reporting by Insurance Enterprises (FAS 60) is the authoritative guidance for an insurance enterprise. FAS 60 prescribes differing reserving methodologies depending on whether a contract fits within its definition of a short-duration contract or a long-duration contract. Financial guaranty contracts have elements of long-duration insurance contracts in that they are irrevocable and extend over a period that may exceed 30 years or more, but for regulatory purposes are reported as property and liability insurance, which are normally considered short-duration contracts. The short-duration and long-duration classifications have different methods of accounting for premium revenue and contract liability recognition. Additionally, the accounting for deferred acquisition costs (DAC) could be different under the two methods.
We believe the guidance of FAS 60 does not expressly address the distinctive characteristics of financial guarantee insurance, so we also apply the analogous guidance of Emerging Issues Task Force (EITF) Issue No. 85-20, Recognition of Fees for Guaranteeing a Loan (EITF 85-20), which provides guidance relating to the recognition of fees for guaranteeing a loan, which has similarities to financial guaranty insurance contracts. Under the guidance in EITF 85-20, the guarantor should assess the probability of loss on an ongoing basis to determine if a liability should be recognized under FAS No. 5, Accounting for Contingencies (FAS 5). FAS 5 requires that a loss be recognized where it is probable that one or more future events will occur confirming that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated.
The following tables summarize our reserves for losses and LAE by segment, by type of reserve and by segment and type of reserve as of the dates presented. For an explanation of changes in these reserves see Consolidated Results of Operations.
|
|
March 31,
|
|
December 31,
|
|
||
|
|
(in millions of U.S. dollars) |
|
||||
|
|
|
|
|
|
||
By segment: |
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
18.4 |
|
$ |
19.9 |
|
Financial guaranty reinsurance |
|
76.1 |
|
78.8 |
|
||
Mortgage guaranty |
|
11.2 |
|
11.2 |
|
||
Other |
|
112.7 |
|
116.6 |
|
||
Total |
|
$ |
218.4 |
|
$ |
226.5 |
|
28
|
|
March 31,
|
|
December 31,
|
|
||
|
|
(in millions of U.S. dollars) |
|
||||
|
|
|
|
|
|
||
By type of reserve: |
|
|
|
|
|
||
Case |
|
$ |
52.2 |
|
$ |
53.5 |
|
IBNR |
|
100.0 |
|
105.8 |
|
||
Portfolio |
|
66.2 |
|
67.2 |
|
||
Total |
|
$ |
218.4 |
|
$ |
226.5 |
|
|
|
As of March 31, 2005 |
|
|||||||||||||
|
|
Financial
|
|
Financial
|
|
Mortgage
|
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
By segment and type of reserve: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Case |
|
$ |
4.3 |
|
$ |
26.0 |
|
$ |
0.7 |
|
$ |
21.2 |
|
$ |
52.2 |
|
IBNR |
|
|
|
|
|
8.5 |
|
91.5 |
|
100.0 |
|
|||||
Portfolio |
|
14.1 |
|
50.1 |
|
2.0 |
|
|
|
66.2 |
|
|||||
Total |
|
$ |
18.4 |
|
$ |
76.1 |
|
$ |
11.2 |
|
$ |
112.7 |
|
$ |
218.4 |
|
|
|
As of December 31, 2004 |
|
|||||||||||||
|
|
Financial
|
|
Financial
|
|
Mortgage
|
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
By segment and type of reserve: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Case |
|
$ |
4.3 |
|
$ |
29.1 |
|
$ |
0.8 |
|
$ |
19.3 |
|
$ |
53.5 |
|
IBNR |
|
|
|
|
|
8.5 |
|
97.3 |
|
105.8 |
|
|||||
Portfolio |
|
15.6 |
|
49.7 |
|
1.9 |
|
|
|
67.2 |
|
|||||
Total |
|
$ |
19.9 |
|
$ |
78.8 |
|
$ |
11.2 |
|
$ |
116.6 |
|
$ |
226.5 |
|
The following table sets forth the financial guaranty in-force portfolio by underlying rating:
|
|
As of March 31, 2005 |
|
As of December 31, 2004 |
|
||||||
Ratings(1) |
|
Net par
|
|
% of Net par
|
|
Net par
|
|
% of Net par
|
|
||
|
|
(in billions of U.S. dollars) |
|
||||||||
AAA |
|
$ |
29.7 |
|
30.8 |
% |
$ |
29.7 |
|
31.1 |
% |
AA |
|
19.6 |
|
20.3 |
% |
19.9 |
|
20.8 |
% |
||
A |
|
32.5 |
|
33.7 |
% |
31.4 |
|
32.8 |
% |
||
BBB |
|
13.4 |
|
13.9 |
% |
13.1 |
|
13.7 |
% |
||
Below investment grade |
|
1.2 |
|
1.3 |
% |
1.5 |
|
1.6 |
% |
||
Total exposures |
|
$ |
96.4 |
|
100.0 |
% |
$ |
95.6 |
|
100.0 |
% |
(1) These ratings represent the Companys internal assessment of the underlying credit quality of the insured obligations. Our scale is comparable to the nationally recognized rating agencies.
Our risk management department is responsible for monitoring our portfolio of credits and maintains a list of closely monitored credits. The closely monitored credits are divided into four categories: Category 1 (low priority; fundamentally sound, greater than normal risk); Category 2 (medium priority; weakening credit profile, may result in loss); Category 3 (high priority; claim/default probable, case reserve established); Category 4 (claim
29
paid, case reserve established for future payments). Credits that are not included in the closely monitored credit list are categorized as fundamentally sound, normal risk.
The following table provides financial guaranty net par outstanding by credit monitoring category as of March 31, 2005 and December 31, 2004:
|
|
As of March 31, 2005 |
|
||||||||
Description: |
|
Net Par
|
|
% of Net Par
|
|
# of Credits
|
|
Case
|
|
||
|
|
($ in millions) |
|
||||||||
Fundamentally sound, normal risk |
|
$ |
94,840 |
|
98.4 |
% |
|
|
|
|
|
Closely monitored: |
|
|
|
|
|
|
|
|
|
||
Category 1 |
|
1,159 |
|
1.2 |
% |
29 |
|
$ |
|
|
|
Category 2 |
|
316 |
|
0.3 |
% |
9 |
|
|
|
||
Category 3 |
|
67 |
|
0.1 |
% |
16 |
|
18 |
|
||
Category 4 |
|
12 |
|
|
|
8 |
|
16 |
|
||
Sub total |
|
1,554 |
|
1.6 |
% |
62 |
|
34 |
|
||
Total |
|
$ |
96,394 |
|
100 |
% |
|
|
$ |
34 |
|
|
|
As of December 31, 2004 |
|
||||||||
Description: |
|
Net Par
|
|
% of Net Par
|
|
# of Credits
|
|
Case
|
|
||
|
|
($ in millions) |
|
||||||||
Fundamentally sound, normal risk |
|
$ |
93,855 |
|
98.2 |
% |
|
|
|
|
|
Closely monitored: |
|
|
|
|
|
|
|
|
|
||
Category 1 |
|
1,490 |
|
1.6 |
% |
35 |
|
$ |
|
|
|
Category 2 |
|
165 |
|
0.2 |
% |
9 |
|
|
|
||
Category 3 |
|
70 |
|
|
|
16 |
|
21 |
|
||
Category 4 |
|
12 |
|
|
|
8 |
|
18 |
|
||
Sub total |
|
1,737 |
|
1.8 |
% |
68 |
|
39 |
|
||
Total |
|
$ |
95,592 |
|
100 |
% |
|
|
$ |
39 |
|
Industry Methodology
The Company is aware that there are certain differences regarding the measurement of portfolio loss liabilities among companies in the financial guaranty industry. The Company is not aware of specific methodologies applied by other companies in the financial guaranty industry regarding the establishment of such liabilities. In January and February 2005, the Securities and Exchange Commission (SEC) staff has had discussions concerning these differences with a number of industry participants. Based on these discussions we understand the Financial Accounting Standards Board (FASB) staff is considering whether additional guidance is necessary regarding financial guaranty contracts. When and if the FASB staff reaches a conclusion on this issue, the Company and the rest of the financial guaranty industry may be required to change some aspects of their loss reserving policies, but the Company cannot currently assess how the FASBs or SEC staffs ultimate resolution of this issue will impact our reserving policy or other balances, i.e., premiums and DAC. Until the issue is resolved, the Company intends to continue to apply its existing policy with respect to the establishment of both case and portfolio reserves.
Valuation of Derivative Financial Instruments
We issue credit derivative financial instruments that we view as an extension of our financial guaranty business but which do not qualify for the financial guaranty insurance scope exception under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) and therefore are reported at fair value, with changes in fair value included in our earnings.
30
Since we view these derivative contracts as an extension of our financial guaranty business, we believe that the most meaningful presentation of these derivatives is to reflect revenue as earned premium, to record estimates of losses and LAE on specific credit events as incurred losses. Reserves for losses and LAE are established on a similar basis as our insurance policies. Other changes in fair value are included in unrealized gains and losses on derivative financial instruments. We generally hold derivative contracts to maturity. However, in certain circumstances such as for risk management purposes or as a result of a decision to exit a line of business, we may decide to terminate a derivative contract prior to maturity. Where we hold a derivative to maturity, the cumulative unrealized gains and losses will net to zero if we incur no credit losses on that contract. In the event that we terminate a derivative contract prior to maturity the unrealized gain or loss will be realized through premiums earned and losses incurred.
The fair value of these instruments depends on a number of factors including credit spreads, changes in interest rates, recovery rates and the credit ratings of referenced entities. Where available, we use quoted market prices to determine the fair value of these credit derivatives. If the quoted prices are not available, particularly for senior layer collateralized debt obligations (CDOs) and equity layer credit protection, the fair value is estimated using valuation models for each type of credit protection. As of the IPO we no longer participate in equity layer credit protection business. These models may be developed by third parties, such as rating agencies, or developed internally based on market conventions for similar transactions, depending on the circumstances. These models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information. The majority of our single name credit derivatives are valued using third-party market quotes. Our exposures to CDOs are typically valued using a combination of rating agency models and internally developed models.
Valuation models include the use of management estimates and current market information. Management is also required to make assumptions on how the fair value of derivative instruments are affected by current market conditions. Management considers factors such as current prices charged for similar agreements, performance of underlying assets, and our ability to obtain reinsurance for our insured obligations. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our unaudited interim consolidated financial statements, and the differences may be material. Management periodically reviews its models and refines its estimates either by enhancing its modeling techniques or incorporating new market information as it becomes available.
During the first quarter 2005 review of its valuation models, management identified a limitation in its valuation models highlighted by the current unusually tight credit spread environment. Management adjusted its valuation models for this limitation in the first quarter 2005 resulting in an adjustment to the unrealized gains on derivative financial instruments caption of $4.3 million, net of income taxes. Management will continue to perform additional analysis, as necessary, to address market anomalies and its effect on its valuation models.
The fair value adjustment recognized in our statements of operations for the three months ended March 31, 2005 was a $3.1 million gain compared with a $7.4 million gain for the three months ended March 31, 2004. The change in fair value is related to many factors but primarily due to tightening in credit spreads.
Valuation of Investments
As of March 31, 2005 and December 31, 2004, we had total investments of $2.1 billion, respectively. The fair values of all of our investments are calculated from independent market quotations.
As of March 31, 2005, approximately 97% of our investments were long-term fixed maturity securities, having an average duration of 4.7 years. Changes in interest rates affect the value of our fixed maturity portfolio. As interest rates fall, the fair value of fixed maturity securities increases and as interest rates rise, the fair value of fixed maturity securities decreases.
Other than Temporary Impairments
We have a formal review process for all securities in our investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:
a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;
a decline in the market value of a security for a continuous period of 12 months;
31
recent credit downgrades of the applicable security or the issuer by rating agencies;
the financial condition of the applicable issuer;
whether scheduled interest payments are past due; and
whether we have the ability and intent to hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.
If we believe a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss on our balance sheet in accumulated other comprehensive income in shareholders equity. If we believe the decline is other than temporary, we write down the carrying value of the investment and record a realized loss in our statement of operations. Our assessment of a decline in value includes managements current assessment of the factors noted above. If that assessment changes in the future, we may ultimately record a loss after having originally concluded that the decline in value was temporary.
The Company had no write downs of investments for other than temporary impairment losses for the three-month periods ended March 31, 2005 and 2004.
The following table summarizes the unrealized losses in our investment portfolio by type of security and the length of time such securities have been in a continuous unrealized loss position as of the dates indicated:
|
|
As of March 31, 2005 |
|
As of December 31, 2004 |
|
||||||||
Length of Time in Continuous
Unrealized
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
||||
|
|
($ in millions) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Municipal securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
$ |
102.8 |
|
$ |
(1.2 |
) |
$ |
16.8 |
|
$ |
|
|
7-12 months |
|
24.5 |
|
(0.5 |
) |
35.6 |
|
(0.3 |
) |
||||
Greater than 12 months |
|
14.5 |
|
(0.6 |
) |
19.2 |
|
(0.4 |
) |
||||
|
|
141.8 |
|
(2.3 |
) |
71.6 |
|
(0.7 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Corporate securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
62.8 |
|
(1.2 |
) |
21.4 |
|
(0.2 |
) |
||||
7-12 months |
|
9.2 |
|
(0.3 |
) |
6.0 |
|
(0.1 |
) |
||||
Greater than 12 months |
|
6.8 |
|
(0.5 |
) |
8.3 |
|
(0.5 |
) |
||||
|
|
78.8 |
|
(2.0 |
) |
35.7 |
|
(0.8 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government obligations |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
93.4 |
|
(1.4 |
) |
46.3 |
|
(0.2 |
) |
||||
7-12 months |
|
5.3 |
|
(0.1 |
) |
9.0 |
|
(0.1 |
) |
||||
Greater than 12 months |
|
1.1 |
|
|
|
|
|
|
|
||||
|
|
99.8 |
|
(1.5 |
) |
55.3 |
|
(0.3 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Mortgage and asset-backed securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
275.9 |
|
(3.3 |
) |
133.8 |
|
(0.7 |
) |
||||
7-12 months |
|
54.0 |
|
(1.3 |
) |
57.4 |
|
(1.0 |
) |
||||
Greater than 12 months |
|
32.2 |
|
(1.2 |
) |
29.8 |
|
(0.6 |
) |
||||
|
|
362.1 |
|
(5.8 |
) |
221.0 |
|
(2.3 |
) |
||||
Total |
|
$ |
682.5 |
|
$ |
(11.6 |
) |
$ |
383.6 |
|
$ |
(4.1 |
) |
32
The following table summarizes the unrealized losses in our investment portfolio by type of security and remaining time to maturity as of the dates indicated:
|
|
As of March 31, 2005 |
|
As of December 31, 2004 |
|
||||||||
Remaining Time to Maturity |
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
||||
|
|
($ in millions) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Municipal securities |
|
|
|
|
|
|
|
|
|
||||
Due in one year or less |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Due after one year through five years |
|
29.0 |
|
(0.4 |
) |
8.2 |
|
|
|
||||
Due after five years through ten years |
|
19.5 |
|
(0.4 |
) |
15.6 |
|
(0.3 |
) |
||||
Due after ten years |
|
93.3 |
|
(1.5 |
) |
47.8 |
|
(0.4 |
) |
||||
|
|
141.8 |
|
(2.3 |
) |
71.6 |
|
(0.7 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Corporate securities |
|
|
|
|
|
|
|
|
|
||||
Due in one year or less |
|
|
|
|
|
|
|
|
|
||||
Due after one year through five years |
|
59.9 |
|
(1.3 |
) |
23.0 |
|
(0.3 |
) |
||||
Due after five years through ten years |
|
13.6 |
|
(0.3 |
) |
8.3 |
|
(0.1 |
) |
||||
Due after ten years |
|
5.3 |
|
(0.4 |
) |
4.4 |
|
(0.4 |
) |
||||
|
|
78.8 |
|
(2.0 |
) |
35.7 |
|
(0.8 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government obligations |
|
|
|
|
|
|
|
|
|
||||
Due in one year or less |
|
11.1 |
|
|
|
9.0 |
|
|
|
||||
Due after one year through five years |
|
24.1 |
|
(0.4 |
) |
8.5 |
|
(0.1 |
) |
||||
Due after five years through ten years |
|
37.3 |
|
(0.7 |
) |
16.5 |
|
(0.1 |
) |
||||
Due after ten years |
|
27.3 |
|
(0.4 |
) |
21.3 |
|
(0.1 |
) |
||||
|
|
99.8 |
|
(1.5 |
) |
55.3 |
|
(0.3 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Mortgage and asset-backed securities |
|
362.1 |
|
(5.8 |
) |
221.0 |
|
(2.3 |
) |
||||
Total |
|
$ |
682.5 |
|
$ |
(11.6 |
) |
$ |
383.6 |
|
$ |
(4.1 |
) |
33
The following table summarizes, for all securities sold at a loss through March 31, 2005 and 2004, the fair value and realized loss by length of time such securities were in a continuous unrealized loss position prior to the date of sale:
|
|
Three Months Ended
|
|
||||||||||
|
|
2005 |
|
2004 |
|
||||||||
Length of Time in Continuous
Unrealized Loss Prior to
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
||||
|
|
($ in millions) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Municipal securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
7-12 months |
|
5.5 |
|
(0.1 |
) |
|
|
|
|
||||
Greater than 12 months |
|
|
|
|
|
|
|
|
|
||||
|
|
5.5 |
|
(0.1 |
) |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Corporate securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
|
|
|
|
1.9 |
|
(0.1 |
) |
||||
7-12 months |
|
|
|
|
|
0.9 |
|
|
|
||||
Greater than 12 months |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
2.8 |
|
(0.1 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
10.4 |
|
|
|
7.3 |
|
(0.1 |
) |
||||
7-12 months |
|
4.9 |
|
(0.1 |
) |
|
|
|
|
||||
Greater than 12 months |
|
|
|
|
|
|
|
|
|
||||
|
|
15.3 |
|
(0.1 |
) |
7.3 |
|
(0.1 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Other invested securities (1) |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
|
|
|
|
|
|
|
|
||||
7-12 months |
|
|
|
|
|
|
|
(1.3 |
) |
||||
Greater than 12 months |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
(1.3 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Mortgage and asset-backed securities |
|
|
|
|
|
|
|
|
|
||||
0-6 months |
|
10.2 |
|
(0.2 |
) |
|
|
|
|
||||
7-12 months |
|
1.8 |
|
|
|
|
|
|
|
||||
Greater than 12 months |
|
3.3 |
|
(0.3 |
) |
|
|
|
|
||||
|
|
15.3 |
|
(0.5 |
) |
|
|
|
|
||||
Total |
|
$ |
36.1 |
|
$ |
(0.7 |
) |
$ |
10.1 |
|
$ |
(1.5 |
) |
(1) Related to the Companys exited title reinsurance business.
34
Premium Revenue Recognition
Premiums are received either upfront or in installments. Upfront premiums are earned in proportion to the expiration of the related risk. Each installment premium is earned ratably over its installment period, generally one year or less. For the financial guaranty direct and financial guaranty reinsurance segments, earned premiums related to upfront premiums are greater in the earlier periods of an upfront transaction when there is a higher amount of risk outstanding. The premiums are allocated in accordance with the principal amortization schedule of the related bond issue and are earned ratably over the amortization period. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining unearned premium reserve is earned at that time. Unearned premium reserves represent the portion of premiums written that is applicable to the unexpired amount at risk of insured bonds.
In our reinsurance businesses, we estimate the ultimate written and earned premiums to be received from a ceding company at the end of each quarter and the end of each year because some of our ceding companies report premium data anywhere from 30 to 90 days after the end of the relevant period. Written premiums reported in our statement of operations are based upon reports received by ceding companies supplemented by our own estimates of premium for which ceding company reports have not yet been received. As of March 31, 2005, the assumed premium estimate and related ceding commissions included in our unaudited interim consolidated financial statements are $20.7 million and $5.8 million, respectively. Key assumptions used to arrive at managements best estimate of assumed premium are premium amounts reported historically and informal communications with ceding companies. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. Historically, the differences have not been material. We do not record a provision for doubtful accounts related to our assumed premium estimate. Historically there have not been any material issues related to the collectibility of assumed premium. No such provision was recorded for 2005 or 2004.
Deferred Acquisition Costs
Acquisition costs incurred that vary with and are directly related to the production of new business are deferred. These costs include direct and indirect expenses such as ceding commissions, brokerage expenses and the cost of underwriting and marketing personnel. As of March 31, 2005 and December 31, 2004, we had deferred acquisition costs of $192.2 million and $186.4 million, respectively. Ceding commissions paid to primary insurers are the largest component of deferred acquisition costs, constituting 78.4% and 79.2% of total deferred acquisition costs as of March 31, 2005 and December 31, 2004, respectively. Management uses its judgment in determining what types of costs should be deferred, as well as what percentage of these costs should be deferred. We periodically conduct a study to determine which operating costs vary with, and are directly related to, the acquisition of new business and qualify for deferral. Acquisition costs other than those associated with our credit derivative products are deferred and amortized in relation to earned premiums. Ceding commissions received on premiums we cede to other reinsurers reduce acquisition costs. Anticipated losses, LAE and the remaining costs of servicing the insured or reinsured business are considered in determining the recoverability of acquisition costs. Acquisition costs associated with credit derivative products are expensed as incurred. When an insured issue is retired early, as discussed in the Premium Revenue Recognition section of these Critical Accounting Estimates, the related deferred acquisition cost is expensed at that time.
Deferred Income Taxes
As of March 31, 2005 and December 31, 2004, we had a net deferred income tax liability of $39.8 million and $40.1 million, respectively. Certain of our subsidiaries are subject to U.S. income tax. Deferred income tax assets and liabilities are established for the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Such temporary differences relate principally to deferred acquisition costs, reserves for losses and LAE, unearned premium reserves, net operating loss carryforwards (NOLs), unrealized gains and losses on investments and derivative financial instruments and statutory contingency reserves. A valuation allowance is recorded to reduce a deferred tax asset to the amount that is more likely than not to be realized.
35
As of March 31, 2005, Assured Guaranty Re Overseas Ltd. (AGRO) had a stand-alone NOL of $92.9 million, which is available to offset its future U.S. taxable income. The Company has $54.3 million of this NOL available through 2017; $20.7 million available through 2023 and the remainder will be available through 2024. AGROs stand-alone NOL is not permitted to offset income of any other members of AGROs consolidated group due to certain tax regulations. Under applicable accounting rules, we are required to establish a valuation allowance for NOLs that we believe are more likely than not to expire before utilized. Management believes it is more likely than not that $20.0 million of AGROs $92.9 million NOL will not be utilized before it expires and has established a $7.0 million valuation allowance related to the NOL deferred tax asset. The valuation allowance is subject to considerable judgment and will be adjusted to the extent actual taxable income differs from estimates of future taxable income that may be used to realize NOLs.
36
The following table presents summary consolidated results of operations data for the three months ended March 31, 2005 and 2004.
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
|
|
|
|
|
|
||
Revenues: |
|
|
|
|
|
||
Gross written premiums |
|
$ |
78.1 |
|
$ |
(1.5 |
) |
Net written premiums |
|
76.5 |
|
(6.9 |
) |
||
Net earned premiums |
|
48.1 |
|
86.7 |
|
||
Net investment income |
|
23.1 |
|
24.4 |
|
||
Net realized investment gains |
|
1.8 |
|
1.2 |
|
||
Unrealized gains on derivative financial instruments |
|
3.1 |
|
7.4 |
|
||
Other income |
|
0.3 |
|
0.5 |
|
||
Total revenues |
|
76.4 |
|
120.1 |
|
||
|
|
|
|
|
|
||
Expenses: |
|
|
|
|
|
||
Loss and loss adjustment expenses |
|
(9.4 |
) |
23.7 |
|
||
Profit commission expense |
|
1.0 |
|
5.5 |
|
||
Acquisition costs |
|
10.2 |
|
13.1 |
|
||
Operating expenses |
|
14.5 |
|
12.6 |
|
||
Other expenses |
|
3.3 |
|
3.1 |
|
||
Total expenses |
|
19.6 |
|
58.0 |
|
||
|
|
|
|
|
|
||
Income before provision for income taxes |
|
56.8 |
|
62.2 |
|
||
Provision for income taxes |
|
12.4 |
|
15.3 |
|
||
Net income |
|
$ |
44.3 |
|
$ |
46.9 |
|
|
|
|
|
|
|
||
Underwriting gain by segment (2): |
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
11.0 |
|
$ |
20.4 |
|
Financial guaranty reinsurance |
|
17.6 |
|
6.3 |
|
||
Mortgage guaranty |
|
2.2 |
|
3.1 |
|
||
Other |
|
1.1 |
|
2.1 |
|
||
Total |
|
$ |
31.9 |
|
$ |
31.9 |
|
(1) Some amounts may not foot due to rounding.
(2) Prior year segment amounts have been adjusted to reflect current year operating expense allocations for comparability purposes.
We organize our business around four financial reporting segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. There are a number of lines of business that we have exited in connection with the initial public offering (IPO), which are included in the other segment. However, the results of these businesses are reflected in the above numbers. These businesses include equity layer credit protection, trade credit reinsurance, title reinsurance and auto residual value reinsurance.
Net income was $44.3 million and $46.9 million for the three months ended March 31, 2005 and 2004, respectively. The decrease of $2.6 million in 2005 compared with 2004 is primarily due to a $1.6 million after-tax decrease in the unrealized gains on derivative financial instruments.
37
Gross Written Premiums
|
|
Three Months Ended
|
|
||||
Gross Written Premiums |
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
|
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
23.8 |
|
$ |
25.6 |
|
Financial guaranty reinsurance |
|
34.0 |
|
52.4 |
|
||
Mortgage guaranty |
|
19.4 |
|
14.0 |
|
||
Other |
|
0.9 |
|
(93.6 |
) |
||
Total |
|
$ |
78.1 |
|
$ |
(1.5 |
) |
Gross written premiums for the three months ended March 31, 2005 were $78.1 million compared with $(1.5) million for the three months ended March 31, 2004. The increase of $79.6 million is primarily due to gross written premiums of $(97.8) million related to the exiting of equity layer credit protection line of business in first quarter 2004. Excluding this item, gross written premiums for first quarter 2005 decreased $18.2 million compared with the same period in 2004. This decrease is primarily related to the financial guaranty reinsurance segment and is attributable to one cedant relationship that was terminated and business from a second cedant was decreased, effective July 1, 2004.
Net Earned Premiums
|
|
Three Months Ended
|
|
||||
Net Earned Premiums |
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
|
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
20.4 |
|
$ |
40.7 |
|
Financial guaranty reinsurance |
|
23.0 |
|
20.4 |
|
||
Mortgage guaranty |
|
4.6 |
|
8.4 |
|
||
Other |
|
|
|
17.2 |
|
||
Total |
|
$ |
48.1 |
|
$ |
86.7 |
|
Net earned premiums for the three months ended March 31, 2005 decreased $38.6 million, or 45%, compared with the same period of 2004. The amounts for 2004 include $17.2 million of net earned premiums in the other segment, which contains business we no longer write, as well as $24.2 million of net earned premiums in the financial guaranty direct segment related to the unwinding of a transaction in connection with the IPO. Excluding these items, net earned premiums for the first quarter 2005 increased $2.8 million, or 6%.
Net Investment Income
Net investment income was $23.1 million and $24.4 million for the three months ended March 31, 2005 and 2004, respectively. The $1.3 million decline is attributable to $0.9 million of interest expense associated with funds held contacts entered into in connection with the IPO included in March 31, 2005 amount. Excluding the effect of this interest expense, net investment income has remained relatively level across the periods as declining investment yields have offset increasing investment balances.
Net Realized Investment Gains
Net realized investment gains, principally from the sale of fixed maturity securities, were $1.8 million and $1.2 million for the three months ended March 31, 2005 and 2004, respectively. The Company had no write downs of investments for other than temporary impairment losses for the three months ended March 31, 2005. Included in net realized investment gains for the three-month period ended March 31, 2004 is a write down of $1.3 million related to the Companys exited title reinsurance business. The investment related to this write down is included in
38
other assets on our balance sheets. Net realized investment gains, net of related income taxes, were $1.5 million and zero for the three months ended March 31, 2005 and 2004, respectively.
Unrealized Gains on Derivative Financial Instruments
Derivative financial instruments are recorded at fair value as required by FAS 133. However, as explained under Critical Accounting Estimates, we record part of the change in fair value in the loss and LAE reserves as well as in unearned premium reserves. The fair value adjustment for the three months ended March 31, 2005 was a $3.1 million gain compared with a $7.4 million gain for the three months ended March 31, 2004. The change in fair value is related to many factors, but primarily due to tightening credit spreads. Unrealized gains on derivative financial instruments, net of related income taxes, were $1.5 million and $3.1 million for the three months ended March 31, 2005 and 2004, respectively.
The gain or loss created by the estimated fair value adjustment will rise or fall based on estimated market pricing and may not be an indication of ultimate claims. Fair value is defined as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. We generally plan to hold derivative financial instruments to maturity. Where we hold derivative financial instruments to maturity, these fair value adjustments would generally be expected to reverse resulting in no gain or loss over the entire term of the contract.
|
|
Three Months Ended
|
|
||||
Loss and Loss Adjustment Expenses |
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
|
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
(1.5 |
) |
$ |
13.4 |
|
Financial guaranty reinsurance |
|
(7.1 |
) |
3.9 |
|
||
Mortgage guaranty |
|
0.2 |
|
(1.2 |
) |
||
Other |
|
(1.1 |
) |
7.5 |
|
||
Total |
|
$ |
(9.4 |
) |
$ |
23.7 |
|
Loss and loss adjustment expenses for the three months ended March 31, 2005 and 2004 were $(9.4) million and $23.7 million, respectively. March 31, 2005 loss and loss adjustment expenses incurred includes subrogation received of $7.9 million. See Segment Results of Operations for further explanations of these changes.
Profit commissions allow the reinsured to share favorable experience on a reinsurance contract due to lower than expected losses. Profit commissions primarily relate to our mortgage guaranty segment. Profit commissions for the three months ended March 31, 2005 and 2004 were $1.0 million and $5.5 million, respectively. The decrease in profit commission expense is due to more favorable loss development on experience rated quota share treaties in 2004 compared with 2005.
Acquisition Costs
Acquisition costs primarily consist of ceding commissions, brokerage fees and operating expenses that are related to the acquisition of new business. Acquisition costs that vary with and are directly related to the acquisition of new business are deferred and are amortized in relation to earned premium. For the three months ended March 31, 2005 and 2004, acquisition costs were $10.2 million and $13.1 million, respectively. The decrease of $2.9 million in 2005 is consistent with the decrease in earned premium.
Operating Expenses
For the three months ended March 31, 2005 and 2004, operating expenses were $14.5 million and $12.6 million, respectively. The increase is principally due to expenses associated with maintaining a holding
39
company platform during the three-month period ended March 31, 2005. This platform was not established until April 28, 2004, the date of the IPO.
Other Expenses
For the three months ended March 31, 2005 and 2004, other expenses were $3.3 million and $3.1million, respectively. The 2005 amount is solely comprised of interest expense related to the issuance of our 7% Senior Notes in May 2004. The 2004 amount is comprised of $1.5 of interest expense related to our $75.0 million cumulative monthly preferred shares and a $1.6 million write off of goodwill in our other segment. This amount is related to the trade credit business which we exited as part of the IPO.
Income Tax
For the three months ended March 31, 2005 and 2004, income tax expense was $12.4 million and $15.3 million, respectively. Our effective tax rate was 21.9% and 24.6% for the three months ended March 31, 2005 and 2004, respectively. Our effective tax rates reflect the proportion of income recognized by each of our operating subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, UK subsidiaries taxed at the UK marginal corporate tax rate of 30%, and no taxes for our Bermuda holding company and subsidiaries. Accordingly, our overall corporate effective tax rate fluctuates based on the distribution of taxable income across these jurisdictions.
Segment Results of Operations
Our financial results include three operating segments: financial guaranty direct, financial guaranty reinsurance and mortgage guaranty. For financial reporting purposes, we have a fourth segment, which we refer to as other. Management uses underwriting gains and losses as the primary measure of each segments financial performance. Underwriting gain (loss) includes net earned premiums, loss and loss adjustment expenses, profit commission expense, acquisition costs and operating expenses that are directly related to the operations of our insurance businesses. This measure excludes certain revenue and expense items, such as investment income, realized investment gains and losses, unrealized gains and losses on derivative financial instruments, and interest expense, that are not directly related to the underwriting performance of our insurance operations, but are included in net income.
Financial Guaranty Direct Segment
The financial guaranty direct segment consists of our primary financial guaranty insurance business and our credit derivative business. Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. As an alternative to traditional financial guaranty insurance, credit protection on a particular security or issuer can also be provided through a credit derivative, such as a credit default swap. Under a credit derivative, the seller of protection makes a specified payment to the buyer of protection upon the occurrence of one or more specified credit events with respect to a reference obligation or a particular reference entity. Credit derivatives typically provide protection to a buyer rather than credit enhancement of an issue as in traditional financial guaranty insurance.
40
The table below summarizes the financial results of our financial guaranty direct segment for the periods presented:
|
|
Three Months Ended
|
|
|||||
|
|
2005 |
|
2004 |
|
|||
|
|
($ in millions) |
|
|||||
Gross written premiums |
|
$ |
23.8 |
|
$ |
25.6 |
|
|
Net written premiums |
|
23.1 |
|
25.3 |
|
|||
Net earned premiums |
|
20.4 |
|
40.7 |
|
|||
Loss and loss adjustment expenses |
|
(1.5 |
) |
13.4 |
|
|||
Profit commission expense |
|
|
|
|
|
|||
Acquisition costs |
|
1.5 |
|
1.4 |
|
|||
Operating expenses |
|
9.4 |
|
5.5 |
|
|||
Underwriting gain |
|
$ |
11.0 |
|
$ |
20.4 |
|
|
|
|
|
|
|
|
|||
Loss and loss adjustment expense ratio |
|
(7.1 |
)% |
32.9 |
% |
|||
Expense ratio |
|
53.1 |
% |
17.0 |
% |
|||
Combined ratio |
|
46.0 |
% |
49.9 |
% |
|||
For the three months ended March 31, 2005 the financial guaranty direct segment contributed $23.8 million to gross written premiums, a decrease of $1.8 million, compared with $25.6 million for the three months ended March 31, 2004. The decrease is mainly attributable to $10.4 million of gross written premiums related to the unwinding of a transaction included in first quarter of 2004 results. Excluding this nonrecurring item, gross written premiums increased $8.6 million compared with the prior year, primarily due to the continuing growth in business production as we execute our primary financial guaranty business strategy.
Gross and net written premiums in this segment generally are received on an installment basis, reflecting our focus on the structured finance and credit derivatives markets. In 2005 and 2004 installment premiums represented 98 % and 100%, respectively of gross written premiums in this segment.
For the three months ended March 31, 2005 and 2004, net written premiums were $23.1 million and $25.3 million, respectively. The decline in net written premiums is primarily due to decrease in gross written premiums as we typically retain a substantial portion of this business.
Net earned premiums for the three months ended March 31, 2005 was $20.4 million compared with $40.7 million for the three months ended March 31, 2004, a decrease of $20.3 million, or 50%. The first quarter of 2004 included $24.2 million of net earned premiums related to the unwinding of a transaction. Excluding this item, net earned premiums increased $3.9 million, primarily due to the exiting of our single name credit default swap (CDS) line of business which generated $2.3 million of net earned premiums.
Loss and LAE were $(1.5) million and $13.4 million, respectively, for the three months ended March 31, 2005 and 2004. The March 31, 2005 amount is attributable to a $0.9 million release of portfolio reserves related to the single name CDS line of business, as well as a release of portfolio reserves related to our CDO book of business as these deals approach maturity and the underlying credit quality improves. Included in the March 31, 2004 balance is $12.3 million associated with the close out of transaction types which we ceased participating in connection with the IPO.
For the three months ended March 31, 2005 and 2004, acquisition costs remained relatively flat at $1.5 million and $1.4 million, respectively.
Operating expenses for the three months ended March 31, 2005 and 2004 were $9.4 million and $5.5 million, respectively. During 2005 the Company implemented a new operating expense allocation methodology. This new methodology more closely applies expenses to the individual operating segments and was based on a comprehensive cost study. The prior allocation was based on segment earned premium. This caused the financial guaranty reinsurance and mortgage guaranty segments to receive a disproportionate amount of the
41
expenses. 2004 amounts have been adjusted to reflect this new allocation. The increase in operating expenses for the three months ended March 31, 2005, compared with the three months ended March 31, 2004 is related to maintaining a holding company platform. This platform was not established until April 28, 2004, the date of the IPO.
Financial Guaranty Reinsurance Segment
In our financial guaranty reinsurance business, we assume all or a portion of risk undertaken by other insurance companies that provide financial guaranty protection. The financial guaranty reinsurance business consists of public finance and structured finance reinsurance lines. Premiums on public finance are typically written upfront and earned over the life of the policy, and premiums on structured finance are typically written on an installment basis and earned ratably over the installment period.
The table below summarizes the financial results of our financial guaranty reinsurance segment for the periods presented:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
Gross written premiums |
|
$ |
34.0 |
|
$ |
52.4 |
|
Net written premiums |
|
34.0 |
|
52.4 |
|
||
Net earned premiums |
|
23.0 |
|
20.4 |
|
||
Loss and loss adjustment expenses |
|
(7.1 |
) |
3.9 |
|
||
Profit commission expense |
|
|
|
0.1 |
|
||
Acquisition costs |
|
8.1 |
|
7.1 |
|
||
Operating expenses |
|
4.4 |
|
3.0 |
|
||
Underwriting gain |
|
$ |
17.6 |
|
$ |
6.3 |
|
|
|
|
|
|
|
||
Loss and loss adjustment expense ratio |
|
(30.9 |
)% |
19.1 |
% |
||
Expense ratio |
|
54.3 |
% |
50.0 |
% |
||
Combined ratio |
|
23.4 |
% |
69.1 |
% |
|
|
Three Months Ended
|
|
||||
Gross Written Premiums |
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
Public finance |
|
$ |
23.2 |
|
$ |
40.5 |
|
Structured finance |
|
10.8 |
|
11.9 |
|
||
Total |
|
$ |
34.0 |
|
$ |
52.4 |
|
Gross written premiums for our financial guaranty reinsurance segment include upfront premiums on transactions underwritten during the period, plus installment premiums on business primarily underwritten in prior periods. Consequently, this amount is affected by changes in the business mix between public finance and structured finance. For the three months ended March 31, 2005, 59% of gross written premiums in this segment were upfront premiums and 41% were installment premiums. For the three months ended March 31, 2004, 65% of gross written premiums in this segment were upfront premiums and 35% were installment premiums. For the three months ended March 31, 2005, $22.2 million, $10.7 million and $4.6 million of our gross written premiums was ceded by Financial Security Assurance Inc. (FSA), Ambac Assurance Corporation (Ambac) and MBIA Insurance Corporation (MBIA), respectively. For the three months ended March 31, 2004, $28.1 million, $11.2 million and $9.9 million of our gross written premiums was ceded by FSA, Ambac and MBIA, respectively.
Gross written premiums for the three months ended March 31, 2005 were $34.0 million, a decrease of
42
$18.4 million, compared with $52.4 million for the three months ended March 31, 2004. This decrease is mainly attributable to one cedant relationship that was terminated and business from a second cedant that was decreased, effective July 1, 2004.
On April 6, 2005, Assured Guaranty Corp (AGC) and Assured Guaranty Re International Ltd. (AGRI) entered into a binding letter of intent with FSA pursuant to which substantially all of FSAs financial guaranty risks previously ceded to AGC (the Ceded Business) would be assumed by AGRI, effective as of January 1, 2005. As of December 31, 2004, the total par outstanding of the Ceded Business was approximately $20.6 billion. FSA has agreed it would release AGC from all liabilities with respect to the Ceded Business. FSA and AGRI have agreed that AGRI would assume all of AGCs liabilities with respect to the Ceded Business. FSA would receive a profit commission on the Ceded Business based on its future performance.
FSA has also agreed to reassume from AGRI approximately $800.0 million par value of healthcare related reinsurance business, which would include a transfer to FSA of approximately $12.0 million of unearned premium reserves, net of ceding commission. These transfers would take place at statutory book value, as of January 1, 2005.
The transaction is expected to be completed in the second quarter of 2005 and is consistent with the Companys strategy of focusing AGCs business on direct financial guaranty and AGRIs business on financial guaranty reinsurance. The Company does not expect the transaction to have a material impact on its consolidated 2005 net income. The transaction is subject to final documentation and certain closing conditions, including regulatory approvals. There can be no assurance that this transaction will be consummated upon the terms specified above or at all.
As of April 1, 2005 our quota share reinsurance treaty with Ambac was renewed. In addition, AGRI entered into a master facultative agreement with Ambac on March 31, 2005. On April 20, 2005, Ambac also provided notice of a non-renewal of the quota share treaty on a run-off basis, effective July 1, 2006. This non-renewal will not affect business ceded from Ambac in any prior year, or business ceded under the current quota share treaty through June 30, 2006.
|
|
Three Months Ended
|
|
|
|||||||||
Net Written Premiums |
|
2005 |
|
2004 |
|
|
|||||||
|
|
($ in millions) |
|
|
|||||||||
Public finance |
|
$ |
23.2 |
|
$ |
40.5 |
|
||||||
Structured finance |
|
10.8 |
|
11.9 |
|
||||||||
Total |
|
$ |
34.0 |
|
$ |
52.4 |
|
||||||
For the three months ended March 31, 2005 and 2004, net written premiums were $34.0 million and $52.4 million, respectively. The decrease of $18.4 million is consistent with the decrease in gross written premium described above.
|
|
Three Months Ended
|
|
||||
Net Earned Premiums |
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
Public finance |
|
$ |
11.0 |
|
$ |
12.6 |
|
Structured finance |
|
12.0 |
|
7.8 |
|
||
Total |
|
$ |
23.0 |
|
$ |
20.4 |
|
Included in public finance reinsurance net earned premiums are refundings of |
|
$ |
1.4 |
|
$ |
2.9 |
|
Growth in our net earned premiums over the period has been driven by growth in the structured finance line of business, due to timing on installment earnings reported by our ceding companies. The public finance businesss contribution includes refunding premiums, which reflect the unscheduled pre-payment or refundings of underlying municipal bonds due to lower interest rates. These unscheduled refunding premiums are sensitive to market interest rates and we evaluate our net earned premiums both including and excluding these premiums.
43
Losses and LAE were $(7.1) million and $3.9 million, respectively, for the three months ended March 31, 2005 and 2004. The predominant portion of the $(7.1) million in 2005 was the recovery of $6.8 million relating to a reinsurance claim incurred in 1998 and 1999. This recovery was received in connection with the completion of two settlements.
For the three months ended March 31, 2005 and 2004, acquisition costs were $8.1 million and $7.1 million, respectively. The increase in acquisition costs over the periods is directly related to an increase in net earned premiums.
Operating expenses for the three months ended March 31, 2005 and 2004, were $4.4 million and $3.0 million, respectively. During 2005 the Company implemented a new operating expense allocation methodology. This new methodology more closely applies expenses to the individual operating segments and was based on a comprehensive cost study. The prior allocation was based on earned premium. This caused the reinsurance guaranty and mortgage guaranty segments to receive an disproportionate amount of the expenses. 2004 amounts have been adjusted to reflect this new allocation. The increase in operating expenses for the three months ended March 31, 2005, compared with the three months ended March 31, 2004 is related to maintaining a holding company platform. This platform was not established until April 28, 2004, the date of the IPO.
Mortgage Guaranty Segment
Mortgage guaranty insurance provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan-to-value ratio in excess of a specified ratio. We primarily function as a reinsurer in this industry and assume all or a portion of the risks undertaken by primary mortgage insurers.
The table below summarizes the financial results of our mortgage guaranty segment for the periods presented:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
Gross written premiums |
|
$ |
19.4 |
|
$ |
14.0 |
|
Net written premiums |
|
19.4 |
|
14.0 |
|
||
Net earned premiums |
|
4.6 |
|
8.4 |
|
||
Loss and loss adjustment expenses |
|
0.2 |
|
(1.2 |
) |
||
Profit commission expense |
|
1.0 |
|
5.0 |
|
||
Acquisition costs |
|
0.5 |
|
0.9 |
|
||
Operating expenses |
|
0.7 |
|
0.6 |
|
||
Underwriting gain |
|
$ |
2.2 |
|
$ |
3.1 |
|
|
|
|
|
|
|
||
Loss and loss adjustment expense ratio |
|
4.3 |
% |
(14.3 |
)% |
||
Expense ratio |
|
47.4 |
% |
77.6 |
% |
||
Combined ratio |
|
51.7 |
% |
63.3 |
% |
Gross written premiums for the three months ended March 31, 2005 and 2004 were $19.4 million and $14.0 million, respectively. The increase in gross written premiums is primarily related to a single transaction executed in first quarter 2005 which contributed $16.3 million to gross written premiums. Likewise the first quarter 2004 included a single transaction which contributed $9.5 million to gross written premiums. Excluding these items, gross written premiums decreased $1.4 million due to the run-off of our quota share treaty business.
Net written premiums for the three months ended March 31, 2005 and 2004 were $19.4 million and $14.0 million, respectively. This is consistent with gross written premiums, as we do not cede a significant amount of our mortgage guaranty business.
44
For the three months ended March 31, 2005 and 2004, net earned premiums were $4.6 million and $8.4 million, respectively. The decrease in net earned premiums reflects the run-off of our quota share treaty business.
Loss and LAE were $0.2 million and $(1.2) million for the three months ended March 31, 2005 and 2004, respectively. During 2005 the Company added $0.2 million to portfolio reserves. The negative losses in 2004 are primarily a result of favorable loss development related to older contracts, which are running off. This 2004 development was also attributable to higher than expected appreciation in real estate values, resulting in both lower frequency of claims and lower severity of losses.
Profit commission expense for the three months ended March 31, 2005 and 2004 was $1.0 million and $5.0 million, respectively. The decrease in profit commission expense for the three months ended March 31, 2005 compared with the three months ended March 31, 2004, is due to the favorable loss development on experience rated quota share treaties in 2004, which caused a reduction in loss and loss adjustment expenses, mentioned above. There was no such favorable loss development in 2005. Portfolio reserves are not a component of these profit commission calculations.
Acquisition costs for the three months ended March 31, 2005 and 2004 were $0.5 million and $0.9 million, respectively. The decline in acquisition costs in 2005 as compared with 2004 is directly related to the decline in net earned premiums.
Operating expenses for the three months ended March 31, 2005 and 2004, were $0.7 million and $0.6 million, respectively. During 2005 the Company implemented a new operating expense allocation methodology. This new methodology more closely applies expenses to the individual operating segments and was based on a comprehensive cost study. The prior allocation was based on earned premium. This caused the reinsurance guaranty and mortgage guaranty segments to receive a disproportionate amount of the expenses. 2004 amounts have been adjusted to reflect this new allocation. The increase in operating expenses for the three months ended March 31, 2005, compared with the three months ended March 31, 2004 is related to maintaining a holding company platform. This platform was not established until April 28, 2004, the date of the IPO.
Other Segment
Our other segment consists of certain non-core businesses that we have exited in connection with the IPO, including equity layer credit protection, trade credit reinsurance, title reinsurance and auto residual value reinsurance.
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
($ in millions) |
|
||||
|
|
|
|
|
|
||
Net earned premiums: |
|
|
|
|
|
||
Equity layer credit protection |
|
$ |
|
|
$ |
5.4 |
|
Trade credit reinsurance |
|
|
|
9.3 |
|
||
Title reinsurance |
|
|
|
2.5 |
|
||
Total |
|
$ |
|
|
$ |
17.2 |
|
|
|
|
|
|
|
||
Underwriting gain (loss): |
|
|
|
|
|
||
Equity layer credit protection |
|
$ |
1.1 |
|
$ |
2.5 |
|
Trade credit reinsurance |
|
|
|
1.4 |
|
||
Title reinsurance |
|
|
|
0.7 |
|
||
Auto residual value reinsurance |
|
|
|
(2.5 |
) |
||
Total |
|
$ |
1.1 |
|
$ |
2.1 |
|
45
Liquidity and Capital Resources
Our liquidity, both on a short-term basis (for the next twelve months) and a long-term basis (beyond the next twelve months), is largely dependent upon: (1) the ability of our subsidiaries to pay dividends or make other payments to us and (2) external financings. Our liquidity requirements include the payment of our operating expenses, interest on our debt, and dividends on our common shares. We may also require liquidity to make periodic capital investments in our operating subsidiaries. In the ordinary course of our business, we evaluate our liquidity needs and capital resources in light of holding company expenses, debt-related expenses and our dividend policy, as well as rating agency considerations. Based on the amount of dividends we expect to receive from our subsidiaries and the income we expect to receive from our invested assets, management believes that we will have sufficient liquidity to satisfy our needs over the next twelve months, including the ability to pay dividends on our common shares in accordance with our dividend policy. Total cash paid during 2005 for dividends to shareholders was $2.3 million, or $0.03 per common share. Beyond the next twelve months, the ability of our subsidiaries to declare and pay dividends may be influenced by a variety of factors including market conditions, insurance and rating agencies regulations and general economic conditions. Consequently, although management believes that we will continue to have sufficient liquidity to meet our debt service and other obligations over the long term, no guarantee can be given that we will not be required to seek external debt or equity financing in order to meet our operating expenses, debt service obligations or pay dividends on our common shares.
We anticipate that a major source of our liquidity, for the next twelve months and for the longer term, will be amounts paid by our operating subsidiaries as dividends. Certain of our operating subsidiaries are subject to restrictions on their ability to pay dividends. The amount available at AGC to pay dividends in 2005 with notice to, but without the prior approval of, the Maryland Insurance Commissioner is approximately $23.7 million (unaudited). AGC has committed to its rating agencies that it will not pay more than $10.0 million per year in dividends. Dividends paid by a U.S. company to a Bermuda holding company presently are subject to withholding tax at a rate of 30%. The amount available at AGRI to pay dividends in 2005 in compliance with Bermuda law is $557.4 million.
Liquidity at our operating subsidiaries is used to pay operating expenses, claims, payment obligations with respect to credit derivatives, reinsurance premiums, dividends to Assured Guaranty U.S. Holdings Inc. for debt service and dividends to us, as well as, where appropriate, to make capital investments in their own subsidiaries. In addition, certain of our operating companies may be required to post collateral in connection with credit derivatives and reinsurance transactions. Management believes that these subsidiaries operating needs generally can be met from operating cash flow, including gross written premium and investment income from their respective investment portfolios.
Net cash flows provided by operating activities were $57.2 million and $12.4 million during the three months ended March 31, 2005 and 2004, respectively. The increase in cash flows provided by operating activities was due to the favorable effect of changes in unearned premiums and reserves for losses and loss adjustment expenses, partially offset by the negative impact of premiums receivable from affiliates.
Net cash flows used in investing activities were $35.4 million and $9.9 million during the three months ended March 31, 2005 and 2004, respectively. These investing activities were primarily net purchases of fixed maturity investment securities during 2005 and 2004.
Net cash flows used in financing activities was $17.0 million during the three months ended March 31, 2005. There were no cash flows associated with financing activities during the three months ended March 31, 2004. In March 2005, we declared and paid dividends of $2.3 million, or $0.03 per common share. No such dividends were paid in First Quarter 2004.
On November 4, 2004, our Board of Directors authorized a $25.0 million share stock repurchase program with no scheduled date to expire. Between November 2004 and March 31, 2005, the Company has spent $20.7 million to repurchase approximately 1.1 million shares of Common Stock. During First Quarter of 2005 we paid $14.7 million to repurchase 0.8 million shares of our Common Stock. In April 2005, the Company completed the share buyback program at which time it has repurchased a total of 1.3 million shares of Common Stock.
46
As of March 31, 2005 our future cash payments associated with contractual obligations pursuant to our operating leases for office space and have not materially changed since December 31, 2004.
Credit Facilities
$250.0 million Credit Facility
The Company entered into a $250.0 million unsecured credit facility ($250.0 million credit facility) on April 29, 2004, with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America are acting as co-arrangers. Each of Assured Guaranty Ltd., AGC and Assured Guaranty (UK) Ltd. (AG (UK)), a subsidiary of AGC organized under the laws of the United Kingdom, is a party, as borrower. The $250.0 million credit facility was replaced by the $300.0 million credit facility discussed below.
The $250.0 million credit facility was a 364-day facility available for general corporate purposes, and any amounts outstanding under the facility at its expiration will be due and payable one year following the facilitys expiry. As of March 31, 2005 and December 31, 2004, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility. Under the $250.0 million credit facility, AGC can borrow up to $250.0 million, Assured Guaranty Ltd. has a borrowing limit not to exceed $50.0 million, and AG (UK) has a borrowing limit not to exceed $12.5 million. The $250.0 million credit facilitys financial covenants require that Assured Guaranty Ltd.: (a) maintain a minimum net worth of 75% of its pro forma net worth (determined as of the first required reporting date under the facility), (b) maintain an interest coverage ratio of at least 2.5:1, and (c) maintain a maximum debt-to-capital ratio of 30%. As of March 31, 2005 Assured Guaranty Ltd. was in compliance with all of these financial covenants. In addition, the $250.0 million credit facility requires that AGC: (a) maintain qualified statutory capital of at least 80% of its statutory capital as of the fiscal quarter prior to the closing date of the facility, (b) maintain a ratio of aggregate net par outstanding to qualified statutory capital of not more than 150:1, and (c) maintain a maximum debt-to-capital ratio of 35%. As of March 31, 2005 AGC was in compliance with all of these financial covenants.
Letter of Credit Agreement
On November 8, 2004 Assured Guaranty Ltd., AGRI and AGRO entered into a standby letter of credit agreement (the LOC Agreement) with KeyBank National Association (KeyBank). Under the LOC Agreement, KeyBank has agreed to issue up to $50.0 million in letters of credit on our behalf. The obligations of Assured Guaranty Ltd., AGRI and AGRO under the LOC Agreement are joint and several. The letters of credit will be used to satisfy AGRIs or AGROs obligations under certain reinsurance agreements and for general corporate purposes. The LOC Agreement contains covenants that limit debt, liens, guaranties, loans and investments, dividends, liquidations, mergers, consolidations, acquisitions, sales of assets or subsidiaries and affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. The LOC Agreement also contains financial covenants that require the Company: (i) to maintain the ratio of consolidated debt to total capitalization at not greater than 0.30 to 1.0; (ii) to maintain consolidated net worth of at least seventy-five percent (75%) of its consolidated net worth as of June 30, 2004; and (iii) to maintain the consolidated interest coverage ratio for any test period ending on the last day of a fiscal quarter at not less than 2.50 to 1.0. In addition, the LOC Agreement provides that the obligations of KeyBank to issue letters of credit may be terminated, and our obligations under the agreement may be accelerated, upon an event of default. As of March 31, 2005 and December 31, 2004, no amounts were payable under any letter of credit issued under this facility. The LOC Agreement expired on April 28, 2005 and was replaced by the $300.0 million credit facility discussed below.
$300.0 million Credit Facility
On April 15, 2005, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million three-year unsecured revolving credit facility (the $300.0 million credit facility) with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as lead arrangers and KeyBank National Association (KeyBank) acted as syndication agent. Under the $300.0 million credit facility, each of AGC, AG (UK) and, subject to AGRI
47
and AGRO entering into the guaranties discussed below, Assured Guaranty Ltd., AGRI and AGRO are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.
The $300.0 million credit facility is intended to replace (1) the $250.0 million credit facility and (2) the LOC Agreement. The $250.0 million credit facility was terminated as of the closing of the $300.0 million credit facility. Under the LOC Agreement, KeyBank has issued two letters of credit, both on behalf of AGRO, with an aggregate stated amount of approximately $20.7 million. The LOC agreement expired effective April 28, 2005. The parties to the LOC Agreement have agreed that no additional letters of credit would be issued, extended or renewed from and after the date of the closing of the $300.0 million credit facility and letters of credit that were outstanding on such date will, unless cancelled and surrendered by the respective beneficiaries thereof, remain outstanding until their respective stated expiration dates of December 31, 2005.
The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.
At the closing of the $300.0 million credit facility, (i) AGC guaranteed the obligations of AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AGRI and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG (UK) under such facility and (iii) Assured Guaranty Overseas US Holdings Inc., as a Material Non-AGC Subsidiary (as defined in the related credit agreement), guaranteed the obligations of Assured Guaranty Ltd., AGRI and AGRO under such facility. It was further agreed that none of Assured Guaranty Ltd., AGRI or AGRO would be able to borrow under the $300.0 million credit facility until AGRI and AGRO, as Material Non-AGC Subsidiaries, have both guaranteed the obligations of the other and of Assured Guaranty Ltd. under such facility.
The $300.0 million credit facilitys financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of $1.2 billion, (b) maintain an interest coverage ratio of at least 2.5:1, and (c) maintain a maximum debt-to-capital ratio of 30%. In addition, the $300.0 million credit facility requires that AGC: (x) maintain qualified statutory capital of at least 80% of its statutory capital as of the fiscal quarter prior to the closing date of the facility and (y) maintain a ratio of aggregate net par outstanding to qualified statutory capital of not more than 150:1. Furthermore, the $300.0 million credit facility contains restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding.
Non-Recourse Credit Facility
AGC is also party to a non-recourse credit facility with a syndicate of banks which provides up to $175.0 million specifically designed to provide rating agency-qualified capital to further support AGCs claims paying resources. The facility expires in December 2010 and is subject to annual extension for an additional term of one year in order to maintain its term at seven periods. As of March 31, 2005 and December 31, 2004, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.
The Companys failure to comply with certain covenants under our credit facilities could, subject to grace periods in the case of certain covenants, result in an event of default. This could require the Company to repay any outstanding borrowings in an accelerated manner.
48
Committed Capital Securities
On April 8, 2005, AGC entered into separate agreements (the Put Agreements) with each of Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV (each, a Custodial Trust) pursuant to which AGC may, at its option, cause each of the Custodial Trusts to purchase up to $50,000,000 of perpetual preferred stock of AGC (the AGC Preferred Stock).
Structure
Each of the Custodial Trusts is a newly organized Delaware statutory trust formed for the purpose of (i) issuing a series of flex committed capital securities (the CCS Securities) representing undivided beneficial interests in the assets of such Custodial Trust; (ii) investing the proceeds from the issuance of the CCS Securities or any redemption in full of AGC Preferred Stock in a portfolio of high-grade commercial paper and (in limited cases) U.S. Treasury Securities (the Eligible Assets), (iii) entering into the Put Agreement with AGC; and (iv) entering into related agreements.
Initially, all of the CCS Securities were issued to a special purpose pass-through trust (the Pass-Through Trust). The Pass-Through Trust is a newly created statutory trust organized under the Delaware Statutory Trust Act formed for the purposes of (i) issuing $200,000,000 of Pass-Through Trust Securities to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended, (ii) investing the proceeds from the sale of the Pass-Through Trust Securities in, and holding, the CCS Securities issued by the Custodial Trusts and (iii) entering into related agreements. Neither the Pass-Through Trust nor the Custodial Trusts are consolidated in Assured Guarantys financial statements.
Income distributions on the Pass-Through Trust Securities will be equal to an annualized rate of One-Month LIBOR plus 110 basis points for all periods ending on or prior to April 8, 2008, and thereafter distributions will be determined pursuant to a remarketing process (the Flexed Rate Period) or pursuant to an auction process (the Auction Rate Mode). Distributions on the CCS Securities and dividends on the AGC Preferred Stock will be determined pursuant to the same process.
Put Agreement
Pursuant to the Put Agreement, AGC will pay a monthly put premium to each Custodial Trust except (1) during any period when the AGC Preferred Stock that has been put to a Custodial Trust is held by that Custodial Trust or (2) upon termination of the Put Agreement. The put premium will equal the product of (A) the applicable distribution rate on the CCS Securities for the respective distribution period less the excess of (i) the Custodial Trusts stated return on the Eligible Assets for such distribution period (including any fees and expenses of the Pass-Through Trust) (expressed as an annual rate) over (ii) the expenses of the Custodial Trust for such distribution period (expressed as an annual rate), (B) the aggregate face amount of the CCS Securities of the Custodial Trust outstanding on the date the put premium is calculated, and (C) a fraction, the numerator of which will be the actual number of days in such distribution period and the denominator of which will be 360. In addition, and as a condition to exercising the put option under a Put Agreement, AGC is required to enter into a Custodial Trust Expense Reimbursement Agreement with the respective Custodial Trust pursuant to which AGC agrees it will pay the fees and expenses of the Custodial Trust (which includes the fees and expenses of the Pass-Through Trust) during the period when such Custodial Trust holds AGC Preferred Stock.
Upon exercise of the put option granted to AGC pursuant to the Put Agreement, a Custodial Trust will liquidate its portfolio of Eligible Assets and purchase the AGC Preferred Stock and will hold the AGC Preferred Stock until the earlier of (i) the redemption of such AGC Preferred Stock and (ii) the liquidation or dissolution of the Custodial Trust.
Each Put Agreement has no scheduled termination date or maturity, however, it will terminate if (1) AGC fails to pay the put premium in accordance with the Put Agreement, and such failure continues for five business days, (2) during the Auction Rate Mode, AGC elects to have the AGC Preferred Stock bear a fixed rate dividend (a Fixed Rate Distribution Event), (3) AGC fails to pay (i) dividends on the AGC Preferred Stock, or (ii) the fees and expenses of the Custodial Trust, for the related dividend period, and such failure continues for five business days, (4) AGC fails to pay the redemption price of the AGC Preferred Stock and such failure continues for five business
49
days, (5) the face amount of a Custodial Trusts CCS Securities is less than $20,000,000, (6) AGC elects to terminate the Put Agreement, or (7) a decree of judicial dissolution of the Custodial Trust is entered. If, as a result of AGCs failure to pay the put premium, the Custodial Trust is liquidated, AGC will be required to pay a termination payment which will be distributed to the holders of the Pass-Through Trust Securities. The termination payment will be at a rate equal to 1.10% per annum of the amount invested in Eligible Assets calculated from the date of the failure to pay the put premium through the end of the applicable period.
AGC Preferred Stock
AGC Preferred Stock will be issued in one or more series, with each series in an aggregate liquidation preference amount equal to the aggregate face amount of a Custodial Trusts outstanding CCS Securities, net of fees and expenses, upon exercise of the put option. Unless redeemed by AGC, the AGC Preferred Stock will be perpetual.
For each distribution period, holders of the outstanding AGC Preferred Stock of any series, in preference to the holders of common stock and of any other class of shares ranking junior to the AGC Preferred Stock, will be entitled to receive out of any funds legally available therefore when, as and if declared by the Board of Directors of AGC or a duly authorized committee thereof, cash dividends at a rate per share equal to the dividends rate for such series of AGC Preferred Stock for the respective distribution period. Prior to a Fixed Rate Distribution Event, the dividend rate on the AGC Preferred Stock will be equal to the distribution rate on the CCS Securities. The Custodial Trusts expenses (including any expenses of the Pass-Through Trust) for the period will be paid separately by AGC pursuant to the Custodial Trust Expense Reimbursement Agreement.
Upon a Fixed Rate Distribution Event, the distribution rate on the AGC Preferred Stock will equal the fixed rate equivalent of one-month LIBOR plus 2.50%. A Fixed Rate Distribution Event will be deemed to have occurred during the Auction Rate Mode when AGC Preferred Stock is outstanding, if: (1) AGC elects to have the AGC Preferred Stock bear dividends at a fixed rate, (2) AGC fails to pay dividends on the AGC Preferred Stock for the related distribution period and such failure continues for five business days or (3) AGC fails to pay the fees and expenses of the Custodial Trust for the related distribution period pursuant to the Custodial Trust Expense Reimbursement Agreement and such failure continues for five business days.
During the Flexed Rate Period and for any period in which AGC Preferred Stock is held by a Custodial Trust, dividends will be paid monthly, except that during the Auction Rate Mode dividends will be paid every 49 days. Following a Fixed Rate Distribution Event, dividends will be paid every 90.
Following exercise of the put option during any Flexed Rate Period, AGC may redeem the AGC Preferred Stock held by a Custodial Trust in whole and not in part on any distribution payment date by paying a redemption price to such Custodial Trust in an amount equal to the liquidation preference amount of the AGC Preferred Stock (plus any accrued but unpaid dividends on the AGC Preferred Stock for the then current distribution period). If AGC redeems the AGC Preferred Stock held by a Custodial Trust, the Custodial Trust will reinvest the redemption proceeds in Eligible Assets and, in accordance with the Put Agreement, AGC will pay the put premium to the Custodial Trust. If the AGC Preferred Stock was distributed to holders of CCS Securities during any Flexed Rate Period then AGC may not redeem the AGC Preferred Stock until the end of such period.
Following exercise of the put option during the Auction Rate Mode or at the end of any Flexed Rate Period, AGC may redeem the AGC Preferred Stock held by a Custodial Trust in whole or in part (x) on the final distribution payment date of the applicable Flexed Rate Period and (y) on any distribution payment date in the Auction Rate Mode, by paying a redemption price to the Custodial Trust in an amount equal to the liquidation preference amount of the AGC Preferred Stock to be redeemed (plus any accrued but unpaid dividends on such AGC Preferred Stock for the then current distribution period). If AGC partially redeems the AGC Preferred Stock held by a Custodial Trust, the redemption proceeds will be distributed pro rata to the holders of the CCS Securities and, if the Pass-Through Trust is the holder of CCS Securities, distributed by the Pass-Through Trust to holders of Pass-Through Securities (and a corresponding reduction in the aggregate face amount of CCS Securities and, if the Pass-Through Trust is the holder of CCS Securities, Pass-Through Trust Securities will be made); provided that AGC must redeem all of the AGC Preferred Stock if after giving effect to a partial redemption, the aggregate liquidation preference amount of the AGC Preferred Stock held by such Custodial Trust immediately following such redemption would be
50
less than $20,000,000. If a Fixed Rate Distribution Event occurs, AGC may not redeem the AGC Preferred Stock for a period of two years from the date of such Fixed Rate Distribution Event.
Our investment portfolio consisted of $2,083.4 million of fixed maturity securities, $63.5 million of short-term investments and had a duration of 4.6 years as of March 31, 2005. Our investment portfolio consisted of $1,965.1 million of fixed maturity securities, $175.8 million of short-term investments and had a duration of 5.0 years as of December 31, 2004. Our fixed maturity securities are designated as available for sale in accordance with FAS No. 115 Accounting for Certain Investments in Debt and Equity Securities(FAS 115) Fixed maturity securities are reported at fair value in accordance with FAS 115, and the change in fair value is reported as part of accumulated other comprehensive income.
Fair value of the fixed maturity securities is based upon quoted market prices provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid indications. Our investment portfolio does not include any non-publicly traded securities. For a detailed description of our valuation of investments see Critical Accounting Estimates.
We review our investment portfolio for possible impairment losses. For additional information, see Critical Accounting Estimates.
The following table summarizes the ratings distributions of our investment portfolio as of March 31, 2005 and December 31, 2004. Ratings are represented by the lower of the Moodys and S&P classifications.
|
|
As of March 31, 2005 |
|
As of December 31, 2004 |
|
|
|
|
|
|
|
AAA or equivalent |
|
81.9 |
% |
77.7 |
% |
AA |
|
12.6 |
% |
15.6 |
% |
A |
|
5.5 |
% |
6.6 |
% |
BBB |
|
|
% |
0.1 |
% |
Total |
|
100.0 |
% |
100.0 |
% |
As of March 31, 2005 and December 31, 2004, our investment portfolio did not contain any securities that were not rated or rated below investment grade.
Short-term investments include securities with maturity dates equal to or less than one year from the original issue date. Our short-term investments are composed of money market funds, discounted notes and certain time deposits for foreign cash portfolios. Short-term investments are reported at cost, which approximates the fair value of these securities due to the short maturity of these investments.
Under agreements with our cedants and in accordance with statutory requirements, we maintain fixed maturity securities in trust accounts for the benefit of reinsured companies and for the protection of policyholders, generally in states where we or our subsidiaries, as applicable, are not licensed or accredited. The carrying value of such restricted balances as of March 31, 2005 and December 31, 2004 was $293.5 million and $304.4 million, respectively.
Under certain derivative contracts, we are required to post eligible securities as collateral, generally cash or U.S. government or agency securities. The need to post collateral under these transactions is generally based on marked to market valuations in excess of contractual thresholds. The fair market values of our pledged securities totaled $1.8 million as of March 31, 2005 and $1.9 million as of December 31, 2004.
51
See Note 2 to the Unaudited Interim Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Item 3 . Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the potential for losses that may result from changes in the value of a financial instrument as a result of changes in market conditions. The primary market risks that impact the value of our financial instruments are interest rate risk, basis risk, such as taxable interest rates relative to tax-exempt interest rates, and credit spread risk. Senior managers in our risk management department are responsible for monitoring risk limits and applying risk measurement methodologies. The estimation of potential losses arising from adverse changes in market conditions is a key element in managing market risk. We use various systems, models and stress test scenarios to monitor and manage market risk. These models include estimates made by management that use current and historic market information. The valuation results from these models could differ materially from amounts that actually are realized in the market. See Critical Accounting EstimatesValuation of Investments.
Financial instruments that may be adversely affected by changes in interest rates consist primarily of investment securities. The primary objective in managing our investment portfolio is generation of an optimal level of after-tax investment income while preserving capital and maintaining adequate liquidity. Investment strategies are based on many factors, including our tax position, fluctuation in interest rates, regulatory and rating agency criteria and other market factors. Prior to January 1, 2005 we had retained Lazard Freres Asset Management and Hyperion Capital Management, Inc. to manage our investment portfolio. As of January 1, 2005 this function has been placed with BlackRock Financial Management, Inc. These investment managers manage our fixed maturity investment portfolio in accordance with investment guidelines approved by our Board of Directors.
Item 4 . Controls and Procedures
Evaluation of Disclosure Controls and Procedures . Assured Guaranty Ltd.s management, with the participation of Assured Guaranty Ltd.s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Assured Guaranty Ltd.s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on this evaluation, Assured Guaranty Ltd.s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Assured Guaranty Ltd.s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Assured Guaranty Ltd. (including its consolidated subsidiaries) in the reports that it files or submits under the Exchange Act.
52
Lawsuits arise in the ordinary course of the Companys business. It is the opinion of the Companys management, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys financial position, results of operations or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Companys results of operations or liquidity in a particular quarter or fiscal year.
In April, AGC received a Notice of Order to Preserve (Order) from the Office of the Commissioner of Insurance, State of Georgia (Commissioner). The Order was directed to ACE Limited, and all affiliates and requires the preservation of documents and other items related to finite insurance and a broad group of other insurance and reinsurance agreements. Also in April, AGC, and numerous other insurers, received a subpoena from the Commissioner related to the initial phase of the Commissioners investigation into finite-risk transactions. The subpoena requests information on AGCs assumed and ceded reinsurance contracts in force during 2004. AGC is cooperating with the Commissioner.
In the ordinary course of their respective businesses, certain of the Companys subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although recoveries in any one or more of these proceedings during any quarter or fiscal year could be material to the Companys results of operations in that particular quarter or fiscal year.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Issuers Purchases of Equity Securities
On November 4, 2004, the Companys Board of Directors authorized a $25.0 million share stock repurchase program with no scheduled date to expire. As of March 31, 2005, the Company has spent approximately $21.2 million to repurchase approximately 1.1 million shares of its Common Stock at an average price of $18.80. The following table reflects purchases made by the Company during the three months ended March 31, 2005:
Period |
|
(a) Total
|
|
(b) Average
|
|
(c) Total Number of
|
|
(d) Approximate Dollar
|
|
||
|
|
|
|
|
|
|
|
|
|
||
January 1 January 31 |
|
25,000 |
|
$ |
19.50 |
|
25,000 |
|
$ |
18,526,376 |
|
February 1 February 28 |
|
250,000 |
|
$ |
19.10 |
|
250,000 |
|
$ |
13,750,969 |
|
March 1 March 31 |
|
530,400 |
|
$ |
18.73 |
|
530,400 |
|
$ |
3,817,277 |
|
Total |
|
805,400 |
|
$ |
18.87 |
|
805,400 |
|
|
|
Item 3 is omitted either because it is inapplicable or because the answer to such question is negative.
Item 4 Submission of Matters to a Vote of Security Holders
At the Annual General Meeting held on May 5, 2005, the following matters were submitted to, and approved by, shareholders of the Company:
1. ELECTION OF CLASS I DIRECTOR FOR TERM EXPIRING IN 2008
|
|
FOR |
|
WITHHOLD |
|
Patrick W. Kenny |
|
64,808,146 |
|
265,476 |
|
2. RE-APPROVAL OF ASSURED GUARANTY LTD. 2004 LONG-TERM INCENTIVE PLAN
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
61,400,035 |
|
2,948,244 |
|
725,343 |
|
0 |
|
3. APPROVAL OF THE ASSURED GUARANTY LTD. EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
59,523,023 |
|
135,056 |
|
718,733 |
|
4,696,810 |
|
4. RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT ACCOUNTANTS OF ASSURED GUARANTY LTD. FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
65,013,741 |
|
55,436 |
|
4,445 |
|
0 |
|
53
5. PROPOSALS CONCERNING ASSURED GUARANTY LTD. SUBSIDIARIES
A. PROPOSALS CONCERNING ASSURED GUARANTY RE INTERNATIONAL LTD. (AGRI)
I. ELECTION OF DIRECTORS FOR TERM EXPIRING IN 2006
|
|
FOR |
|
WITHHOLD |
|
Howard Albert |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Robert Bailenson |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Dominic J. Frederico |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
James M. Michener |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Robert B. Mills |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
David Penchoff |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Pierre A. Samson |
|
64,808,146 |
|
265,476 |
|
II. APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT AUDITORS OF AGRI FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
64,869,281 |
|
54,836 |
|
149,505 |
|
0 |
|
III. CHANGING THE NAME OF AGRI TO ASSURED GUARANTY RE LTD.
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
65,040,721 |
|
24,246 |
|
8,655 |
|
0 |
|
54
B. PROPOSALS CONCERNING ASSURED GUARANTY BARBADOS HOLDINGS LTD. (AGL BARBADOS)
I. ELECTION OF DIRECTOR FOR TERM EXPIRING IN 2006
|
|
FOR |
|
WITHHOLD |
|
James M. Michener |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Robert B. Mills |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Michael J. Schozer |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Kenneth Thomson |
|
64,808,146 |
|
265,476 |
|
|
|
|
|
|
|
Robert Worme |
|
64,808,146 |
|
265,476 |
|
II. APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT AUDITORS OF AGL BARBADOS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005
|
|
|
|
|
|
BROKER |
|
FOR |
|
AGAINST |
|
ABSTAIN |
|
NON-VOTES |
|
64,868,296 |
|
55,821 |
|
149,505 |
|
0 |
|
For purposes of Section 162(m) of the Internal Revenue Code, on February 9, 2005, the Compensation Committee of the Board of Directors approved an objective performance goal for 2005 under the Long-Term Incentive Plan of net income, as adjusted. After completion of the applicable performance period, the Compensation Committee will determine the extent to which the performance goal has been achieved and the amounts to be paid under the Long-Term Incentive Plan.
See Exhibit Index for a list of exhibits filed with this report.
55
SIGNATURES
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 under signed thereunto duly authorized.
|
|
Assured Guaranty Ltd.(Registrant) |
|||
|
|
|
|||
Dated: May 9, 2005 |
|
By: |
|
/S/ Robert B. Mills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert B. Mills
|
56
EXHIBIT INDEX
Exhibit
|
|
Description |
10.1 |
|
$300,000,000 Revolving Credit Facility Credit Agreement |
|
|
|
10.2* |
|
Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan |
|
|
|
10.3* |
|
Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (to be used with Employment Agreement) |
|
|
|
10.4* |
|
Restricted Stock Agreement under Assured Guaranty Ltd. 2004 Long Term Incentive Plan |
|
|
|
10.5* |
|
Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long Term Incentive Plan (to Be used with employment agreement) |
|
|
|
10.6 |
|
Put Agreement between Assured Guaranty Corp. and Woodbourne Capital Trust [I][II][III][IV] |
|
|
|
10.7 |
|
Custodial Trust Expense Reimbursement Agreement |
|
|
|
10.8 |
|
Assured Guaranty Corp. Articles Supplementary Classifying and Designating Series of Preferred Stock as Series A Perpetual Preferred Stock, Series B Perpetual Preferred Stock, Series C Perpetual Preferred Stock, Series D Perpetual Preferred Stock |
|
|
|
31.1 |
|
Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
99.1 |
|
Assured Guaranty Corp.s Consolidated Unaudited Financial Statements as of March 31, 2005 and December 31, 2004 and for the Three Months Ended March 31, 2005 and 2004 |
* management contract or compensatory plan
57
Exhibit 10.1
$300,000,000
3-YEAR REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
Among
ASSURED GUARANTY LTD.,
ASSURED GUARANTY CORP.,
ASSURED GUARANTY (UK) LTD.,
ASSURED GUARANTY RE INTERNATIONAL LTD.,
ASSURED GUARANTY RE OVERSEAS LTD.
and
THE BANKS PARTY HERETO
and
ABN AMRO BANK N.V.,
As Administrative Agent
Dated as of April 15, 2005
ABN AMRO INCORPORATED AND BANK
OF AMERICA SECURITIES LLC.,
as Lead Arrangers
and
BANK OF AMERICA, N.A. AND KEY
BANK, N.A.,
As Syndication Agents,
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Section 2.02 Nature of Banks Obligations with Respect to Revolving Credit Loans |
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Section 2.11 Conditions to the Issuance of all Letters of Credit |
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Section 3.04 LIBOR Unascertainable; Illegality; Increased Costs; Deposits Not Available |
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Section 4.06 Additional Compensation in Certain Circumstances |
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LIST OF SCHEDULES AND EXHIBITS
SCHEDULES |
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SCHEDULE 1.01(A) |
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PRICING GRID |
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SCHEDULE 1.01(B) |
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COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES |
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SCHEDULE 1.01(M) |
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MATERIAL SUBSIDIARIES |
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SCHEDULE 1.01(P) |
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EXISTING LIENS |
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SCHEDULE 5.01(b) |
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SUBSIDIARIES |
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SCHEDULE 5.01(h) |
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REINSURANCE COVERAGE |
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SCHEDULE 7.02(a) |
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EXISTING INDEBTEDNESS |
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EXHIBITS |
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EXHIBIT 1.01(A) |
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ASSIGNMENT AND ASSUMPTION AGREEMENT |
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EXHIBIT 1.01(B) |
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BID NOTE |
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EXHIBIT 1.01(G)(1) |
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GUARANTOR JOINDER |
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EXHIBIT 1.01(G)(2)-1 |
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GUARANTY AGREEMENT OF MATERIAL NON-AGC SUBSIDIARIES |
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EXHIBIT 1.01(G)(2)-2 |
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GUARANTY AGREEMENT OF ASSURED GUARANTY CORP. |
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vi
EXHIBIT 1.01(G)(2)-3 |
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GUARANTY AGREEMENT OF ASSURED GUARANTY LTD. |
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EXHIBIT 1.01(R) |
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REVOLVING CREDIT NOTE |
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EXHIBIT 2.05 |
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REVOLVING CREDIT LOAN REQUEST |
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EXHIBIT 2.08(a) |
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BID LOAN REQUEST |
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EXHIBIT 2.12 |
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LETTER OF CREDIT REQUEST |
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EXHIBIT 6.01(d) |
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OPINION(S) OF COUNSEL |
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EXHIBIT 7.03(c) |
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QUARTERLY COMPLIANCE CERTIFICATE |
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vii
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of April 15, 2005, and is made by and among ASSURED GUARANTY LTD., a company organized under the laws of Bermuda, ASSURED GUARANTY CORP., a Maryland corporation, ASSURED GUARANTY (UK) LTD., a company organized under the laws of England and Wales, ASSURED GUARANTY RE INTERNATIONAL LTD., a company organized under the laws of Bermuda, ASSURED GUARANTY RE OVERSEAS LTD., a company organized under the laws of Bermuda, the BANKS (as hereinafter defined), and ABN AMRO BANK N.V., in its capacity as administrative agent for the Banks under this Agreement and sole bookrunner.
W I T N E S S E T H :
WHEREAS, the Borrowers have requested the Banks to provide a three-year revolving credit facility, including the issuance of letters of credit, to the Borrowers in an aggregate principal amount not to exceed the Commitments of the Banks; and
WHEREAS, such revolving credit facility shall be used for the general corporate purposes of the Borrowers; and
WHEREAS, the Banks are willing to provide such credit upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth, hereby covenant and agree as follows:
ARTICLE I
Section 1.01 Certain Definitions. In addition to words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise:
ABN AMRO Bank or ABN AMRO shall mean ABN AMRO Bank N.V., its successors and assigns.
ACE shall mean ACE Limited, a Cayman Islands company.
Affiliate as to any Person shall mean any other Person (i) which directly or indirectly controls, is controlled by, or is under common control with, such Person, (ii) which beneficially owns or holds 5% or more of any class of the voting or other equity interests of such Person, or (iii) 5% or more of any class of voting interests or other equity interests of which is beneficially owned or held, directly or indirectly, by such Person. Control, as used in this
definition, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be.
Agent shall mean ABN AMRO Bank N.V., and its successors and permitted assigns, in their respective capacities as administrative agent for the Banks under this Agreement.
Agents Fee shall have the meaning assigned to that term in Section 9.15.
Agents Letter shall have the meaning assigned to that term in Section 9.15.
Aggregate Outstandings shall have the meaning assigned to that term in Section 4.10(a).
Agreement shall mean this Credit Agreement, as the same may be supplemented or amended from time to time, including all schedules and exhibits.
AGRI shall mean Assured Guaranty Re International Ltd., a Bermuda company.
AGRO shall mean Assured Guaranty Re Overseas Ltd., a Bermuda company.
Alternate Currency shall mean each of Euros and Pounds Sterling.
Alternate Currency Loan shall mean any Loan denominated in an Alternate Currency.
Applicable Company Facility Fee Rate shall mean the percentage rate per annum corresponding to the indicated level of Insurer Financial Strength Rating in the pricing grid on Schedule 1.01(A) below the heading Company Facility Fee. The Applicable Company Facility Fee Rate shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .
Applicable Holdings Facility Fee Rate shall mean the percentage rate per annum corresponding to the indicated level of the Holdings Debt Rating in the pricing grid on Schedule 1.01(A) below the heading Holdings Facility Fee. The Applicable Holdings Facility Fee Rate shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .
Applicable Margin shall mean, as applicable:
(A) the percentage spread to be added to Base Rate under the Base Rate Option corresponding to the indicated level of Insurer Financial Strength Rating or Holdings Debt Rating, as the case may be, in the pricing grid on Schedule 1.01(A) below the heading Applicable Margin for Base Rate Loans, or
(B) the percentage spread to be added to LIBOR under the Revolving Credit LIBOR Option corresponding to the indicated level of Insurer Financial Strength Rating
2
or Holdings Debt Rating, as the case may be, in the pricing grid on Schedule 1.01(A) below the heading Applicable Margin for LIBOR Loans.
The Applicable Margin shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .
Applicable Usage Premium shall mean the percentage rate per annum corresponding to the indicated level of Insurer Financial Strength Rating or Holdings Debt Rating, as the case may be, in the pricing grid on Schedule 1.01(A) below the heading Usage Premium. The Applicable Usage Premium shall be computed in accordance with the parameters set forth on Schedule 1.01(A) .
Approved Currency shall mean each of Dollars and each Alternate Currency.
Assignment and Assumption Agreement shall mean an Assignment and Assumption Agreement by and among a Purchasing Bank, a Transferor Bank and the Agent, as Agent and on behalf of the remaining Banks, substantially in the form of Exhibit 1.01(A) .
Associated Cost Rate shall mean, with respect to any Interest Period for Pounds Sterling denominated Loans, the amount (expressed as a percentage rate per annum, rounded up to the nearest four decimal places, as determined by the Agent on the first day of such Interest Period) required to compensate the Banks lending from facility offices in the United Kingdom for the portion of the cost of each such Bank of complying with the cash ratio and special deposit requirements of the Bank of England and/or capital adequacy requirements and banking supervision or other fees imposed by the United Kingdom Financial Services Authority, which, in the reasonable determination of such Bank, is attributable to the Loans made by such Bank from its facility office in the United Kingdom and outstanding during such Interest Period.
Authorized Officer shall mean those individuals, designated by written notice to the Agent from each Borrower, authorized to execute notices, reports and other documents required hereunder on behalf of such Borrower. Each Borrower may amend such list of individuals from time to time by giving written notice of such amendment to the Agent.
Banks shall mean the financial institutions named on Schedule 1.01(B) and their respective successors and assigns as permitted hereunder, each of which is referred to herein as a Bank.
Base Rate shall mean the greater of (i) the interest rate per annum announced from time to time by the Agent at its Principal Office as its then prime rate, which rate may not be the lowest rate then being charged commercial borrowers by the Agent, or (ii) the Federal Funds Effective Rate plus 0.5% per annum.
Base Rate Loan shall mean each Loan designated or deemed designated as such by any Borrower at the time of incurrence thereof or conversion thereto.
Base Rate Option shall mean the option of the Borrowers to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.01(a)(i).
3
Benefit Arrangement shall mean at any time an employee benefit plan, within the meaning of Section 3(3) of ERISA, which is neither a Plan nor a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to by any member of the ERISA Group.
Bermuda Law Event shall have the meaning assigned to that term in Section 7.04.
Bid shall have the meaning assigned to such term in Section 2.08(b).
Bid Deadline shall have the meaning assigned to such term in Section 2.08(b).
Bid Loan Borrowing Date shall mean, with respect to any Bid Loan, the date for the making thereof, which date shall be a Business Day.
Bid Loan Fixed Rate Option shall mean the option of each Borrower to request that the Banks submit Bids to make Bid Loans bearing interest at a fixed rate per annum quoted by such Banks as a numerical percentage (and not as a spread over another rate such as the LIBOR).
Bid Loan Interest Period shall have the meaning assigned to such term in Section 2.08(a).
Bid Loan LIBOR Rate Option shall mean the option of each Borrower to request that the Banks submit Bids to make Bid Loans bearing interest at a rate per annum quoted by such Banks at the LIBOR in effect two Business Days before the Borrowing Date of such Bid Loan plus a LIBOR Bid Loan Spread.
Bid Loan Request shall have the meaning assigned to such term in Section 2.08(a).
Bid Loans shall mean collectively all of the Bid Loans and Bid Loan shall mean separately any Bid Loan, made by any of the Banks to either Borrower pursuant to Section 2.08.
Bid Notes shall mean collectively all of the Bid Notes and Bid Note shall mean separately any Bid Note, of each Borrower in the form of Exhibit 1.01(B) evidencing the Bid Loans made to such Borrower together with all amendments, extensions, renewals, replacements, refinancings or refunds thereof in whole or in part.
Borrower shall mean the Company, the UK Borrower and, at all times after the conditions precedent set forth in Section 6.02(b) have been satisfied, Holdings, AGRI and AGRO.
Borrowing Date shall mean, with respect to any Loan, the date for the making thereof or the renewal or conversion thereof at or to the same or a different Interest Rate Option, which date shall be a Business Day.
Borrowing Tranche shall mean specified portions of Loans outstanding as follows: (i) any Loans to which a LIBOR Option or a Bid Loan Fixed Rate Option applies which become subject to the same Interest Rate Option under the same Loan Request by a Borrower
4
and which have the same Interest Period shall constitute one Borrowing Tranche, and (ii) all Loans to which a Base Rate Option applies shall constitute one Borrowing Tranche.
Business Day shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in New York, New York and, if the applicable Business Day (i) relates to any Loan to which the LIBOR Option applies, such day must also be a day on which dealings are carried on in the London interbank market and, with respect to any payments due by Holdings, AGRI or AGRO, such day must also be a day which is not a national or public holiday in Bermuda, and (ii) any Letter of Credit Outstandings due from the UK Borrower, such day must also be a day other than a legal holiday on which commercial banks are authorized or required to be closed for business in London, England.
Cash Collateral Account shall have the meaning assigned to such term in Section 4.10.
Closing Date shall mean the date on which the conditions precedent set forth in Section 6.01 have been satisfied.
Commitment shall mean as to any Bank its Revolving Credit Commitment, and Commitments shall mean the aggregate of the Revolving Credit Commitments of all of the Banks.
Company shall mean Assured Guaranty Corp., a Maryland corporation.
Company Facility Fee shall have the meaning assigned to such term in Section 2.03(a).
Company Consolidated Assets shall mean, at any time, the assets of the Company and its Subsidiaries at such time, determined on a consolidated basis in accordance with GAAP; provided that the foregoing shall be calculated without giving effect to Financial Accounting Standards Board Statements No. 115 and 133.
Compliance Certificate shall have the meaning assigned to such term in Section 7.03(c).
Consideration shall mean a greater than de minimis monetary return for the sale or provision of a service or product or for the undertaking of an obligation or liability, except that with respect to a Permitted Acquisition, Consideration shall mean the aggregate of (i) the cash paid by any of the Company or any Material Subsidiary, as buyer, directly or indirectly, to the seller in connection with such Permitted Acquisition, (ii) the Indebtedness incurred or assumed by the Company or any of the Material Subsidiaries, as buyer, with respect to such Permitted Acquisition, whether in favor of the seller or otherwise and whether fixed or contingent, (iii) any Guaranty given or incurred by the Company or any Material Subsidiary in connection therewith, and (iv) any other consideration given or obligation incurred by the Company or any of the Material Subsidiaries in connection with such Permitted Acquisition.
5
Consolidated Debt shall mean, at any time, an amount equal to the sum (without duplication) of the then outstanding Indebtedness of Holdings or the Company, as the case may be, and of each Subsidiary of Holdings or the Company, as the case may be, (excluding, however, (i) the amount of all Insurance-Related Guaranties, (ii) the amount of any Soft Capital, (iii) the obligations of Holdings with respect to any preferred stock of Holdings, (iv) the obligations of any of Holdings or its Subsidiaries under Guaranteed Investment Contracts, and (v) the amount of any preferred stock issued in connection with the Contingent Capital Facility), determined and consolidated in accordance with GAAP.
Consolidated Interest Coverage Ratio for any period shall mean the ratio of Consolidated Net Income to Consolidated Interest Expense for such period.
Consolidated Interest Expense shall mean, for any period, the total consolidated interest expense of Holdings and its Subsidiaries for such period.
Consolidated Net Income shall mean, for any period, the net income for such period for Holdings and its Subsidiaries, determined on a consolidated basis in accordance with GAAP.
Consolidated Net Worth shall mean, at any time, the net worth of Holdings and its Subsidiaries at such time, determined on a consolidated basis in accordance with GAAP.
Contingent Capital Facility shall mean, collectively (i) the put agreement between the Company and Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV pursuant to which the Company has the right to cause each of such trusts to purchase up to $50 million of preferred stock of the Company and (ii) the put agreement between AGRI and Hamilton Preferred Trust I and Hamilton Preferred Trust II pursuant to which AGRI has the right to cause each of such trusts to purchase up to $50 million of preferred stock of AGRI.
Credit Derivative Guaranties shall have the meaning assigned to such term in Section 7.02(c).
Credit Event shall mean the incurrence of each Loan and the issuance of each Letter of Credit.
Dollar , Dollars , U.S. Dollars and the symbol $ shall mean lawful money of the United States of America.
Dollar Equivalent shall mean, at any time for the determination thereof, the amount of Dollars which could be purchased with the amount of the relevant Alternate Currency involved in such computation at the spot exchange rate therefor as quoted by the Administrative Agent as of 11:00 A.M., London time, on the date two Business Days prior to the date of any determination thereof for purchase on such date.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect.
6
ERISA Group shall mean, at any time, Holdings and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with Holdings, are treated as a single employer under Section 414 of the Internal Revenue Code.
Euro shall mean the single currency of participating member states of the European Union.
Eurodollar Rate shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Dollars to which the LIBOR Option applies for any Interest Period, an interest rate per annum determined on the basis of the rate for deposits in Dollars for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), the Eurodollar Rate shall be determined by reference to such other publicly available service for displaying eurodollar rates as may be agreed upon by the Agent and the Borrowers or, in the absence of such agreement, the Eurodollar Rate shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Dollar deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Eurodollar Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
Eurodollar Reserve Percentage shall mean as of any day and with respect to any Bank or the Agent, the maximum percentage in effect on such day for such Bank or the Agent, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements as it affects such Bank or the Agent (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as Eurocurrency Liabilities).
Euro-LIBOR shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Euros to which the LIBOR Option applies for any Interest Period, an interest rate per annum determined on the basis of the rate for deposits in Euros for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), Euro LIBOR shall be determined by reference to such other publicly available service for displaying Euro-denominated rates as may be agreed upon by the Agent and the Borrowers or, in the absence of such agreement, the Euro LIBOR shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Euro deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to
7
the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Euro LIBOR as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
Event of Default shall mean any of the events described in Section 8.01 and referred to therein as an Event of Default.
Existing Credit Agreement shall mean the Credit Agreement, dated as of April 29, 2004, among Holdings, the Company, the UK Borrower, the banks party thereto, ABN AMRO Bank N.V., as administrative agent, and ABN AMRO Incorporated, as syndication agent, lead arranger and bookrunner.
Existing Reinsurance Coverage shall have the meaning assigned to such term in Section 5.01(h)(C).
Expiration Date shall mean the third anniversary of the Closing Date.
Facility Fee shall mean the Company Facility Fee and the Holdings Facility Fee.
Facility Usage shall mean at any time the sum of the principal amount of the Revolving Credit Loans outstanding and the Letter of Credit Outstandings and, solely for purposes of Section 2.04, the principal amount of the Bid Loans outstanding.
Federal Funds Effective Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the Federal Funds Effective Rate as of the date of this Agreement; provided , if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the Federal Funds Effective Rate for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced.
Fixed Rate shall mean a fixed interest rate quoted by a Bank in its Bid to apply to such Banks Bid Loan over the term of such Bid Loan if such Banks Bid is accepted.
Fixed Rate Bid Loan shall mean a Bid Loan that bears interest under the Bid Loan Fixed Rate Option.
Fronting Fee shall have the meaning assigned to such term in Section 2.03(c).
GAAP shall mean generally accepted accounting principles as in effect from time to time in the United States, subject to the provisions of Section 1.03, applied on a consistent basis both as to classification of items and amounts.
8
Guaranteed Investment Contract shall mean, with respect to any Person, a guaranteed investment contract, funding agreement or similar agreement issued or entered into by such Person wherein such Person guarantees a rate of return on invested capital over the term of such contract or agreement.
Guarantor shall mean Holdings, the Company and each Material Subsidiary which hereafter becomes a Guarantor after the date hereof pursuant to Section 10.18.
Guarantor Joinder shall mean a joinder by a Person as a Guarantor under this Agreement, the Guaranty Agreement and the other Loan Documents in the form of Exhibit 1.01(G)(1) .
Guaranty of any Person shall mean any obligation of such Person guarantying or in effect guarantying any liability or obligation of any other Person in any manner, whether directly or indirectly, including any agreement to indemnify or hold harmless any other Person (other than as an incidental part of another transaction), any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business.
Guaranty Agreement shall mean one or more Guaranty Agreements in substantially the form of Exhibit 1.01(G)(2)-1 , Exhibit 1.01(G)(2)-2 or Exhibit 1.01(G)(2)-3 , or otherwise entered into pursuant to Section 7.01(l), and in each case executed and delivered by a Guarantor to the Agent for the benefit of the Banks.
Historical Statements shall have the meaning assigned to that term in Section 5.01(h)(A).
Holdings shall mean Assured Guaranty Ltd., a company organized under the laws of Bermuda.
Holdings Debt Rating shall mean the senior unsecured debt rating of Holdings as determined by either of Standard & Poors or Moodys.
Holdings Facility Fee shall have the meaning assigned to such term in Section 2.03(a).
Holdings Sub-Limit shall mean an amount equal to $100,000,000; provided that at any time when all Commitments hereunder have been terminated, the Holdings Sub-Limit shall mean an amount equal to zero.
Indebtedness shall mean, as to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of: (i) borrowed money, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) payment obligations (contingent or otherwise) under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device, (iv) any other transaction (including forward sale or purchase agreements, capitalized leases and conditional sales agreements) having the commercial effect of
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a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than ninety (90) days past due), (v) any Guaranteed Investment Contract, or (vi) any Guaranty of Indebtedness.
Insolvency Proceeding shall mean, with respect to any Person, (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of Holdings or any Material Subsidiary, or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other similar arrangement in respect of such Persons creditors generally or any substantial portion of its creditors, undertaken under any Law.
Insurance-Related Guaranties shall have the meaning assigned to that term in Section 7.02(c).
Insurer Financial Strength Rating shall mean the insurer financial strength rating of the Company as determined by either of Standard & Poors and Moodys.
Interest Period shall mean either a Revolving Credit Loan Interest Period or a Bid Loan Interest Period.
Interest Rate Hedge shall mean an interest rate exchange, collar, cap, swap, adjustable strike cap, adjustable strike corridor, or similar agreement entered into by Holdings or any Material Subsidiary in order to provide protection to, or minimize the impact upon, Holdings or any Material Subsidiary of increasing floating rates of interest applicable to Indebtedness.
Interest Rate Option shall mean any Revolving Credit LIBOR Option, Bid Loan LIBOR Option, Bid Loan Fixed Rate Option, or Base Rate Option.
Internal Revenue Code shall mean the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect.
Issuing Bank shall mean (a) ABN AMRO Bank N.V. and (b) PNC Bank, National Association.
Law shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree, bond, judgment, authorization, or approval, lien or award of or settlement agreement with any Official Body.
Letter of Credit shall have the meaning assigned to such term in Section 2.10(a).
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Letter of Credit Fee shall have the meaning assigned to such term in Section 2.03(b).
Letter of Credit Outstandings shall mean, at any time, the sum of (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit at such time.
Letter of Credit Request shall have the meaning assigned to such term in Section 2.12(a).
LIBOR shall mean, with respect to any Borrowing Tranche of Loans, the relevant interest rate, i.e. , Eurodollar Rate, Euro LIBOR or Sterling LIBOR.
LIBOR Bid Loan shall mean any Bid Loan that bears interest under the Bid Loan LIBOR Option.
LIBOR Bid Loan Spread shall mean the spread quoted by a Bank in its Bid to apply to such Banks Bid Loan if such Banks Bid is accepted. The LIBOR Bid Loan Spread shall be quoted as a percentage rate per annum and expressed in multiples of 1/1000th of one percentage point to be either added to (if it is positive) or subtracted from (if it is negative) the LIBOR in effect two (2) Business Days before the Borrowing Date with respect to such Bid Loan. Interest on LIBOR Bid Loans shall be computed based on a year of 360 days for the actual days elapsed.
LIBOR Interest Period shall mean the Interest Period applicable to a LIBOR Bid Loan or a Revolving Credit Loan that is subject to the Revolving Credit LIBOR Option.
LIBOR Loan shall mean each Loan designated or deemed designated as such by any Borrower at the time of incurrence thereof or conversion thereto.
LIBOR Option shall mean either the Revolving Credit LIBOR Option or the Bid Loan LIBOR-Rate Option.
Lien shall mean any mortgage, deed of trust, pledge, lien, security interest, charge, or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including any conditional sale or title retention arrangement, and any assignment, deposit arrangement, or lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing).
Loan Documents shall mean this Agreement, the Agents Letter, each Guaranty Agreement, and any other instruments, certificates, or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may be supplemented or amended from time to time in accordance herewith or therewith, and Loan Document shall mean any of the Loan Documents.
Loan Request shall mean either a Bid Loan Request or a Revolving Credit Loan Request.
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Loans shall mean collectively all Revolving Credit Loans and Bid Loans and Loan shall mean separately any Revolving Credit Loan or Bid Loan.
Material Adverse Change shall mean any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of Holdings and its Material Subsidiaries taken as a whole or the Company and its Material Subsidiaries taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of Holdings and the Material Subsidiaries taken as a whole duly and punctually to pay or to perform their respective obligations under the Loan Documents, or (d) impairs materially or could reasonably be expected to impair materially the ability of the Agent or any of the Banks, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document.
Material Non-AGC Subsidiary shall mean any Material Subsidiary of Holdings other than (a) Assured Guaranty US Holdings Inc. and its Subsidiaries (including the Company and its Subsidiaries), (b) any Material Subsidiary of Holdings which is regulated by a state insurance regulatory authority in the U.S. and (c) Assured Guaranty Barbados Holdings Ltd.
Material Subsidiary shall mean (i) any Subsidiary of Holdings which has at any time, or which will have after giving effect to any contemplated transaction, acquisition, loan or investment, a net worth equal to or greater than an amount which is the greater of five percent (5%) of the consolidated tangible net worth of Holdings and its Subsidiaries or $25,000,000, (ii) any Subsidiary of Holdings as to which Holdings requests in writing that it be a Material Subsidiary, and (iii) any Subsidiary or Subsidiaries of Holdings which own(s) in the aggregate 30% or more of any Material Subsidiary; and Material Subsidiaries shall mean all such Subsidiaries. Notwithstanding the foregoing, each of the Company, AGRI, AGRO and the UK Borrower shall be deemed to be a Material Subsidiary for all purposes of this Agreement and the other Loan Documents; provided , however , that neither the Company nor the UK Borrower shall be required to be a Guarantor (except for the requirement that the Company guaranty all obligations of the UK Borrower). As of the date hereof, Material Subsidiary shall include, without limitation, the Subsidiaries listed on Schedule 1.01(M).
Month , with respect to an Interest Period under the LIBOR Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any LIBOR Interest Period begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final month of such Interest Period shall be deemed to end on the last Business Day of such final month.
Moodys shall mean Moodys Investors Service, Inc. and its successors.
Multiemployer Plan shall mean any employee benefit plan which is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA and to which Holdings or any member of the ERISA Group is then making or accruing an obligation to make
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contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions.
Multiple Employer Plan shall mean a Plan which has two or more contributing sponsors (including Holdings or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA.
Net Par shall mean the aggregate maximum par amount of insurance and reinsurance coverage under all obligations of insurance or reinsurance (or similar arrangements) provided by a Person less the aggregate maximum par amount of reinsurance (or similar arrangements including hedging arrangements) coverage in favor of such Person with respect to its insurance or reinsurance obligations.
Notes shall mean the Revolving Credit Notes and Bid Notes.
Notice of Non-Extension shall have the meaning assigned to such term in Section 2.14.
Notices shall have the meaning assigned to that term in Section 10.06.
Obligation shall mean any obligation or liability of any Borrower, any Guarantor or any Material Subsidiary to the Agent or any of the Banks, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under or in connection with this Agreement, any Notes, the Agents Letter or any other Loan Document.
Off-Balance Sheet Transactions shall have the meaning assigned to that term in Section 7.03(e).
Offered Amount shall have the meaning assigned to such term in Section 2.08(b).
Official Body shall mean any national, federal, state, local, or other government or political subdivision or any agency, authority, board, bureau, central bank, commission, department, or instrumentality of either, or any court, tribunal, grand jury, or arbitrator, in each case whether foreign or domestic.
Participant shall have the meaning assigned to such term in Section 2.10(b).
PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor.
Permitted Acquisitions shall have the meaning assigned to such term in Section 7.02(f).
Permitted Investments shall mean:
(i) direct obligations of the United States of America or the United Kingdom or any agency or instrumentality thereof or obligations backed by the full faith and credit
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of the United States of America or the United Kingdom maturing in twelve (12) months or less from the date of acquisition;
(ii) commercial paper maturing in 180 days or less rated not lower than A-1, by Standard & Poors or P-1 by Moodys on the date of acquisition;
(iii) demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poors on the date of acquisition;
(iv) fixed income securities with a weighted average credit quality of A by Standard & Poors or A2 by Moodys on the date of acquisition; and
(v) investments of the types specified in Sections 1402(b) and 1404(a)(1), (2), (3), (8), and (10) of the New York Insurance Law.
Permitted Liens shall mean:
(i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable;
(ii) Liens and pledges or deposits made in the ordinary course of business of Holdings or any Material Subsidiary with respect to employees salaries and benefits, to secure payment of workmens compensation, or to participate in any fund in connection with workmens compensation, unemployment insurance, old-age pensions or other social security programs with respect to such Persons officers or employees;
(iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default;
(iv) Good-faith pledges or deposits made in the ordinary course of business of Holdings or any Material Subsidiary to secure statutory or regulatory obligations of Holdings or any Material Subsidiary;
(v) Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use;
(vi) Liens, security interests and mortgages in favor of the Agent for the benefit of the Banks securing the Obligations;
(vii) Liens on property leased by Holdings or any Material Subsidiary under capital and operating leases;
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(viii) Any Lien described on Schedule 1.01(P) , provided that the principal amount secured thereby is not hereafter increased;
(ix) Purchase Money Security Interests;
(x) Liens on assets received by any Borrower from a third Person and held in trust by any Borrower in respect of liabilities assumed by any Borrower in the course of the reinsurance business of such Borrower;
(xi) Liens securing Credit Derivative Guaranties;
(xii) To the extent that they would constitute Liens, Insurance-Related Guaranties; and
(xiii) The following, (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry, and they do not in the aggregate materially impair the ability of any Borrower or any Material Subsidiary to perform its Obligations hereunder or under the other Loan Documents:
(1) Claims or Liens for taxes, assessments or charges due and payable and subject to interest or penalty, provided that the applicable Borrower or applicable Material Subsidiary maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien;
(2) Claims, Liens, or encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits;
(3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; or
(4) Liens resulting from final judgments or orders described in Section 8.01(f).
Person shall mean any individual, company, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, joint venture, government or political subdivision or agency thereof, or any other entity.
Plan shall mean at any time an employee pension benefit plan (including a Multiple Employer Plan, but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group.
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Potential Default shall mean any event or condition which with notice, passage of time or a determination by the Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default.
Pounds Sterling shall mean freely transferable lawful money of the United Kingdom.
Principal Amount shall mean (i) the stated principal amount of each Loan denominated in Dollars, and/or (ii) the Dollar Equivalent of the stated principal amount of each Alternate Currency Loan, as the context may require.
Principal Office shall mean the main banking office of the Agent in New York, New York.
Prohibited Transaction shall mean any prohibited transaction as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor.
Property shall mean all real property, both owned and leased, of Holdings or any Material Subsidiary.
Purchase Money Security Interest shall mean Liens upon tangible personal property securing loans to the Company or any Material Subsidiary, or deferred payments by such Person, in either case for the purchase of such tangible personal property.
Purchasing Bank shall mean a Bank which becomes a party to this Agreement by executing an Assignment and Assumption Agreement.
Ratable Share shall mean the proportion that a Banks Commitment bears to the Commitments (or, if the Commitments have terminated, the proportion that a Banks Commitment immediately prior to such termination bears to the Commitments immediately prior to such termination).
Regulation U shall mean any of Regulations T, U, or X as promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time.
Reportable Event shall mean a reportable event described in Section 4043 of ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan.
Requested Amount shall have the meaning assigned to such term in Section 2.08(a).
Required Banks shall mean
(A) if there are no Loans, Required Banks shall mean Banks whose Commitments aggregate greater than 50% of the Commitments of all of the Banks, or
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(B) if there are Loans, Required Banks shall mean:
(i) prior to a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b), any Bank or group of Banks if the sum of (x) the Principal Amount of the Revolving Credit Loans of such Banks then outstanding plus (y) such Banks participating interests in the Letter of Credit Outstandings at such time aggregates greater than 50% of the sum of (x) the total Principal Amount of all of the Revolving Credit Loans then outstanding plus (y) all Letter of Credit Outstandings at such time; and
(ii) after a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b), any Bank or group of Banks if the sum of (x) the Principal Amount of the Loans of such Banks then outstanding plus (y) such Banks participating interests in the Letter of Credit Outstandings at such time aggregates greater than 50% of the sum of (x) the total principal amount of all of the Loans then outstanding plus (y) all Letter of Credit Outstandings at such time.
Revolving Credit Commitment shall mean, as to any Bank at any time, the amount initially set forth opposite its name on Schedule 1.01(B) in the column labeled Amount of Commitment for Revolving Credit Loans, and thereafter on Schedule I to the most recent Assignment and Assumption Agreement, and Revolving Credit Commitments shall mean the aggregate Revolving Credit Commitments of all of the Banks.
Revolving Credit LIBOR Option shall mean the option of the Borrowers to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.01(a)(ii).
Revolving Credit Loan Interest Period shall mean the period of time selected by a Borrower in connection with (and to apply to) any election permitted hereunder by such Borrower to have Revolving Credit Loans bear interest under the LIBOR Option. Subject to the last sentence of this definition, such period shall be one, two, three or six Months or, subject to availability to each Bank, nine or twelve Months. Such Interest Period shall commence on the effective date of borrowing of any Loan bearing interest at a rate determined with reference to the LIBOR Option, which shall be (i) the Borrowing Date if the respective Borrower is requesting new Loans, or (ii) the date of renewal of or conversion to the LIBOR Option if the respective Borrower is renewing or converting to the LIBOR Option applicable to outstanding Loans. Notwithstanding the second sentence hereof: (A) any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the directly preceding Business Day, and (B) such Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date.
Revolving Credit Loan Request shall mean a request for a Revolving Credit Loan or a request to select, convert to or renew a Base Rate Option or LIBOR Option with respect to an outstanding Revolving Credit Loan in accordance with Section 2.05, Section 3.01 and Section 3.02.
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Revolving Credit Loans shall mean collectively all Revolving Credit Loans made by the Banks to the Borrowers and Revolving Credit Loan shall mean separately any Revolving Credit Loan, made by one of the Banks to a Borrower, pursuant to Section 2.01. A Bid Loan is not a Revolving Credit Loan, except that it will be treated as a Revolving Credit Loan following a termination of the Commitments hereunder pursuant to Section 8.02(a) or Section 8.02(b) as provided in Section 8.03.
Revolving Credit Note shall mean any Revolving Credit Note of a Borrower in the form of Exhibit 1.01(R) issued by such Borrower to a Bank evidencing the Revolving Credit Loans of such Bank to such Borrower, together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part.
SEC shall mean the Securities and Exchange Commission or any governmental agencies substituted therefor.
Soft Capital shall have the meaning assigned to that term in Section 7.02(a).
Standard & Poors shall mean Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.
Stated Amount shall mean, at any time, (i) the maximum amount available to be drawn under any Letter of Credit denominated in Dollars (regardless of whether any conditions for drawing could then be met) and (ii) the Dollar Equivalent of the maximum amount available to be drawn under any Letter of Credit denominated in an Alternate Currency (regardless of whether any conditions for drawing could then be met).
Statutory Capital shall mean the aggregate of policyholders surplus of the Company and the contingency reserve of the Company, each determined in a manner consistent with that used in preparing the Historical Statements referred to in Section 5.01(h)(A) [Historical Statements].
Sterling LIBOR shall mean, with respect to the Loans comprising any Borrowing Tranche denominated in Pounds Sterling to which the LIBOR Option applies for any Interest Period, (A) an interest rate per annum determined on the basis of the rate for deposits in Pounds Sterling for a period comparable to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period plus (B) the Associated Cost Rate for such Loans for such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), Sterling LIBOR shall be determined by reference to such other publicly available service for displaying Pounds Sterling-denominated rates as may be agreed upon by the Agent and the Borrowers or, in the absence of such agreement, Sterling LIBOR shall be the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) equal to the rate per annum at which Pounds Sterling deposits approximately equal in principal amount to such Borrowing Tranche for a period and with a maturity comparable to such Interest Period are offered to the principal London office of Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business
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Days prior to the commencement of such Interest Period. The Agent shall give prompt notice to the Borrowers of the Sterling LIBOR as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
Subsidiary of any Person at any time shall mean (i) any corporation, company or trust of which 50% or more (by number of shares or number of votes) of the outstanding capital stock or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Persons Subsidiaries, (ii) any partnership of which such Person is a general partner or of which 50% or more of the partnership interests is at the time directly or indirectly owned by such Person or one or more of such Persons Subsidiaries, (iii) any limited liability company of which such Person is a member or of which 50% or more of the limited liability company interests is at the time directly or indirectly owned by such Person or one or more of such Persons Subsidiaries or (iv) any corporation, trust, partnership, limited liability company or other entity which is controlled or capable of being controlled by such Person or one or more of such Persons Subsidiaries. Notwithstanding the foregoing, the Company, AGRI, AGRO and the UK Borrower shall be deemed to be a Subsidiary of Holdings and, with respect to the UK Borrower, of the Company, for all purposes in this Agreement and the other Loan Documents; provided , however , that neither the Company nor the UK Borrower shall be required to be a Guarantor (except for the requirement that the Company guaranty all obligations of the UK Borrower).
Test Period shall mean each period of four consecutive fiscal quarters of Holdings (taken as one accounting period) ending after the date hereof; provided that for each fiscal quarter ending prior to June 30, 2005, Test Period shall mean the period from July 1, 2004 through the end of such fiscal quarter.
Total Capitalization shall mean, at any time, an amount (without duplication) equal to (i) the then outstanding Consolidated Debt of Holdings or the Company, as the case may be, and its Subsidiaries, plus (ii) consolidated stockholders equity of Holdings or of the Company, as the case may be, and its Subsidiaries.
Transferor Bank shall mean the selling Bank pursuant to an Assignment and Assumption Agreement.
UK Borrower shall mean Assured Guaranty (UK) Ltd., a company organized under the laws of England and Wales.
Unpaid Drawing has the meaning provided in Section 2.13(a).
US Holdco shall mean Assured Guaranty US Holdings Inc., a Delaware corporation which is a direct wholly-owned Subsidiary of Holdings and which owns, inter alia , 100% of the capital stock of the Company.
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Section 1.02 Construction . Unless the context of this Agreement otherwise clearly requires, the following rules of construction shall apply to this Agreement and each of the other Loan Documents:
(a) Number; Inclusion . References to the plural include the singular, the plural, the part and the whole; or has the inclusive meaning represented by the phrase and/or, and including is not a term of limitation and has the meaning represented by the phrase including without limitation;
(b) Determination . References to determination of or by the Agent or the Banks shall be deemed to include good-faith estimates by the Agent or the Banks (in the case of quantitative determinations) and good-faith beliefs by the Agent or the Banks (in the case of qualitative determinations) and such determination shall be conclusive absent manifest error;
(c) Agents Discretion and Consent . Whenever the Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised in good faith;
(d) Documents Taken as a Whole . The words hereof, herein, hereunder, hereto and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document;
(e) Headings . The section and other headings contained in this Agreement or such other Loan Document and the Table of Contents (if any), preceding this Agreement or such other Loan Document are for reference purposes only and shall not control or affect the construction of this Agreement or such other Loan Document or the interpretation thereof in any respect;
(f) Implied References to this Agreement . Article, section, subsection, clause, schedule and exhibit references are to this Agreement or other Loan Document, as the case may be, unless otherwise specified;
(g) Persons . Reference to any Person includes such Persons successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement or such other Loan Document, as the case may be, and reference to a Person in a particular capacity excludes such Person in any other capacity;
(h) Modifications to Documents . Reference to any agreement (including this Agreement and any other Loan Document together with the schedules and exhibits hereto or thereto), document or instrument means such agreement, document or instrument as amended, modified, replaced, substituted for, superseded or restated;
(i) From, To and Through . Relative to the determination of any period of time, from means from and including, to means to but excluding, and through means through and including; and
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(j) Shall; Will . References to shall and will are intended to have the same meaning.
Section 1.03 Accounting Principles; Computations . (a) Except as otherwise provided in this Agreement (as, for example, where reference is made to statutory or regulatory financial matters), all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP as in effect on the date hereof applied on a basis consistent with that used in preparing the Historical Statements referred to in Section 5.01(h)(A) [Historical Statements]. In the event of any change after the date hereof in GAAP, and if such change would result in the inability to determine compliance with the financial covenants set forth in Section 7.02 based upon Holdings regularly prepared financial statements by reason of the preceding sentence, then the parties hereto agree to endeavor, in good faith, to agree upon an amendment to this Agreement that would adjust such financial covenants in a manner that would not affect the substance thereof, but would allow compliance therewith to be determined in accordance with Holdings financial statements at that time.
(b) For purposes of this Agreement, the Dollar Equivalent of each Loan that is an Alternate Currency Loan and the Stated Amount of each Letter of Credit denominated in an Alternate Currency shall be calculated on the date when any such Loan is made or Letter of Credit is issued, on the second Business Day of each month, or such date as a Borrower may request and at such other times as designated by the Agent at any time when a Potential Default or an Event of Default exists. Such Dollar Equivalent shall remain in effect until the same is recalculated by the Agent as provided above and notice of such recalculation is received by the Borrowers, it being understood that until such notice is received, the Dollar Equivalent shall be that Dollar Equivalent as last reported to the Borrowers by the Agent. The Agent shall promptly notify the Borrowers and the Banks of each such determination of the Dollar Equivalent.
ARTICLE II
Section 2.01 Credit Commitments . Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make Revolving Credit Loans to any Borrower (on a several basis) at any time or from time to time on or after the date hereof to the Expiration Date, which Revolving Credit Loans (i) may be made and maintained in such Approved Currency as is requested by the applicable Borrower; (ii) shall not exceed in aggregate Principal Amount outstanding an amount which, when added to the aggregate outstanding Principal Amount of all Bid Loans and the Letter of Credit Outstandings at such time, is equal to the sum of the Revolving Credit Commitments at such time; (iii) shall not, in the case of Revolving Credit Loans incurred by Holdings, AGRI and AGRO, exceed in aggregate Principal Amount outstanding an amount which, when added to the outstanding Principal Amount of all Bid Loans incurred by all such Borrowers in the aggregate and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all such
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Borrowers in the aggregate, is equal to the Holdings Sub-Limit; and (iv) shall not, in the case of Revolving Credit Loans incurred by the UK Borrower, exceed in aggregate Principal Amount outstanding an amount which, when added to the outstanding Principal Amount of all Bid Loans incurred by the UK Borrower and the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower, is equal to $12,500,000. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrowers may borrow, repay, and reborrow Revolving Credit Loans pursuant to this Section 2.01.
Section 2.02 Nature of Banks Obligations with Respect to Revolving Credit Loans . Each Bank shall be obligated to participate in each request for Revolving Credit Loans pursuant to Section 2.05 [Revolving Credit Loan Requests] in accordance with its Ratable Share. The aggregate Principal Amount of each Banks Revolving Credit Loans outstanding hereunder to the Borrowers at any time shall never exceed its Revolving Credit Commitment. The obligations of each Bank hereunder are several and not joint. The failure of any Bank to perform its obligations hereunder shall not affect the Obligations of the Borrowers to any other party nor shall any other party be liable for the failure of such Bank to perform its obligations hereunder. The Banks shall have no obligation to make Revolving Credit Loans hereunder on or after the Expiration Date.
Section 2.03 Facility Fees; Letter of Credit Fee . (a) Accruing from the date hereof until but not including the Expiration Date, Holdings and the Company agree to pay, on a joint and several basis, to the Agent for the account of each Bank, as consideration for such Banks Revolving Credit Commitment hereunder, an amount equal to such Banks Ratable Share of (i) a non-refundable facility fee (the Holdings Facility Fee) equal to the product of (A) the Applicable Holdings Facility Fee Rate (computed on the basis of a year of 360 days for the actual days elapsed) and (B) the Holdings Sub-Limit from time to time and (ii) a non-refundable facility fee (the Company Facility Fee) equal to the product of (A) the Applicable Company Facility Fee Rate (computed on the basis of a year of 360 days for the actual days elapsed) and (B) an amount equal to the average daily amount of the total Revolving Credit Commitments, as the same may be constituted from time to time, regardless of usage, minus the Holdings Sub-Limit as in effect at such time. All Facility Fees shall be payable in arrears on the first Business Day of each June, September, December, and March after the date hereof and on the Expiration Date or upon acceleration of the Loans.
(b) Each Borrower severally agrees to pay to the Agent for pro rata distribution to each Bank (based on their respective Ratable Share) a non-refundable letter of credit fee (the Letter of Credit Fee) equal to the product of (i) a rate per annum equal to the Applicable Margin with respect to Revolving Credit Loans outstanding as LIBOR Loans and (ii) the average daily Stated Amount of all Letters of Credit issued for the account of such Borrower. Accrued Letter of Credit Fees shall be due and payable in arrears on the first Business Day of each June, September, December and March after the date hereof and upon the first Business Day on or after the termination of the Commitments upon which no Letters of Credit remain outstanding.
(c) Each Borrower severally agrees to pay to each Issuing Bank, for its own account, a fronting fee (the Fronting Fee) in respect of each Letter of Credit issued by such Issuing Bank for the account of such Borrower in an amount and on dates as shall have separately been agreed to by such Borrower and such Issuing Bank.
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Section 2.04 Utilization Fee . On each day on which the Facility Usage exceeds 33.3% of the amount of the Commitments, the Applicable Margin shall be increased for such day by the Applicable Usage Premium.
Section 2.05 Revolving Credit Loan Requests . Except as otherwise provided herein, a Borrower may from time to time prior to the Expiration Date request the Banks to make Revolving Credit Loans in Dollars, or renew or convert the Interest Rate Option applicable to existing Revolving Credit Loans pursuant to Section 3.01(c) [Interest Periods], by delivering to the Agent, not later than 10:00 a.m., New York time, (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the LIBOR Option applies, or with respect to the conversion to or the renewal of the LIBOR Option for any Loans, provided that at any time when an Event of Default shall have occurred and be continuing, a LIBOR Option shall not be available to a Borrower if the Required Banks have so notified the Borrower; and (ii) one (1) Business Day prior to either the proposed Borrowing Date with respect to the making of a Revolving Credit Loan to which the Base Rate Option applies or the last day of the preceding Revolving Credit Loan Interest Period with respect to the conversion to the Base Rate Option for any Loan, of a duly completed Revolving Credit Loan Request therefor substantially in the form of Exhibit 2.05 or a Revolving Credit Loan Request by telephone immediately confirmed in writing by letter, facsimile, email, or telex in the form of such Exhibit. In addition, a Borrower may from time to time prior to the Expiration Date request to make Revolving Credit Loans in Alternate Currencies by delivering to the Agent, not later than 1:00 P.M., New York time, at least four Business Days prior to the Borrowing Date a duly completed Revolving Credit Loan Request substantially in the form of Exhibit 2.05 or a Revolving Credit Loan Request by telephone immediately confirmed in writing by letter, facsimile, email or telex in the form of such Exhibit. Each Revolving Credit Loan Request shall be irrevocable and shall specify (i) the identity of the applicable Borrower; (ii) the respective Approved Currency for such Loan; (iii) the proposed Borrowing Date; (iv) the aggregate amount of the proposed Loans comprising each Borrowing Tranche (stated in the applicable Approved Currency), which shall be (A) for all Loans made to Holdings, the Company, AGRI and AGRO, in integral multiples of $1,000,000 and not less than $10,000,000 for each Borrowing Tranche to which the LIBOR Option applies and not less than the lesser of $500,000 or the maximum amount available for Borrowing Tranches to which the Base Rate Option applies and (B) for all Loans made to the UK Borrower, in integral multiples of $1,000,000 for each Borrowing Tranche to which the LIBOR Option applies and not less than $500,000 or the maximum amount available for Borrowing Tranches to which the Base Rate Option applies; (v) whether Revolving Credit LIBOR Option or Base Rate Option shall apply to the proposed Loans comprising the applicable Borrowing Tranche; and (vi) in the case of a Borrowing Tranche to which the Revolving Credit LIBOR Option applies, an appropriate Revolving Credit Interest Period for the Loans comprising such Borrowing Tranche.
Section 2.06 Making Revolving Credit Loans . The Agent shall, promptly after receipt by it of a Revolving Credit Loan Request pursuant to Section 2.05 [Revolving Credit Loan Requests], notify the Banks of its receipt of such Loan Request specifying: (i) the applicable Borrower making the Loan Request; (ii) the proposed Borrowing Date and the time and method of disbursement of the Revolving Credit Loans requested thereby; (iii) the amount and type of each such Revolving Credit Loan (stated in the applicable Approved Currency) and the applicable Interest Period (if any); and (iv) the apportionment among the Banks of such
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Revolving Credit Loans as determined by the Agent in accordance with Section 2.02 [Nature of Banks Obligations]. Each Bank shall remit the principal amount of each Revolving Credit Loan to the Agent such that the Agent is able to, and the Agent shall, to the extent the Banks have made funds available to it for such purpose and subject to Section 6.02 [Each Additional Loan], fund such Revolving Credit Loans to the applicable Borrower in the applicable Approved Currency and immediately available funds at the Principal Office prior to 2:00 p.m., New York time, on the applicable Borrowing Date, provided that if any Bank fails to remit such funds to the Agent in a timely manner, the Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loans of such Bank on such Borrowing Date, and such Bank shall be subject to the repayment obligation in Section 9.16 [Availability of Funds].
Section 2.07 Use of Proceeds . The proceeds of the Loans and Letters of Credit shall be used for the working capital and other general corporate purposes of the Borrowers and in accordance with Section 7.01(j) [Use of Proceeds].
Section 2.08 Bid Loan Facility . (a) Bid Loan Requests. Except as otherwise provided herein, any Borrower may from time to time prior to the Expiration Date request that the Banks make Bid Loans by delivery to the Agent not later than 10:00 A.M., New York time, of a duly completed request therefor substantially in the form of Exhibit 2.08(a) hereto or a request by telephone immediately confirmed in writing by letter, facsimile, email, or telex (each, a Bid Loan Request) at least three (3) Business Days prior to the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting Fixed Rate Bid Loans and four (4) Business Days prior to the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting Bid Loans with the Bid Loan LIBOR Rate Option of one, two, three, or six months duration. Each Bid Loan Request shall be irrevocable and shall specify (i) the identity of the applicable Borrower; (ii) the respective Approved Currency for such Loan; (iii) the proposed Bid Loan Borrowing Date; (iv) whether the applicable Borrower is electing the Bid Loan Fixed Rate Option or the Bid Loan LIBOR Option; (v) the term of the proposed Bid Loan (the Bid Loan Interest Period), which may be no less than seven (7) day(s) and no longer than one hundred eighty (180) days if the applicable Borrower is requesting a Fixed Rate Bid Loan and one, two, three, or six months if the applicable Borrower is requesting a LIBOR Bid Loan; and (vi) the maximum principal amount (the Requested Amount) of such Bid Loan, which (x) in the case of Bid Loans to Holdings, the Company, AGRI and AGRO, shall be not less than $10,000,000 and shall be an integral multiple of $1,000,000 and (y) in the case of Bid Loans to the UK Borrower, shall be not less than $1,000,000 and shall be an integral multiple of $1,000,000. After giving effect to such Bid Loan and any other Loan made on or before the Bid Loan Borrowing Date, the sum of the aggregate Principal Amount of all Revolving Credit Loans and Bid Loans outstanding plus the Letter of Credit Outstandings shall not exceed the aggregate amount of the Revolving Credit Commitments of the Banks. In addition, after giving effect to any such Bid Loan incurred by (i) Holdings, AGRI and AGRO and any other Loan made on or before the Bid Loan Borrowing Date, the aggregate outstanding Principal Amount of all Bid Loans and Revolving Credit Loans incurred by all such Borrowers plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all such Borrowers shall not exceed the Holdings Sub-Limit; and (ii) the UK Borrower and any other Loan made on or before the Bid Loan Borrowing Date, the aggregate outstanding Principal Amount of all Bid Loans and Revolving Credit Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower shall not exceed
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$12,500,000. Notwithstanding any provision hereof to the contrary, no Bid Loan may be requested for a period that would end beyond the Expiration Date.
(b) Bidding . The Agent shall promptly after receipt by it of a Bid Loan Request pursuant to Section 2.08(a) notify the Banks of its receipt of such Bid Loan Request specifying (i) the identity of the applicable Borrower, (ii) the proposed Bid Loan Borrowing Date, (iii) whether the proposed Bid Loan shall be a Fixed Rate Bid Loan or a LIBOR Bid Loan, (iv) the Bid Loan Interest Period, (v) the principal amount of the proposed Bid Loan and (vi) the Approved Currency for such Bid Loan. Each Bank may submit a bid (a Bid) to the Agent by telephone (immediately confirmed in writing by letter, facsimile, email, or telex) not later than the following (each, as applicable, a Bid Deadline): 10:00 A.M. New York time two (2) Business Day before the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting a Fixed Rate Bid Loan or 10:00 A.M. New York time three (3) Business Days before the proposed Bid Loan Borrowing Date if the applicable Borrower is requesting a LIBOR Bid Loan of one, two, three, or six months duration. Each Bid shall specify: (A) the principal amount of proposed Bid Loans offered by such Bank (the Offered Amount) which (i) may be less than, but shall not exceed, the Requested Amount, (ii) shall be at least $1,000,000 and shall be an integral multiple of $1,000,000 and (iii) may exceed such Banks Revolving Credit Commitment; and (B) the Fixed Rate which shall apply to such proposed Bid Loan if the applicable Borrower has requested a Fixed Rate Bid Loan or the LIBOR Bid Loan Spread which shall apply to such proposed Bid Loan if the applicable Borrower has requested a LIBOR Bid Loan and which may be a positive or negative number. If any Bid omits information required hereunder, the Agent may in its sole discretion attempt to notify the Bank submitting such Bid. If the Agent so notifies a Bank, such Bank may resubmit its Bid, provided that it does so prior to the applicable Bid Deadline. The Agent shall promptly notify the applicable Borrower of the Bids which it timely received from the Banks. If the Agent in its capacity as a Bank shall, in its sole discretion, make a Bid, it shall notify the Borrower of such Bid at least one-half hour before the applicable Bid Deadline.
(c) Accepting Bids . The applicable Borrower, at its option, shall irrevocably accept or reject Bids by notifying the Agent of such acceptance or rejection by telephone (immediately confirmed in writing by letter, facsimile, email, or telex) not later than one hour after the applicable Bid Deadline. If the applicable Borrower elects to accept any Bids, its acceptance must meet the following conditions: (1) the total amount which (A) Holdings, the Company, AGRI and AGRO accepts from all Banks must not be less than $10,000,000 and shall be in integral multiples of $1,000,000 and (B) the UK Borrower accepts from all Banks shall be in integral multiples of $1,000,000, and may not exceed the Requested Amount; (2) the applicable Borrower must accept Bids based solely on the amount of the Fixed Rates or LIBOR Bid Loan Spreads, as the case may be, which each of the Banks quoted in their Bids in ascending order of the amount of Fixed Rates or LIBOR Bid Loan Spreads; (3) the applicable Borrower may not borrow Bid Loans from any Bank on the Bid Loan Borrowing Date in an amount exceeding such Banks Offered Amount; (4) if two or more Banks make Bids at the same Fixed Rate (if the applicable Borrower Requested a Fixed Rate Bid Loan) or LIBOR Bid Loan Spread (if the applicable Borrower Requested a LIBOR Bid Loan) and the applicable Borrower desires to accept a portion but not all of the Bids at such Fixed Rate or LIBOR Bid Loan Spread, as the case may be, the applicable Borrower shall accept a portion of each Bid equal to the product of the Offered Amount of such Bid times the fraction obtained by dividing the total amount of Bids
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which the applicable Borrower desires to accept at such Fixed Rate or LIBOR Bid Loan Spread, as the case may be, by the sum of the Offered Amounts of the Bids at such Fixed Rate or LIBOR Bid Loan Spread, provided that the applicable Borrower shall round the Bid Loans allocated to each such Bank upward or downward as the applicable Borrower may select to integral multiples of $1,000,000. The Agent shall (i) promptly notify a Bank that has made a Bid of the amount of its Bid that was accepted or rejected by the applicable Borrower and (ii) as promptly as practical notify all of the Banks of all Bids submitted and those which have been accepted.
(d) Funding Bid Loans . Each Bank whose Bid or portion thereof is accepted shall remit the principal amount of its Bid Loan to the Agent by 12:00 Noon on the Bid Loan Borrowing Date. The Agent shall make such funds available to the applicable Borrower on or before 1:00 P.M. on the Borrowing Date, provided that the conditions precedent to the making of such Bid Loan set forth in Section 6.02 have been satisfied not later than 10:00 A.M. New York time on the proposed Bid Loan Borrowing Date. If such conditions precedent have not been satisfied prior to such time, then (i) the Agent shall not make such funds available to the applicable Borrower, (ii) the Bid Loan Request shall be deemed to be canceled, (iii) the Agent shall return the amount previously funded to the Agent by each applicable Bank no later than the next following Business Day, and (iv) the applicable Borrower shall be obligated to each such Bank for any loss, costs, and expenses applicable pursuant to Section 4.06(b) [Indemnity]. The applicable Borrower shall immediately notify the Agent of any failure to satisfy the conditions precedent to the making of Bid Loans under Section 6.02. The Agent may assume that the applicable Borrower has satisfied such conditions precedent if the applicable Borrower (i) has delivered to the Agent any documents required to be delivered under Section 6.02, (ii) the applicable Borrower has not notified the Agent that any other conditions precedent have not been satisfied, and (iii) the Agent has no actual notice of such a failure.
(e) Several Obligations . The obligations of the Banks to make Bid Loans after their Bids have been accepted are several. No Bank shall be responsible for the failure of any other Bank to make any Bid Loan which another Bank has agreed to make.
(f) Bid Notes . The obligation of the applicable Borrower to repay the aggregate unpaid principal amount of the Bid Loans made to it by each Bank, together with interest thereon, shall be evidenced by a Bid Note dated as of the Closing Date payable to the order of such Bank in a face amount equal to the aggregate Revolving Credit Commitments of all of the Banks.
Section 2.09 Restriction on Loans and Letters of Credit . Notwithstanding anything to the contrary in this Agreement, none of AGRO, AGRI nor the UK Borrower will be permitted to borrow or incur any new Loans hereunder or have any new Letters of Credit issued for its account at any time after such Person ceases to be a wholly-owned Subsidiary of Holdings.
Section 2.10 Letters of Credit . (a) Subject to and upon the terms and conditions set forth herein, each Borrower may request that any Issuing Bank issue at any time and from time to time on or after the Closing Date and prior to the Expiration Date one or more letters of credit for the account of such Borrower or any of its Subsidiaries to any other Person and in
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support of, on a standby basis, obligations of such Borrower to any other Person and subject to and upon the terms and conditions herein set forth each Issuing Bank agrees to issue at any time and from time to time on or after the Closing Date and prior to the Expiration Date one or more irrevocable standby letters of credit in such form as may be approved by such Issuing Bank, which approval shall not be unreasonably withheld (each such letter of credit, a Letter of Credit and, collectively, the Letters of Credit).
(b) Immediately upon the issuance by any Issuing Bank of any Letter of Credit, such Issuing Bank shall be deemed to have sold and transferred to each Bank other than such Issuing Bank (each such Bank, in its capacity under this Section 2.10(b), a Participant), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Participants Ratable Share, in such Letter of Credit, each drawing made thereunder and the obligations of each Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto. Upon any change in the Commitments or Ratable Shares of the Banks pursuant to this Agreement, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participation amounts pursuant to this Section 2.10 to reflect the new Ratable Shares of the assignor and assignee Bank or of all Banks with Commitments, as the case may be.
(c) In the event that any Issuing Bank makes any payment under any Letter of Credit and the respective Borrower shall not have reimbursed such amount in full to such Issuing Bank pursuant to Section 2.13, such Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Participant, of such failure, and each Participant shall promptly and unconditionally pay to such Issuing Bank the amount of such Participants Ratable Share of such unreimbursed payment in the respective Approved Currency and in immediately available funds. If, prior to 11:00 a.m., New York time, on any Business Day, the Administrative Agent so notifies any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to such Issuing Bank in the respective Approved Currency and in immediately available funds such Participants Ratable Share of the amount of such payment on such Business Day (or, if notice is given after 11:00 a.m., New York time, on any Business Day, on the next Business Day). If and to the extent such Participant shall not have so made its Ratable Share of the amount of such payment available to such Issuing Bank, such Participant agrees to pay to such Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such date to but excluding the date such amount is paid to such Issuing Bank at the overnight Base Rate. The failure of any Participant to make available to such Issuing Bank its Ratable Share of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to such Issuing Bank its Ratable Share of any payment on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to such Issuing Bank such other Participants Ratable Share of any such payment.
(d) Whenever any Issuing Bank receives any payment by any Borrower as to which it has also received payments from the Participants pursuant to paragraph (c) above, such Issuing Bank shall forward such payment to the Agent, which in turn shall distribute to each Participant which has paid its Ratable Share thereof, in the respective Approved Currency and in
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immediately available funds, an amount equal to such Participants share (based upon the amount funded by such Participant to the aggregate amount funded by all Participants and retained by the Issuing Bank) of the principal amount of such payment and interest thereon accruing after the purchase of the respective participations.
(e) The obligations of the Participants to make payments to each Issuing Bank with respect to Letters of Credit issued by it shall be irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances:
(i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents or any amendment, supplement or modification to any of the foregoing;
(ii) the existence of any claim, setoff, defense or other right which the Participant or any of its Affiliates may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Issuing Bank, any Participant, any Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Borrower or any of its Affiliates and the beneficiary named in any such Letter of Credit);
(iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Event of Default or Potential Default; or
(vi) any matter or event set forth in subsection 2.13(b).
(b) Upon the request of any Participant, each Issuing Bank shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant.
Section 2.11 Conditions to the Issuance of all Letters of Credit . (a) Notwithstanding anything to the contrary set forth in this Article II, no Issuing Bank shall be under any obligation to issue any Letter of Credit if at the time of such issuance:
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(b) Notwithstanding anything to the contrary set forth in this Article II;
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(c) Subject to and on the terms and conditions set forth herein, each Issuing Bank is hereby authorized by each Borrower and the Banks to arrange for the issuance of any Letter of Credit pursuant to Section 2.10 and the amendment of any Letter of Credit pursuant to Section 2.15 and/or 10.01 by:
Section 2.12 Letter of Credit Requests . (a) Whenever a Borrower desires that a Letter of Credit be issued for its account, such Borrower shall give the Agent and the respective Issuing Bank written notice (including by way of facsimile transmission, immediately confirmed in writing by submission of the original of such request by mail to the Issuing Bank) thereof prior to 12:00 Noon, New York time, at least three Business Days prior to the proposed date of issuance (which shall be a Business Day), which written notice shall be in the form of Exhibit 2.12 (each, a Letter of Credit Request). Each Letter of Credit Request shall include any other documents as the respective Issuing Bank customarily requires in connection therewith.
(b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the respective Borrower that such Letter of Credit may be issued in accordance with, and it will not violate the requirements applicable to such Borrower and/or such Letter of Credit of, Sections 2.10 and 2.11.
(c) Upon its issuance of, or amendment to, any Letter of Credit, the respective Issuing Bank shall promptly notify the respective Borrower and each Bank of such issuance or amendment, which notice shall include a summary description of the Letter of Credit actually issued and any amendments thereto.
(d) The Stated Amount of each Letter of Credit upon issuance shall be not less than $1,000,000.
Section 2.13 Agreement to Repay Letter of Credit Drawings . (a) Each Borrower severally agrees to reimburse the respective Issuing Bank directly for any payment or disbursement made by such Issuing Bank under any Letter of Credit issued for the account of such Borrower (each such amount so paid or disbursed until reimbursed, an Unpaid Drawing ), in each case, no later than one Business Day following the date of such payment or disbursement, with interest on the amount so paid or disbursed by such Issuing Bank, to the extent not reimbursed prior to 3:00 p.m., New York time, on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date such Issuing Bank is reimbursed therefor at a rate per annum which shall be the Base Rate as in effect from time to time plus the Applicable Margin for Base Rate Loans incurred by such Borrower (plus an additional 2% per annum, payable on demand, if not reimbursed by the third Business
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Day after the date on which the respective Borrower receives notice from the respective Issuing Bank of such payment or disbursement).
(b) Each Borrowers obligation under this Section 2.13 to reimburse each Issuing Bank with respect to Unpaid Drawings of such Borrower (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which such Borrower may have or have had against such Issuing Bank, or any Issuing Bank, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such drawing; provided, however, that no Borrower shall be obligated to reimburse any Issuing Bank for any wrongful payment made by such Issuing Bank under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Issuing Bank (as determined by a court of competent jurisdiction in a final and non-appealable decision).
(c) In determining whether to pay under any Letter of Credit, no Issuing Bank shall have any obligation relative to the other Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Issuing Bank under or in connection with any Letter of Credit, if taken or omitted in the absence of such Issuing Banks gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and non-appealable decision), shall not create for such Issuing Bank any resulting liability to any Borrower or any of its Affiliates or any Bank.
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Section 2.14 Letter of Credit Expiration Extensions . Each Bank acknowledges that to the extent provided under the terms of any Letter of Credit, the expiration date of such Letter of Credit will be automatically extended for an additional year, without written amendment, unless within a set period of time prior to the expiration date of such Letter of Credit, notice is given by the respective Issuing Bank in accordance with the terms of the respective Letter of Credit (a Notice of Non-Extension) that the expiration date of such Letter of Credit will not be extended beyond its current expiration date. The respective Issuing Bank will give Notices of Non-Extension as to any or all outstanding Letters of Credit issued by it if requested to do so by the Required Banks pursuant to Article VIII. In addition, the respective Issuing Bank will give Notices of Non-Extension as to all outstanding Letters of Credit issued by it if the Expiration Date has occurred. The respective Issuing Bank will send a copy of each Notice of Non-Extension to the respective Borrower concurrently with delivery thereof to the respective beneficiary, unless prohibited by law from doing so.
Section 2.15 Changes to Stated Amount . At any time when any Letter of Credit is outstanding, at the request of the respective Borrower, the Issuing Bank will enter into an amendment increasing or reducing the Stated Amount of such Letter of Credit, provided that (i) the Stated Amount of a Letter of Credit may not be increased at any time if the conditions set forth in Sections 2.10 and 2.11 or the conditions precedent set forth in Section 6.02 are not satisfied at such time, and (ii) the Stated Amount of a Letter of Credit may not be increased at any time after the Expiration Date.
ARTICLE III
Section 3.01 Interest Rate Options . Each Borrower shall pay interest in respect of the outstanding unpaid principal amount of the Revolving Credit Loans as selected by it from the Base Rate Option or Revolving Credit LIBOR Option set forth below applicable to the Revolving Credit Loans, it being understood that, subject to the provisions of this Agreement, the Borrowers may select different Interest Rate Options and different Interest Periods to apply to different Borrowing Tranches of the Revolving Credit Loans, and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Revolving Credit Loans comprising any Borrowing Tranche, provided that there shall not be at any one time outstanding more than eight (8) Borrowing Tranches in the aggregate among all of the Revolving Credit Loans. If at any time the designated rate applicable to any Revolving Credit Loan made by any Bank exceeds such Banks highest lawful rate, the rate of interest on such Banks Revolving Credit Loan shall be limited to such Banks highest lawful rate.
(a) Revolving Credit Interest Rate Options . Each Borrower shall have the right to select from the following Interest Rate Options applicable to the Revolving Credit Loans incurred by it:
(i) Revolving Credit Base Rate Option : A fluctuating rate per annum (computed on the basis of a year of 365 or 366 days, as the case may be, for the actual days elapsed) equal to the Base Rate plus the Applicable Margin, such
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interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate; or
(ii) Revolving Credit LIBOR Option : A rate per annum (computed on the basis of a year of 360 days for the actual days elapsed) equal to the applicable LIBOR plus the Applicable Margin.
(b) Rate Quotations . The Borrowers may call the Agent on or before the date on which a Revolving Credit Loan Request is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such projection shall not be binding on the Agent or the Banks nor affect the rate of interest which thereafter is actually in effect when the election is otherwise made in accordance with the terms of this Agreement.
(c) Change in Fees or Interest Rates . If the Applicable Margin or Applicable Facility Fee Rate is increased or reduced with respect to any period for which any Borrower has already paid interest or Facility Fees, the Agent shall recalculate the additional interest or Facility Fees due from, or the amount of the refund of interest or Facility Fees due to, such Borrower and shall, within fifteen (15) Business Days after the Agent received the information which gave rise to such increase or decrease, give the applicable Borrower and the Banks notice of such recalculation.
(i) Any additional interest or Facility Fee due from any Borrower shall be paid to the Agent for the account of the Banks on the next date on which an interest or fee payment is due; provided , however , that if there are no Loans outstanding or if the Loans are due and payable, such additional interest or Facility Fee shall be paid promptly after receipt of written request for payment from the Agent.
(ii) Any interest or Facility Fee refund due to any Borrower shall be credited against payments otherwise due from such Borrower on the next interest or fee payment date or, if the Loans have been repaid and the Banks are no longer committed to lend under this Agreement, the Banks shall pay the Agent for the account of such Borrower such interest or Facility Fee refund not later than five Business Days after written notice from the Agent to the Banks.
Section 3.02 Revolving Credit Loans Interest Periods . At any time when any Borrower shall select, convert to, or renew a Revolving Credit Loan LIBOR Option, the applicable Borrower shall notify the Agent thereof at least three (3) Business Days prior to the effective date of such LIBOR Option by delivering a Loan Request. The notice shall specify a Revolving Credit Loan Interest Period during which such Interest Rate Option shall apply. Notwithstanding the preceding sentence, the following provisions shall apply to any selection of, renewal of, or conversion to a Revolving Credit Loan LIBOR Option:
(a) Amount of Borrowing Tranche . Each Borrowing Tranche of Revolving Credit Loans shall be in integral multiples of $1,000,000 and not less than $5,000,000 (or, in the case of Borrowing Tranches of Revolving Credit Loans to the UK Borrower, not less than $1,000,000); and
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(b) Renewals . In the case of the renewal of a Revolving Credit Loan LIBOR Option at the end of an Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period, without duplication in payment of interest for such day.
Section 3.03 Interest After Default . To the extent permitted by Law, upon the occurrence of an Event of Default and until such time such Event of Default shall have been cured or waived:
(a) Interest Rate . The rate of interest otherwise applicable for each Loan pursuant to Section 3.01 [Interest Rate Options] shall be increased by 2.0% per annum; and
(b) Other Obligations . Each other Obligation hereunder if not paid when due shall bear interest at a rate per annum equal to the sum of the rate of interest applicable under the Base Rate Option plus an additional 2.0% per annum from the time such Obligation becomes due and payable and until it is paid in full.
(c) Acknowledgment . The Borrowers acknowledge that the increase in rates referred to in this Section 3.03 reflects, among other things, the fact that such Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk; and all such interest referred to in this Section 3.03 shall be payable by the Borrowers upon demand by the Agent.
Section 3.04 LIBOR Unascertainable; Illegality; Increased Costs; Deposits Not Available . (a) Unascertainable . If on any date on which LIBOR would otherwise be determined with respect to Revolving Credit Loans or Bid Loans, the Agent shall have determined that:
(i) adequate and fair means do not exist for ascertaining such LIBOR, or
(ii) a contingency has occurred which materially and adversely affects the respective London interbank market relating to LIBOR, the Agent shall have the rights specified in Section 3.04(c).
(b) Illegality; Increased Costs; Deposits Not Available . If at any time any Bank shall have determined that:
(i) the making, maintenance or funding of any Loan to which a LIBOR Option applies has been made unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any such Official Body (whether or not having the force of Law), or
(ii) such LIBOR Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or
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(iii) after making all reasonable efforts, deposits of the relevant amount in the relevant Approved Currency for the relevant Interest Period for a Loan to which a LIBOR Option applies are not available to such Bank with respect to such Loan in the respective London interbank market,
then the Agent shall have the rights specified in Section 3.04(c).
(c) Agents and Banks Rights . In the case of any event specified in Section 3.04(a) above, the Agent shall promptly so notify the Banks and the Borrowers thereof, and in the case of an event specified in Section 3.04(b) above, such Bank shall promptly so notify the Agent and endorse a certificate to such notice as to the specific circumstances of such notice, and the Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrowers. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of (A) the Banks, in the case of such notice given by the Agent, or (B) such Bank, in the case of such notice given by such Bank, to allow the Borrowers to select, convert to or renew a LIBOR Option shall be suspended until the Agent shall have later notified the Borrowers, or such Bank shall have later notified the Agent, of the Agents or such Banks, as the case may be, determination that the circumstances giving rise to such previous determination no longer exist. If at any time the Agent makes a determination under Section 3.04(a) and any Borrower has previously notified the Agent of its selection of, conversion to or renewal of a LIBOR Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for the termination of the applicable Borrowers Bid Loan request (without penalty) for such Loans if the applicable Borrower has requested Bid Loans under the Bid Loan LIBOR Option and for the selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to such Loans if the applicable Borrower has requested the Revolving Credit Loan LIBOR Option. If any Bank notifies the Agent of a determination under Section 3.04(b), the Borrowers shall, subject to the Borrowers indemnification Obligations under Section 4.06(b) [Indemnity], as to any Loan of the Bank to which a LIBOR Option applies, on the date specified in such notice either convert such Loan to the Base Rate Option otherwise available with respect to such Loan (in the case of Dollar-denominated Loans) or prepay such Loan in accordance with Section 4.04 [Voluntary Prepayments]. Absent due notice from the Borrowers of conversion or prepayment, such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date in the case of Dollar-denominated Loans, or prepaid on such date in the case of all other Loans.
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Section 3.05 Selection of Interest Rate Options . If any Borrower fails to select a new Interest Period to apply to any Borrowing Tranche of Revolving Credit Loans under the Revolving Credit Loan LIBOR Option at the expiration of an existing Interest Period applicable to such Borrowing Tranche in accordance with the provisions of Section 3.01(c) [Interest Periods], the applicable Borrower shall be deemed to have (i) in the case of Dollar-denominated Loans, converted such Borrowing Tranche to the Base Rate Option commencing upon the last day of the existing Interest Period and (ii) in the case of Alternate Currency Loans, selected a one-month Interest Period commencing upon the last day of the existing Interest Period.
ARTICLE IV
Section 4.01 Payments . All payments and prepayments to be made in respect of principal, interest, Facility Fees, Letter of Credit Fees, Fronting Fees, Agents Fee, or other fees or amounts due from the Borrowers hereunder shall be payable prior to 11:00 A.M., New York time, on the date when due without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by the Borrowers, and without set-off, counterclaim, or other deduction of any nature, and an action therefor shall immediately accrue. Such payments shall be made to the Agent at the Principal Office for the ratable accounts of the Banks with respect to the Revolving Credit Loans and Letters of Credit and for the account of the lending Bank with respect to the Bid Loans, in the applicable Approved Currency and in immediately available funds, and the Agent shall promptly distribute such amounts to the Banks in immediately available funds, provided that in the event payments are received by 11:00 A.M., New York time, by the Agent with respect to the Loans and such payments are not distributed to the Banks on the same day received by the Agent, the Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Agent and not distributed to the Banks. The Agents and each Banks statement of account, ledger, or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement.
Section 4.02 Pro Rata Treatment of Banks . Each borrowing of Revolving Credit Loans shall be allocated to each Bank according to its Ratable Share (irrespective of the amount of Bid Loans outstanding), and each selection of, conversion to or renewal of any Interest Rate Option applicable to Revolving Credit Loans and each payment or prepayment by the Borrowers with respect to principal or interest on the Revolving Credit Loans, Facility Fees or Letter of Credit Fees or other fees (except for the Agents Fee, the Bid Loan Processing Fee and the Fronting Fees) or amounts due from the Borrowers hereunder to the Banks with respect to the Revolving Credit Loans shall (except as provided in Section 3.04(c) [Agents and Banks Rights] in the case of an event specified in Section 3.04 [Euro-Rate Unascertainable; Etc.], Section 4.04 [Replacement of a Bank] or Section 4.06 [Additional Compensation in Certain Circumstances]) be made in proportion to the applicable Revolving Credit Loans outstanding from each Bank and, if no such Loans are then outstanding, in proportion to the Ratable Share of each Bank. Each borrowing of a Bid Loan shall be made according to the provisions in Section 2.08 hereof and each payment or prepayment by the Borrowers of principal, interest, fees, or other amounts
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from the Borrowers with respect to Bid Loans shall be made to the Banks in proportion to the amounts due to such Banks with respect to Bid Loans then outstanding.
Section 4.03 Interest Payment Dates . Interest on Revolving Credit Loans to which the Base Rate Option applies shall be due and payable in arrears on the first Business Day of each June, September, December, and March after the date hereof and on the Expiration Date or upon acceleration of the Loan. Interest on Revolving Credit Loans and Bid Loans to which the LIBOR Option applies and Bid Loans to which the Bid Loan Fixed Rate Option applies shall be due and payable on the last day of each Interest Period for those Loans and, if such Interest Period is longer than three (3) Months, also at the end of the third Month of such Interest Period. Interest on payments of principal and other monetary Obligations shall be due on the date such payment is due (whether on the stated maturity date, upon acceleration, or otherwise) or if principal or such other Obligation is paid earlier than the date when due, then on the date when paid.
Section 4.04 Voluntary Prepayments . (a) Right to Prepay . Each Borrower shall have the right at its option from time to time to prepay the Revolving Credit Loans incurred by it in whole or in part without premium or penalty (except as provided in Section 4.04(b) below or in Section 4.06 [Additional Compensation in Certain Circumstances]):
(i) at any time with respect to any Revolving Credit Loan to which the Base Rate Option applies,
(ii) on the last day of the applicable Interest Period with respect to Revolving Credit Loans to which a LIBOR Option applies,
(iii) on the date specified in a notice by any Bank pursuant to Section 3.04 [LIBOR Unascertainable, Etc.] with respect to any Revolving Credit Loan to which a LIBOR Option applies.
Whenever any Borrower desires to prepay any part of the Revolving Credit Loans, it shall provide a prepayment notice to the Agent by 12:00 Noon, New York time, at least one (1) Business Day prior to the date of prepayment of Revolving Credit Loans to which a Base Rate Option applies and at least three (3) Business Days prior to the date of prepayment of Revolving Credit Loans to which a LIBOR Option applies setting forth the following information:
(x) the date, which shall be a Business Day, on which the proposed prepayment is to be made;
(y) a statement indicating the application of the prepayment among the Borrowing Tranches of such Loans; and
(z) the total principal amount of such prepayment, which shall not be less than $1,000,000 or such lesser amount as may be outstanding under the Borrowing Tranche to be prepaid.
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The principal amount of the Revolving Credit Loans for which a prepayment notice is given, together with such interest and fees as have accrued on such principal amount, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made; provided , however , that failure of any Borrower to make payment in accordance with a prepayment notice given by it shall not be an Event of Default in and of itself. Except as provided in Section 3.04(c) [Agents and Banks rights], if any Borrower prepays a Revolving Credit Loan, but fails to specify the applicable Borrowing Tranche which the applicable Borrower is prepaying, the prepayment shall be applied first to Revolving Credit Loans to which the Base Rate Option applies, then to Loans to which the Revolving Credit Loan LIBOR Option applies. Any prepayment hereunder and any failure of the applicable Borrower to make payment in accordance with a prepayment notice provided by it shall be subject to the applicable Borrowers Obligation to indemnify the Banks under Section 4.06(b) [Indemnity].
(b) Replacement of a Bank . In the event any Bank (i) gives notice under Section 3.04 [LIBOR Unascertainable, Etc.] or Section 4.06 [Additional Compensation in Certain Circumstances], (ii) does not fund Revolving Credit Loans, Bid Loans or Unpaid Drawings because the making of such Loans would contravene any Law applicable to such Bank, or (iii) becomes subject to the control of an Official Body (other than normal and customary supervision), then Holdings or the Company shall have the right at its option, with the consent of the Agent and each Issuing Bank, which shall not be unreasonably withheld, to prepay the Loans of such Bank in whole, together with all interest accrued thereon, and terminate such Banks Commitment at any time after (x) receipt of such Banks notice under Section 3.04 [LIBOR Unascertainable, Etc.] or Section 4.06(a) [Increased Costs, Etc.], (y) the date such Bank has failed to fund Revolving Credit Loans, Bid Loans or Unpaid Drawings because the making of such Loans would contravene Law applicable to such Bank, or (z) the date such Bank became subject to the control of an Official Body, as applicable; provided that the applicable Borrower shall also pay to such Bank at the time of such prepayment any amounts required under Section 4.06 [Additional Compensation in Certain Circumstances] and any accrued interest due on such amount and any related fees; provided , however , that the Commitment and any Bid Loan of such Bank shall be provided by one or more of the remaining Banks or a replacement bank acceptable to the Agent and each Issuing Bank; provided , further , the remaining Banks shall have no obligation hereunder to increase their Commitments or provide the Bid Loan of such Bank. Notwithstanding the foregoing, the Agent may only be replaced subject to the requirements of Section 9.14 [Successor Agent].
(c) Change of Lending Office . Each Bank agrees that, upon the occurrence of any event giving rise to increased costs or other special payments under Section 3.04(b) [Illegality, Etc.] or Section 4.06(a) [Increased Costs, Etc.] with respect to such Bank, it will, if requested by Holdings or the Company, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event, provided that such designation is made on terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of such Section. Nothing in this Section 4.04(c) shall affect or postpone any of the Obligations or the rights of the Agent or any Bank provided in this Agreement.
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Section 4.05 Reduction or Termination of Commitments . The aggregate amount of the Commitments shall be automatically reduced to zero on the Expiration Date. The aggregate amount of Commitments shall be automatically reduced to zero on the 90 th day following the date hereof unless the Closing Date has occurred by such time. In addition, the Borrower shall have the right to terminate or reduce the then unused portion of Commitments at any time or from time to time; provided that (a) each partial reduction shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof; (b) at no time shall the total amount of the Commitments be less than the sum of the current Loans outstanding and the Letter of Credit Outstandings at such time (except following the Expiration Date to the extent no Loans are outstanding and all Letters of Credit are cash collateralized in accordance with Section 4.10); and (c) any Borrower shall provide at least five (5) Business Days prior written notice of each such termination or reduction to the Agent specifying the amount of the Commitments to be reduced or terminated. Each such notice shall be irrevocable, and Commitments once terminated or reduced may not be reinstated. Any partial reduction of Commitments pursuant to this Section 4.05 will apply ratably to all Banks based upon each such Banks Commitment.
Section 4.06 Additional Compensation in Certain Circumstances . (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc . If any Law, guideline or interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body:
(i) subjects any Bank or Issuing Bank to any tax or changes the basis of taxation with respect to this Agreement, the Revolving Credit Loans, the Bid Loans or Letters of Credit or payments by any Borrower of principal, interest, Facility Fees, Letter of Credit Fees, Unpaid Drawings or other amounts due from the Borrowers hereunder (except for taxes on the overall net income of such Bank or Issuing Bank),
(ii) imposes, modifies or deems applicable any reserve (including the Eurodollar Reserve Percentage), special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank or Issuing Bank, or
(iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank or Issuing Bank, or (B) otherwise applicable to the obligations of any Bank or Issuing Bank under this Agreement,
and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or Issuing Bank with respect to this Agreement, or the making, maintenance or funding of any part of the Revolving Credit Loans or the Bid Loans, or the issuance of or participation in any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Banks capital or Issuing Bank, taking into consideration such Banks or Issuing
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Banks customary policies with respect to capital adequacy) by an amount which such Bank or Issuing Bank in its sole discretion deems to be material, such Bank or Issuing Bank shall from time to time notify the Borrowers and the Agent of the amount determined in good faith (using any averaging and attribution methods employed in good faith) by such Bank or Issuing Bank to be necessary to compensate such Bank or Issuing Bank for such increase in cost, reduction of income, additional expense or reduced rate of return. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the applicable Borrower to such Bank or Issuing Bank ten (10) Business Days after such notice is given.
(b) Indemnity . In addition to the compensation required by Section 4.06 (a) [Increased Costs, Etc.], each Borrower, with respect to Loans incurred or requests therefor made by such Borrower, shall indemnify each Bank against all liabilities, losses, or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to a LIBOR Option or the Bid Loan Fixed Rate Option) which such Bank sustains or incurs as a consequence of any
(i) payment, prepayment, conversion, or renewal of any Loan to which a LIBOR Option or the Bid Loan Fixed Rate Option applies on a day other than the last day of the corresponding Interest Period (whether or not such payment or prepayment is mandatory, voluntary, or automatic and whether or not such payment or prepayment is then due),
(ii) attempt by such Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any Loan Requests under Section 2.05 [Revolving Credit Loan Requests], Section 2.08 [Bid Loan Facility] or Section 3.02 [Interest Periods] or notice relating to prepayments under Section 4.04 [Voluntary Prepayments],
(iii) default by such Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including any failure of such Borrower to pay when due (by acceleration or otherwise) any principal of or interest on the Revolving Credit Loans or the Bid Loans, Facility Fee, Letter of Credit Fee or any other amount due hereunder, or
(iv) payment or prepayment of any Bid Loan on a day other than the maturity date thereof (whether or not such payment or prepayment is mandatory or voluntary).
If any Bank sustains or incurs any such loss or expense, it shall from time to time notify the applicable Borrower of the amount determined in good faith by such Bank (which determination may include such assumptions, allocations of costs and expenses, and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by such Borrower to such Bank ten (10) Business Days after such notice is given.
Section 4.07 Taxes . (a) No Deductions . All payments made by each Borrower hereunder and under each Note or for Unpaid Drawings shall be made free and clear of and
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without deduction for any present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the net income of any Bank or Issuing Bank and all income and franchise taxes applicable to any Bank or Issuing Bank of the United States (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as Taxes). If any Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or for Unpaid Drawings, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.07(a)) each Bank or Issuing Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the applicable Borrower shall make such deductions, and (iii) the applicable Borrower shall timely pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable Law.
(b) Stamp Taxes . In addition, each Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made by such Borrower hereunder or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or any Note executed and delivered by such Borrower (hereinafter referred to as Other Taxes).
(c) Indemnification for Taxes Paid by a Bank . Each Borrower, with respect to Loans incurred or requests therefor made by such Borrower, shall indemnify each Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.07(c)) paid by any Bank and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date a Bank makes written demand therefor.
(d) Certificate . Within 30 days after the date of any payment of any Taxes by any Borrower, the applicable Borrower shall furnish to each Bank, at its address referred to herein, the original or a certified copy of a receipt evidencing payment thereof.
(e) Survival . Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 4.07 shall survive the payment in full of principal and interest hereunder and under any instrument delivered hereunder.
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Section 4.08 Judgment Currency . (a) Currency Conversion Procedures for Judgments . If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder or under a Note in any currency (the Original Currency) into another currency (the Other Currency), the parties hereby agree, to the fullest extent permitted by Law, that the rate of exchange used shall be that at which in accordance with normal banking procedures each Bank could purchase the Original Currency with the Other Currency after any premium and costs of exchange on the Business Day preceding that on which final judgment is given.
(b) Indemnity in Certain Events . The obligation of each Borrower in respect of any sum due from such Borrower to any Bank hereunder shall, notwithstanding any judgment in an Other Currency, whether pursuant to a judgment or otherwise, be discharged only to the extent that, on the Business Day following receipt by any Bank of any sum adjudged to be so due in such Other Currency, such Bank may in accordance with normal banking procedures purchase the Original Currency with such Other Currency. If the amount of the Original Currency so purchased is less than the sum originally due to such Bank in the Original Currency, each Borrower agrees, with respect to Loans incurred and requests therefor made by such Borrower, as a separate obligation and notwithstanding any such judgment or payment, to indemnify such Bank against such loss.
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Section 4.09 Notes, Maturity . The Revolving Credit Loans made by each Bank shall be evidenced by a Revolving Credit Note in the form of Exhibit 1.01(R) . Notwithstanding anything to the contrary contained elsewhere in this Agreement, all outstanding Revolving Credit Loans shall be repaid in full on the Expiration Date.
Section 4.10 Mandatory Prepayments . (a) If on any date (including, without limitation, (i) any date on which Dollar Equivalents are determined and (ii) the Expiration Date) the sum of the aggregate outstanding Principal Amount of Revolving Credit Loans and Bid Loans plus the Letter of Credit Outstandings (all the foregoing, collectively, the Aggregate Outstandings) exceeds the Commitments as then in effect, Holdings, the Company, AGRI, AGRO and/or the UK Borrower (as they shall determine) shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Credit Loans as set forth above, the remaining Aggregate Outstandings exceed the Commitments, Holdings, the Company, AGRI, AGRO and/or the UK Borrower (as they shall determine) shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Credit loans and Bid Loans as set forth above, the remaining Aggregate Outstandings exceed the Commitment, the Borrowers shall (i) establish an account in the name and for the benefit of the Agent, as Agent for the Banks (the Cash Collateral Account), (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent, and (iii) fund the Cash Collateral Account with cash to be held as security for the Borrowers reimbursement obligations in respect of Letters of Credit then outstanding, equal to the Letter of Credit Outstandings in excess of the Commitment at such time. In addition, at all times on and after the 90 th day prior to the Expiration Date and continuing until all Letters of Credit have been terminated and all Obligations paid in full, the Borrowers will maintain in the Cash Collateral Account an amount of cash equal to the Letter of Credit Outstandings at such time.
(b) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the aggregate Principal Amount of Revolving Credit Loans and Bid Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceeds $12,500,000, the UK Borrower shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the repayment of all outstanding Revolving Credit Loans incurred by the UK Borrower as set forth above, the sum of the outstanding Bid Loans incurred by the UK Borrower plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceeds $12,500,000, the UK Borrower shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the repayment of all Revolving Credit Loans and Bid Loans incurred by the UK Borrower as set forth above, the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of the UK Borrower exceed $12,500,000, the UK Borrower shall on such day (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for the UK Borrowers reimbursement obligations in respect of Letters of Credit equal to such excess.
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(c) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the aggregate outstanding Principal Amount of Revolving Credit Loans and Bid Loans incurred by any of Holdings, AGRI or AGRO plus the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of all of such Borrowers exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall repay no later than the next following Business Day the principal amount of Revolving Credit Loans in an aggregate Principal Amount equal to such excess. If, after giving effect to the repayment of all outstanding Revolving Credit Loans incurred by Holdings, AGRI and AGRO plus the Letter of Credit Outstandings in respect of Letter of Credit issued for the account of such Borrowers, in the aggregate, exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall repay on such date the principal of Bid Loans in an aggregate amount equal to such excess. If, after giving effect to the repayment of all Revolving Credit Loans and Bid Loans incurred by Holdings, AGRI and AGRO, in the aggregate, as set forth above, the Letter of Credit Outstandings in respect of Letters of Credit issued for the account of such Borrowers, in the aggregate, exceeds the Holdings Sub-Limit, Holdings, AGRI and/or AGRO shall on such day (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for such Borrowers reimbursement obligations in respect of Letters of Credit equal to such excess.
(d) If on any date (including, without limitation, any date on which Dollar Equivalents are determined) the Letter of Credit Outstandings exceed $100,000,000, the Borrowers shall (i) establish a Cash Collateral Account, (ii) enter into a control agreement over such Cash Collateral Account satisfactory to the Agent and (iii) fund such Cash Collateral Account with cash to be held as security for the Borrowers reimbursement obligations in respect of Letters of Credit equal to such excess.
Section 5.01 Representations and Warranties . Each Borrower represents and warrants (in each case solely as to itself and its Subsidiaries) to the Agent and each of the Banks as follows:
(a) Organization and Qualification . Such Borrower is a corporation duly incorporated, validly existing, and in good standing under the laws of its jurisdiction of organization. Such Borrower has the lawful power to own or lease its properties and to engage in the business it presently conducts. Such Borrower is duly licensed or qualified and in good standing in each jurisdiction where the property owned or leased by it or the nature of the business transacted by it or both makes such licensing or qualification necessary.
(b) Capitalization and Subsidiaries . As of the Closing Date, Holdings has no Subsidiaries other than those Subsidiaries listed on Schedule 5.01(b) . Assured Value Insurance Company is an inactive corporation having no material liabilities or
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Indebtedness. All of the issued and outstanding share capital of Holdings has been validly issued and is fully paid and nonassessable.
(c) Power and Authority . Such Borrower has full power to enter into, execute, deliver, and carry out this Agreement and the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents, and to perform its Obligations under the Loan Documents to which it is a party, and all such actions have been duly authorized by all necessary proceedings on its part.
(d) Validity and Binding Effect . This Agreement has been duly and validly executed and delivered by such Borrower, and each other Loan Document which such Borrower is required to execute and deliver as of the date hereof has been duly executed and delivered by such Borrower. Assuming the due execution and delivery by Agent and the Banks of those Loan Documents to which they are a party, this Agreement and each other Loan Document to which such Borrower is a party constitute the legal, valid and binding obligations of such Borrower on and after its date of delivery thereof, enforceable against such Borrower in accordance with its terms, except to the extent that enforceability of any of such Loan Document may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforceability of creditors rights generally or limiting the right of specific performance.
(e) No Conflict . Neither the execution and delivery of this Agreement or the other Loan Documents by such Borrower nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of the certificate or articles of incorporation, bylaws, memorandum of association or other organizational or constitutional documents of such Borrower, or (ii) any Law or any material agreement or instrument or order, writ, judgment, injunction, or decree to which such Borrower is a party or by which it is bound or to which it is subject, or result in the creation or enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of such Borrower (other than Permitted Liens).
(f) Litigation . Except as disclosed under the Legal Proceedings heading of the Annual Report on Form 10-K filed by Holdings with the SEC on March 22, 2005, there are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Borrower, threatened against such Borrower at law or in equity before any Official Body which individually or in the aggregate may result in any Material Adverse Change. Such Borrower is not in violation of any order, writ, injunction, or any decree of any Official Body which may result in any Material Adverse Change.
(g) Title to Properties . Such Borrower has good and marketable title to or valid leasehold interests in all properties, assets, and other rights which it purports to own or lease or which are reflected as owned or leased on its books and records, free and clear of all Liens and encumbrances except Permitted Liens. All leases of property are in full force and effect and are subject only to the terms and conditions of the applicable leases.
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(h) Financial Statements, Reinsurance Coverage .
(A) Historical Statements . The Company has delivered to the Agent copies of its audited consolidated year-end financial statements for and as of the end of the three (3) fiscal years ended December 31, 2002, 2003 and 2004 (the Historical Statements). The Historical Statements were compiled from the books and records maintained by the Companys management, are correct and complete and fairly represent the consolidated financial condition of the Company and its Subsidiaries as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP and statutory requirements consistently applied.
(B) Accuracy of Financial Statements . As of the Closing Date, neither the Company nor any Subsidiary of the Company has any liabilities, contingent or otherwise, or forward or long-term commitments or Off-Balance Sheet Transactions that are not disclosed in the Historical Statements or in the notes thereto, and except as disclosed therein there are no unrealized or anticipated losses from any commitments of the Company or any Subsidiary of the Company which may cause a Material Adverse Change. Since December 31, 2004 , no Material Adverse Change has occurred.
(C) Reinsurance Coverage . The Company has delivered Schedule 5.01(h) to the Agent setting forth the amount, terms, and provider(s) to the Company of reinsurance and the extent of the Companys insurance or reinsurance exposure covered thereby; as of December 31, 2004, Schedule 5.01(h) is correct and complete and fairly represents the reinsurance coverage pertaining to the business of the Company and its Subsidiaries (Existing Reinsurance Coverage).
(i) Use of Proceeds; Margin Stock . Such Borrower intends to use the proceeds of the Loans and Letters of Credit in accordance with Section 2.07 and Section 7.01(j). Such Borrower does not engage or intend to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (such term used herein within the meaning of Regulation U). No part of the proceeds of any Loan has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. Such Borrower does not hold or intend to hold margin stock in such amounts that more than 25% of the reasonable value of its assets are or will be represented by margin stock.
(j) Full Disclosure . Neither this Agreement nor any other Loan Document, nor any certificate, statement, agreement, or other document furnished to the Agent or any Bank by either of Holdings or the Company in connection herewith or therewith, contains any untrue statement of a material fact or omits to state a material fact necessary
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in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading. There is no fact known to either of Holdings or the Company which materially adversely affects the business, property, assets, financial condition, results of operations, or prospects of Holdings and its Subsidiaries taken as a whole or the Company and its Subsidiaries taken as a whole which has not been set forth in this Agreement or in the certificates, statements, agreements, or other documents furnished in writing to the Agent and the Banks by either Holdings or the Company prior to or at the date hereof in connection with the transactions contemplated hereby.
(k) Taxes . All federal, state, local, and other tax returns required to have been filed with respect to such Borrower have been filed, and payment or adequate provision has been made for the payment of all taxes, fees, assessments, and other governmental charges which have or may become due pursuant to said returns or to assessments received, except to the extent that such taxes, fees, assessments, and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. There are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of such Borrower for any period.
(l) Consents and Approvals . No consent, approval, exemption, order, or authorization of, or a registration or filing with, any Official Body or any other Person is required by any Law or any agreement in connection with the execution, delivery, or carrying out of this Agreement or any of the other Loan Documents by such Borrower, except such as have been obtained or made on or prior to the Closing Date.
(m) No Event of Default; Compliance With Instruments . No event has occurred and is continuing and no condition exists or will exist after giving effect to the borrowings or other extensions of credit to be made under or pursuant to the Loan Documents which constitutes an Event of Default or Potential Default. Such Borrower is not in violation of (i) any term of its certificate or articles of incorporation, bylaws, memorandum of association or other organizational or constitutional documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound, in each such case where such violation would constitute a Material Adverse Change.
(n) Licenses, Etc . Such Borrower owns or possesses all the material licenses, registrations, franchises, permits, and rights necessary to own and operate its properties and to carry on its business as presently conducted by such Borrower, without conflict with the rights of others.
(o) Insurance . No notice has been given or claim made and no grounds exist to cancel or avoid any insurance policy or bond in favor of such Borrower or any of its property, or to reduce the coverage provided thereby. Such policies and bonds provide adequate coverage from reputable and financially sound insurers in amounts sufficient to
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insure the assets and risks of such Borrower in accordance with prudent business practice in the industry of such Borrower.
(p) Compliance With Laws . Such Borrower is in compliance in all material respects with all applicable Laws in all jurisdictions in which such Borrower is doing business, except where the failure to do so would not constitute a Material Adverse Change.
(q) Material Contracts; Burdensome Restrictions . All material contracts relating to the business operations of such Borrower are valid, binding, and enforceable upon such Borrower and, to the knowledge of such Borrower, each of the other parties thereto in accordance with their respective terms, and there is no default thereunder, to such Borrowers knowledge, with respect to parties other than such Borrower. Such Borrower is not bound by any contractual obligation, or subject to any restriction in any organizational document or any requirement of Law, which in and of itself is material and adverse to such Borrower.
(r) Investment Companies; Regulated Entities . Such Borrower is not an investment company registered or required to be registered under the Investment Company Act of 1940 or under the control of an investment company as such terms are defined in the Investment Company Act of 1940 and shall not become such an investment company or under such control. Such Borrower is not subject to any other Federal or state statute or regulation limiting its ability to incur Indebtedness for borrowed money.
(s) Plans and Benefit Arrangements . To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and each other member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans, and Multiemployer Plans. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrowers, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of Holdings or any other member of the ERISA Group. To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and all other members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, if any, Holdings and each other member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC other than PBGC premiums due but not delinquent under Section 4007 of ERISA, and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. All Plans, Benefit Arrangements and Multiemployer Plans, if any, have been administered in accordance with their terms and applicable Law.
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Holdings and each other member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans, and Multiemployer Plans, if any. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of Holdings, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of Holdings or any other member of the ERISA Group. To the extent of any Benefit Arrangement, Plan or Multiemployer Plan in place during the term of this Agreement, Holdings and all other members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, if any, Holdings and each other member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC other than PBGC premiums due but not delinquent under Section 4007 of ERISA, and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. All Plans, Benefit Arrangements and Multiemployer Plans have been administered in accordance with their terms and applicable Law.
(A) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan.
(B) Neither Holdings nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither Holdings nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of Holdings, no Multiemployer Plan or Multiple Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA.
(t) Senior Debt Status . The Obligations of such Borrower under this Agreement and each of the other Loan Documents to which it is a party do rank and will rank at least pari passu in priority of payment with all other Indebtedness of the such Borrower except (i) Indebtedness of such Borrower to the extent secured by Permitted Liens, and (ii) Indebtedness which constitutes a preferred claim under Section 9-227 of the Maryland Insurance Law (or any analogous provision of United Kingdom or Bermuda law) in the event of the liquidation, rehabilitation, reorganization, or conservation of the such Borrower. There is no Lien upon or with respect to any of the properties or income of such Borrower which secures indebtedness or other obligations of any Person except for Permitted Liens.
(u) Holdings . Holdings was created on August 21, 2003 for the purpose of holding the capital stock of the Company and its other subsidiaries (but it is recognized that
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Holdings has the corporate capacity to carry on other business under the objects expressed in its Memorandum of Association).
Section 5.02 Continuation of Representations . Each Borrower makes the representations and warranties in this ARTICLE V on the date hereof and on the Closing Date and each date thereafter on which a Loan is made to such Borrower or a Letter of Credit is issued for the account of such Borrower as provided in and subject to Section 6.01 and Section 6.02.
The obligation of each Bank to make Loans hereunder and the obligation of each Issuing Bank to issue Letters of Credit hereunder is subject to the performance by the Borrowers of their Obligations to be performed hereunder at or prior to the occurrence of each such Credit Event, and to the satisfaction of the following further conditions:
Section 6.01 Closing Date . The Closing Date shall occur when the following conditions have been satisfied:
(a) Representations and Warranties True and Complete, No Defaults . The representations and warranties of the Borrowers contained in Article V shall be true, complete, and accurate on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and the Borrowers shall have performed and complied with all covenants and conditions hereof and thereof, no Event of Default or Potential Default shall have occurred and be continuing.
(b) Secretarys Certificate . There shall be delivered to the Agent for the benefit of each Bank certificates dated the Closing Date and signed by the Secretary or an Assistant Secretary of Holdings, the Company, AGRI, AGRO and the UK Borrower certifying as appropriate as to:
(i) resolutions approving all actions taken by Holdings, the Company, AGRI, AGRO and the UK Borrower in connection with this Agreement and the other Loan Documents;
(ii) the names of the officer or officers authorized to sign this Agreement and the other Loan Documents and the true signatures of such officer or officers and specifying certain Authorized Officers of Holdings, the Company, AGRI, AGRO and the UK Borrower for purposes of this Agreement and the true signatures of such officers, on which the Agent and each Bank may conclusively rely; and
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(iii) copies of its organizational or constitutional documents, including its certificate or articles of incorporation and bylaws as in effect on the Closing Date certified by the appropriate state or governmental official where such documents are filed in a state office and capable of being certified by the appropriate state or governmental official, together with certificates from the appropriate state officials as to the continued existence and good standing of Holdings, the Company, AGRI, AGRO and the UK Borrower in each jurisdiction where organized to the extent applicable.
(c) Delivery of Notes, Guaranty Agreements, and Loan Request . The Notes, the Guaranty Agreement to be entered into by Holdings, the Guaranty Agreement to be entered into by the Company and the Guaranty Agreement to be entered into by the Material Non-AGC Subsidiaries (other than AGRI and AGRO) shall have been duly executed and delivered to the Agent for the benefit of the Banks.
(d) Opinion of Counsel . There shall be delivered to the Agent for the benefit of each Bank party hereto on the Closing Date one or more written opinions of counsel for Holdings, the Company, AGRI, AGRO and the UK Borrower dated the Closing Date and in form and substance satisfactory to the Agent and its counsel:
(i) as to the matters set forth in Exhibit 6.01(d) ; and
(ii) as to such other matters incident to the transactions contemplated herein as the Agent may reasonably request.
(e) Legal Details . All legal details and proceedings in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be in form and substance satisfactory to the Agent and counsel for the Agent, and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agent and said counsel, as the Agent or said counsel may reasonably request.
(f) Payment of Fees . The Borrowers shall have paid or caused to be paid to the Agent for itself and for the account of the Banks to the extent not previously paid the Facility Fees, all other fees accrued through the Closing Date and the costs and expenses for which the Agent and the Banks are entitled to be reimbursed.
(g) No Material Adverse Change . There has not occurred a Material Adverse Change since the date of the Historical Statements.
(h) Existing Agreement . The commitments under the Existing Credit Agreement shall have been terminated, all loans thereunder shall have been repaid in full, together with all accrued and unpaid interest thereon, all accrued and unpaid fees thereon shall have been paid in full, and all other amounts then owing pursuant to the Existing Credit Agreement shall have been repaid in full, and the Agent shall have received evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in this Section 6.01(h) have been satisfied at such time.
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Section 6.02 Each Credit Event . (a) At the time of each Credit Event, and after giving effect to the proposed extensions of credit: the Closing Date shall have occurred; the representations and warranties of the Borrowers contained in ARTICLE V and in the other Loan Documents and the representations and warranties of each Material Non-AGC Subsidiary contained or incorporated in the Guarantor Joinder given by such Material Non-AGC Subsidiary pursuant to Section 10.18 shall be true on and as of the date of such additional Loan with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Borrowers shall have performed and complied with all covenants and conditions hereof that are required to be performed or complied with as of the date of such Credit Event and each Material Non-AGC Subsidiary shall have complied with Section 10.18 and all other covenants and conditions that are required to be performed or complied with as of the date of such Loan and which are set forth in or incorporated into the Guarantor Joinder given by such Material Non-AGC Subsidiary pursuant to Section 10.18; no Event of Default or Potential Default shall have occurred and be continuing or shall exist; and the applicable Borrower shall have delivered to the Agent a duly executed and completed Loan Request.
(b) Notwithstanding anything to the contrary in this Agreement, Holdings, AGRI and AGRO shall not be permitted to incur any Loans hereunder or have Letters of Credit issued for their respective account unless and until both AGRI and AGRO have entered into the Guaranty Agreement substantially in the form of Exhibit 1.01(G)(2)-1 hereto by executing and delivering a counterpart thereof to the Agent.
Section 7.01 Affirmative Covenants . Subject to Section 7.04, each Borrower covenants and agrees (in each case solely on behalf of itself and its Subsidiaries) that, until payment in full of the Loans, and interest thereon, satisfaction of all of the other Obligations under the Loan Documents, expiration of all Letters of Credit and termination of the Commitments, each Borrower shall comply at all times with the following affirmative covenants:
(a) Preservation of Existence, Etc . Holdings shall, and shall cause each of its Material Subsidiaries to, maintain its legal existence as a corporation, limited partnership, or limited liability company and its license or qualification and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such license or qualification necessary, except as otherwise expressly permitted in Section 7.02(f) [Liquidations, Mergers, Etc.].
(b) Payment of Liabilities, Including Taxes, Etc . Holdings shall, and shall cause each of its Material Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments, and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges,
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are being contested in good faith and by appropriate and lawful proceedings diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, provided that Holdings will pay, and cause its Material Subsidiaries to pay, all such liabilities forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor.
(c) Maintenance of Insurance . Holdings shall, and shall cause each of its Material Subsidiaries to, insure its properties and assets against loss or damage by insurable hazards as such assets are commonly insured (including, to the extent applicable to the respective industry of Holdings or any Subsidiary thereof, fire, extended coverage, property damage, workers compensation, public liability, and business interruption insurance) and against other risks (including errors and omissions) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary.
(d) Maintenance of Properties and Leases . Holdings shall, and shall cause each of its Material Subsidiaries to, maintain in good repair, working order, and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and from time to time Holdings will make or cause to be made all appropriate repairs, renewals, or replacements thereof.
(e) Maintenance of Licenses, Etc . Holdings shall, and shall cause each of its Material Subsidiaries to, maintain in full force and effect all licenses, franchises, permits, rights, and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change.
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(f) Visitation Rights . Holdings shall, and shall cause each of its Material Subsidiaries to, permit any of the officers or authorized employees or representatives of the Agent or any Bank to visit and inspect any of its properties and to examine and make excerpts from its books and records and discuss its business affairs, finances and accounts with its officers, all in such detail and at such times and as often as the Agent or any such Bank may reasonably request and at the pro rata expense of the Banks (if requested by the Required Banks), the requesting Bank or, if the request has not come from any Bank, the Agent, provided that the Agent or such Bank shall provide the Company with reasonable notice prior to any visit or inspection, provided further no Bank shall be permitted more than one visit per one year period and provided further that during the continuation of any Event of Default, (i) the limitation on visits in the immediately preceding proviso shall not apply and (ii) all such visits and inspections by Agent and or Bank shall be at the expense of the Borrowers. In the event any Bank desires to conduct a visitation or inspection as contemplated hereby of Holdings or any Subsidiary, such Bank shall make a reasonable effort to conduct such visitation and inspection contemporaneously with any visitation or inspection to be performed by the Agent.
(g) Keeping of Records and Books of Account . Holdings shall, and shall cause each Subsidiary of Holdings to, maintain and keep proper books of record and account which enable Holdings and its Material Subsidiaries to issue financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction over Holdings or any Subsidiary of Holdings, and in which full, true and correct entries shall be made in all material respects of all its dealings and business and financial affairs.
(h) Plans and Benefit Arrangements . Holdings shall, and shall cause each other member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other Laws applicable to any Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, Holdings shall cause all of its Plans and all Plans maintained by any member of the ERISA Group, if any, to be funded in accordance with the minimum funding requirements of ERISA and, to the extent applicable shall make, and cause each member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans.
(i) Compliance With Laws . Holdings shall, and shall cause each of its Material Subsidiaries to, comply with all applicable Laws in all respects, provided that it shall not be deemed to be a violation of this Section 7.01(i) if any failure to comply with any Law would not result in fines, penalties, remediation costs, other similar liabilities or injunctive relief which in the aggregate would constitute a Material Adverse Change.
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(j) Use of Proceeds . Each Borrower will use the proceeds of the Loans and Letters of Credit only for the general corporate purposes and working capital needs of the such Borrower. No Borrower shall use the proceeds of the Loans or Letters of Credit for any purposes which contravenes any applicable Law or any provision hereof.
(k) Senior Debt Status . Holdings shall ensure that the Obligations of Holdings and any Material Subsidiary under this Agreement, a Guarantor Joinder, any Guaranty Agreement, and each of the other Loan Documents to which it is a party shall at all times rank at least pari passu in priority of payment with all other senior unsecured Indebtedness of Holdings or such Material Subsidiary (except to the extent of any Indebtedness which has a preferred status under any Law governing the bankruptcy, liquidation, insolvency, rehabilitation, reorganization, conservation, or like circumstance of Holdings or such Material Subsidiary) and no such other senior unsecured Indebtedness of Holdings or such Material Subsidiary shall at any time be governed by or subject to covenants, defaults, or other provisions that are more restrictive on Holdings or such Material Subsidiary than those set forth herein; and provided that if payment of any present or future Indebtedness of Holdings or any Material Subsidiary, except Indebtedness of Holdings or any Material Subsidiary to the extent secured by Permitted Liens, shall at any time hereafter become secured by any Lien on any property, Holdings or such Material Subsidiary shall secure payment of the Obligations with a Lien of like priority on the same or substantially similar property of the same or greater value (but, in any event, such Lien shall secure an amount of Obligations not to exceed the amount secured by the Lien given to secure payment of such other Indebtedness).
(l) Company Consolidated Assets . If at any time the Company Consolidated Assets is less than $1,200,000,000, within 15 days following such occurrence Holdings will enter into a Guaranty Agreement in form and substance satisfactory to the Agent pursuant to which Holdings will unconditionally and irrevocably guaranty all Obligations of the Company and the UK Borrower.
Section 7.02 Negative Covenants . Subject to Section 7.04, each Borrower covenants and agrees (in each case on behalf of itself and its Subsidiaries) that until payment in full of the Loans and interest thereon, satisfaction of all of the other Obligations hereunder, expiration of all Letters of Credit and termination of the Commitments, such Borrower shall comply with the following negative covenants:
(a) Indebtedness . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time create, incur, assume, or suffer to exist any Indebtedness, except:
(i) Indebtedness under the Loan Documents;
(ii) Existing Indebtedness as set forth on Schedule 7.02(a) (including any extensions or renewals thereof, provided there is no increase in the amount thereof or other significant change in the terms thereof unless otherwise specified on Schedule 7.02(a) ;
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(iii) Capitalized and operating leases;
(iv) Indebtedness secured by Purchase Money Security Interests;
(v) Indebtedness of Holdings or any Material Subsidiary to the Company or any other Material Subsidiary, or any of their respective Affiliates;
(vi) Any Interest Rate Hedge;
(vii) Any Guaranties permitted pursuant to Section 7.02(c);
(viii) Other Indebtedness of the Company which is non-recourse to the Company and in the nature (as to its purpose and non-recourse structure) of that existing Indebtedness in favor of Deutsche Bank shown on Exhibit 7.02(a) (Soft Capital);
(ix) Other Indebtedness of Material Subsidiaries which are regulated insurance companies consisting of letters of credit, trust accounts and similar collateral support required in the ordinary course of business either by statute or by rating agencies to support the insurance and/or reinsurance businesses of such Material Subsidiaries;
(x) All obligations of any Affiliate of Holdings under Guaranteed Investment Contracts issued by such Person in an aggregate amount of up to $1,000,000,000;
(xi) Other Indebtedness of Holdings, US Holdco, AGRI or AGRO from time to time so long as such Indebtedness is permitted at such time by the other provisions of this Agreement; and
(xii) Any obligations pursuant to the Contingent Capital Facility.
(b) Liens . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time create, incur, assume, or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired, or agree or become liable to do so, except Permitted Liens.
(c) Guaranties . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time, directly or indirectly, become or be liable in respect of any Guaranty, or assume, guaranty, become surety for, endorse or otherwise agree, become or remain directly or contingently liable upon or with respect to any obligation or liability of any other Person, except for Guaranties of that Indebtedness of Holdings and the Material Subsidiaries permitted hereunder and (the following, collectively, Insurance-Related Guaranties): (i) reinsurance and insurance agreements and policies and Guaranties which Holdings or any Material Subsidiary is authorized or licensed to provide in the ordinary course of its reinsurance or insurance business, (ii) Guaranties given by the Company to support credit derivative transactions entered into by AG Financial Products Inc., a Delaware corporation and Affiliate of the Company (Credit Derivative
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Guaranties), (iii) Guaranties given by the Company to support the obligations of any Subsidiary of Holdings pursuant to Guaranteed Investment Contracts issued by such Subsidiary; (iv) keepwell and similar agreements between and among various Subsidiaries of Holdings, the purpose and effect of which is to transfer the financial strength ratings of either of the Company or Assured Guaranty Re International Ltd. to its Subsidiaries, and (v) letters of credit, trust accounts or similar collateral support procured by Subsidiaries of Holdings which are required in the ordinary course of business either by statute or by rating agencies in order to support the respective reinsurance or insurance business of such Subsidiaries.
(d) Loans and Investments . Holdings shall not, and shall not permit any of its Material Subsidiaries to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) or limited liability company interest in, or any other investment or interest in, or make any capital contribution to, any other Person, or agree, become, or remain liable to do any of the foregoing, except:
(i) trade credit extended on usual and customary terms in the ordinary course of business;
(ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business;
(iii) Permitted Investments and Permitted Acquisitions; and
(iv) loans, advances and investments in Holdings and any Subsidiary of Holdings; provided that the Company may not make any loans, advances and investments in Holdings or any Subsidiary of Holdings which is not a Subsidiary of the Company (other than any such Subsidiary of Holdings which issues or proposes to issue Guaranteed Investment Contracts).
(e) Dividends and Related Distributions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of its shares of capital stock, partnership interests, or limited liability company interests or on account of the purchase, redemption, retirement, or acquisition of its shares of capital stock (or warrants, options or rights therefor), partnership interests or limited liability company interests, except (i) dividends or other distributions payable to Holdings or any Material Subsidiary, (ii) so long as there shall exist no Potential Default or Event of Default (both before and after giving effect to the payment thereof), dividends payable by Holdings or the Company and AGRI pursuant to clause (iv) below not in excess of an aggregate amount of $20,000,000 in any fiscal year of Holdings, (iii) so long as there shall exist no Potential Default or Event of Default (both before and after giving effect to the payment thereof), the repurchase of shares of Holdings by Holdings during any fiscal year not in excess of 3% of the Consolidated Net Worth of Holdings as of the end of the most recently ended fiscal year minus the amount of dividends paid pursuant to the clause (ii) or (iv) hereof during
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such fiscal year; provided that, in any event, the aggregate amount of share repurchases made pursuant to this clause (iii) shall not exceed an amount equal to 5% of the Consolidated Net Worth of Holdings as of the end of the most recently ended fiscal year and (iv) so long as there shall exist no Potential Default or Event of Default (both before and after giving effect to the payment thereof), the Company and AGRI may pay accrued but unpaid dividends on any preferred stock issued pursuant to the Contingent Capital Facility so long as the aggregate amount paid under clause (ii) herein and this clause (iv) does not exceed $20,000,000 in any fiscal year of Holdings.
(f) Liquidations, Mergers, Consolidations, Acquisitions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, dissolve, liquidate, or wind-up its affairs, or become a party to any amalgamation, merger or consolidation, or acquire by purchase, lease, or otherwise all or substantially all of the assets or capital stock of or other ownership interest in any other Person, provided that
(1) any Material Subsidiary may consolidate, amalgamate or merge into Holdings or any other Material Subsidiary provided that the Company may not merge, amalgamate or consolidate with Holdings, and the Company may only merge, amalgamate or consolidate with another Material Subsidiary if the Company is the surviving entity of such merger, amalgamation or consolidation; and
(2) Holdings or any Material Subsidiary may acquire, whether by purchase, by amalgamation or by merger, (A) all of the ownership interests of another Person or (B) substantially all of the assets of another Person or of a business or division of another Person (each a Permitted Acquisition), provided that each of the following requirements is met:
(i) if Holdings or any Material Subsidiary is acquiring the ownership interests in such Person and such Person meets the criteria for a Material Subsidiary set forth in the definition of such term at Section 1.01, such Person shall execute a Guarantor Joinder and join this Agreement as a Guarantor pursuant to Section 10.18 [Joinder of Guarantors] on or before the date of such Permitted Acquisition;
(ii) the board of directors or other equivalent governing body of such Person shall have approved such Permitted Acquisition and Holdings or the relevant Material Subsidiary shall have delivered to the Banks written evidence of such approval of the board of directors (or equivalent body) of such Person for such Permitted Acquisition;
(iii) the business acquired, or the business conducted by the Person whose ownership interests are being acquired, as applicable, shall be substantially the same as, or otherwise complementary or related to, one or more lines of business conducted by Holdings or any Material Subsidiary, or otherwise incidental to the business of a financial services
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company, and shall comply with Section 7.02(j) [Continuation of or Change in Business];
(iv) no Potential Default or Event of Default shall exist immediately prior to and after giving effect to such Permitted Acquisition; and
(v) upon the reasonable request of Agent, Holdings or the relevant Material Subsidiary shall deliver to the Agent at least five (5) Business Days before such Permitted Acquisition such information about such Person or its assets as Agent may reasonably require.
(g) Dispositions of Assets or Subsidiaries . Holdings shall not, and shall not permit any of its Material Subsidiaries to, sell, convey, assign, lease, abandon, or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including by sale, assignment, discount, or other disposition of accounts, contract rights, chattel paper, equipment, or general intangibles with or without recourse or of capital stock, shares of beneficial interest, partnership interests or limited liability company interests of a Subsidiary of Holdings), except:
(i) transactions involving the sale of inventory, if any, in the ordinary course of business;
(ii) any sale, transfer, or lease of assets, including any sale of investment assets, in the ordinary course of business which are no longer necessary or required in the conduct of Holdings or such Subsidiarys business or which are incidental to the management of Holdings or its Subsidiarys investment portfolio in a manner consistent with past practices;
(iii) any sale, transfer, lease or assignment of assets or novation of rights by any wholly owned Subsidiary of Holdings to Holdings or any Material Subsidiary;
(iv) any sale, transfer or lease of assets in the ordinary course of business which are replaced by reasonably equivalent substitute assets; or
(v) any sale, transfer or lease of assets, other than those specifically excepted pursuant to clauses (i) through (iv) above, provided that (A) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, and (B) the aggregate value of all assets so sold by (x) Holdings shall not exceed in any fiscal year fifteen percent (15%) of the consolidated tangible net worth of Holdings and its Subsidiaries or (y) any Material Subsidiary in any fiscal year shall not exceed a material portion of such Material Subsidiarys tangible net worth.
(h) Affiliate Transactions . Holdings shall not, and shall not permit any of its Material Subsidiaries to, enter into or carry out any transaction (including purchasing
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property or services from or selling property or services to any Affiliate of Holdings or any Material Subsidiary or other Person) unless such transaction is not otherwise prohibited by this Agreement, is entered into upon fair and reasonable arms-length terms and conditions which are fully disclosed to the Agent, and is in accordance with all applicable Law and accounting standards.
(i) Subsidiaries, Partnerships and Joint Ventures . Holdings shall not, and shall not permit any of its Material Subsidiaries to, own, acquire, or create directly or indirectly any Material Non-AGC Subsidiary other than Material Non-AGC Subsidiaries each of which has joined this Agreement as a Guarantor at any time after the Closing Date in accordance with Section 10.18 [Joinder of Guarantors]; provided , however, that the parties hereto acknowledge and agree that AGRI and AGRO shall not be required to become Guarantors and deliver all required documents pursuant to Section 10.18 unless Loans have been incurred by, or Letters of Credit issued for the account of, Holdings, AGRO and/or AGRI as contemplated in Section 6.02(b). Each of Holdings and its Material Subsidiaries shall not become or agree to become (1) a general or limited partner in any general or limited partnership, except that Holdings or any of its Material Subsidiaries may be general or limited partners in any other Material Subsidiary, (2) a member or manager of, or hold a limited liability company interest in, a limited liability company, except that Holdings or any of its Material Subsidiaries may be members or managers of, or hold limited liability company interests in, other Material Subsidiaries, or (3) a joint venturer or hold a joint venture interest in any joint venture except that Holdings or any of its Material Subsidiaries may be a party to a joint venture (A) that would not otherwise be a Material Subsidiary were it a Subsidiary of Holdings, and (B) as to which neither Holdings nor any Material Subsidiary is directly or indirectly jointly or severally liable for any act or omission of the joint venture beyond the amount of its investment therein.
(j) Continuation of or Change in Business . Holdings shall not, and shall not permit any of its Material Subsidiaries to, make a material change in the nature of its business as substantially conducted and operated by Holdings or such Subsidiary as of the Closing Date; provided , however , that (A) it shall not be a material change hereunder for Holdings or any of its Material Subsidiaries to alter the concentration percentages of products offered or business conducted as of the Closing Date, nor to enter into any business incidental to the offering of such products or the conduct of such business and it shall not be a material change hereunder for a Material Subsidiary to engage in any business incidental to the conduct of a financial services company and (B) the parties hereto hereby acknowledge and agree that the issuance of Guaranteed Investment Contracts is a business incidental to the conduct of a financial services company.
(k) Plans and Benefit Arrangements . Holdings shall not, and shall not permit any of its Material Subsidiaries to, engage in a Prohibited Transaction with any Plan, Benefit Arrangement, or Multiemployer Plan which, alone or in conjunction with any other circumstance or set of circumstances, would result in a material liability under ERISA or otherwise violate ERISA in a material respect.
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(l) Fiscal Year . Holdings shall not, and shall not permit any Subsidiary of Holdings to, change its fiscal year from the twelve-month period beginning January 1 and ending December 31 unless Holdings has (i) provided thirty (30) days prior written notice to the Agent and the Banks of the proposed change accompanied by an explanation in reasonable detail of the effect thereof on Holdings and its Subsidiaries in general and on Holdings or its Material Subsidiarys financial reporting and covenant compliance hereunder, and (ii) agreed to amend the covenants contained herein (including the financial covenants set forth below) if reasonably requested by the Agent and the Required Banks to maintain the continuity of the such covenants.
(m) Minimum Statutory Capital . The Company shall not at any time permit the Statutory Capital of the Company to be less than eighty percent (80%) of the Statutory Capital of the Company as of the most recent fiscal quarter of the Company prior to the Closing Date.
(n) Maximum Exposure Ratio (Company) . The Company shall not at any time permit the ratio of the Net Par of the Company to the Statutory Capital of the Company to exceed 150 to 1.0.
(o) Maximum Debt to Total Capitalization Ratio (Holdings) . Holdings shall maintain at all times a ratio of Consolidated Debt to Total Capitalization of not more than 0.30 to 1.0.
(p) Minimum Net Worth . Holdings shall not permit at any time its Consolidated Net Worth to be less than $1,200,000,000.
(q) Interest Coverage Ratio . Holdings will not permit the Consolidated Interest Coverage Ratio for any Test Period ending on the last day of a fiscal quarter of Holdings to be less than 2.5:1.0.
Section 7.03 Reporting Requirements . Subject to Section 7.04, each Borrower covenants and agrees (in each case solely on behalf of itself and its Subsidiaries) that until payment in full of the Loans and interest thereon, satisfaction of all other Obligations hereunder and under the other Loan Documents, expiration of all Letters of Credit and termination of the Commitments, Holdings will furnish or cause to be furnished to the Agent (which shall promptly furnish the same to each of the Banks):
(a) Quarterly Financial Statements . As soon as available and in any event within forty-five (45) calendar days after the end of each of the first three fiscal quarters in each fiscal year, the Form 10-Q of Holdings as filed with the SEC and two sets of financial statements of Holdings and the Company, each consisting of a consolidated balance sheet as of the end of such fiscal quarter and related consolidated statements of income, stockholders equity, and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified (subject to normal year-end audit adjustments) by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings or the Company, as the case may be, as having been prepared as the set of financial statements of Holdings in accordance with
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GAAP, consistently applied, and as to the set of financial statements of the Company as having been prepared in accordance with statutory accounting principles required by the State of Maryland.
(b) Annual Financial Statements . As soon as available and in any event within ninety (90) days after the end of each fiscal year of Holdings, the Form 10-K of Holdings as filed with the SEC and two sets of financial statements of Holdings and the Company, each consisting of a consolidated balance sheet as of the end of such fiscal year, and related consolidated statements of income, stockholders equity, and cash flows for the fiscal year then ended, all in reasonable detail with the set relating to Holdings being prepared in accordance with GAAP, consistently applied, and the set relating to the Company being prepared in accordance with statutory accounting principles required by the State of Maryland, and, in each case, certified by independent certified public accountants of nationally recognized standing satisfactory to the Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not indicate the occurrence or existence of any event, condition, or contingency which would materially impair the prospect of payment or performance of any covenant, agreement, or duty of Holdings and/or any Material Subsidiary under any of the Loan Documents.
(c) Certificate of the Company . Concurrently with the financial statements of Holdings and the Company furnished to the Agent and to the Banks pursuant to Section 7.03(a) [Quarterly Financial Statements] and Section 7.03(b) [Annual Financial Statements], a certificate (each a Compliance Certificate) of each of Holdings and the Company signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings or the Company, in the form of Exhibit 7.03(c), to the effect that, except as described pursuant to Section 7.03(d) [Notice of Default], (i) the representations and warranties of the Borrowers contained in ARTICLE V and in the other Loan Documents and the representations and warranties of each Material Non-AGC Subsidiary, if any, contained or incorporated in the Guarantor Joinder given by such Non-AGC Material Subsidiary pursuant to Section 10.18 are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and each Borrower has performed and complied with all covenants and conditions hereof and each Material Subsidiary, if any, shall have complied with all covenants and conditions of or incorporated into the Guarantor Joinder given by such Non-AGC Material Subsidiary pursuant to Section 10.18, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate, and (iii) containing calculations in sufficient detail to (A) demonstrate compliance as of the date of such financial statements with all applicable financial covenants contained in Section 7.02 [Negative Covenants] and (B) determine the Net Par of the Company and any material changes or loss experience in connection with Existing Reinsurance Coverage from the components thereof set forth on Schedule 5.01(h) .
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(d) Notice of Default . Promptly after any officer of a Borrower has learned of: (i) the occurrence of an Event of Default or Potential Default, a certificate signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of such Borrower setting forth the details of such Event of Default or Potential Default and the action which such Borrower proposes to take with respect thereto, or (ii) the creation or acquisition of a Material Subsidiary (or the existence of a Material Non-AGC Subsidiary other than AGRI or AGRO which has not executed and delivered a Guaranty Agreement to Agent for the benefit of the Banks), a certificate signed by the Chief Executive Officer, President, Chief Financial Officer, Treasurer, or Assistant Treasurer of Holdings setting forth the legal name, jurisdiction of organization, and such other relevant information reasonably requested by Agent.
(e) Off-Balance Sheet Financing . None of Holdings or any of its Material Subsidiaries shall engage in any off-balance sheet transaction ( i.e. , the liabilities in respect of which do not appear on the liability side of the balance sheet) providing the functional equivalent of material Indebtedness or otherwise providing for a material liability of Holdings or any of its Material Subsidiaries (collectively, Off-Balance Sheet Transactions), except the Contingent Capital Facility and such other Off-Balance Sheet Transactions as are fully disclosed to the Banks and Agent prior to their creation.
(f) Notice of Litigation . Promptly after the commencement thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other Person against Holdings or any Material Subsidiary of Holdings, which involve a claim or series of claims in excess of $20,000,000 or which, if adversely determined, would constitute a Material Adverse Change.
(g) Notice of Change in Insurer Financial Strength Rating . Within two (2) Business Days after Standard & Poors or Moodys announces a change in the Companys Insurer Financial Strength Rating, notice of such change. Holdings will deliver together with such notice a copy of any written notification which the Company received from the applicable rating agency regarding such change of its Insurer Financial Strength Rating.
(h) Sale of Assets . At least fifteen (15) calendar days prior thereto, notice with respect to any proposed sale or transfer of material assets pursuant to Section 7.02(g)(v).
(i) Budgets, Other Reports and Information . Promptly upon their becoming available to Holdings or the Company, such reports and information as any of the Banks may from time to time reasonably request. Each Borrower shall also notify the Banks and Agent promptly of the enactment, enforcement, or adoption of any Law which may result in a Material Adverse Change with respect to such Borrower.
Section 7.04 Bermuda Law Event . To the extent that the making by Holdings, the Company or any Guarantor of any covenant set forth in Sections 7.01, 7.02 or 7.03 or in any of the Loan Documents is for such Person not permitted by, or is unlawful under or is in violation of, any Bermuda Law pertaining to fetters on statutory powers, then such covenant
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shall be deemed not made by nor applicable to such Person, but if such Person shall take or fail to take any action which would have breached such covenant had the same been applicable to such Person, the action or failure to take action shall constitute a Bermuda Law Event.
Section 8.01 Events of Default . An Event of Default shall mean the occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary, or effected by operation of Law):
(a) Payments Under Loan Documents . Any Borrower shall fail to pay (i) any principal of any Loan (including scheduled installments or mandatory prepayments, if any, or the payment due at maturity) when such principal is due hereunder or any reimbursement obligation in respect of any Letter of Credit when due hereunder or (ii) any interest on any Loan or any other amount owing hereunder or under the other Loan Documents within five (5) Business Days after such interest or other amount becomes due in accordance with the terms hereof or thereof;
(b) Breach of Warranty . Any representation or warranty made at any time by any of Holdings and the Material Subsidiaries herein or by any of Holdings and the Material Subsidiaries in any other Loan Document, or in any certificate, other instrument, or statement furnished by Holdings or a Material Subsidiary pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or furnished;
(c) Breach of Negative Covenants or Visitation Rights . Holdings or any Material Subsidiary shall default in the observance or performance of any covenant contained in Section 7.02 [Negative Covenants] or Section 7.01(l) or shall default for a period of ten (10) days or more in the observance or performance of any covenant contained in Section 7.01(f);
(d) Breach of Other Covenants . Holdings or any Material Subsidiary shall default in the observance or performance of any other covenant, condition, or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) days (such grace period to be applicable only in the event such default can be remedied by corrective action);
(e) Defaults in Other Agreements or Indebtedness . A default or event of default shall occur at any time under the terms of any other agreement involving borrowed money or the extension of credit or any other Indebtedness under which Holdings or any Material Subsidiary of Holdings may be obligated as a borrower or guarantor in excess of $20,000,000 in the aggregate, and either (1) such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any Indebtedness when due (whether at stated maturity, by acceleration or otherwise) or (2) such breach or default causes (or permits
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the holder or holders of such Indebtedness to cause) the acceleration of any Indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend;
(f) Final Judgments or Orders . Any final judgments or orders for the payment of money which results in an uninsured liability to pay in excess of $20,000,000 in the aggregate shall be entered against Holdings or any Material Subsidiary by a court having jurisdiction in the premises, which judgment is not discharged, vacated, bonded, or stayed pending appeal within a period of forty-five (45) days from the date of entry;
(g) Loan Document Unenforceable . Any of the Loan Documents shall cease to be legal, valid, and binding agreements enforceable against the party executing the same or such partys successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or become or be declared stayed, ineffective, or inoperative or shall cease to give or provide the respective Liens or security interests intended to be created thereby; provided , however , if any of the foregoing is a result of an involuntary proceeding of the type described in Section 8.01(m), such proceeding has not been contested by the affected party or has not been dismissed after the passage of more than sixty (60) days;
(h) Losses; Proceedings Against Assets . Any of Holdings or the Companys assets having an aggregate value (reasonably determined) in excess of five (5%) of the tangible net worth of Holdings and its Subsidiaries or the Company and the Subsidiaries, as the case may be, or any of its Material Subsidiaries assets having an aggregate value (reasonably determined) in excess of a material amount of such Material Subsidiarys tangible net worth, are attached, seized, levied upon or subjected to a writ or distress warrant; or such come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within sixty (60) days thereafter;
(i) Notice of Lien or Assessment . A notice of Lien or assessment in excess of $20,000,000 which is not a Permitted Lien is filed of record with respect to all or any part of the Holdings or any of its Material Subsidiaries assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or other governmental agency, including the PBGC, or any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within thirty (30) days after the same becomes payable;
(j) Insolvency . Holdings or any Material Subsidiary of Holdings ceases to be solvent or admits in writing its inability to pay its debts as they mature;
(k) Events Relating to Plans and Benefit Arrangements . Any of the following occurs: (i) any Reportable Event, which the Agent determines in good faith constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan, or a termination
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notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; and, in the case of the occurrence of (i), (ii), (iii) or (iv) above, the Agent determines in good faith that the amount of Holdings liability is likely to exceed 10% of its Consolidated Net Worth; (v) Holdings or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) Holdings or any other member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) Holdings or any other member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) Holdings or any other member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable Law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements and, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix), the Agent determines in good faith that any such occurrence would be reasonably likely to materially and adversely affect the total enterprise represented by Holdings and the other members of the ERISA Group;
(l) Change of Control . (i) Any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Securities Exchange Act of 1934, as amended), other than ACE or an Affiliate of ACE, shall have acquired beneficial ownership of (within the meaning of Rule 13d-3 promulgated by the SEC under said Act) 30% or more of the voting capital stock of Holdings; or (ii) within a period of twelve (12) consecutive calendar months, individuals who were directors of Holdings on the first day of such period and individuals approved by the existing board of directors of Holdings shall cease to constitute a majority of the board of directors of Holdings; or (iii) the Company, AGRI or AGRO shall cease to be a wholly-owned Subsidiary of Holdings; provided , however, any issuance of preferred stock in connection with the Contingent Capital Facility shall not be a violation of this Section 8.01(l) and shall not be deemed an Event of Default; or (iv) the UK Borrower shall cease to be a subsidiary of the Company at any time when any Loans are outstanding to the UK Borrower or, Letters of Credit have been issued for the account of the UK Borrower;
(m) Involuntary Proceedings . A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of Holdings or any Material Subsidiary of Holdings in an involuntary case under any applicable bankruptcy, insolvency, reorganization, or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, or conservator (or similar official) of Holdings or any Material Subsidiary of Holdings or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding;
(n) Voluntary Proceedings . Holdings or any Material Subsidiary of Holdings shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization,
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or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or conservator (or other similar official) of itself or for any substantial part of its property or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing; or
(o) Bermuda Law Event . A Bermuda Law Event shall occur and be continuing, provided that any grace period provided under the provisions of this Section 8 or otherwise under this Agreement or under the other Loan Documents applicable to an equivalent breach of covenant under Section 7 shall apply to this Section 8.01(o).
Section 8.02 Consequences of Event of Default . (a) Events of Default Other Than Bankruptcy, Insolvency or Reorganization Proceedings . If an Event of Default or Potential Default specified under Section 8.01(a) through Section 8.01(l) or Section 8.01(o) shall occur and be continuing, the Banks, the Issuing Banks and the Agent shall be under no further obligation to make Revolving Credit Loans or Bid Loans or issue Letters of Credit, as the case may be, and if any such Event of Default shall occur and be continuing, the Agent may, and upon the request of the Required Banks, shall by written notice to the Borrowers, take any of the following actions: (i) terminate the Commitments and thereupon the Commitments shall be terminated and of no further force or effect, (ii) terminate any Letter of Credit which may be terminated in accordance with its terms, (iii) declare the unpaid principal amount of the Revolving Credit Notes and Bid Notes then outstanding and all interest accrued thereon, any unpaid fees, and all other Indebtedness of the Borrowers to the Banks or the Issuing Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived or (iv) require the respective Borrowers to cash collateralize all Letters of Credit issued to the account of such Borrower; and
(b) Bankruptcy, Insolvency or Reorganization Proceedings . If an Event of Default specified under Section 8.01(m) [Involuntary Proceedings] or Section 8.01(n) [Voluntary Proceedings] shall occur, the Commitments shall automatically terminate and be of no further force and effect, the Banks and the Issuing Banks shall be under no further obligations to make Revolving Credit Loans, Bid Loans, or issue Letters of Credit hereunder and the unpaid principal amount of the Loans then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrowers to the Banks or the Issuing Bank hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and
(c) Set-off . If an Event of Default shall occur and be continuing, any Bank or any Issuing Bank to whom any Obligation is owed by any Borrower or any Material Subsidiary hereunder or under any other Loan Document or any participant of such Bank or Issuing Bank which has agreed in writing to be bound by the provisions of Section 9.13 [Equalization of Banks] and any branch, Subsidiary, or Affiliate of such Bank or participant anywhere shall have the right, in addition to all other rights and remedies available to it, without notice to any
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Borrower or any Material Subsidiary, to set-off against and apply to the then unpaid balance of all the Loans and all other Obligations hereunder or under any other Loan Document any debt owing to, and any other funds held in any manner for the account of, such Borrower or such Material Subsidiary by such Bank or participant or by such branch, Subsidiary or Affiliate, including all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by such Borrower or such Material Subsidiary for its own account (but not including funds of others held in custodian or trust accounts maintained by any Borrower or any of its Material Subsidiaries) with such Bank or participant or such branch, Subsidiary, or Affiliate. Such right shall exist whether or not any Bank or the Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of such Borrower or such Material Subsidiary is or are matured or unmatured and regardless of the existence or adequacy of any Guaranty or any other security, right, or remedy available to any Bank or the Agent; and
(d) Suits, Actions, Proceedings . If an Event of Default shall occur and be continuing, and whether or not the Agent shall have accelerated the maturity of Committed Loans pursuant to any of the foregoing provisions of this Section 8.02, the Agent or any Bank or Issuing Bank, upon the request or consent of the Required Banks, may proceed to protect and enforce the Agents or any one or more Banks or Issuing Banks rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the other Loan Documents, including as permitted by applicable Law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Agent, such Bank or such Issuing Bank; and
(e) Application of Proceeds . From and after the date on which the Agent has taken any action pursuant to this Section 8.02 and until all Obligations have been paid in full, any and all proceeds received by the Agent from the exercise of any remedy by the Agent, shall be applied as follows:
(A) first, to reimburse the Agent, the Banks and the Issuing Banks for out-of-pocket costs, expenses and disbursements, including reasonable attorneys fees and legal expenses, incurred by the Agent, the Banks or the Issuing Banks in connection with collection of any Obligations under any of the Loan Documents;
(B) second, to the repayment of all Indebtedness then due and unpaid of any Borrower or any Material Subsidiary to the Banks or the Issuing Banks incurred under this Agreement or any of the other Loan Documents, with such repayments to be applied in the following order: (i) interest, (ii) principal, (iii) fees and (iv) expenses and other amounts owing to the Banks; and
(C) the balance, if any, as required by Law; and
(f) Other Rights and Remedies . In addition to all of the rights and remedies contained in this Agreement or in any of the other Loan Documents, the Agent shall have all of the rights and remedies under applicable Law, all of which rights and remedies shall be
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cumulative and non-exclusive, to the extent permitted by Law. The Agent may, and upon the request of the Required Banks shall, exercise all post-default rights granted to the Agent, the Banks and the Issuing Banks under the Loan Documents or applicable Law.
Section 8.03 Right of Competitive Bid Loan Banks . If any Event of Default shall occur and be continuing, the Banks which have any Bid Loans then outstanding to the Borrowers (the Bid Loan Banks) shall not be entitled to accelerate payment of the Bid Loans or to exercise any right or remedy related to the collection of the Bid Loans until the Commitments shall be terminated hereunder pursuant to Section 8.02. Upon such a termination of the Commitments: (i) references to Revolving Credit Loans in Section 8.02 shall be deemed to apply also to the Bid Loans and the Bid Loan Banks shall be entitled to all enforcement rights given to a holder of a Revolving Credit Loan in Section 8.02, and (ii) the definition of Required Banks shall be changed as provided in Section 1.01 so that each Bank shall have voting rights hereunder in proportion to its share of the total Loans outstanding.
ARTICLE IX
THE AGENT
Section 9.01 Appointment . Each Bank hereby irrevocably designates, appoints and authorizes ABN AMRO Bank N.V. to act as Agent for such Bank under this Agreement and to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. ABN AMRO Bank N.V. agrees to act as the Agent on behalf of the Banks to the extent provided in this Agreement.
Section 9.02 Delegation of Duties . The Agent may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agent) and, subject to Section 9.05 [Reimbursement of Agent by Borrower, Etc.] and Section 9.06, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained.
Section 9.03 Nature of Duties; Independent Credit Investigation . The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be construed as to impose upon the Agent any obligations in respect of this Agreement except as expressly set forth herein. Without limiting the generality of the foregoing, the use of the term agent in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of
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any applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. Each Bank expressly acknowledges (i) that the Agent has not made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of any of Holdings or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of each of Holdings and its Subsidiaries in connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter.
Section 9.04 Actions in Discretion of Agent; Instructions From the Banks . The Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Agents rights, powers or discretion herein, provided that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 9.06 [Exculpatory Provisions, Etc.]. Subject to the provisions of Section 9.06, no Bank shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or in the absence of such instructions, in the absolute discretion of the Agent.
Section 9.05 Reimbursement and Indemnification of Agent by the Borrowers . Each Borrower (other than AGRI and AGRO) unconditionally, jointly and severally, agrees to pay or reimburse the Agent and hold the Agent harmless against (a) liability for the payment of all reasonable out-of-pocket costs, expenses, and disbursements (including fees and expenses of counsel) incurred by the Agent (i) in connection with the development, negotiation, preparation, printing, execution, administration, syndication, interpretation and performance of this Agreement and the other Loan Documents, (ii) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (iii) in connection with the enforcement of this Agreement or any other Loan Document or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (iv) in any workout or restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that the Borrowers shall not be liable for any portion of such
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liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Agents gross negligence or willful misconduct, or if the Borrowers were not given notice of the subject claim and the opportunity to participate in the defense thereof, at their expense (except that the Borrowers shall remain liable to the extent such failure to give notice does not result in a loss to the Borrowers), or if the same results from a compromise or settlement agreement entered into without the consent of the Borrowers, which shall not be unreasonably withheld.
Section 9.06 Exculpatory Provisions; Limitation of Liability . Neither the Agent nor any of its directors, officers, employees, agents, attorneys or Affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including pursuant to any Loan Document, unless caused by its or their own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection with this Agreement or any other Loan Documents, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Borrowers or any of their Subsidiaries, or the financial condition of the Borrowers or any of their Subsidiaries, or the existence or possible existence of any Event of Default or Potential Default. No claim may be made by the Borrowers or any of their Subsidiaries, any Bank, the Agent or any of their respective Subsidiaries against the Agent, any Bank or any of their respective directors, officers, employees, agents, attorneys or Affiliates, or any of them, for any special, indirect or consequential damages or, to the fullest extent permitted by Law, for any punitive damages in respect of any claim or cause of action (whether based on contract, tort, statutory liability, or any other ground) based on, arising out of or related to any Loan Document or the transactions contemplated hereby or any act, omission or event occurring in connection therewith, including the negotiation, documentation, administration or collection of the Loans, and the Borrowers (for themselves and on behalf of each of their Subsidiaries), the Agent and each Bank hereby waive, release and agree never to sue upon any claim for any such damages, whether such claim now exists or hereafter arises and whether or not it is now known or suspected to exist in their favor. Each Bank agrees that, except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder or given to the Agent for the account of or with copies for the Banks, the Agent and each of its directors, officers, employees, agents, attorneys or Affiliates shall not have any duty or responsibility to provide any Bank with an credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrowers or any of their Subsidiaries which may come into the possession of the Agent or any of its directors, officers, employees, agents, attorneys or Affiliates.
Section 9.07 Reimbursement and Indemnification of Agent and Issuing Banks by Banks . Each Bank agrees to reimburse and indemnify the Agent and the Issuing Banks (to the extent not reimbursed by the Borrowers and without limiting the Obligation of the Borrowers to do so) in proportion to its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements, including attorneys fees and disbursements (including the allocated costs of staff counsel), and costs of appraisers and environmental consultants, of any kind or nature whatsoever which may be
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imposed on, incurred by or asserted against the Agent or the Issuing Banks, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent or Issuing Banks hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Agents or such Issuing Banks gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense (except that such Bank shall remain liable to the extent such failure to give notice does not result in a loss to the Bank), or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank, which shall not be unreasonably withheld. In addition, each Bank agrees promptly upon demand to reimburse the Agent (to the extent not reimbursed by the Borrowers and without limiting the Obligation of the Borrowers to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrowers to the Agent in connection with the Agents periodic audit of the Companys or any of its respective Material Subsidiaries books, records and business properties.
Section 9.08 Reliance by Agent and Issuing Banks . The Agent and Issuing Banks shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon the advice and opinions of counsel and other professional advisers selected by the Agent or the Issuing Banks. The Agent and Issuing Banks shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action.
Section 9.09 Notice of Default . The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless the Agent has received written notice from a Bank or a Borrower referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a notice of default.
Section 9.10 Notices . The Agent shall promptly send to each Bank a copy of all notices received from any Borrower pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Agent shall promptly notify the Borrowers and the other Banks of each change in the Base Rate and the effective date thereof.
Section 9.11 Banks in Their Individual Capacities; Agents in Its Individual Capacity . With respect to its Revolving Credit Commitment, the Revolving Credit Loans and any Bid Loans made by it and any other rights and powers given to it as a Bank hereunder or under any of the other Loan Documents, the Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Agent, and the term Bank and Banks shall, unless the context otherwise indicates, include the Agent in its individual capacity. ABN AMRO Bank and its Affiliates and each of the Banks and their respective Affiliates may, without liability to account, except as prohibited herein, make loans to, issue letters of credit for the account of, acquire equity interests in, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking,
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trust, financial advisory, underwriting or other business with, Holdings and its Subsidiaries and their Affiliates, in the case of the Agent, as though it were not acting as Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder, in each case without notice to or consent of the other Banks. The Banks acknowledge that, pursuant to such activities, the Agent or its Affiliates may (i) receive information regarding Holdings and any of its Subsidiaries or Affiliates (including information that may be subject to confidentiality obligations in favor of Holdings or any of its Subsidiaries or Affiliates) and acknowledge that the Agent shall be under no obligation to provide such information to them, and (ii) accept fees and other consideration from Holdings and any of its Subsidiaries for services in connection with this Agreement and otherwise without having to account for the same to the Banks.
Section 9.12 Holders of Notes . The Agent may deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor.
Section 9.13 Equalization of Banks . The Banks and the holders of any participations in any Commitments, Loans or Letters of Credit or other rights or obligations of a Bank hereunder agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any Obligation hereunder or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or bankers lien, by counterclaim, or by any other non- pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts will be shared ratably among the Banks and such holders in proportion to their interests in payments on the Loans and the Letters of Credit, except as otherwise provided in Section 3.04(c) [Agents and Banks Rights], Section 4.04(b) [Replacement of a Bank] or Section 4.06 [Additional Compensation in Certain Circumstances]. The Banks or any such holder receiving any such amount shall purchase for cash from each of the other Banks an interest in such Banks Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount of the Loans, provided that if all or any portion of such excess amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase.
Section 9.14 Successor Agent . The Agent (i) may resign as Agent or (ii) shall resign if such resignation is required by Section 4.04(b) [Replacement of a Bank], in either case of (i) or (ii) by giving not less than thirty (30) days prior written notice to the Borrowers. If the Agent shall resign under this Agreement, then either (a) the Required Banks shall appoint from among the Banks a successor agent for the Banks, subject to the consent of the Borrowers, such consent not to be unreasonably withheld, or (b) if a successor agent shall not be so appointed and approved within the thirty (30) day period following the Agents notice to the Banks of its resignation, then the Agent shall appoint, with the consent of the Borrowers, such consent not to be unreasonably withheld, a successor agent who shall serve as Agent until such time as the Required Banks appoint and the Borrowers consent to the appointment of a successor agent.
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Upon its appointment pursuant to either clause (a) or (b) above, such successor agent shall succeed to the rights, powers and duties of the Agent, and the term Agent shall mean such successor agent, effective upon its appointment, and the former Agents rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of any Agent hereunder, the provisions of this ARTICLE IX shall inure to the benefit of such former Agent and such former Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was an Agent under this Agreement.
Section 9.15 Agents Fee . The Borrowers shall pay to the Agent a nonrefundable fee (the Agents Fee) for Agents services hereunder under the terms of a letter (the Agents Letter) between the Borrowers and Agent, as amended from time to time.
Section 9.16 Availability of Funds . The Agent may assume that each Bank has made or will make the proceeds of a Loan available to the Agent unless the Agent shall have been notified by such Bank on or before the later of (1) the close of Business on the Business Day preceding the Borrowing Date with respect to such Loan or (2) two hours before the time on which the Agent actually funds the proceeds of such Loan to the respective Borrower (whether using its own funds pursuant to this Section 9.16 or using proceeds deposited with the Agent by the Banks and whether such funding occurs before or after the time on which Banks are required to deposit the proceeds of such Loan with the Agent). The Agent may, in reliance upon such assumption (but shall not be required to), make available to the respective Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand from the Borrowers) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrowers and ending on the date the Agent recovers such amount, at a rate per annum equal to (i) the Federal Funds Effective Rate during the first three (3) days after such interest shall begin to accrue and (ii) the applicable interest rate in respect of such Loan after the end of such three-day period.
Section 9.17 Calculations . In the absence of gross negligence or willful misconduct, the Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Agent, the Borrowers and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate.
Section 9.18 Beneficiaries . Except as expressly provided herein, the provisions of this ARTICLE IX are solely for the benefit of the Agent and the Banks, and Holdings and its Subsidiaries shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Company or any of its Subsidiaries.
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ARTICLE X
MISCELLANEOUS
Section 10.01 Modifications, Amendments, or Waivers . With the written consent of the Required Banks, the Agent, acting on behalf of all the Banks, and the Borrowers may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Borrowers hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the Obligations hereunder or thereunder. Any such agreement, waiver or consent made with such written consent shall be effective to bind all the Banks and the Borrowers; provided that, without the written consent of all the Banks, no such agreement, waiver, or consent may be made which will:
(a) Increase of Commitment ; Extension of Expiration Date . Increase the amount of the Revolving Credit Commitment of any Bank hereunder or extend the Expiration Date;
(b) Extension of Payment ; Reduction of Principal Interest or Fees; Modification of Terms of Payment . Whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan (excluding the due date of any mandatory prepayment of a Loan or any mandatory Commitment reduction in connection with such a mandatory prepayment hereunder except for mandatory reductions of the Commitments on the Expiration Date), the Facility Fee, the Letter of Credit Fee or any other fee payable to any Bank, or reduce the principal amount of or the rate of interest borne by any Loan or reduce the Facility Fee, the Letter of Credit Fee or any other fee payable to any Bank, or otherwise affect the terms of payment of the principal of or interest of any Loan, the Facility Fee or any other fee payable to any Bank;
(c) Release of Collateral or Guarantor . Release any Guarantor from its Obligations under any Guaranty Agreement or any other security for any of the Obligations except as otherwise may be permitted by the terms hereof or of the instrument establishing the Lien; or
(d) Miscellaneous . Amend Section 4.02 [Pro Rata Treatment of Banks], Section 9.06 [Exculpatory Provisions, Etc.] or Section 9.13 [Equalization of Banks] or this Section 10.01, alter any provision regarding the pro rata treatment of the Banks, change the definition of Required Banks, or change any requirement providing for the Banks or the Required Banks to authorize the taking of any action hereunder;
provided , further , that (i) no agreement, waiver or consent which would modify the interests, rights or obligations of the Agent in its capacity as Agent shall be effective without the written consent of the Agent and (ii) no agreement, waiver or consent which would modify the interests, rights or obligations of any Issuing Bank in its capacity as an Issuing Bank shall be effective without the written consent of such Issuing Bank.
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Section 10.02 No Implied Waivers; Cumulative Remedies; Writing Required . No course of dealing and no delay or failure of the Agent or any Bank in exercising any right, power, remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Agent and the Banks under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing.
Section 10.03 Reimbursement and Indemnification of Banks by the Borrowers; Taxes . Each Borrower jointly and severally agrees unconditionally upon demand to pay or reimburse to each Bank (other than the Agent, as to which the Borrowers Obligations are set forth in Section 9.05 [Reimbursement of Agent By Borrower, Etc.]) and to save such Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including fees and expenses of counsel for each Bank except with respect to (a) and (b) below), incurred by such Bank (a) in connection with the review, execution, delivery, administration, or interpretation of this Agreement, and other instruments and documents to be delivered hereunder, (b) relating to any amendments, waivers, or consents pursuant to the provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout or restructuring or in connection with the protection, preservation, exercise, or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection, or bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Bank (including such Banks officers, directors and employees), in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents, use of proceeds of the Loans or the transactions contemplated by the Loan Documents or any action taken or omitted by such Bank (including such Banks officers, directors and employees) hereunder or thereunder, provided that the Borrowers shall not be liable to a Bank (including such Banks officers, directors and employees) for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements (A) if the same results from such Banks or its officers, directors or employees gross negligence or willful misconduct, or (B) if the Borrowers were not given notice of the subject claim and the opportunity to participate in the defense thereof, at their expense (except that the Borrowers shall remain liable to the extent such failure to give notice does not result in a loss to the Borrowers), or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrowers, which shall not be unreasonably withheld. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrowers on a joint and several basis hereunder by considering the usage of one law firm to represent the Banks and the Agent if appropriate under the circumstances. The Borrowers, jointly and severally, agree
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unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Loan Document, and the Borrowers, jointly and severally, agree unconditionally to save the Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions.
Section 10.04 Holidays . Whenever payment of a Loan to be made or taken hereunder shall be due on a day which is not a Business Day such payment shall be due on the next Business Day (except as provided in the definition of Committed Loan Interest Period with respect to Interest Periods under the LIBOR Option) and such extension of time shall be included in computing interest and fees, except that the Loans shall be due on the Business Day preceding the Expiration Date if the Expiration Date is not a Business Day. Whenever any payment or action to be made or taken hereunder (other than payment of the Loans) shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day, and such extension of time shall not be included in computing interest or fees, if any, in connection with such payment or action.
Section 10.05 Funding by Branch, Subsidiary, or Affiliate . (a) Notional Funding . Each Bank shall have the right from time to time, without notice to the Borrowers, to deem any branch, Subsidiary, or Affiliate (which for the purposes of this Section 10.05 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained, or funded any Loan to which the LIBOR Option applies at any time, provided that immediately following (on the assumption that a payment was then due from the Borrowers to such other office), and as a result of such change, the Borrowers will not be under any greater financial obligation pursuant to Section 4.06 [Additional Compensation in Certain Circumstances] than they would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to such Banks actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank.
(b) Actual Funding . Each Bank shall have the right from time to time to make or maintain any Loan by arranging for a branch, Subsidiary or Affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 10.05(b). If any Bank causes a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Bank, but in no event shall any Banks use of such a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, Subsidiary or Affiliate to incur any cost or expenses payable by any Borrower hereunder or require any Borrower to pay any other compensation to any Bank (including any expenses incurred or payable pursuant to Section 4.06 [Additional Compensation in Certain Circumstances]) which would otherwise not be incurred.
Section 10.06 Notices . Any notice, request, demand, direction, or other communication (for purposes of this Section 10.06 only, a Notice) to be given to or made upon
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any party hereto under any provision of this Agreement shall be given or made by telephone or in writing (which includes means of electronic transmission ( i.e. , e-mail) or facsimile transmission in accordance with this Section 10.06. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on Schedule 1.01(B) hereof or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 10.06. Any Notice shall be effective:
(A) In the case of hand-delivery, when delivered;
(B) If given by mail, four days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested;
(C) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand delivery, a facsimile or electronic transmission, a Website Posting or overnight courier delivery of a confirmatory notice (received at or before noon on such next Business Day);
(D) In the case of a facsimile transmission, when sent to the applicable partys facsimile machines telephone number if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine;
(E) In the case of electronic transmission, when actually received;
(F) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such web site) by another means set forth in this Section 10.06; and
(G) If given by any other means (including by overnight courier), when actually received.
Any Bank giving a Notice to any Borrower or any Material Subsidiary shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Banks of its receipt of such Notice.
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Section 10.07 Severability . The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction.
Section 10.08 Governing Law . This Agreement and any other documents delivered herewith and the rights and obligations of the parties hereto and thereto shall be for all purposes governed by, and construed and enforced in accordance with the internal Laws of the State of New York, without giving effect to its conflicts of law principles.
Section 10.09 Prior Understanding . This Agreement and the other Loan Documents supersede all prior understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments.
Section 10.10 Duration; Survival . All representations and warranties of the Borrowers and the Material Subsidiaries contained herein or made in connection herewith shall survive the making of Loans and the issuance of Letters of Credit and shall not be waived by the execution and delivery of this Agreement, any investigation by the Agent or the Banks, the making of Loans, the issuance of Letters of Credit, or payment in full of the Loans. All covenants and agreements of the Borrowers contained in Section 7.01 [Affirmative Covenants], Section 7.02 [Negative Covenants] and Section 7.03 [Reporting Requirements], and all comparable covenants and agreements contained in or incorporated into the Guarantor Joinder given by each Material Non-AGC Subsidiary pursuant to Section 10.18, shall continue in full force and effect from and after the date hereof so long as the Borrowers may borrow hereunder and until termination of the Commitments, expiration of all Letters of Credit and payment in full of the Loans. All covenants and agreements of the Borrowers contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in ARTICLE IV [Payments] and Section 9.05 [Reimbursement of Agent by Borrowers, Etc.], Section 9.07 [Reimbursement of Agent by Banks, Etc.] and Section 10.03 [Reimbursement of Banks by Borrowers; Etc.], and all comparable covenants and agreements contained in or incorporated into the Guarantor Joinder given by each Material Non-AGC Subsidiary pursuant to Section 10.18, shall survive payment in full of the Loans, expiration of all Letters of Credit and termination of the Commitments.
Section 10.11 Successors and Assigns . (a) This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agent, the Borrowers and, when party to this Agreement, each of the Material Subsidiaries, and their respective successors and assigns, except that no Borrowers or any Material Subsidiary may assign or transfer any of its rights or Obligations or any interest herein or in any other Loan Document, except as may be permitted by the terms hereof or otherwise approved by each Bank. Each Bank may, at its own cost, make assignments of or sell participations in all or any part of its Revolving Credit Commitments and the Loans made by it to one or more banks or other entities, subject to the consent of the Borrowers, the Agent and each Issuing Bank with respect to any assignee, such consent not to be unreasonably withheld, provided that (1) no consent of the Borrowers shall be required (A) if an
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Event of Default exists and is continuing, or (B) in the case of an assignment by a Bank to an Affiliate of such Bank, (2) any assignment by a Bank to a Person other than an Affiliate of such Bank may not be made in amounts less than the lesser of $5,000,000 or the amount of the assigning Banks Commitment, (3) a Bank may assign an interest or sell a participation in less than 100% of its Commitments, Revolving Credit Loans, or Bid Loans, provided that such Bank sells an equal percentage interest or participation in each of its Revolving Credit Commitment and Revolving Credit Loans, (4) a Bank may assign a Bid Loan to another Person without assigning any portion of its Commitment to such Person and (5) no consent of the Agent or any Issuing Bank shall be required in the case of an assignment by a Bank to an Affiliate of such Bank or to another Bank already party to this Agreement. In the case of an assignment, upon receipt by the Agent of the Assignment and Assumption Agreement, the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Commitments shall be adjusted accordingly, and upon surrender of any Revolving Credit Note subject to such assignment, the applicable Borrower shall execute and deliver a new Revolving Credit Note to the assignee, if such assignee requests such a Note in an amount equal to the amount of the Revolving Credit Commitment assumed by it and a new Revolving Credit Note to the assigning Bank, if the assigning Bank requests such a Note with respect to the Commitment it has retained. The assigning Bank shall surrender its Bid Note and the respective Borrower shall execute and deliver to the assignee (and to the assignor if the assignor is assigning less than all of its Revolving Credit Commitments and Bid Loans) a new Bid Note in the form of Exhibit 1.01(B) as appropriate. Any Bank which assigns any or all of its Commitment or Loans to a Person other than an Affiliate of such Bank shall pay to the Agent a service fee in the amount of $3,500 for each assignment. In the case of a participation, the participant shall only have the rights specified in Section 8.02 [Set-off] (the participants rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights except with respect to changes of the type referenced in Section 10.01(a) [Increase of Commitment, Etc.], Section 10.01(b) [Extension of Payment, Etc.], or Section 10.01(c) [Release of Collateral or Guarantor]), all of such Banks obligations under this Agreement or any other Loan Document shall remain unchanged, and all amounts payable by any Borrower or any Material Subsidiary hereunder or thereunder shall be determined as if such Bank had not sold such participation.
(b) Any assignee or participant which is not incorporated under the Laws of the United States of America or a state thereof shall deliver to the Borrowers and the Agent the form of certificate described in Section 10.17 [Tax Withholding Clause] relating to federal income tax withholding. Each Bank may furnish any publicly available information concerning the Borrowers or its Subsidiaries and any other information concerning the Borrowers or its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants), provided that such assignees and participants agree to be bound by the provisions of Section 10.12 [Confidentiality].
(c) Notwithstanding any other provision in this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Note (if any) and the other Loan Documents to any Federal Reserve Bank without notice to or consent of the Borrowers or the Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document.
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Section 10.12 Confidentiality . (a) Genera l . The Agent and the Banks each agree to keep confidential all information obtained from the Borrowers or their Subsidiaries which is nonpublic and confidential or proprietary in nature (including any information the Borrowers specifically designate as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement, subject to agreement of such Persons to maintain the confidentiality of such information as provided herein, (ii) to assignees and participants as contemplated by Section 10.11, and prospective assignees and participants, provided that Agent or such Bank, as the case may be, exercises its best efforts to obtain the agreement of such prospective assignees and participants to be bound by the confidentiality provisions hereof, (iii) to the extent requested by any bank regulatory authority, any self-regulatory body or, to the extent permissible and practicable, with notice to the Borrowers, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not known to be subject to confidentiality restrictions, or (v) if the Borrowers shall have consented to such disclosure.
(b) Sharing Information With Affiliates of the Banks . The Borrowers acknowledge that from time to time financial advisory, investment banking, and other services may be offered or provided to the Borrowers or one or more of their Affiliates (in connection with this Agreement or otherwise) by any Bank or by one or more Subsidiaries or Affiliates of such Bank and the Borrowers hereby authorize each Bank to share any information delivered to such Bank by the Borrowers or any of their Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such Subsidiary or Affiliate of such Bank, it being understood that any such Subsidiary or Affiliate of any Bank receiving such information shall be bound by the provisions of Section 10.12 as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and other Obligations and the termination of the Commitments.
Section 10.13 Counterparts . This Agreement may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument.
Section 10.14 Agents or Banks Consent . Whenever the Agents or any Banks consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Agent and each Bank shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter.
Section 10.15 Exceptions . The representations, warranties and covenants contained herein shall be independent of each other, and no exception to any representation, warranty or
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covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law.
Section 10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL . EACH OF THE BORROWERS HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN NEW YORK CITY, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT. THE COMPANY CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE COMPANY AT THE ADDRESS PROVIDED FOR IN SECTION 10.06 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. HOLDINGS AND THE UK BORROWER CONSENTS THAT ALL SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE COMPANY AT THE ADDRESS PROVIDED IN SECTION 10.06 (AND HOLDINGS AND THE UK BORROWER HEREBY IRREVOCABLY APPOINTS THE COMPANY AS ITS AGENT TO RECEIVE SUCH SERVICE OF PROCESS), AND SERVICE SO MADE SHALL BE COMPLETED UPON ACTUAL RECEIPT THEREOF. EACH OF THE BORROWERS WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE.
EACH BORROWER, THE AGENT, AND EACH OF THE BANKS HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW.
Section 10.17 Tax Withholding Clause . Each Bank or assignee or participant of a Bank that is not incorporated under the Laws of the United States of America or a state thereof (and, upon the written request of the Agent, each other Bank or assignee or participant of a Bank) agrees that it will deliver to each of the Borrowers and the Agent two (2) duly completed appropriate valid Withholding Certificates (as defined under § 1.1441-1(c)(16) of the Income Tax Regulations (the Regulations)) certifying its status ( i.e. , U.S. or foreign person) and, if appropriate, making a claim of reduced, or exemption from, U.S. withholding tax on the basis of an income tax treaty or an exemption provided by the Internal Revenue Code. The term Withholding Certificate means a Form W-9; a Form W-8BEN; a Form W-8ECI; a Form W-8IMY and the related statements and certifications as required under § 1.1441-1(e)(2) and/or (3) of the Regulations; a statement described in § 1.871-14(c)(2)(v) of the Regulations; or any other certificates under the Internal Revenue Code or Regulations that certify or establish the status of a payee or beneficial owner as a U.S. or foreign person. Each Bank, assignee or participant required to deliver to the Borrowers and the Agent a Withholding Certificate pursuant to the preceding sentence shall deliver such valid Withholding Certificate as follows: (A) each Bank which is a party hereto on the Closing Date shall deliver such valid Withholding Certificate at least five (5) Business Days prior to the first date on which any interest or fees are payable by the Borrowers hereunder for the account of such Bank; (B) each assignee or participant shall deliver such valid Withholding Certificate at least five (5) Business Days before the effective date of
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such assignment or participation (unless the Agent in its sole discretion shall permit such assignee or participant to deliver such valid Withholding Certificate less than five (5) Business Days before such date in which case it shall be due on the date specified by the Agent). Each Bank, assignee or participant which so delivers a valid Withholding Certificate further undertakes to deliver to each of the Borrowers and the Agent two (2) additional copies of such Withholding Certificate (or a successor form) on or before the date that such Withholding Certificate expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent Withholding Certificate so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrowers or the Agent. Notwithstanding the submission of a Withholding Certificate claiming a reduced rate of or exemption from U.S. withholding tax, the Agent shall be entitled to withhold United States federal income taxes at the full 30% withholding rate if in its reasonable judgment it is required to do so under the due diligence requirements imposed upon a withholding agent under § 1.1441-7(b) of the Regulations. Further, the Agent is indemnified under § 1.1461-1(e) of the Regulations against any claims and demands of any Bank or assignee or participant of a Bank for the amount of any tax it deducts and withholds in accordance with regulations under § 1441 of the Internal Revenue Code.
Section 10.18 Joinder of Guarantors . Any Material Non-AGC Subsidiary of Holdings which is required to be a Guarantor pursuant to Section 7.02(i) [Subsidiaries, Partnerships and Joint Ventures] shall execute and deliver to the Agent (i) a Guarantor Joinder in substantially the form attached hereto as Exhibit 1.01(G)(1) pursuant to which it shall join as a Guarantor each of the documents to which the Guarantors are parties; and (ii) documents in the forms described in Section 6.01 [Closing Date] modified as appropriate to relate to such Subsidiary. Holdings shall deliver such Guarantor Joinder and related documents to the Agent within five (5) Business Days after, as the case may be, the date of the acquisition of such Subsidiary, the date upon which a Subsidiary meets the criteria for a Material Non-AGC Subsidiary as set forth in the definition thereof in Section 1.01, or the date the filing of such Subsidiarys certificate or articles of incorporation if the Subsidiary is a corporation, the date of the filing of its certificate of limited partnership if it is a limited partnership or the date of its organization if it is an entity other than a limited partnership or corporation.
Section 10.19 Limited Recourse . Notwithstanding anything contained in this Agreement or any other Loan Document, except as expressly provided herein and therein the obligations of the Borrowers hereunder and thereunder are several and not joint, and in no event shall the Banks or the Agent have legal recourse to (i) Holdings with respect to Loans incurred by or Letters of Credit issued for the account of the Company or the UK Borrower and (ii) the Company or the UK Borrower with respect to Loans incurred by or Letters of Credit for the account of Holdings, AGRI or AGRO (it being understood and agreed that the Banks and the Agent shall have legal recourse to the Company with respect to Loans incurred by and Letters of Credit issued for the account of the UK Borrower in accordance with the terms of the Guaranty Agreement entered into by the Company).
Section 10.20 Change of Lending Office . Each Bank may transfer and carry its Loans and/or Commitments at, to or for the account of any branch office, subsidiary or affiliate of such Bank; provided that no Borrower shall be responsible for costs arising under Sections
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3.04, 4.06 or 4.07 resulting from any such transfer to the extent such costs would not otherwise be applicable to such Bank in the absence of such transfer.
Section 10.21 USA Patriot Act . Each Bank hereby notifies the Borrowers and Guarantors that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the Act), it is required to obtain, verify and record information that identifies the Borrowers and Guarantors, which information includes the name and address of each Borrower and Guarantor and other information that will allow such Bank to identify such Borrower and Guarantor in accordance with the Act, and each Borrower and each Guarantor agrees to provide such information from time to time to each Bank.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written.
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ASSURED GUARANTY LTD. |
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By: |
/s/ Robert B. Mills |
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Title: Chief Financial Officer |
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ASSURED GUARANTY CORP. |
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By: |
/s/ Robert B. Mills |
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Title: Chief Financial Officer |
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ASSURED GUARANTY (UK) LTD. |
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By: |
/s/ Charles J. Lester |
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Title: Managing Director |
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ASSURED GUARANTY RE
INTERNATIONAL
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By: |
/s/ Pierre Samson |
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Title: President |
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ASSURED GUARANTY RE OVERSEAS LTD. |
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By: |
/s/ Robert B. Mills |
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Title: Deputy Chairman
& Chief Financial
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ABN AMRO BANK N.V.,
Individually and as
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By: |
/s/ Neil R. Stein |
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Title: Director |
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By: |
/s/ Michael DeMarco |
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Title: Assistant Vice President |
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BANK OF AMERICA N.A. |
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By: |
/s/ Debra Basler |
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Title: Senior Vice President |
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KEYBANK NATIONAL ASSOCIATION |
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/s/ Mary K. Young |
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Title: Vice President |
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JPMORGAN CHASE BANK, N.A. |
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/s/ Helen L. Newcomb |
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Title: Vice President |
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DEUTSCHE BANK AG NEW YORK BRANCH |
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/s/ Ruth Leung |
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Title: Director |
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By: |
/s/ Clinton Johnson |
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Title: Managing Director |
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WACHOVIA BANK, NATIONAL
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/s/ Joan Anderson |
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Title: Director |
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THE BANK OF NEW YORK |
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/s/ Sreecaran Ganesan |
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Title: Vice President |
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CITIBANK N.A. |
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/s/ Maria G. Hackley |
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Title: Managing Director |
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PNC BANK, NATIONAL ASSOCIATION |
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/s/ Edward J. Chidiac |
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Title: Managing Director |
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THE ROYAL BANK OF SCOTLAND PLC |
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By: |
/s/ John Mallett |
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Title: Corporate Director |
Exhibit 10.2
Non-Qualified Stock Option Agreement
under
Assured Guaranty Ltd. 2004
Long-Term Incentive Plan
THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Participant and Assured Guaranty Ltd. (the Company):
WITNESSETH THAT:
WHEREAS, the Company maintains the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the Plan), and the Participant has been selected by the committee administering the Plan (the Committee) to receive a Non-Qualified Stock Option Award under the Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the Participant, as follows:
1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:
(a) The Participant is .
(b) The Grant Date is .
(c) The number of Covered Shares shall be shares of Stock.
(d) The Exercise Price is $ per share.
Other words and phrases used in this Agreement are defined pursuant to paragraph 17 or elsewhere in this Agreement.
2. Non-Qualified Stock Option . This Agreement specifies the terms of the option (the Option) granted to the Participant to purchase the number of Covered Shares of Stock at the Exercise Price per share as set forth in paragraph 1. The Option is not intended to constitute an incentive stock option as that term is used in Code section 422.
3. Date of Exercise . Subject to the limitations of this Agreement, each Installment of Covered Shares of the Option shall be exercisable on and after the Vesting Date for such Installment as described in the following schedule (but only if the Date of Termination has not occurred before the Vesting Date):
INSTALLMENT |
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VESTING DATE APPLICABLE
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1/3 of Covered Shares |
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One year anniversary of the Grant Date |
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1/3 of Covered Shares |
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Two year anniversary of the Grant Date |
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1/3 of Covered Shares |
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Three year anniversary of the Grant Date |
Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become vested and exercisable as follows:
(a) The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participants death or Disability.
(b) The Option shall become fully exercisable upon a Change in Control that occurs on or before the Date of Termination.
The Option may be exercised on or after the Date of Termination only as to that portion of the Covered Shares for which it was exercisable immediately prior to (or became exercisable on) the Date of Termination. Notwithstanding the foregoing provisions of this paragraph 3, as of the Participants Date of Termination for Cause, the Option shall be canceled as to any Covered Shares as to which it has not previously been exercised.
4. Expiration . The Option shall not be exercisable after the Companys close of business on the last business day that occurs prior to the Expiration Date. The Expiration Date shall be the earliest to occur of:
(a) the ten-year anniversary of the Grant Date;
(b) if the Participants Date of Termination occurs by reason of death or Disability, the three-year anniversary of such Date of Termination;
(c) if the Participants Date of Termination occurs for Cause, the Date of Termination;
(d) if the Participants Date of Termination occurs by reason of the Participants Retirement, the ten-year anniversary of the Grant Date; or
(e) if the Participants Date of Termination occurs for any reason other than those listed in subparagraph (b), (c), or (d) of this paragraph 4, the 90 day anniversary of such Date of Termination.
5. Method of Option Exercise . Subject to this Agreement and the Plan, the Option may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters prior to the Companys close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the Exercise
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Price for such shares of Stock indicated by the Participants election. Payment shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.
6. Withholding . All deliveries and distributions under this Agreement are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Companys minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
7. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participants life, may be exercised only by the Participant.
8. Cancellation and Rescission of Options .
(a) The Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict the Option at any time if the Participant engages in any Detrimental Activity.
(b) Upon exercise of the Option, the Participant shall certify, to the extent provided by the Committee, in a manner acceptable to the Committee, that the Participant is not engaging and has not engaged in any Detrimental Activity. In the event a Participant has engaged in any Detrimental Activity prior to, or during the six months after, any exercise of the Option, such exercise may be rescinded by the Committee within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized as a result of the rescinded exercise, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company and/or Subsidiary.
9. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by
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merger, consolidation, purchase of assets or otherwise, all or substantially all of the Companys assets and business. If any rights exercisable by the Participant or benefits deliverable to the Participant under this Agreement have not been exercised or delivered, respectively, at the time of the Participants death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and the Plan. The Designated Beneficiary shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be exercised by or distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the Designated Beneficiarys exercise of all rights under this Agreement or before the complete distribution of benefits to the Designated Beneficiary under this Agreement, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
10. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons. The Committee shall have the authority to obtain such information from the Participant (including tax return information) as it determines may be necessary to confirm that the Participant is in compliance with the requirements applicable to Cause or Detrimental Activity, and if the Participant fails to provide such information, the Committee may conclude that the Participant is not in compliance with such requirements.
11. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.
12. Not An Employment Contract . The Option will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participants employment or other service at any time.
13. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participants address indicated by the Companys records, or if to the Company, at the Companys principal executive office.
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14. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option pursuant to the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
15. No Rights As Shareholder . The Participant shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.
16. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
17. Definitions . For purposes of this Agreement, words and phrases shall be defined as follows:
(a) Cause . The term Cause shall mean (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company or the Subsidiaries (including, without limitation, Financial Security Assurance Inc., MBIA, Inc., AMBAC Financial Group Inc., and Radian Group Inc.), or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company or the Subsidiaries; (ii) the disclosure to anyone outside the Company or the Subsidiaries, or the use in other than the Companys or the Subsidiaries business, without prior written authorization from the Company or the Subsidiaries, of any confidential information or material, relating to the business of the Company or the Subsidiaries, acquired by the Participant either during or after employment with the Company or the Subsidiaries; (iii) a violation of any rules, policies, procedures or guidelines of the Company or the Subsidiaries, including but not limited to the Companys business conduct guidelines; (iv) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company; (v) the Participant being convicted of, or entering a guilty plea with respect to, a crime, whether or not connected with the Company; or (vi) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company.
(b) Change in Control . The term Change in Control shall be defined as set forth in the Plan.
(c) Date of Termination . A Participants Date of Termination means, with respect to an employee, the date on which the Participants employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participants transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participants cessation of service as a Director if immediately
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following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participants termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participants employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participants employer.
(d) Detrimental Activity . The term Detrimental Activity shall mean the occurrence of actions described in clause (i) (relating to competition), (ii) (relating to confidentiality), or (iv) (relating to solicitation), all as set forth under the definition of Cause above.
(e) Director . The term Director means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.
(f) Disability . The Participant shall be considered to have a Disability during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.
(g) Retirement . Retirement of a Participant shall mean with respect to an employee of the Company or a Subsidiary, the occurrence of a Participants Date of Termination with the consent of the Participants employer after the Participant has completed five years of service and attained age 55. For purposes of this definition, years of service shall be determined in accordance with rules established by the Committee, and shall take into account service with the Company and its Subsidiaries, as well as service with ACE Limited and its subsidiaries occurring prior to the initial public offering of stock of the Company.
(h) Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.
IN WITNESS WHEREOF, the Participant has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.
Assured Guaranty Ltd.
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Exhibit 10.3
To Be Used With Employment Agreement
Non-Qualified Stock Option Agreement under
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Participant and Assured Guaranty Ltd. (the Company):
WITNESSETH THAT:
WHEREAS, the Company maintains the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the Plan), and the Participant has been selected by the committee administering the Plan (the Committee) to receive a Non-Qualified Stock Option Award under the Plan; and
WHEREAS, the Participant and the Company agree that this Award is in full satisfaction of the stock option awards to be granted to the Participant pursuant to paragraph 7(a) of the employment agreement between the Company and the Participant dated April 28, 2004;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the Participant, as follows:
1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:
(a) The Participant is .
(b) The Grant Date is .
(c) The number of Covered Shares shall be shares of Stock.
(d) The Exercise Price is $ per share.
Other words and phrases used in this Agreement are defined pursuant to paragraph 17 or elsewhere in this Agreement.
2. Non-Qualified Stock Option . This Agreement specifies the terms of the option (the Option) granted to the Participant to purchase the number of Covered Shares of Stock at the Exercise Price per share as set forth in paragraph 1. The Option is not intended to constitute an incentive stock option as that term is used in Code section 422.
3. Date of Exercise . Subject to the limitations of this Agreement, each Installment of Covered Shares of the Option shall be exercisable on and after the Vesting Date for such Installment as described in the following schedule (but only if the Date of Termination has not occurred before the Vesting Date):
INSTALLMENT |
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VESTING DATE APPLICABLE
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1/3 of Covered Shares |
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One year anniversary of the Grant Date |
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1/3 of Covered Shares |
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Two year anniversary of the Grant Date |
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1/3 of Covered Shares |
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Three year anniversary of the Grant Date |
Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become vested and exercisable as follows:
(a) The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participants death or Disability.
(b) The Option shall become fully exercisable upon a Change in Control that occurs on or before the Date of Termination.
(c) If the Option is not fully exercisable upon the Participants Date of Termination, and the Participants Date of Termination occurs because of Retirement, the Participant shall be treated as though employed by the Company and Subsidiaries after the Participants actual Date of Termination until the Vesting Date has occurred with respect to all of the Covered Shares.
(d) If the Option is not fully exercisable upon the Participants Date of Termination, and the Participants Date of Termination occurs by virtue of a Termination Without Cause, then for purposes of applying the foregoing vesting schedule, and for purposes of determining the Expiration Date of the Option, the Participant shall be treated as though employed by the Company and Subsidiaries after the Participants actual Date of Termination until the later of the date on which the Payment Period ends under the Employment Agreement or the date on which the term of the Employment Agreement ends. The terms Cause and Terminated Without Cause shall be defined as set forth in the Employment Agreement. Notwithstanding the foregoing, if the Executives employment is Terminated without Cause, the provisions of this paragraph (d) shall apply only if the Executive executes and returns to the Company a general release and waiver of all claims against the Company as required under the Employment Agreement.
Subject to paragraphs (c) and (d) above, the Option may be exercised on or after the Date of Termination only as to that portion of the Covered Shares for which it was exercisable immediately prior to (or became exercisable on) the Date of Termination. Notwithstanding the foregoing provisions of this paragraph 3, as of the Participants Date of Termination for Cause, the Option shall be canceled as to any Covered Shares as to which it has not previously been exercised.
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4. Expiration . The Option shall not be exercisable after the Companys close of business on the last business day that occurs prior to the Expiration Date. The Expiration Date shall be the earliest to occur of:
(a) the ten-year anniversary of the Grant Date;
(b) if the Participants Date of Termination occurs by reason of death or Disability, the three-year anniversary of such Date of Termination;
(c) if the Participants Date of Termination occurs for Cause, the Date of Termination;
(d) if the Participants Date of Termination occurs because of Retirement, the ten-year anniversary of the Grant Date;
(e) if the Participants Date of Termination occurs because of Termination Without Cause, the later of the date on which the Payment Period ends under the Employment Agreement or the date on which the term of the Employment Agreement ends; or
(f) if the Participants Date of Termination occurs for any reason other than those listed in subparagraph (b), (c), (d) or (e) of this paragraph 4, the 90-day anniversary of such Date of Termination.
Notwithstanding the foregoing provisions of this paragraph 4, if a Change in Control occurs on or before the Participants Date of Termination, the Expiration Date shall be the ten-year anniversary of the Grant Date.
5. Method of Option Exercise . Subject to this Agreement and the Plan, the Option may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters prior to the Companys close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Stock indicated by the Participants election. Payment shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.
6. Withholding . All deliveries and distributions under this Agreement are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules
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and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Companys minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
7. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participants life, may be exercised only by the Participant.
8. Cancellation and Rescission of Options .
(a) The Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict the Option at any time if the Participant engages in any Detrimental Activity.
(b) Upon exercise of the Option, the Participant shall certify, to the extent provided by the Committee, in a manner acceptable to the Committee, that the Participant is not engaging and has not engaged in any Detrimental Activity. In the event a Participant has engaged in any Detrimental Activity prior to, or during the six months after, any exercise of the Option, such exercise may be rescinded by the Committee within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized as a result of the rescinded exercise, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company and/or Subsidiary.
9. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Companys assets and business. If any rights exercisable by the Participant or benefits deliverable to the Participant under this Agreement have not been exercised or delivered, respectively, at the time of the Participants death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and the Plan. The Designated Beneficiary shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be exercised by or distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the Designated Beneficiarys exercise of all rights under this Agreement or before the complete distribution of benefits to the Designated Beneficiary under this Agreement, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any
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benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
10. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons. The Committee shall have the authority to obtain such information from the Participant (including tax return information) as it determines may be necessary to confirm that the Participant is in compliance with the requirements applicable to Detrimental Activity, and if the Participant fails to provide such information, the Committee may conclude that the Participant is not in compliance with such requirements.
11. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.
12. Not An Employment Contract . The Option will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participants employment or other service at any time.
13. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participants address indicated by the Companys records, or if to the Company, at the Companys principal executive office.
14. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option pursuant to the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
15. No Rights As Shareholder . The Participant shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.
16. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
17. Definitions . For purposes of this Agreement, words and phrases shall be defined as follows:
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(a) Change in Control . The term Change in Control shall be defined as set forth in the Plan.
(b) Date of Termination . A Participants Date of Termination means, with respect to an employee, the date on which the Participants employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participants transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participants cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participants termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participants employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participants employer.
(c) Detrimental Activity . The term Detrimental Activity shall mean (i) a violation of paragraph 11 of the Employment Agreement (relating to competition) during the period in which such activity is prohibited under the Employment Agreement; or (ii) a violation of paragraph 12 of the Employment Agreement (relating to confidentiality).
(d) Director . The term Director means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.
(e) Disability . The Participant shall be considered to have a Disability during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.
(f) Employment Agreement . Employment Agreement shall mean the agreement between the Participant and the Company dated February 11, 2004 or any successor agreement thereto.
(g) Retirement . Retirement of a Participant shall mean with respect to an employee of the Company or a Subsidiary, the occurrence of a Participants Date of Termination after the Participant has completed five years of service and attained age 55. For purposes of this definition, years of service shall be determined in accordance with rules established by the Committee, and shall take into account service with the Company and its Subsidiaries, as well as service with ACE Limited and its subsidiaries occurring prior to the initial public offering of stock of the Company.
(h) Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.
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IN WITNESS WHEREOF, the Participant has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.
Assured Guaranty Ltd.
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7
Exhibit 10.4
Restricted Stock Agreement under
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Participant and Assured Guaranty Ltd. (the Company):
WITNESSETH THAT:
WHEREAS, the Company maintains the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the Plan), and the Participant has been selected by the committee administering the Plan (the Committee) to receive a Restricted Stock Award under the Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the Participant, as follows:
1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:
(a) The Participant is .
(b) The Grant Date is .
(c) The number of Covered Shares shall be shares of Stock.
Other words and phrases used in this Agreement are defined pursuant to paragraph 18 or elsewhere in this Agreement.
2. Restricted Stock Award . This Agreement specifies the terms of the Restricted Stock Award granted to the Participant.
3. Restricted Period . Subject to the limitations of this Agreement, the Restricted Period for each Installment of Covered Shares of the Restricted Stock Award shall begin on the Grant Date and end as described in the following schedule (but only if the Date of Termination has not occurred before the end of the Restricted Period):
INSTALLMENT |
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RESTRICTED PERIOD WILL END ON: |
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¼ of Covered Shares |
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One year anniversary of the Grant Date |
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¼ of Covered Shares |
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Two year anniversary of the Grant Date |
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¼ of Covered Shares |
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Three year anniversary of the Grant Date |
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¼ of Covered Shares |
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Four year anniversary of the Grant Date |
The Restricted Period shall end prior to the date specified in the foregoing schedule to the extent set forth below:
(a) For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participants Date of Termination, if the Date of Termination occurs by reason of the Participants Disability or death.
(b) For Installments as to which the Restricted Period has not ended prior to the date of a Change in Control, the Restricted Period for such Installments shall end upon a Change in Control, provided that such Change in Control occurs on or before the Date of Termination.
(c) For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Participants Date of Termination occurs because of Retirement, the Participant shall be treated as though employed by the Company and Subsidiaries after the Participants actual Date of Termination until the Restricted Period has ended with respect to all Installments.
4. Transfer and Forfeiture of Shares . If the Restricted Period with respect to any Installment of the Covered Shares ends on or before the Participants Date of Termination, then at the end of such Restricted Period, that Installment of Covered Shares shall be transferred to the Participant free of all restrictions (except for restrictions described in paragraph 10). If the Restricted Period with respect to any Installments does not end on or before the Participants Date of Termination, then as of the Participants Date of Termination, the Participant shall forfeit such Installments. However, the Committee, in its sole discretion, may accelerate the end of the Restricted Period or provide for the vesting of the Covered Shares under circumstances that such vesting would not otherwise occur in its sole discretion, based on such factors as the Committee deems appropriate.
5. Withholding . All deliveries and distributions under this Agreement are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Companys minimum
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statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
6. Transferability . Except as otherwise provided by the Committee, the Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period.
7. Dividends . The Participant shall not be prevented from receiving dividends and distributions paid on the Covered Shares of Restricted Stock merely because those shares are subject to the restrictions imposed by this Agreement and the Plan; provided, however that no dividends or distributions shall be payable to or for the benefit of the Participant with respect to record dates for such dividends or distributions for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
8. Voting . The Participant shall not be prevented from voting the Restricted Stock Award merely because those shares are subject to the restrictions imposed by this Agreement and the Plan; provided, however, that the Participant shall not be entitled to vote Covered Shares with respect to record dates for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
9. Registration of Restricted Stock Award . Each certificate issued in respect of the Covered Shares awarded under this Agreement shall be registered in the name of the Participant.
10. Cancellation and Rescission of Restricted Stock Award .
(a) The Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict the Restricted Stock Award at any time if the Participant engages in any Detrimental Activity.
(b) At the end of the Restricted Period with respect to an Installment and prior to the transfer of the Covered Shares to the Participant, the Participant shall certify, to the extent required by the Committee, in a manner acceptable to the Committee, that the Participant is not engaging and has not engaged in any Detrimental Activity. In the event a Participant has engaged in any Detrimental Activity prior to, or during the six months after, the vesting of any Installment of Covered Shares, such vesting may be rescinded by the Committee within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized as a result of the rescinded vesting, in such manner and on such terms and conditions as may be required by the Company, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company and/or Subsidiary.
11. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Companys assets and business. If any benefits deliverable to the Participant under this Agreement have not been delivered at the time of the Participants death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and
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the Plan. The Designated Beneficiary shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the complete distribution of benefits to the Designated Beneficiary under this Agreement, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
12. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons. The Committee shall have the authority to obtain such information from the Participant (including tax return information) as it determines may be necessary to confirm that the Participant is in compliance with the requirements applicable to Detrimental Activity, and if the Participant fails to provide such information, the Committee may conclude that the Participant is not in compliance with such requirements.
13. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.
14. Not An Employment Contract . The Restricted Stock Award will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right the Company or any Related Company would otherwise have to terminate or modify the terms of such Participants employment or other service at any time.
15. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participants address indicated by the Companys records, or if to the Company, at the Companys principal executive office.
16. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Award pursuant to the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
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17. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
18. Definitions . For purposes of this Agreement, words and phrases shall be defined as follows:
(a) Change in Control . The term Change in Control shall be defined as set forth in the Plan.
(b) Date of Termination . A Participants Date of Termination means, with respect to an employee, the date on which the Participants employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participants transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participants cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participants termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participants employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participants employer.
(c) Detrimental Activity . The term Detrimental Activity shall mean (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company or the Subsidiaries (including, without limitation, Financial Security Assurance Inc., MBIA, Inc., AMBAC Financial Group Inc., and Radian Group Inc.), or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company or the Subsidiaries; (ii) the disclosure to anyone outside the Company or the Subsidiaries, or the use in other than the Companys or the Subsidiaries business, without prior written authorization from the Company or the Subsidiaries, of any confidential information or material, relating to the business of the Company or the Subsidiaries, acquired by the Participant either during or after employment with the Company or the Subsidiaries; (iii) a violation of any rules, policies, procedures or guidelines of the Company or the Subsidiaries, including but not limited to the Companys business conduct guidelines; (iv) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company; (v) the Participant being convicted of, or entering a guilty plea with respect to, a crime, whether or not connected with the Company; or (vi) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company. Notwithstanding the foregoing, activity occurring after the Date of Termination shall constitute Detrimental Activity only if it is
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described in clause (i) (relating to competition), (ii) (relating to confidentiality), or (iv) (relating to solicitation) above.
(d) Director . The term Director means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.
(e) Disability . The Participant shall be considered to have a Disability during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.
(f) Retirement . Retirement of a Participant shall mean with respect to an employee of the Company or a Subsidiary, the occurrence of a Participants Date of Termination with the consent of the Participants employer after the Participant has completed five years of service and attained age 55. For purposes of this definition, years of service shall be determined in accordance with rules established by the Committee, and shall take into account service with the Company and its Subsidiaries, as well as service with ACE Limited and its subsidiaries occurring prior to the initial public offering of stock of the Company.
(g) Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.
IN WITNESS WHEREOF, the Participant has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.
Assured Guaranty Ltd.
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6
Exhibit 10.5
To Be Used With Employment Agreement
Restricted Stock Agreement under
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
THIS AGREEMENT, entered into as of the Grant Date (as defined in paragraph 1), by and between the Participant and Assured Guaranty Ltd. (the Company):
WITNESSETH THAT:
WHEREAS, the Company maintains the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the Plan), and the Participant has been selected by the committee administering the Plan (the Committee) to receive a Restricted Stock Award under the Plan; and
WHEREAS, the Participant and the Company agree that this Award is in full satisfaction of the restricted stock awards to be granted to the Participant pursuant to paragraph 7(a) of the employment agreement between the Company and the Participant dated April 28, 2004;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the Participant, as follows:
1. Terms of Award . The following words and phrases used in this Agreement shall have the meanings set forth in this paragraph 1:
(a) The Participant is .
(b) The Grant Date is .
(c) The number of Covered Shares shall be shares of Stock.
Other words and phrases used in this Agreement are defined pursuant to paragraph 18 or elsewhere in this Agreement.
2. Restricted Stock Award . This Agreement specifies the terms of the Restricted Stock Award granted to the Participant.
3. Restricted Period . Subject to the limitations of this Agreement, the Restricted Period for each Installment of Covered Shares of the Restricted Stock Award shall begin on the Grant Date and end as described in the following schedule (but only if the Date of Termination has not occurred before the end of the Restricted Period):
INSTALLMENT |
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RESTRICTED PERIOD WILL END ON: |
¼ of Covered Shares |
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One year anniversary of the Grant Date |
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¼ of Covered Shares |
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Two year anniversary of the Grant Date |
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¼ of Covered Shares |
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Three year anniversary of the Grant Date |
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¼ of Covered Shares |
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Four year anniversary of the Grant Date |
The Restricted Period shall end prior to the date specified in the foregoing schedule to the extent set forth below:
(a) For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participants Date of Termination, if the Date of Termination occurs by reason of the Participants Disability or death.
(b) For Installments as to which the Restricted Period has not ended prior to the date of a Change in Control, the Restricted Period for such Installments shall end upon a Change in Control, provided that such Change in Control occurs on or before the Date of Termination.
(c) For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Participants employment is Terminated Without Cause, the Participant shall be treated as though employed by the Company and Subsidiaries after the Participants actual Date of Termination until the later of (i) the date on which the Participant ceases receiving severance payments under the Employment Agreement or (ii) the date on which the term of the Employment Agreement expires. Under clause (ii), a notice of termination shall be deemed to constitute a notice of non-renewal of the Employment Agreement term under the provisions of the Employment Agreement to be effective as of the earliest date permitted under the Employment Agreement. The terms Cause and Terminated Without Cause shall be defined as set forth in the Employment Agreement. Notwithstanding the foregoing, if the Executives employment is Terminated without Cause, the provisions of this paragraph (c) shall apply only if the Executive executes and returns to the Company a general release and waiver of all claims against the Company as required under the Employment Agreement.
(d) For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Participants Date of Termination occurs because of Retirement, the Participant shall be treated as though employed by the Company and Subsidiaries after the Participants actual Date of Termination until the Restricted Period has ended with respect to all Installments.
4. Transfer and Forfeiture of Shares . If the Restricted Period with respect to any Installment of the Covered Shares ends on or before the Participants Date of Termination, then
2
at the end of such Restricted Period, that Installment of Covered Shares shall be transferred to the Participant free of all restrictions (except for restrictions described in paragraph 10). If the Restricted Period with respect to any Installments does not end on or before the Participants Date of Termination, then as of the Participants Date of Termination, the Participant shall forfeit such Installments. However, the Committee, in its sole discretion, may accelerate the end of the Restricted Period or provide for the vesting of the Covered Shares under circumstances that such vesting would not otherwise occur in its sole discretion, based on such factors as the Committee deems appropriate.
5. Withholding . All deliveries and distributions under this Agreement are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Companys minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
6. Transferability . Except as otherwise provided by the Committee, the Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period.
7. Dividends . The Participant shall not be prevented from receiving dividends and distributions paid on the Covered Shares of Restricted Stock merely because those shares are subject to the restrictions imposed by this Agreement and the Plan; provided, however that no dividends or distributions shall be payable to or for the benefit of the Participant with respect to record dates for such dividends or distributions for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
8. Voting . The Participant shall not be prevented from voting the Restricted Stock Award merely because those shares are subject to the restrictions imposed by this Agreement and the Plan; provided, however, that the Participant shall not be entitled to vote Covered Shares with respect to record dates for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
9. Registration of Restricted Stock Award . Each certificate issued in respect of the Covered Shares awarded under this Agreement shall be registered in the name of the Participant.
10. Cancellation and Rescission of Restricted Stock Award .
(a) The Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict the Restricted Stock Award at any time if the Participant engages in any Detrimental Activity.
(b) At the end of the Restricted Period with respect to an Installment and prior to the transfer of the Covered Shares to the Participant, the Participant shall certify, to the extent required by the Committee, in a manner acceptable to the Committee, that the Participant
3
is not engaging and has not engaged in any Detrimental Activity. In the event a Participant has engaged in any Detrimental Activity prior to, or during the six months after, the vesting of any Installment of Covered Shares, such vesting may be rescinded by the Committee within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized as a result of the rescinded vesting, in such manner and on such terms and conditions as may be required by the Company, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company and/or Subsidiary.
11. Heirs and Successors . This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Companys assets and business. If any benefits deliverable to the Participant under this Agreement have not been delivered at the time of the Participants death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of this Agreement and the Plan. The Designated Beneficiary shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the complete distribution of benefits to the Designated Beneficiary under this Agreement, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
12. Administration . The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to this Agreement is final and binding on all persons. The Committee shall have the authority to obtain such information from the Participant (including tax return information) as it determines may be necessary to confirm that the Participant is in compliance with the requirements applicable to Detrimental Activity, and if the Participant fails to provide such information, the Committee may conclude that the Participant is not in compliance with such requirements.
13. Plan Governs . Notwithstanding anything in this Agreement to the contrary, this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.
14. Not An Employment Contract . The Restricted Stock Award will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right the Company or any Related Company would otherwise have to terminate or modify the terms of such Participants employment or other service at any time.
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15. Notices . Any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participants address indicated by the Companys records, or if to the Company, at the Companys principal executive office.
16. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Award pursuant to the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
17. Amendment . This Agreement may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
18. Definitions . For purposes of this Agreement, words and phrases shall be defined as follows:
(a) Change in Control . The term Change in Control shall be defined as set forth in the Plan.
(b) Date of Termination . A Participants Date of Termination means, with respect to an employee, the date on which the Participants employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participants transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participants cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participants termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participants employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participants employer.
(c) Detrimental Activity . The term Detrimental Activity shall mean (i) a violation of paragraph 11 of the Employment Agreement (relating to competition) during the period in which such activity is prohibited under the Employment Agreement; or (ii) a violation of paragraph 12 of the Employment Agreement (relating to confidentiality).
(d) Director . The term Director means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.
(e) Disability . The Participant shall be considered to have a Disability during the period in which the Participant is unable, by reason of a medically determinable physical or mental
5
impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.
(f) Employment Agreement . Employment Agreement shall mean the agreement between the Participant and the Company dated February 11, 2004 or any successor agreement thereto.
(g) Retirement . Retirement of a Participant shall mean with respect to an employee of the Company or a Subsidiary, the occurrence of a Participants Date of Termination after the Participant has completed three years of service and attained age 55. For purposes of this definition, years of service shall be determined in accordance with rules established by the Committee, and shall take into account service with the Company and its Subsidiaries, as well as service with ACE Limited and its subsidiaries occurring prior to the initial public offering of stock of the Company.
(h) Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement.
IN WITNESS WHEREOF, the Participant has executed the Agreement, and the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.
Assured Guaranty Ltd.
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6
Exhibit 10.6
PUT AGREEMENT
between
ASSURED GUARANTY CORP.
and
WOODBOURNE CAPITAL TRUST [I][II][III][IV]
Dated April 8, 2005
Preamble
This Put Agreement, dated as of April 8, 2005 (this Agreement ), is by and between Assured Guaranty Corp., a Maryland domestic stock insurer (the Company ), and Woodbourne Capital Trust [I][II][III][IV] (the Custodial Trust ), a Delaware statutory trust.
Recitals
WHEREAS, the Company is authorized to issue 50,001 shares of non-cumulative, redeemable, perpetual preferred stock, par value $1,000 per share, designated as 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, the Company and the Custodial Trust desire to enter into a binding agreement pursuant to which the Company will have the right to sell, at its option, the Preferred Stock to the Custodial Trust, and the Custodial Trust will have an obligation to purchase the Preferred Stock upon the Company s exercise of its option and upon the other terms and conditions agreed upon by the parties.
NOW, THEREFORE, in consideration of the foregoing and for other valuable consideration, the adequacy of which is hereby acknowledged, the parties hereto agree as follows:
Agreement has the meaning set forth above in the Preamble.
Auction Rate Mode has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Business Day has the meaning set forth in the Declaration.
Charter means the Articles of Incorporation of the Company, as supplemented by the Articles Supplementary relating to the Preferred Stock , a copy of which is attached hereto as Annex C .
Company has the meaning set forth above in the Preamble.
CCS Securities has the meaning set forth in the Declaration.
Custodial Trust has the meaning set forth above in the Preamble.
Custodial Trust Expense Reimbursement Agreement has the meaning set forth in Section 3.1.
Declaration means the Amended and Restated Declaration of Trust governing the Custodial 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 CCS Securities attached to the Declaration as Appendix A.
Delayed Auction Date has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Delayed Auction Period has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Delayed Auction Rate has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Delayed Put Premium has the meaning set forth in Section 5.1.
Delayed Put Premium Certificate has the meaning set forth in Section 5.2.
Distribution Rate has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Distribution Payment Date has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Distribution Period has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
Dividend has the meaning set forth in the Charter.
Eligible Assets has the meaning set forth in the Declaration.
Federal Funds Effective Rate has the meaning set forth in the Declaration.
Fixed Rate Distribution Event has the meaning set forth in the Charter.
Fixed Rate Election means an election by the Company to pay Dividends on the Preferred Stock at the rate described in clause (iii) of the definition of Dividend Rate set forth in the Charter.
Flexed Rate Period has the meaning set forth in the General Terms of the CCS Securities attached to the Declaration as Appendix A.
2
Holder has the meaning set forth in the Declaration.
Liquidation Preference has the meaning set forth in the Charter.
Maximum Rate has the meaning set forth in the Charter.
Moodys shall mean Moodys Investor Services, Inc. and its successors.
Overnight Rate of Return means the rate earned on the interest and on the principal of the Eligible Assets during the period from the last Business Day of each Distribution Period until the related Distribution Payment Date and, if applicable, during any Delayed Auction Period, which shall be equal to the Federal Funds Effective Rate then in effect..
Pass Through Trust has the meaning set forth in the Charter.
Pass Through Trust Securities has the meaning set forth in the Charter.
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 Premium has the meaning set forth in Section 5.1.
Put Premium Certificate has the meaning set forth in Section 5.2.
Redemption Price has the meaning set forth in the Charter.
Redemption Proceeds has the meaning set forth in Section 3.2(d).
Standard & Poors shall mean Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc. and its successors.
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 Custodial 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 last Business Day of each respective Distribution Period.
Tax Matters Partner has the meaning set forth in the Declaration.
Termination Payment has the meaning set forth in Section 5.3.
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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.
If as a result of losses of principal of or interest on Eligible Assets there is a Delayed Auction, the Company will pay to the Custodial 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 Premium, an amount equal to the product of (A) the Delayed Auction Rate on the C CS Securities for the Delayed Auction Period less the excess of
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(i) the Stated Yield for such Delayed Auction Period over (ii) the expenses of the Custodial 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 C CS Securities outstanding on the date the Put Premium is determined, (B) the aggregate face amount of the CCS Securities outstanding at the time the Delayed Put 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 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 Custodial 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 Custodial Trust shall not terminate this Agreement or limit the rights of the Company 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 the Company at:
Assured Guaranty Corp.
1325 Avenue of the Americas
New York, New York
10019
Attention: General Counsel
Facsimile: (212) 581-3268
If to the Custodial 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
101 Barclay Street
8
th
Floor East Dealing and Trading Department
New York, New York 10286
Facsimile: (212) 815-2830
In the case of any event under Sections 2.3, 7.3 or 14 of the Agreement, the Company shall give notice to:
Standard & Poors Ratings Services at:
Standard & Poors Ratings Services
55 Water Street
New York, New York 10041
Moodys Investors Services, Inc. at:
Moodys Investors Services, 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.
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[SIGNATURES FOLLOW.]
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IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.
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WOODBOURNE
CAPITAL TRUST
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ASSURED GUARANTY CORP. |
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ANNEX A
Form of Put Notice
To:
Woodbourne
Capital Trust [I][II][III][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
101 Barclay Street
8
th
Floor East
New York, New York 10286
Attention: Dealing and Trading Group
Facsimile: (212) 815-2830
Date:
Ladies and Gentlemen:
We refer to the put agreement dated , 2005 (as heretofore amended, the Put 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 Agreement. We hereby elect to exercise the put option with regard to Preferred Stock having a liquidation preference of an amount equal to the Preferred Stock Purchase Price, and 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,
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ASSURED GUARANTY CORP. |
ANNEX B
Put Premium Certificate/Delayed Put Premium
Certificate
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Distribution Period: [first day of Period]-[last day of Period]: [number of days in period] |
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Distribution Rate determined for the Distribution Period on [insert last Business Day prior to the Distribution Payment Date]. |
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Eligible Assets: |
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4. |
Broker-Dealer Fees |
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[ ] % |
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[ ] |
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5. |
Trustee and Custodian Fees |
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6. |
Investment Manager Fee |
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7. |
Tax Matters Partner Fee |
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Rating Agency Fees |
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9. |
Tax Fees. Including preparation of returns |
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Other Fees and Expenses for the Distribution Period, if any |
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11. |
Computation of Put Premium Due on [insert Distribution Payment Date] by 11:00 a.m. New York Time: |
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The Investment Manager is in compliance with the Investment Management Agreement. |
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ANNEX C
Charter of Assured Guaranty Corp.
ANNEX D
Custodial Trust Expense Reimbursement Agreement
Exhibit 10.7
EXECUTION COPY
CUSTODIAL TRUST EXPENSE REIMBURSEMENT AGREEMENT
THIS CUSTODIAL TRUST EXPENSE REIMBURSEMENT AGREEMENT (this Agreement ), dated as of April 8, 2005 is between Assured Guaranty Corp. ( AGC ) and Woodbourne Capital Trust I, a Delaware statutory trust (the Custodial Trust ).
WHEREAS, AGC and the Custodial Trust have entered into a Put Agreement (the Put Agreement ), dated as of April 8, 2005.
WHEREAS, the Custodial Trust, Woodbourne Pass-Through Trust (the Pass-Through Trust ) and the other Custodial Trusts have entered into a Pass-Through Trust Expense Reimbursement Agreement (the Pass-Through Trust Expense Reimbursement Agreement ), dated as of April 8, 2005 pursuant to which the Custodial Trust has agreed to reimburse a portion of the expenses of the Pass-Through Trust.
WHEREAS, a condition precedent for AGC to exercise its right to require the Custodial Trust to purchase the AGC Preferred Stock (the Preferred Stock ) under the Put Agreement is the execution and delivery of a Custodial Trust Expense Reimbursement Agreement substantially in the form hereof.
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Custodial Trust and AGC agree as follows:
ARTICLE 1
Section 1.01 . Reimbursement. Subject to the terms and conditions set forth herein, AGC hereby irrevocably and unconditionally agrees to reimburse the Custodial Trust for the Expenses (defined below) of the Custodial Trust on the first Distribution Payment Date after receiving a notice of the estimated or actual Expenses for the related Distribution Period from the Custodial Trust, whichever is earlier, but in no case earlier than the Distribution Payment Date during such Distribution Period.
As used herein, Expenses mean all costs, claims, expenses, damages, liabilities and disbursements (including the reasonable fees and expenses of counsel) and all obligations of the Custodial Trust, including, without limitation, (i) any amounts payable to the Trustee pursuant to Sections 5.01(d) and 12.01(c) of the Declaration of Trust (as defined in Section 2.05 hereof) to the extent that such Expenses are imposed upon, or incurred by, the Custodial Trust with respect to the transactions contemplated by the Declaration of Trust (as defined in Section 2.05 herein) during any time when the Custodial Trust holds Preferred Stock and (ii) any amounts payable to the Pass-Through Trust by the Custodial Trust pursuant to the Pass-Through Trust Expense Reimbursement Agreement; provided that the term Expenses shall not include any obligation
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of the Custodial Trust to make any payment evidenced by, in respect of or any related right of payment under, the Flex Committed Capital Securities (the CCS Securities ) issued by the Custodial Trust. For the avoidance of doubt, those expenses payable to the Pass-Through Trust under the Pass-Through Trust Expense Reimbursement Agreement shall be covered by the term Expenses.
Section 1.02. Term of Agreement . This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made and no amounts are payable (including distributions on the CCS Securities, whether or not declared) to any holders of the CCS Securities (whether upon liquidation, redemption or otherwise) and (b) the date on which there are no Expenses due and payable by the Custodial Trust.
Section 1.03 . Waiver of Notice. AGC hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands, except as expressly provided herein.
Section 1.04. No Impairment . The obligations, covenants, agreements and duties of AGC under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following:
(a) any delay in the notification of Expenses by the Custodial Trust;
(b) the extension of time for the payment of all or any portion of the Expenses or for the performance of any other obligation under, arising out of, or in connection with, the Expenses; and
(c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Custodial Trust or any of the assets of the Custodial Trust.
Section 1.05. Subrogation. AGC shall be subrogated to all (if any) rights of the Custodial Trust in respect of any amounts directly or indirectly paid to any person by AGC under this Agreement; provided that AGC shall not enforce any payment by way of subrogation in the event or to the extent that such enforcement would have an adverse effect on the CCS Securities or Pass-Through Trust Securities issued by the Pass-Through Trust.
Section 1.06. Actions; Notification. The Custodial Trust shall give prompt written notice to AGC of any litigation, or any investigation or proceeding by any governmental agency or body or other person commenced or threatened against the Custodial Trust or any trustee in connection with which the payment of Expenses may be sought hereunder (collectively referred to herein as a Proceeding), but failure to so notify AGC shall not relieve AGC from any liability which it may have otherwise under this Agreement, unless such failure to provide notice has an adverse impact upon AGCs ability to avoid or reduce any Expenses. AGC may, in its sole discretion, elect to assume the defense of the Custodial Trust for Expenses hereunder, and if it so elects, AGC shall select counsel to represent the Custodial Trust (and any others AGC may
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designate) and pay the fees and expenses of such counsel. In any Proceeding, the Custodial Trust shall have the right to retain its own counsel, but the fees and disbursements of such counsel shall not constitute an Expense under this Agreement for which AGC is liable unless (i) AGC and the Custodial Trust shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such Proceeding (including any impleaded parties) include both AGC and the Custodial Trust and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. For the avoidance of doubt, when the named parties to any such Proceeding (including any impleaded parties) include both the Pass-Through Trust and the Custodial Trust and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, AGC shall not be liable for fees and expenses of (i) more than one counsel (in addition to any local counsel) for the Custodial Trust and (ii) more than one counsel (in addition to any local counsel) for the Pass-Through Trust , in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. In no event shall AGC be liable for fees and expenses of more than one counsel (in addition to any local counsel) for the Custodial Trust in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.
Section 1.07. Settlement without Consent. The Custodial Trust may not settle any Proceeding without the consent of AGC.
ARTICLE 2
Section 2.01. Binding Effect. All agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of AGC and shall inure to the benefit of those persons to whom Expenses are due and payable by the Custodial Trust, including the Pass-Through Trust.
Section 2.02. Amendments . So long as there remain any CCS Securities outstanding, this Agreement shall not be modified or amended in any manner adverse to the holders of the CCS Securities without the consent of a majority of the holders of the outstanding face amount of CCS Securities.
Section 2.03. Notices . Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor by facsimile transmission (confirmed by mail), telex or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answer-back, if sent by telex).
If to the Custodial Trust, to:
Woodbourne Capital Trust I
c/o The Bank of New York (Delaware).
White Clay Center
3
Route 273
Newark, Delaware 19711
With a copy to:
The Bank of New York
101 Barclay Street, 8
th
Floor East
New York, New York 10286
Attention: Dealing and Trading Group
Telephone No.: (212) 815-2912
Facsimile No.: (212) 815-2830
If to AGC, to:
1325 Avenue of the Americas
18 th Floor
New York, NY 10019
Attention: General Counsel
Section 2.04. Governing Law . This Agreement and all the rights and obligations of the parties shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in such State.
Section 2.05. Defined Terms. Capitalized terms used but not defined in this Agreement have the meaning ascribed to them in the Amended and Restated Declaration of Trust (the Declaration of Trust ), dated April 8, 2005, by and among Banc of America Securities LLC, as Sponsor, Blue Ridge Investments, LLC as Tax Matters Partner, and The Bank of New York (Delaware), as Trustee, creating the Custodial Trust, as such Declaration of Trust may be amended and restated from time to time.
Section 2.06. Limitation of Liability. It is expressly understood that (i) this Agreement is executed and delivered by The Bank of New York (Delaware), not individually or personally but solely as Trustee, in the exercise of the powers and authority conferred and vested in it under the Declaration of Trust, (ii) each of the representations, undertakings and agreements herein made on the part of the Custodial Trust is made and intended not as personal representations, undertakings and agreements by The Bank of New York (Delaware), but is made and intended for the purpose for binding only the Custodial Trust and (iii) under no circumstances shall The Bank of New York (Delaware) be personally liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Custodial Trust under this Agreement or the other related documents.
Section 2.07. Third-Party Beneficiary. Each of the Trustee, the Custodian and the Pass-Through Trust is a third-party beneficiary to this Agreement and is entitled to the rights and benefits hereunder and may enforce the provisions hereof as if it were a party hereto.
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Section 2.08. Tax Confidentiality Waiver. Notwithstanding anything to the contrary contained herein, all persons may disclose to any and all persons, without limitation of any kind, the U.S. federal, state and local tax treatment of the Pass-Through Trust Securities, the CCS Securities and the transactions contemplated herein, any fact relevant to understanding the U.S. federal, state and local tax treatment of the Pass-Through Trust Securities, the CCS Securities and the transactions contemplated herein, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. federal, state and local tax treatment other than the name of any of the parties referenced herein or information that would permit identification of any of the parties referenced herein.
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Exhibit 10.8
ASSURED GUARANTY CORP.
ARTICLES SUPPLEMENTARY CLASSIFYING AND
DESIGNATING SERIES OF PREFERRED STOCK AS
SERIES A PERPETUAL PREFERRED STOCK,
SERIES B PERPETUAL PREFERRED STOCK
SERIES C PERPETUAL PREFERRED STOCK,
SERIES D PERPETUAL PREFERRED STOCK
Assured Guaranty Corp., a Maryland corporation having its principal office in Baltimore City, Maryland (which is hereinafter called, the Corporation), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
Pursuant to the authority expressly vested in the Board of Directors of Assured Guaranty Corp. in the charter of the Corporation, the Board of Directors adopted resolutions authorizing revisions to the Articles Supplementary Classifying and Designating Series Of Preferred Stock As Series A Perpetual Preferred Stock, Series B Perpetual Preferred Stock that were filed with the Department of Assessments and Taxation on February 14, 2005. The revised Articles Supplementary set forth below shall replace, in its entirety, the Articles Supplementary filed on February 14, 2005.
The text of the Articles Supplementary Classifying and Designating Series Of Preferred Stock As Series A Perpetual Preferred Stock, Series B Perpetual Preferred Stock, Series C Perpetual Preferred Stock, Series D Perpetual Preferred Stock, is as follows:
Pursuant to the authority expressly vested in the Board of Directors by Article SIXTH of the charter of the Corporation, the Board of Directors adopted resolutions authorizing the creation and issuance of four series of perpetual preferred stock, each series to be comprised
of 50,001 shares, with a liquidation preference of One Thousand Dollars ($1,000) per share and adopted resolutions establishing the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the shares of such series. Such preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption, number of shares and dividend rate, as determined by the Board are as follows:
WHEREAS , the Corporation is seeking to enhance its liquidity by entering into the series of transactions described below;
WHEREAS , Woodbourne Pass Through Trust (the Pass Through Trust), an unaffiliated special purpose trust, will issue in a private placement pass-through trust securities (the Pass Through Trust Securities), having an initial aggregate face amount of $200,000,000;
WHEREAS , the Woodbourne Pass-Through Trust will invest the proceeds of the issuance of the pass-through trust securities in a corresponding amount of CCS Securities (as defined below) to be issued by Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV;
WHEREAS , each of Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV will invest the proceeds of the issuance of the CCS Securities in a portfolio of high-grade commercial paper and (in limited cases) U.S. Treasury securities;
WHEREAS , each of Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III and Woodbourne Capital Trust IV will enter into a put agreement (the Put Agreement) with the Corporation under which the Corporation will have the right to require each such trust to purchase shares of the Corporations non-cumulative perpetual preferred stock created by these Articles Supplementary; and
WHEREAS , the distribution rate established in respect of the CCS Securities pursuant to the terms of the CCS Securities shall apply to the shares of non-cumulative perpetual preferred stock created by these Articles Supplementary as if such methodologies (i.e., initial placement, remarketing or auction) were performed specifically with respect to such shares of preferred stock of the Corporation.
NOW THEREFORE BE IT RESOLVED, that pursuant to the authority expressly vested in this Board of Directors by Article SIXTH of the charter of the Corporation, the Board of Directors hereby resolves as follows:
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Affiliate shall mean, as to any Person, any other Person controlled by, in control of, or under common control with, such Person.
Agent Member shall mean a member of the Securities Depositary that will act on behalf of an Existing Holder or a Potential Holder that is identified as such in a Holders Purchaser Letter.
Articles Supplementary shall mean these Articles Supplementary of the Corporation.
Auction shall mean a periodic implementation of the Auction Procedures.
Auction Agent shall mean The Bank of New York (Delaware) unless and until (i) another commercial bank or trust company duly organized under the laws of the United States of America and/or any state or territory thereof, having its principal place of business in New York, New York, and having a combined capital stock surplus and undivided profits of at least US$15,000,000, or (ii) a member of the National Association of Securities Dealers, Inc., having a capitalization of at least US$15,000,000, and in either case authorized by law to perform all the duties imposed on it under the Auction Agent Agreement and appointed by the Trustee, enters into an agreement with the Custodial Trusts and the Broker-Dealers to follow the Auction Procedures for the purpose of determining the Auction Rate and to act as transfer agent, registrar or dividend disbursing agent for the Preferred Stock to the extent such Preferred Stock is not held through a Clearing Agency.
Auction Agent Agreement shall mean the agreement entered into among the Custodial Trusts, the Broker-Dealers and the Auction Agent and any similar agreement with a successor Auction Agent, which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purpose of determining the Auction Rate.
Auction Date shall mean the last business date next preceding each Distribution Payment Date that occurs during the Auction Rate Mode.
Auction Procedures shall mean the procedures set forth in the Auction Agent Agreement for conducting Auctions, substantially as described in subsections (n) through (u), inclusive, below.
Auction Rate shall mean a rate per annum equal to the lesser of (i) the rate provided to the Corporation by the Auction Agent, as determined by the Auction Agent pursuant to the Auction
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Procedures (notwithstanding that such Auction Procedures relate to the CCS Securities) and (ii) the Maximum Rate.
Auction Rate Mode shall mean that the Distribution Rate for the CCS Securities is determined in accordance with the Auction Procedures.
Broker-Dealer shall mean any broker-dealer or other entity permitted by law (i) to perform the functions required of a broker-dealer in the Auction Procedures, (ii) that is a member of, or a participant in, the Securities Depositary and (iii) that has been selected by the Trustee and has entered into a Broker-Dealer Agreement that remains effective.
Broker-Dealer Agreement shall mean any agreement among the Custodial Trusts, the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction Procedures.
Business Day shall mean a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or any other day on which the banks in The City of New York, New York are authorized or obligated by law to close.
By-Laws shall mean the By-Laws of the Corporation.
Calculation Agent means [ name of entity acting as such for Remarketing ], its successor and assigns, or such other bank or trust company appointed to such capacity by the Trustee.
CCS Liquidation Amount means, with respect to each CCS Security, the then current face amount of such CCS Security.
CCS Security or CCS Securities shall mean each of the Committed Capital Securities issued by Woodbourne Capital Trust I, Woodbourne Capital Trust II, Woodbourne Capital Trust III or Woodbourne Capital Trust IV or all such series, as the context requires.
Clearing Agency shall mean an organization registered as a clearing agency pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency.
Clearing Agency Participant shall mean a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency.
Corporation means Assured Guaranty Corp., a Maryland domestic stock insurer.
Custodial Trust shall mean any issuer of CCS Securities.
Date of Original Issue shall mean, for each series of Preferred Stock, the date on which such series was initially issued.
Delayed Auction shall mean that during the Auction Rate Mode, following any allocation of any loss of principal or interest with respect to eligible assets held by a Custodial Trust realized on or after the third Business Day preceding an Auction Date or on an Auction Date, the then outstanding aggregate CCS Liquidation Amount of that Custodial Trusts CCS Securities (other
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than the Tax Matters Partner Share) will be reduced in integral increments of $100,000 to reflect such loss and the Auction Date for such CCS Securities will be delayed by three (3) Business Days.
Delayed Auction Rate shall mean the rate (expressed as a percentage rounded to one-thousandth (.001) of 1.000%) that is equal to the sum of (A) the one-month LIBOR Rate on the originally scheduled Auction Date for related delayed auction period, plus (B) 200 basis points (2.00%); provided that if the rating of the CCS Securities drops below Aa3 or below AA-, the Delayed Auction Rate will be the one-month LIBOR Rate on the originally scheduled Auction Date plus 250 basis points (2.50%).
Distribution Payment Date shall mean the first Business Day following the last day of each Distribution Period applicable to a series of Preferred Stock.
Distribution Period shall mean, for each series of Preferred Stock (i) each monthly period in a Flexed Rate Mode, except that the initial distribution period shall be the period from and including such series Date of Original Issue to but excluding the initial Distribution Payment Date and thereafter the monthly period from and including each Distribution Payment Date to but excluding the next following Distribution Payment Date, (ii) the period commencing on, and including, the Distribution Payment Date for a series of Preferred Stock for the preceding Distribution Period and ending on and including the 49th day thereafter in an Auction Rate Mode, or (iii) following a Fixed Rate Distribution Event, the period commencing on and including the Distribution Payment Date for such series of Preferred Stock for the preceding Distribution Period and ending on and including the 90th day thereafter, in each case, such ending date being the Reference Date ; provided , that, if the Reference Date is not a Business Day, the Distribution Period for such series of Preferred Stock will continue to but not include the next Business Day, in which case the next Distribution Period for such series of Preferred Stock will end on and include the next Reference Date following the date on which the preceding Distribution Period for such series of Preferred Stock would have ended if such normally scheduled date had been a Business Day.
Distribution Rate shall mean, as to each share of Preferred Stock of a series, the rate per annum at which a Dividend shall be payable on such share of Preferred Stock in respect of any Distribution Period as determined pursuant to these Articles Supplementary, which rate shall be the Initial Distribution Rate, the Remarketing Rate, the Auction Rate, the Fixed Rate Distribution or the Maximum Rate, as applicable. For the avoidance of doubt, notwithstanding that the procedures to establish the Auction Rate and Remarketing Rate relate to the CCS Securities or the Pass Through Trust Securities, the rates so determined shall also apply to the Preferred Stock as provided herein.
Dividend shall mean a payment in cash declared by the Corporation payable to a Holder of Preferred Stock.
DTC shall mean The Depository Trust Company.
Existing Holder shall mean, in respect of any Auction, any Person who is listed as the owner of any CCS Securities on the records of the Auction Agent or Clearing Agency, as applicable, at the close of business on the Business Day prior to such Auction.
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Failed Auction shall have the meaning given to such term in subsection (n)(iii)(C) hereof.
Failed Remarketing shall have the meaning given to such term in subsection (n)(iii) hereof.
Fixed Rate Distribution means a Distribution Rate equal to the fixed-rate equivalent of LIBOR plus 2.50% (the fixed-rate equivalent shall be determined by using the bid 30-year U.S. dollar swap rate quoted on page 19901 on the Bridge Telerate Service at 11:00 A.M. New York time on the LIBOR Determination Date; if the 30-year U.S. dollar swap rate is not available, the fixed-rate equivalent will be determined by using the bid 10-year U.S. dollar swap rate).
Fixed Rate Distribution Event shall have the meaning given to such term in subsection (d)(ii) hereof.
Flexed Mode Redemption Date shall mean, with respect to any CCS Securities that are in Flexed Rate Mode, the final Distribution Payment Date of the applicable Flexed Rate Period.
Flexed Rate Mode shall mean that the Distribution Rate for the CCS Securities are determined in accordance with the Remarketing Procedures.
Flexed Rate Period means the Initial Flexed Rate Period and for so long as the CCS Securities are in Flexed Rate Mode, each subsequent 5-year period following a Remarketing.
Holder shall mean a Person identified as a holder of record of shares of Preferred Stock, any CCS Securities or any Pass Through Trust Securities in the Register.
Holder Election Date means a date that is no later than the fifth Business Day prior to the proposed Remarketing Date.
Initial Distribution Rate shall mean, for each series of Preferred Stock, the Distribution Rate for the corresponding CCS Securities or Pass Through Trust Securities on the Date of Original Issue of such series of Preferred Stock.
Initial Flexed Rate Period means April 8, 2005 to the third anniversary of such date.
Junior Securities shall have the meaning given to such term in subsection (d)(i) hereof.
LIBOR shall mean, on the LIBOR Determination Date, the interest rate for the applicable Distribution Period determined by the Auction Agent on the basis of the British Bankers Association Interest Settlement Rate for one-month deposits in U.S. dollars as found on Telerate page 3750 as of 11:00 A.M. London time on such LIBOR Determination Date. As used herein Telerate page 3750 means the display designated as page 3750 on the Bridge Telerate Service. If on any LIBOR Determination Date the Auction Agent cannot determine LIBOR on the basis of the method set forth above, LIBOR shall be the rate per annum the Auction Agent determines to be either (a) the arithmetic mean (rounding such arithmetic mean upwards if necessary to the nearest whole multiple of 1/16%) of the one-month U.S. Dollar lending rate that New York City banks selected by the Auction Agent are quoting on the relevant LIBOR Determination Date to the principal London offices of at least two leading banks in the London interbank market or (b) in the event such arithmetic mean cannot be determined by the Auction
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Agent, the lowest one-month U.S. Dollar lending rate that the New York City banks selected by the Auction Agent quoting on such LIBOR Determination Date to leading European banks.
The establishment of LIBOR on each LIBOR Determination Date by the Auction Agent shall (in the absence of manifest error) be final and binding.
LIBOR Determination Date shall mean the second London business day prior to the commencement of each relevant Distribution Period.
Liquidation Preference shall have the meaning given to such term in subsection (f)(i) hereof.
Maximum Rate shall mean, in respect of any Distribution Period, a rate (expressed as a percentage rounded to the nearest one one-thousandth (0.001) of 1.000%) equal to the sum of (A) the Reference Rate in effect as of the end of the Business Day prior to the Remarketing Date or Auction Date applicable to such Distribution Period, plus (B)(l) if the CCS Securities are rated at or above Aa3 and AA- by Moodys and Standard & Poors, respectively, 2.00%; or (2) if the CCS Securities are rated below Aa3 and AA- by Moodys and Standard & Poors, respectively, 2.50%; provided, however , that if Moodys and Standard & Poors issue split ratings (e.g., Aa3 by Moodys and AA by Standard & Poors), then the lower rating shall be used to determine the Maximum Rate. In no event shall the Maximum Rate on any date of determination exceed the maximum rate permitted under applicable law.
Moodys shall mean Moodys Investor Services, Inc. and its successors.
Outstanding shall mean, as of any date and for any series of Preferred Stock, Preferred Stock theretofore issued by the Corporation except, without duplication, (i) any Preferred Stock theretofore cancelled or delivered to the Corporation for cancellation, (ii) any Preferred Stock as to which the Corporation or any Affiliate thereof (including any Affiliate that is a Broker-Dealer) shall be the owner, (iii) any Preferred Stock represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation or (iv) any Preferred Stock previously redeemed by the Corporation.
Pass Through Trust shall have the meaning given to such term in the recitals hereof.
Pass Through Trust Securities shall have the meaning given to such term in the recitals hereof.
Pass Through Trust Securities Face Amount means the stated liquidation amount of $100,000 per Pass Through Trust Security.
Person shall mean and shall include an individual, a partnership, a limited liability company, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.
Potential Holder shall mean any Person, including any Existing Holder, who may be interested in acquiring any Preferred Stock (or, in the case of an Existing Holder, additional Preferred Stock) either directly or indirectly through its ownership of CCS Securities.
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Preferred Stock Directors shall have the meaning given to such term in subsection (g)(iii) hereof.
Purchaser Letter shall have the meaning given to such term in subsection (j) hereof.
Redemption Date shall have the meaning given to such term in subsection (e)(i) hereof.
Redemption Price shall mean the price paid by the Corporation for shares of Preferred Stock redeemed on any Redemption Date, as determined in accordance with subsection (e) hereof.
Reference Date shall have the meaning given to such term in this subsection (c) within the definition of Distribution Period.
Reference Rate shall mean, on any date, the one-month LIBOR rate as published by the British Bankers Association as of 11:00 a.m., London time on such date.
Register shall mean the register of Holders of Preferred Stock and CCS Securities maintained on behalf of the Corporation by the Trustee or any other Person in its capacity as transfer agent and registrar for the Preferred Stock and the CCS Securities.
Remarketing shall mean a periodic implementation of the Remarketing Procedures.
Remarketing Agent shall mean each of Banc of America Securities LLC and Lehman Brothers Inc., and their respective successors or assigns, or such other remarketing agent appointed to such capacity by the Trustee.
Remarketing Agreement means the agreement entered into between the Pass Through Trust and the Remarketing Agent and any similar agreement with a successor Remarketing Agent, which provides, among other things, that the Remarketing Agent will follow the Remarketing Procedures for the purpose of determining the applicable Distribution Rate for the relevant Flexed Rate Period and that the Corporation will use its best efforts to facilitate the Remarketing in accordance with such procedures.
Remarketing Date means any Business Day no later than the third Business Day prior to any Remarketing Settlement Date.
Remarketing Procedures shall mean the procedures set forth in the Remarketing Agreement for conducting a Remarketing, substantially as described in subsection (n) hereof.
Remarketing Rate shall mean a rate per annum equal to the rate provided to the Corporation by the Remarketing Agent, as determined by the Remarketing Agent pursuant to the Remarketing Procedures (notwithstanding that such Remarketing Procedures relate to the Pass Through Trust Securities), which rate shall be less than the Maximum Rate.
Remarketing Settlement Date means the first Business Day of the Flexed Rate Period with respect to which a Remarketing occurred.
Restated Charter means that document on file with the Maryland Department of Assessment and Taxation entitled Articles of Amendment and Restatement with an effective date of February 14, 2005.
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Securities Depositary shall mean The Depository Trust Company or any successor company or other entity selected by the Corporation as securities depositary for the Preferred Stock and the CCS Securities that agrees to follow the procedures required to be followed by such securities depository in connection with the Preferred Stock and the CCS Securities.
Standard & Poors shall mean Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc. and its successors.
Tax Matters Partner shall mean the entity acting as tax matters partner of any of the Custodial Trusts.
Tax Matters Partner Share shall mean the CCS Securities of a Custodial Trust owned by a Tax Matter Partner in order to qualify such entity to act as tax matters partner of the relevant Custodial Trust.
Trustee shall mean The Bank of New York (Delaware), as trustee of the Pass Through Trust and the Custodial Trusts, unless and until a successor trustee is appointed pursuant to the organizational documents of the Pass Through Trust or the Custodial Trusts, as the case may be.
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(i) The Preferred Stock shall bear the following legend:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ) , OR ANY STATE OR OTHER SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH ASSURED GUARANTY CORP. ( ASSURED GUARANTY ) OR ANY AFFILIATE OF ASSURED GUARANTY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE RESALE RESTRICTION TERMINATION DATE ), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (C) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND: PROVIDED THAT ASSURED GUARANTY AND THE TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (B) OR (C) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
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HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS HAVE THE MEANINGS GIVEN TO THEM BY REGULATIONS UNDER THE SECURITIES ACT.
(ii) The purchaser or transferee of any Preferred Stock shall deliver a letter (the Purchaser Letter ) addressed to the Trustee of the relevant Custodial Trust and the related Broker-Dealer if in Auction Rate Mode in which such Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell any Preferred Stock and/or CCS Securities only as set forth in the Auction Procedures, Remarketing Procedures, or as otherwise required, as applicable.
Whenever reference is made to shares ranking on a parity with the Preferred Stock, such reference shall mean and include all shares of the Corporation in respect of which the rights of the Holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation rank equally with the rights of the Holders of Preferred Stock; and whenever reference is made to Junior Securities or shares ranking junior to the Preferred Stock, such reference shall mean and include all shares of the Corporation in respect of which the rights of the Holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are junior and subordinate to the rights of the holders of the Preferred Stock.
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For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (A) or (B) of this subsection (p)(i) is hereinafter referred to as an Order and collectively as Orders . Each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a Bidder and collectively as Bidders .
Subject to the provisions described in subsection (r) hereof, a Sell Order by an Existing Holder will constitute an irrevocable offer to sell the CCS Liquidation Amount of outstanding CCS Securities specified in such Sell Order.
If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate down to the next highest one-thousandth (0.001) of 1.000%.
If an Order or Orders covering all outstanding CCS Securities held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline for any reason, including the failure of a Broker-Dealer to submit such Existing Holders Order to the Auction Agent prior to the Submission Deadline, the Auction Agent will deem a Hold Order to have been submitted on behalf of such Existing Holder covering the CCS Liquidation Amount of outstanding CCS Securities held by such Existing Holder and not subject to an Order submitted to the Auction Agent.
Neither a Custodial Trust nor the Auction Agent will be responsible for any failure of the Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Holder or Potential Holder, nor will any such party be responsible for failure by the Securities Depositary, to effect any transfer or to
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provide the Auction Agent with current information regarding registration of transfers.
Neither the Corporation nor any Affiliate thereof, nor any Holder of a fractional share of the Preferred Stock or the CCS Securities may submit an Order in any Auction.
An Existing Holder may submit different types of Orders in an Auction with respect to the CCS Securities then held by such Existing Holder. An Existing Holder that offers to purchase additional CCS Securities is, for purposes of such offer, treated as a Potential Holder with respect to such securities.
22
If more than one Bid for CCS Securities is submitted on behalf of any Potential Holder, each Bid submitted will be a separate Bid with the rate and amount therein specified. Any Bid or Sell Order submitted by an Existing Holder not equal to an integral multiple of the CCS Liquidation Amount of each share of CCS Securities will be rejected and be deemed a Hold Order. Any Bid submitted by a Potential Holder not equal to an integral multiple of the CCS Liquidation Amount of CCS Securities will be rejected. Any Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to the Submission Deadline on any Auction Date shall be irrevocable, except in the case of a Delayed Auction, in which the new Orders will be submitted on the date of such Delayed Auction.
23
24
25
26
27
If all CCS Securities are subject to Submitted Hold Orders, all Submitted Bids will be rejected.
If as a result of the procedures described in clause (B) or (C) above, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a security of CCS Securities, the Auction Agent will, in such manner as it will, in its sole discretion, determine, round up or down the number of CCS Securities to be purchased or sold by any Existing Holder or Potential Holder so that only whole securities will be entitled to be purchased or sold by each Potential Holder or Existing Holder even if such allocation results in one or more of such Potential Holders not purchasing any CCS Securities.
Based on the results of each Auction, the Auction Agent will determine the aggregate CCS Liquidation Amount of CCS Securities to be purchased and the aggregate CCS Liquidation Amount of CCS Securities to be sold by Potential Holders and Existing Holders (other than any fractional Tax Matters Partner Share) on whose behalf the Broker-Dealer submitted Bids or Sell Orders.
28
29
* * *
These Articles Supplementary shall be effective on the date of acceptance for record by the Maryland State Department of Assessments and Taxation.
IN WITNESS WHEREOF, ASSURED GUARANTY CORP. has caused these presents to be signed in its name and on behalf by its President and witnessed by its Secretary or one of its Assistant Secretaries on , 2005.
ATTEST: |
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ASSURED GUARANTY CORP.,
(a
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30
THE UNDERSIGNED, President of ASSURED GUARANTY CORP., who executed on behalf of the Corporation the foregoing Articles Supplementary of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury.
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31
EXHIBIT 31.1
Assured Guaranty Ltd.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dominic J. Frederico, certify that:
1. I have reviewed this annual report on Form 10-Q of Assured Guaranty 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 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. [Reserved]
c. 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
d. 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 officer 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 function):
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.
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By: |
/S/ Dominic J. Frederico |
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Dominic J. Frederico |
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President and Chief Executive Officer |
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D ate: May 9, 2005 |
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EXHIBIT 31.2
Assured Guaranty Ltd.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert B. Mills, certify that:
1. I have reviewed this annual report on Form 10-Q of Assured Guaranty 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 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. [Reserved]
c. 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
d. 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 officer 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 function):
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.
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By: |
/S/ Robert B. Mills |
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Robert B. Mills |
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Chief Financial Officer |
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Date: May 9, 2005 |
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EXHIBIT 32.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Assured Guaranty Ltd. (the Company) for the period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), Dominic J. Frederico, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(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.
/S/ Dominic J. Frederico |
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Name: Dominic J. Frederico |
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Title: President and Chief Executive Officer |
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Date: May 9, 2005 |
EXHIBIT 32.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Assured Guaranty Ltd. (the Company) for the period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), Robert B. Mills, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(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.
/S/ Robert B. Mills |
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Name: Robert B. Mills |
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Title: Chief Financial Officer |
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Date: May 9, 2005 |
EXHIBIT 99.1
ASSURED GUARANTY CORP.
INDEX
Assured Guaranty Corp.
Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)
(Unaudited)
|
|
March 31,
|
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December 31,
|
|
||
|
|
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|
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|
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Assets |
|
|
|
|
|
||
Fixed maturity securities, at fair value (amortized cost: $1,124,579 in 2005 and $1,108,149 in 2004) |
|
$ |
1,171,755 |
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$ |
1,172,355 |
|
Short-term investments, at cost which approximates fair value |
|
30,733 |
|
66,057 |
|
||
Total investments |
|
1,202,488 |
|
1,238,412 |
|
||
Cash and cash equivalents |
|
11,075 |
|
2,766 |
|
||
Accrued investment income |
|
15,213 |
|
14,547 |
|
||
Deferred acquisition costs |
|
139,798 |
|
140,335 |
|
||
Prepaid reinsurance premiums |
|
48,984 |
|
49,653 |
|
||
Reinsurance recoverable on ceded losses |
|
33,371 |
|
36,379 |
|
||
Premiums receivable |
|
33,811 |
|
48,868 |
|
||
Goodwill |
|
85,417 |
|
85,417 |
|
||
Unrealized gains on derivative financial instruments |
|
34,368 |
|
29,445 |
|
||
Other assets |
|
10,707 |
|
10,683 |
|
||
Total assets |
|
$ |
1,615,232 |
|
$ |
1,656,505 |
|
|
|
|
|
|
|
||
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Unearned premium reserves |
|
$ |
363,503 |
|
$ |
369,320 |
|
Reserves for losses and loss adjustment expenses |
|
109,944 |
|
118,403 |
|
||
Profit commissions payable |
|
4,166 |
|
4,181 |
|
||
Reinsurance balances payable |
|
27,578 |
|
64,929 |
|
||
Deferred income taxes |
|
57,433 |
|
58,255 |
|
||
Funds held by Company under reinsurance contracts |
|
5,854 |
|
5,829 |
|
||
Other liabilities |
|
23,057 |
|
28,108 |
|
||
Total liabilities |
|
591,535 |
|
649,025 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
Shareholders equity |
|
|
|
|
|
||
Common stock ($720.00 par value, 200,000 shares authorized; 20,834 shares issued and outstanding in 2005 and 2004) |
|
15,000 |
|
15,000 |
|
||
Additional paid-in capital |
|
390,462 |
|
386,403 |
|
||
Unearned stock grant compensation |
|
(7,888 |
) |
(5,845 |
) |
||
Retained earnings |
|
594,665 |
|
569,222 |
|
||
Accumulated other comprehensive income |
|
31,458 |
|
42,700 |
|
||
Total shareholders equity |
|
1,023,697 |
|
1,007,480 |
|
||
Total liabilities and shareholders equity |
|
$ |
1,615,232 |
|
$ |
1,656,505 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Assured Guaranty Corp.
Consolidated Statements of
Operations and Comprehensive Income
(in thousands of U.S. dollars)
(Unaudited)
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Revenues |
|
|
|
|
|
||
Gross written premiums |
|
$ |
32,371 |
|
$ |
47,534 |
|
Ceded premiums |
|
(6,897 |
) |
(405 |
) |
||
Net written premiums |
|
25,474 |
|
47,129 |
|
||
Decrease (increase) in net unearned premium reserves |
|
5,158 |
|
(9,631 |
) |
||
Net earned premiums |
|
30,632 |
|
37,498 |
|
||
Net investment income |
|
13,322 |
|
12,625 |
|
||
Net realized investment gains |
|
162 |
|
|
|
||
Unrealized gains on derivative financial instruments |
|
4,923 |
|
10,001 |
|
||
Total revenues |
|
49,039 |
|
60,124 |
|
||
|
|
|
|
|
|
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Expenses |
|
|
|
|
|
||
Loss and loss adjustment expenses |
|
(1,828 |
) |
8,713 |
|
||
Profit commission expense |
|
3 |
|
302 |
|
||
Acquisition costs |
|
8,053 |
|
9,187 |
|
||
Other operating expenses |
|
7,917 |
|
10,781 |
|
||
Goodwill impairment |
|
|
|
1,645 |
|
||
Total expenses |
|
14,145 |
|
30,628 |
|
||
|
|
|
|
|
|
||
Income before provision for income taxes |
|
34,894 |
|
29,496 |
|
||
Provision for income taxes |
|
|
|
|
|
||
Current |
|
4,310 |
|
2,178 |
|
||
Deferred |
|
5,141 |
|
5,992 |
|
||
Total provision for income taxes |
|
9,451 |
|
8,170 |
|
||
Net income |
|
25,443 |
|
21,326 |
|
||
Other comprehensive income, net of taxes |
|
|
|
|
|
||
Unrealized holding (losses) gains on fixed maturity securities arising during the year |
|
(11,137 |
) |
6,093 |
|
||
Reclassification adjustment for realized gains included in net income |
|
(105 |
) |
|
|
||
Change in net unrealized gains on fixed maturity securities |
|
(11,242 |
) |
6,093 |
|
||
Comprehensive income |
|
$ |
14,201 |
|
$ |
27,419 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Assured Guaranty Corp.
Consolidated Statements of
Shareholders Equity
For the Three Months Ended March 31, 2005
(in thousands of U.S. dollars)
(Unaudited)
|
|
Common
|
|
Additional
|
|
Unearned
|
|
Retained
|
|
Accumulated
|
|
Total
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, January 1, 2005 |
|
$ |
15,000 |
|
$ |
386,403 |
|
$ |
(5,845 |
) |
$ |
569,222 |
|
$ |
42,700 |
|
$ |
1,007,480 |
|
Net income |
|
|
|
|
|
|
|
25,443 |
|
|
|
25,443 |
|
||||||
Tax benefit for options exercised |
|
|
|
4,059 |
|
|
|
|
|
|
|
4,059 |
|
||||||
Unrealized loss on fixed maturity securities, net of tax of $(5,975) |
|
|
|
|
|
|
|
|
|
(11,242 |
) |
(11,242 |
) |
||||||
Unearned stock grant compensation, net |
|
|
|
|
|
(2,043 |
) |
|
|
|
|
(2,043 |
) |
||||||
Balance, March 31, 2005 |
|
$ |
15,000 |
|
$ |
390,462 |
|
$ |
(7,888 |
) |
$ |
594,665 |
|
$ |
31,458 |
|
$ |
1,023,697 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Assured Guaranty Corp.
Consolidated Statements of
Cash Flows
(in thousands of U.S. dollars)
(Unaudited)
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Operating activities |
|
|
|
|
|
||
Net income |
|
$ |
25,443 |
|
$ |
21,326 |
|
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities: |
|
|
|
|
|
||
Non-cash operating expenses |
|
727 |
|
|
|
||
Net amortization of premium on fixed maturity securities |
|
1,454 |
|
1,888 |
|
||
Goodwill impairment |
|
|
|
1,645 |
|
||
Provision for deferred income taxes |
|
5,141 |
|
5,992 |
|
||
Net realized investment gains |
|
(162 |
) |
|
|
||
Change in unrealized gains on derivative financial instruments |
|
(4,923 |
) |
(10,001 |
) |
||
Change in deferred acquisition costs |
|
537 |
|
(3,849 |
) |
||
Change in accrued investment income |
|
(666 |
) |
(1,170 |
) |
||
Change in premiums receivable |
|
15,057 |
|
(3,931 |
) |
||
Change in prepaid reinsurance premiums |
|
669 |
|
540 |
|
||
Change in unearned premium reserves |
|
(5,817 |
) |
9,091 |
|
||
Change in reserves for losses and loss adjustment expenses, net |
|
(42,802 |
) |
6,111 |
|
||
Change in profit commissions payable |
|
(15 |
) |
87 |
|
||
Change in funds held by Company under reinsurance contracts |
|
25 |
|
|
|
||
Other |
|
(3,934 |
) |
(5,182 |
) |
||
Net cash flows (used in) provided by operating activities |
|
(9,266 |
) |
22,547 |
|
||
|
|
|
|
|
|
||
Investing activities |
|
|
|
|
|
||
Fixed maturity securities: |
|
|
|
|
|
||
Purchases |
|
(59,545 |
) |
(46,882 |
) |
||
Sales |
|
41,822 |
|
20,816 |
|
||
Maturities |
|
|
|
|
|
||
Sales of short-term investments, net |
|
35,324 |
|
4,336 |
|
||
Net cash flows provided by (used in) investing activities |
|
17,601 |
|
(21,730 |
) |
||
|
|
|
|
|
|
||
Effect of exchange rate changes |
|
(26 |
) |
|
|
||
Increase in cash and cash equivalents |
|
8,309 |
|
817 |
|
||
Cash and cash equivalents at beginning of period |
|
2,766 |
|
18,009 |
|
||
Cash and cash equivalents at end of period |
|
$ |
11,075 |
|
$ |
18,826 |
|
|
|
|
|
|
|
||
Supplementary cash flow information |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Income taxes |
|
$ |
|
|
$ |
6,389 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Assured Guaranty Corp.
Notes to Consolidated
Financial Statements
March 31, 2005
(Unaudited)
1. Business and Organization
Assured Guaranty Corp. (formerly known as ACE Guaranty Corp. and ACE Guaranty Re Inc.) (the Company) is a Maryland domiciled company, which commenced operations in January 1988 and provides insurance and reinsurance of investment grade financial guaranty exposures, including municipal and nonmunicipal reinsurance and credit default swap (CDS) transactions. As of December 31, 2003, the Company was an indirect wholly-owned subsidiary of ACE Limited (ACE), a holding company incorporated with limited liability under Cayman Islands Companies Law. However, on April 28, 2004, subsidiaries of ACE completed an initial public offering (IPO) of 49,000,000 of their 75,000,000 common shares of their wholly-owned subsidiary and parent of the Company, Assured Guaranty Ltd. (Assured Guaranty). Assured Guarantys common shares are traded on the New York Stock Exchange under the symbol AGO. This offering raised approximately $840.1 million in net proceeds, all of which went to the selling shareholders. As a result of the IPO, the Company implemented a new underwriting strategy. As part of this strategy, the Company has exited certain lines of business. The Company was renamed Assured Guaranty Corp. upon completion of the IPO.
The Company has financial strength ratings of AAA and Aa1 as of December 31, 2004 from Standard & Poors Rating Service (S&P) and Moodys Investor Services, Inc. (Moodys), respectively, and is licensed in 48 jurisdictions. The Company owns 100% of Assured Value Insurance Company (formerly Assured Guaranty Risk Assurance Company and ACE Risk Assurance Company), a Maryland domiciled company and Assured Guaranty (UK) Ltd. (AG (UK)), a company organized under the laws of the United Kingdom.
Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. A loss event occurs upon existing or anticipated credit deterioration, while a payment under a policy occurs when the insured obligation defaults. This requires the Company to pay the required principal and interest when due in accordance with the underlying contract. The principal types of obligations covered by the Companys financial guaranty direct and financial guaranty assumed reinsurance businesses are structured finance obligations and public finance obligations. Because both businesses involve similar risks, the Company analyzes and monitors its financial guaranty direct portfolio and its financial guaranty reinsurance portfolio on a combined basis.
The Companys financial results include three principal business segments: financial guaranty direct, financial guaranty reinsurance and other. These segments are further discussed in Note 9.
2. Basis of Presentation
The unaudited interim consolidated financial statements, which include the accounts of the Company, have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Companys financial condition, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements cover the three-month period ended March 31, 2005 and the three-month period ended March 31, 2004. Operating results for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results that may be expected for a full year. Certain items in the prior year consolidated financial statements have been reclassified to conform with the current period presentation. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements included in the audited consolidated financial statements of Assured Guaranty Ltd. as of December 31, 2004 and
6
2003, and for each of the years in the three-year period ended December 31, 2004 which was filed with the Securities and Exchange Commission as Exhibit 99.1.
The Company and its subsidiaries are subject to U.S. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (FAS) FAS No. 109, Accounting for Income Taxes. The Companys provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its derivative financial instruments. A discrete calculation of the provision is calculated for each interim period. The Companys tax sharing agreement is further discussed in Note 8.
3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FAS No. 123 (revised 2004), Share-Based Payment (FAS 123R). FAS 123R replaces FAS No.123, Accounting for Stock-Based Compensation (FAS 123) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). As permitted by FAS 123, the Company currently accounts for share-based payments to employees using APB 25s intrinsic value method and, as such, generally recognizes no compensation expense for employee stock options. Accordingly, the adoption of FAS 123Rs fair value method will impact the Companys results of operations, although it will have no impact on its overall financial position. The impact of adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FAS 123R in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income in Note 7. FAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in the First Quarter 2005 and First Quarter 2004 for such excess tax deductions were $4.1 million and $5.4 million, respectively. In April 2005, the Securities and Exchange Commission delayed the effective date for adoption of FAS 123R for the Company until December 31, 2005.
In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments (EITF 03-1), which provides guidance on recognizing other-than-temporary impairments on several types of investments including debt securities classified as held-to-maturity and available-for-sale under FAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. In September 2004, FASB Staff Position (FSP) EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments was issued, delaying the effective date for the recognition and measurement guidance of EITF 03-1, as contained in paragraphs 10-20, until certain implementation issues are addressed and a final FSP providing implementation guidance is issued. The disclosure requirements of the consensus remain in effect. The Company will continue to monitor this project and, once the final FSP is issued, will evaluate its potential effects on its results of operations.
4. Reinsurance
To limit its exposure on assumed risks, at the time of the IPO, the Company entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE, to cede
7
a portion of the risk underwritten by the Company. The Company has also entered into other reinsurance agreements with non-affiliated companies.
In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. Direct, assumed, and ceded reinsurance amounts were as follows:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in thousands of U.S. dollars) |
|
||||
|
|
|
|
|
|
||
Premiums Written |
|
|
|
|
|
||
Direct |
|
$ |
16,004 |
|
$ |
9,128 |
|
Assumed |
|
16,367 |
|
38,406 |
|
||
Ceded |
|
(6,897 |
) |
(405 |
) |
||
Net |
|
$ |
25,474 |
|
$ |
47,129 |
|
|
|
|
|
|
|
||
Premiums Earned |
|
|
|
|
|
||
Direct |
|
$ |
12,567 |
|
$ |
9,766 |
|
Assumed |
|
25,630 |
|
25,613 |
|
||
Ceded |
|
(7,565 |
) |
2,119 |
|
||
Net |
|
$ |
30,632 |
|
$ |
37,498 |
|
|
|
|
|
|
|
||
Loss and Loss Adjustment Expenses |
|
|
|
|
|
||
Direct |
|
$ |
(1,103 |
) |
$ |
1,550 |
|
Assumed |
|
(3,758 |
) |
7,163 |
|
||
Ceded |
|
3,033 |
|
|
|
||
Net |
|
$ |
(1,828 |
) |
$ |
8,713 |
|
Reinsurance recoverable on ceded losses and LAE as of March 31, 2005 and December 31, 2004 is $33.4 million and $36.4 million, respectively.
5. Commitments and Contingencies
Lawsuits arise in the ordinary course of the Companys business. It is the opinion of the Companys management, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys financial position, results of operations or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Companys results of operations or liquidity in a particular quarter or fiscal year.
In April, the Company received a Notice of Order to Preserve (Order) from the Office of the Commissioner of Insurance, State of Georgia (Commissioner). The Order was directed to ACE Limited, and all affiliates and requires the preservation of documents and other items related to finite insurance and a broad group of other insurance and reinsurance agreements. Also in April, the Company, and numerous other insurers, received a subpoena from the Commissioner related to the initial phase of the Commissioners investigation into finite-risk transactions. The subpoena requests information on the Companys assumed and ceded reinsurance contracts in force during 2004. The Company is cooperating with the Commissioner.
In the ordinary course of their respective businesses, certain of the Companys subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although recoveries in any one or more of these proceedings during any quarter or fiscal year could be material to the Companys results of operations in that particular quarter or fiscal year.
The Company is party to reinsurance agreements with most of the major monoline primary financial guaranty insurance companies. The Companys facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, the Company may be
8
required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
6. Credit Facilities
On April 29, 2004, t he Company entered into a $250.0 million unsecured credit facility ($250.0 million credit facility) to r eplace its general corporate purpose credit facilities, with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America are acting as co-arrangers. Each of Assured Guaranty Ltd., Assured Guaranty Corp. (AGC) and Assured Guaranty (UK) Ltd. (AG (UK)), is a party, as borrower. The $250.0 million credit facility was a 364-day facility and any amounts outstanding under the facility at its expiration will be due and payable one year following the facilitys expiry. Under the $250.0 million credit facility, AGC can borrow up to $250.0 million, Assured Guaranty Ltd. has a borrowing limit not to exceed $50.0 million, and Assured Guaranty (UK) Ltd. has a borrowing limit not to exceed $12.5 million. As of March 31, 2005 and December 31, 2004, no amounts had been drawn under this credit facility.
As of December 31, 2004, the Company was party to a $175.0 million non-recourse credit facility with a syndicate of banks. This facility was specifically designed to provide rating agency qualified capital to further support the Companys claim paying resources. This agreement is due to expire December 2010. As of March 31, 2005 and December 31, 2004, no amounts had been drawn under this credit facility.
On April 15, 2005, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million three-year unsecured revolving credit facility (the $300.0 million credit facility) with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as lead arrangers and KeyBank National Association (KeyBank) acted as syndication agent. Under the $300.0 million credit facility, each of the Company, AG (UK) and, subject to Assured Guaranty Re International Ltd. (AGRI) and Assured Guaranty Re Overseas Ltd. (AGRO) entering into the guaranties discussed below, Assured Guaranty Ltd., AGRI and AGRO are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.
The $300.0 million credit facility is intended to replace the $250.0 million credit facility. The $250.0 million credit facility was terminated as of the closing of the $300.0 million credit facility.
Of the $300.0 million available to be borrowed, no more than $100.0 million may be borrowed by Assured Guaranty Ltd., AGRI or AGRO, individually or in the aggregate, and no more than $12.5 million may be borrowed by AG (UK). The stated amount of all outstanding letters of credit and the amount of all unpaid drawings in respect of all letters of credit cannot, in the aggregate, exceed $100.0 million.
The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.
At the closing of the $300.0 million credit facility, (i) the Company guaranteed the obligations of AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AGRI and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of the Company and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of the Company and AG (UK) under such facility and (iii) Assured Guaranty Overseas US Holdings Inc., as a Material Non-AGC Subsidiary (as defined in the related credit agreement), guaranteed the obligations of Assured Guaranty Ltd., AGRI and AGRO under such facility. It was further agreed that none of Assured Guaranty Ltd., AGRI or AGRO would be able to borrow under the $300.0 million credit facility until AGRI and AGRO, as Material Non-AGC Subsidiaries, have both guaranteed the obligations of the other and of Assured Guaranty Ltd. under such facility.
The $300.0 million credit facilitys financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of $1.2 billion, (b) maintain an interest coverage ratio of at least 2.5:1, and (c) maintain a maximum debt-to-capital ratio of 30%. In addition, the $300.0 million credit facility requires that the Company: (x) maintain qualified statutory capital of at least 80% of its statutory capital as of the fiscal quarter prior to the closing date of the facility and (y) maintain a ratio of aggregate net par outstanding to qualified statutory capital of
9
not more than 150:1. Furthermore, the $300.0 million credit facility contains restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding.
7. Employee Benefit Plans and Stock Based Compensation
Employee Benefit Plans
Prior to the IPO, Assured Guarantys officers and employees participated in ACEs long-term incentive plans providing options to purchase shares and restricted share unit awards.
Upon completion of the IPO, any unvested options to purchase ACE ordinary shares granted to the Companys officers or employees under the ACE employee long-term incentive plan immediately vested and any unvested restricted ACE ordinary shares were forfeited. These officers and employees generally had 90 days from the date of the IPO to exercise any vested options to acquire ACE ordinary shares. The acceleration of vesting of options to purchase ordinary shares resulted in a pre-tax charge to the Company of approximately $1.4 million. Based upon a price of $42.79 per ACE ordinary share, the Company incurred a pre-tax charge of $3.1 million and contributed cash in the same amount to fund a trust, with a trustee, for the value of the restricted ACE ordinary shares forfeited by all of the Companys officers and employees. These pre-tax charges took place during the second quarter 2004. The trust purchased common shares of Assured Guaranty Ltd. and allocated to each such individual common shares having the approximate value of the ACE ordinary shares forfeited by such individual. Based on Assured Guarantys initial public offering price of $18.00 per common share, the trust purchased approximately 173,000 Assured Guaranty Ltd. common shares on behalf of the Company. The common shares will be deliverable to each individual on the 18-month anniversary of the IPO so long as during that 18-month period the individual was not employed, directly or indirectly, by any designated financial guaranty company. (The forfeiture restriction has been waived for one former employee of the Company.) Any forfeited common shares will be delivered to Assured Guaranty Ltd. The trustees do not have any beneficial interest in the trust. Since completion of the IPO, the Companys officers and employees are no longer eligible to participate in the ACE long-term incentive plans. In connection with these events, the Company received $2.5 million from ACE, for the book value of unrestricted compensation, which is recorded in unearned stock grant compensation, which is included in shareholders equity at December 31, 2004.
Stock Based Compensation
The Company accounts for stock-based compensation plans in accordance with APB 25 and related interpretations. No compensation expense for options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Pro forma information regarding net income and earnings per share is required by FAS 123. In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS 148). FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosure in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.
For restricted stock awards, the Company records the market value of the shares awarded at the time of the grant as unearned stock grant compensation and includes it as a separate component of shareholders equity. The unearned stock grant compensation is amortized into income ratably over the vesting period.
10
The following table outlines the Companys net income for the three-month period ended March 31, 2005, had the compensation expense been determined in accordance with the fair value method recommended in FAS 123.
(in thousands of U.S. dollars) |
|
Three Months Ended
|
|
|
Net income as reported |
|
$ |
25,443 |
|
Add: Stock-based compensation expense included in reported net income, net of income tax |
|
284 |
|
|
Deduct: Compensation expense, net of income tax |
|
623 |
|
|
Pro forma net income |
|
$ |
25,104 |
|
Since the Company was an indirect wholly-owned subsidiary of ACE during the three-month period ended March 31, 2004, management has determined that disclosing amounts related to these periods would not be meaningful, as the compensation expense determined under FAS 123 would be based on ACEs ordinary share price. The amount of stock-based compensation expense included in reported net income, net of income tax, was $0.1 million for the three months ended March 31, 2004.
8. Tax Allocation Agreement
In connection with the IPO, the Company and ACE Financial Services Inc. (AFS) entered into a tax allocation agreement, whereby the Company and AFS will make a Section 338 (h)(10) election that will have the effect of increasing the tax basis of certain affected subsidiaries tangible and intangible assets to fair value. Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.
As a result of the election, the Company has adjusted its net deferred tax liability, to reflect the new tax basis of the Companys affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Companys affected subsidiaries actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15-year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.
The Company recorded a $49.0 million reduction of its existing deferred tax liability, based on an estimate of the ultimate resolution of the Section 338(h)(10) election. Under the tax allocation agreement, the Company estimates that as of the IPO date, it will pay $20.9 million to AFS and accordingly has established this amount as a liability, which is included in other liabilities on the balance sheet. The difference, which is attributable to the change in the tax basis of certain liabilities for which there is no associated step-up in the tax basis of its assets and no amounts due to AFS, resulted in an increase to additional paid-in capital of $28.1 million during 2004.
9. Segment Reporting
The Company has three principal business segments: (1) financial guaranty direct, which includes transactions whereby the Company provides an unconditional and irrevocable guaranty that indemnifies the holder of a financial obligation against non-payment of principal and interest when due, and includes credit support for credit default swaps; (2) financial guaranty reinsurance, which includes agreements whereby the Company is a reinsurer and agrees to indemnify a primary insurance company against part or all of the loss which the latter may sustain under a policy it has issued; and (3) other, which includes trade credit reinsurance in which the Company is no longer active.
The Company does not segregate certain assets and liabilities at a segment level since management reviews and controls these assets and liabilities on a consolidated basis. The Company allocates operating expenses to each segment based on a comprehensive cost study. The other segment received proportional share of operating expenses up to the IPO date. From the IPO date, the other segment was not allocated operating expenses. Management uses underwriting gains and losses as the primary measure of each segments financial performance.
11
The following table summarizes the components of underwriting gain for each reporting segment (amounts may not foot due to rounding):
|
|
Three Months Ended March 31, 2005 |
|
||||||||||
|
|
Financial
|
|
Financial
|
|
Other |
|
Total |
|
||||
|
|
(in millions of U.S. dollars) |
|
||||||||||
Gross written premiums |
|
$ |
19.8 |
|
$ |
11.9 |
|
$ |
0.6 |
|
$ |
32.4 |
|
Net written premiums |
|
16.0 |
|
9.5 |
|
|
|
25.5 |
|
||||
Net earned premiums |
|
12.4 |
|
18.2 |
|
|
|
30.6 |
|
||||
Loss and loss adjustment expenses |
|
0.2 |
|
(2.0 |
) |
|
|
(1.8 |
) |
||||
Profit commission expense |
|
|
|
|
|
|
|
|
|
||||
Acquisition costs |
|
1.2 |
|
6.9 |
|
|
|
8.1 |
|
||||
Other operating expenses |
|
5.3 |
|
2.5 |
|
|
|
7.9 |
|
||||
Underwriting gain |
|
$ |
5.7 |
|
$ |
10.8 |
|
$ |
|
|
$ |
16.5 |
|
|
|
Three Months Ended March 31, 2004 |
|
||||||||||
|
|
Financial
|
|
Financial
|
|
Other |
|
Total |
|
||||
|
|
(in millions of U.S. dollars) |
|
||||||||||
Gross written premiums |
|
$ |
11.3 |
|
$ |
35.1 |
|
$ |
1.2 |
|
$ |
47.5 |
|
Net written premiums |
|
10.9 |
|
35.1 |
|
1.2 |
|
47.1 |
|
||||
Net earned premiums |
|
10.8 |
|
18.5 |
|
8.2 |
|
37.5 |
|
||||
Loss and loss adjustment expenses |
|
0.9 |
|
3.5 |
|
4.3 |
|
8.7 |
|
||||
Profit commission expense |
|
|
|
0.1 |
|
0.2 |
|
0.3 |
|
||||
Acquisition costs |
|
0.7 |
|
6.4 |
|
2.1 |
|
9.2 |
|
||||
Other operating expenses |
|
5.0 |
|
3.1 |
|
2.6 |
|
10.8 |
|
||||
Underwriting gain (loss) |
|
$ |
4.3 |
|
$ |
5.4 |
|
$ |
(1.1 |
) |
$ |
8.5 |
|
The following is a reconciliation of total underwriting gain to income before provision for income taxes for the periods ended:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
|
|
|
|
|
|
||
Total underwriting gain |
|
$ |
16.5 |
|
$ |
8.5 |
|
Net investment income |
|
13.3 |
|
12.6 |
|
||
Net realized investment gains |
|
0.2 |
|
|
|
||
Unrealized gains on derivative financial instruments |
|
4.9 |
|
10.0 |
|
||
Goodwill impairment |
|
|
|
(1.6 |
) |
||
Income before provision for income taxes |
|
$ |
34.9 |
|
$ |
29.5 |
|
12
The following table provides the lines of businesses from which each of the Companys three reporting segments derive their net earned premiums:
|
|
Three Months Ended
|
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Financial guaranty direct: |
|
|
|
|
|
||
Financial guaranty direct |
|
$ |
12.4 |
|
$ |
10.8 |
|
|
|
|
|
|
|
||
Financial guaranty reinsurance: |
|
|
|
|
|
||
Public finance |
|
8.4 |
|
11.0 |
|
||
Structured finance |
|
9.8 |
|
7.5 |
|
||
Total |
|
18.2 |
|
18.5 |
|
||
|
|
|
|
|
|
||
Other: |
|
|
|
|
|
||
Trade credit reinsurance |
|
|
|
8.2 |
|
||
Total |
|
|
|
8.2 |
|
||
Total net earned premiums |
|
$ |
30.6 |
|
$ |
37.5 |
|
On April 8, 2005, the Company entered into four separate agreements with four different custodial trusts pursuant to which the Company may, at its option, cause each of the custodial trusts to purchase up to $50.0 million of perpetual preferred stock of the Company. The custodial trusts were created as a vehicle for providing capital support to the Company by allowing the Company to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, the Company would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose including the payment of claims.
Agreement with FSA
On April 6, 2005 the Company and AGRI entered into a binding letter of intent with Financial Security Assurance Inc. (FSA) pursuant to which substantially all of FSAs financial guaranty risks previously ceded to the Company (the Ceded Business) would be assumed by AGRI, effective as of January 1, 2005. As of December 31, 2004, the total par outstanding of the Ceded Business was approximately $20.6 billion. FSA has agreed it would release the Company from all liabilities with respect to the Ceded Business. FSA and AGRI have agreed that AGRI would assume all of the Companys liabilities with respect to the Ceded Business. FSA would receive a profit commission on the Ceded Business based on its future performance.
FSA has also agreed to reassume from AGRI approximately $800.0 million par value of healthcare related reinsurance business, which would include a transfer to FSA of approximately $12.0 million of unearned premium reserves, net of ceding commission. These transfers would take place at statutory book value, as of January 1, 2005.
The transaction is expected to be completed in the second quarter of 2005. The Company does not expect the transaction to have a material impact on its consolidated 2005 net income. The transaction is subject to final documentation and certain closing conditions, including regulatory approvals. There can be no assurance that this transaction will be consummated upon the terms specified above or at all.
13